<PAGE>
As filed with the Securities and Exchange Commission on November 4, 1998
Registration No. 333-63527
================================================================================
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------
AMENDMENT NO. 1
TO
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
ROLLING PIN KITCHEN EMPORIUM, INC.
(Name of Small Business Issuer in Its Charter)
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<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.)
</TABLE>
<TABLE>
<S> <C>
John D. Critser
President and Chief Executive Officer
Rolling Pin Kitchen Emporium, Inc.
4264 Winters Chapel Road, Building B 4264 Winters Chapel Road, Building B
Atlanta, Georgia 30360 Atlanta, Georgia 30360
(770) 457-2600 (770) 457-2600
(Address and Telephone Number of Principal Executive (Name, Address and Telephone Number of Agent for
Offices and Principal Place of Business) Service of Process)
</TABLE>
Copies To:
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<CAPTION>
<S> <C>
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. / /
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>
CALCULATION OF REGISTRATION FEE
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=============================================================================================================================
Proposed Proposed
Number of Maximum Maximum Amount of
Shares to be Offering Price Aggregate Registration
Title of Each Class of Securities to be Registered Registered Per Share Offering Price(1) Fee
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Class A Common Stock, $0.01 par value ............... 1,500,000 $ 7.00 $ 10,500,000 $ 3,098
- -----------------------------------------------------------------------------------------------------------------------------
Underwriters' Warrants(2) ........................... 150,000 $ 0.01 $ 1,500 $ 0(3)
- -----------------------------------------------------------------------------------------------------------------------------
Class A Common Stock, $0.01 par value(4) ............ 150,000 $ 11.55 $ 1,732,500 $ 511
- -----------------------------------------------------------------------------------------------------------------------------
Class A Common Stock, $0.01 par value(5) ............ 225,000 $ 7.00 $ 1,575,000 $ 465
- -----------------------------------------------------------------------------------------------------------------------------
Total ............................................... 2,025,000 $ 13,809,000 $ 4,074(6)
=============================================================================================================================
</TABLE>
- --------------------------------------------------------------------------------
(1) Estimated solely for purposes of calculating the registration fee, pursuant
to Rule 457(a) under the Securities Act of 1933, as amended.
(2) Represents warrants sold to the Representative of the Underwriters.
(3) None pursuant to Rule 457(g).
(4) Represents shares issuable upon exercise of the warrants to be issued to
the Representative of the Underwriters, which warrants have an exercise
price of $11.55 per share. See "Description of Securities -- Warrants."
(5) Represents shares issuable upon the exercise of the Underwriters' option to
cover over-allotments, if any.
(6) This amount was previously paid.
<PAGE>
The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an
offer to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer of sale is not permitted.
SUBJECT TO COMPLETION, DATED NOVEMBER 4, 1998
PROSPECTUS
[GRAPHIC OMITTED]
1,500,000 shares of common stock
$5.00 to $7.00 per share
This prospectus relates to the offering of up to 1,500,000 shares of Class
A common stock, par value $.01 per share.
Shares of the predecessor company, Gaylord Companies, Inc., were traded on
the Nasdaq's SmallCap Market and OTC Bulletin Board under the symbol "GJCO."
Prior to filing for bankruptcy, shares of the predecessor company ceased trading
on Nasdaq's SmallCap Market. Effective August 12, 1998, the predecessor company
emerged from bankruptcy and ceased trading on the OTC Bulletin Board.
Application has been made to list the Class A common stock of the Company on the
Nasdaq SmallCap Market under the symbol "RPKE."
THIS INVESTMENT INVOLVES A HIGH DEGREE OF RISK.
PLEASE REFER TO "RISK FACTORS" BEGINNING ON PAGE 7.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THESE SECURITIES, OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL AND COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
================================================================================
Underwriting
Price to Discounts and Proceeds to
Public Commissions(1) Company(2)
- --------------------------------------------------------------------------------
Price per share ......... $ $ $
- --------------------------------------------------------------------------------
Total(3) ................ $ $ $
================================================================================
(1) See "Underwriting" for information concerning indemnification of the
underwriters and other matters.
(2) Before deducting expenses payable by the company, estimated at $_______.
(3) The company has granted the underwriters a 30-day option to purchase up to
225,000 additional shares of common stock solely to cover over-allotments,
if any. If the underwriters exercise the option in full, the price to the
public will total $____, the underwriting discount will total $____ and
the proceeds to the company will total $_____. See "Underwriting."
The shares are being offered by the underwriters when, as and if received and
accepted by them, subject to prior sale, to withdrawal of the offer without
notice, to the approval of counsel and to certain other conditions.
NUTMEG SECURITIES, LTD.
November , 1998
<PAGE>
[Map depicting store locations]
CERTAIN PERSONS WHO PARTICIPATE IN THIS OFFERING MAY ENGAGE IN
TRANSACTIONS THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE
SHARES, INCLUDING PURCHASES OF SHARES TO MAINTAIN THEIR MARKET PRICE OR
PURCHASES TO COVER SOME OR ALL OF THE UNDERWRITERS' SHORT POSITION IN THE
SHARES.
<PAGE>
[Photographs of various store locations]
<PAGE>
Table of Contents
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Page
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Summary .................................................................................. 3
About Our Company ....................................................................... 3
Recent Bankruptcy of our Predecessor .................................................... 3
The Offering ............................................................................ 3
Common Stock ............................................................................ 3
Warrants Held by the Underwriter ........................................................ 3
Other Warrants .......................................................................... 3
Our Predecessor Entity Failed to Make Certain Required Securities Filings ............... 4
Where You Can Find More Information ..................................................... 4
Key Facts ................................................................................ 5
Summary Financial Information ............................................................ 6
RISK FACTORS ............................................................................. 7
Recent Bankruptcy of our Predecessor .................................................... 7
Seasonal Variations in the Quality Cookware Industry Will Affect Our Revenues ........... 7
Risks Related to Our Acquistion Strategy ................................................ 7
Need for Additional Capital for Acquisitions ............................................ 7
Difficulties Related to Integration of Acquired Companies ............................... 8
Competition in the Quality Cookware Industry May Affect Our Revenues and Market Position 8
Risks Associated with Our Cookware Store Franchises ..................................... 8
Lack of Written Contracts with Suppliers ................................................ 8
Dependence on Existing Leased Locations in Shopping Malls ............................... 8
Inability to Retain and Attract Key Executives .......................................... 8
Control by Current Officers and Directors; Relationship of Principal Stockholders ....... 9
Dilution in the Value of Your Shares .................................................... 9
Certain Anti-Takeover Provisions in Our Charter and Bylaws;
Possible Future Issuances of Preferred Stock ............................................ 9
Our Predecessor Entity Failed to Make Certain Required Securities Filings ............... 9
Negotiated Public Offering Price of the Common Stock .................................... 9
No Liquid Trading Market for Your Common Stock .......................................... 10
Potential Effects of Failure to List Common Stock on The Nasdaq SmallCap Market ......... 10
The Price of Our Stock May Fluctuate Which May Affect the Value of Your Shares .......... 10
Future Sales of Our Common Stock May Affect the Value of Your Shares .................... 10
Risks Associated with Forward-Looking Statements ........................................ 11
THE COMPANY .............................................................................. 12
USE OF PROCEEDS .......................................................................... 13
DIVIDEND POLICY .......................................................................... 13
CAPITALIZATION ........................................................................... 14
DILUTION ................................................................................. 15
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 ........................................... 17
Expansion ............................................................................... 18
Acquisition of Aropi .................................................................... 18
Franchise Operations .................................................................... 19
The Company ............................................................................. 19
Aropi, Inc. ............................................................................. 20
Liquidity and Capital Resources ......................................................... 20
Year 2000 Compliance .................................................................... 22
Treatment of Cost of Goods Sold ......................................................... 22
Seasonality ............................................................................. 22
</TABLE>
i
<PAGE>
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Page
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BUSINESS ................................................................. 24
The Company ............................................................. 24
Industry Background ..................................................... 24
Competition ............................................................. 24
Strategy ................................................................ 25
Reorganization of Predecessor ........................................... 26
Acquisition of Aropi .................................................... 27
Discontinued Operations ................................................. 27
Properties .............................................................. 28
Franchise Regulation .................................................... 28
Trademarks .............................................................. 28
Employees ............................................................... 28
Legal Proceedings ....................................................... 28
MANAGEMENT ............................................................... 29
Executive Officers, Directors and Key Employees ......................... 29
Director Compensation ................................................... 30
Executive Compensation .................................................. 30
Summary Compensation Table .............................................. 30
Stock Option Grants ..................................................... 31
1998 Equity Incentive Plan .............................................. 31
Employment Agreements ................................................... 33
Indemnification of Officers and Directors ............................... 33
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS ..................... 34
The Home Retail Acquisition Corp. Junior Participation; The Merger ...... 34
The Reorganization ...................................................... 34
Other Transactions ...................................................... 34
Control by Certain Directors ............................................ 35
Advisory Agreement ...................................................... 35
PRINCIPAL STOCKHOLDERS ................................................... 36
DESCRIPTION OF SECURITIES ................................................ 37
Common Equity Securities ................................................ 37
Preferred Stock ......................................................... 38
Registration Rights ..................................................... 38
Warrants ................................................................ 38
Transfer Agent and Registrar ............................................ 40
SHARES ELIGIBLE FOR FUTURE SALE .......................................... 40
UNDERWRITING ............................................................. 42
LEGAL MATTERS ............................................................ 43
EXPERTS .................................................................. 43
ADDITIONAL INFORMATION ................................................... 43
INDEX TO FINANCIAL STATEMENTS ............................................ F-1
</TABLE>
ii
<PAGE>
SUMMARY
This summary highlights selected information from this document and may
not contain all of the information that is important to you. To understand the
specific terms of the common stock we are offering, you should carefully read
this document. It describes the company, its finances, and products. Federal
and state securities laws require that we include in this prospectus all the
important information that investors will need to make an investment decision.
We have not authorized anyone to provide you with information that is different
from what is contained in this prospectus.
About Our Company
We operate a chain of specialty retail stores for quality cookware and
serving equipment, cooking accessories and certain select food products as well
as cookbooks and food-related publications. We operate 19 company-owned stores
and 21 franchised locations under the trademarks The Cookstore and Rolling Pin
Kitchen Emporium, which are located primarily throughout the Midwest and
Southeast regions of the United States.
Our business is comprised of the cookware business of (i) our
predecessor entity that was organized in the State of Delaware on July 19,
1994, and operates four retail cookware stores in Ohio, and (ii) Aropi,
Incorporated, which operates 15 company-owned stores in eight states and 21
franchised stores in nine states. We acquired Aropi, Incorporated on August 21,
1998. See "Business."
Recent Bankruptcy of Our Predecessor
Our predecessor entity, Gaylord Companies, Inc., filed for a chapter 11
reorganization in bankruptcy on November 13, 1997 and emerged from bankruptcy
on August 12, 1998. During the reorganization, we sold our bookstore
operations, closed two of our cookware stores and brought in certain of the
current management. We incurred substantial losses in 1996 and 1997 and while
in bankruptcy during 1998. Since emerging from bankruptcy, we have continued to
incur losses. We cannot be certain that our future operations will be
profitable. We may, in fact, continue to incur losses for the foreseeable
future.
The Offering
We are selling shares of our common stock to raise capital in order to
open additional cookware stores, acquire existing cookware chains and for
general working capital.
Common Stock
Holders of the company's common stock are entitled to receive dividends
declared by the board of directors. Currently, we do not pay dividends and we
do not expect to pay dividends in the foreseeable future. Each holder of common
stock is entitled to one vote per share and has no preemptive or cumulative
voting rights. Prior to the offering, we had 1,522,041 shares of common stock
outstanding. After giving effect to the offering, there will be 3,022,041
shares of common stock outstanding.
Warrants Held by the Underwriter
We have issued warrants to purchase 150,000 shares of common stock to
Nutmeg Securities, Ltd., the lead underwriter of this offering. The exercise
price of the warrants is equal to 165% of the public offering price. The
warrants may be exercised at any time during a four year period that begins one
year from the effective date of this prospectus. These warrants include demand
and piggyback registration rights as well as anti-dilution provisions that
provide for adjustment to the exercise price and number of shares subject to
the warrants if certain events occur.
Other Warrants
We also have issued warrants to warrant holders of our predecessor
entity as required under the plan of reorganization. In addition, we have
issued warrants to our creditors in order to induce them to enter into
financing arrangements with us. In the aggregate, we have issued warrants to
purchase up to 512,754 shares of common stock.
3
<PAGE>
Our Predecessor Entity Failed to Make Certain Required Securities Filings
Prior to filing for bankruptcy, our predecessor entity failed to make
certain regular disclosure filings that such entity was required to make under
the Securities Exchange Act of 1934. Although we will resume compliance with
the Securities Exchange Act of 1934 once we are subject to this law, we may be
subject to various sanctions, disabilities and damages as a result of our
previous non-compliance.
Where You Can Find More Information
We will file annual, quarterly and special reports, proxy statements and
other information with the Securities and Exchange Commission. You may read and
copy any document we file at the Securities and Exchange Commission's public
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 (770) 457-2600.
4
<PAGE>
KEY FACTS
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<S> <C>
Class A Common Stock Offered
To The Public .............. 1,500,000 shares
Total Shares Outstanding After
Offering ................... 3,022,041(1)
Use Of Proceeds .............. Acquisition of cookware store chains; opening new stores;
capital investment; refinance debt; working capital; and
general corporate purposes.
Nasdaq SmallCap Market
Symbol ..................... RPKE
</TABLE>
- -------------
(1) Excludes options, warrants, Class B common stock and 180,000 shares of
common stock reserved under the 1998 Equity Incentive Plan. See
"Description of Securities."
5
<PAGE>
SUMMARY FINANCIAL INFORMATION
The following table depicts the summarized statement of operations and
balance sheet data of the company and Aropi, Incorporated on a historical, pro
forma and as adjusted basis. The information is only a summary and does not
provide all of the information contained in the actual financial statements,
including the related notes, beginning at page F-1 and the Management's
Discussion and Analysis of Financial Condition and Results of Operations.
Statement of Operations Data:
<TABLE>
<CAPTION>
Rolling Pin Kitchen
Pro forma(2) Emporium, Inc.
-------------------------------- --------------------- The Gaylord
Period From Companies, Inc.
Nine Months August 12, 1998 -------------------------------
ended Year Ended through Years ended December 31,
September 30, December 31, September 30, -------------------------------
1998 1997 1998 1997 1996
--------------- -------------- --------------------- --------------- -------------
<S> <C> <C> <C> <C> <C>
Net revenues .............. $ 5,433,345 $ 10,122,079 $ 728,767 $ 3,724,157 $3,497,940
Cost of goods sold ........ 3,125,657 6,740,176 436,628 3,508,874 2,899,932
Gross profit (loss) ....... 2,307,688 3,381,903 292,139 215,283 598,008
Operating expenses ........ 3,868,609 4,684,050 1,123,642 1,414,976 458,457
Other income
(expenses) .............. (1,516,861) (1,058,517) (323,873) (191,687) (177,394)
Loss from continuing
operations .............. (3,077,782) (2,761,313) (1,155,376) (1,792,029) (37,843)
Loss per share ............ (1.84) (1.66) (.69)
</TABLE>
Aropi, Incorporated
Years ended June 30,
-----------------------------
1998 1997
------------- -------------
Net revenues .......................... $6,310,362 $6,572,905
Cost of goods sold .................... 3,134,668 3,407,466
Gross profit (loss) ................... 3,175,694 3,165,439
Operating expenses .................... 3,100,287 3,188,113
Other income (expenses) ............... (90,126) 65,968
Income (loss) from operations ......... (14,719) 43,294
<PAGE>
Balance Sheet Data:
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<CAPTION>
September 30, 1998
----------------------------------
Actual As Adjusted(1)
---------------- ---------------
<S> <C> <C>
Working Capital (Deficit) .............. $ (2,325,490) $ 4,683,260
Total Assets ........................... 5,177,982 11,326,732
Total Liabilities ...................... 5,996,588 5,059,088
Stockholders' Equity (Deficit) ......... (818,606) 6,267,644
</TABLE>
- -------------
(1) Adjusted for the sale of the 1,500,000 shares of Class A common stock
offered hereby (less underwriting discount and estimated offering
expenses) and the application of the net proceeds therefrom.
(2) Adjusted to reflect the acquisition of Aropi and the adoption of fresh
start accounting as if both had occurred on January 1, 1997. Adjustments
include amortization of the goodwill arising in the acquisition, the
amortization of the reorganization value in excess of amounts allocable to
identifiable assets which was recorded upon the adoption of fresh start
accounting, the interest expense on the additional debt arising from the
acquisition and the amortization of debt discount and financing costs.
6
<PAGE>
RISK FACTORS
The shares of common stock offered by this prospectus are speculative and
involve a high degree of risk of loss. In addition to the other information in
this prospectus, the following factors should be considered carefully in
evaluating an investment in the common stock offered hereby. This prospectus
contains forward-looking statements that involve risks and uncertainties. The
company's actual results may differ materially from the results discussed in
the forward-looking statements. The factors that may cause such a difference
include, but are not limited to, those discussed below in "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business." Prior to making an investment, you should carefully read this
entire prospectus and consider the following risk and speculative factors.
Recent Bankruptcy of Our Predecessor
Our predecessor entity, The Gaylord Companies, Inc., filed for a chapter
11 reorganization in bankruptcy on November 13, 1997 and emerged from
bankruptcy on August 12, 1998. During the reorganization, we sold our bookstore
operations, closed two of our cookware stores and brought in certain of the
current management. We incurred substantial losses in 1996 and 1997 and while
in bankruptcy during 1998. Since emerging from bankruptcy, we have continued to
incur losses. We cannot be certain that our future operations will be
profitable. We may, in fact, continue to incur losses for the foreseeable
future.
Seasonal Variations in the Quality Cookware Industry Will Affect Our Revenues
Our business is subject to seasonal variations. Historically, a
significant portion of our net sales and net earnings have been realized during
the period from October through December, and levels of net sales and net
earnings have generally been significantly lower during the period from January
through September. This is the general pattern associated with similar retail
industries, including those companies in our industry segment. If for any
reason our sales were to be substantially below seasonal norms during the
October through December period, our annual results of operations could be
materially and adversely affected. Unfavorable economic conditions affecting
retailers generally during the Christmas selling season in any year could
materially and adversely affect our results of operations for the year. We must
also make decisions regarding how much inventory to purchase well in advance of
the season in which it will be sold, especially for the Christmas season.
Significant deviations in actual demand from the projected demand for products
can have an adverse affect on our sales and profitability.
Risks Related to Our Acquisition Strategy
We plan to acquire retail cookware businesses, such as the recent
acquisition of Aropi, Incorporated, and other companies complementary to our
core business. The success of any such acquisitions will depend on many factors,
including our ability to identify suitable acquisition candidates and
investigate their business prospects; negotiate the appropriate price to be paid
for acquired companies; the ability to obtain financing on acceptable terms; and
our ability to effectively integrate the acquired businesses into our
operations. Although we plan to make acquisitions, we may not complete any
future acquisitions. Presently, we do not have any agreements with any
acquisition candidates although we have had preliminary discussions with
representatives of various potential acquisition candidates. Our stockholders do
not have the right to approve future acquisitions and will not have the
opportunity to review the financial statements of potential acquisition
candidates prior to the consummation of any acquisition. No assurances can be
given that we will be able to operate acquired businesses profitably or
otherwise successfully implement our expansion strategy. No assurance can be
made that the profits expected from any of the companies acquired in the future
will justify our investment in them.
Need for Additional Capital for Acquisitions
We expect to finance future acquisitions and planned internal growth
through financing arrangements or the issuance of equity securities. We have no
commitment for any debt or equity financing, and we may not be able to obtain
sufficient credit on favorable terms. If we do not obtain additional financing
when required, we may
7
<PAGE>
be required to modify, delay, or abandon some or all of our development and
expansion plans, which may have a material adverse effect on our business and
negatively impact the value of our outstanding securities. We plan to use
$1,000,000, or 13.55%, of the proceeds from the offering for the acquisition of
existing retail cookware businesses. See "Use of Proceeds."
Further the issuance of additional equity securities could have a
significant dilutive effect on the value of the shares held by the Company's
stockholders, including stockholders that acquired their shares in the offering.
Such acquisitions may result in increased costs, significant goodwill, increases
in depreciation and amortization expenses, and could also result in write downs
of purchased assets. All of these factors could adversely affect our operating
results in future periods. In the event that our plans for expansion are not
successful, our business will be materially adversely affected.
Difficulties Related to Integration of Acquired Companies
We will attempt to (i) hire, train, and integrate qualified employees, and
(ii) adapt our management information and other operational systems to the
extent necessary to grow in a profitable manner. Integrating diverse operations
of different companies may result in delays and complications and may be costly.
Although we believe our systems to be adequate for our current purposes, the
acquisition of new companies will require modification, improvement or
replacement of our current computer networks, accounting and other operational
systems. No assurance can be made that we will be able to successfully integrate
new companies into our company.
Competition in the Quality Cookware Industry May Affect Our Revenues and Market
Position
We face significant competition from companies that are similarly
specialized and also from companies that are involved in more generalized
retailing. We also face competition from other companies, such as catalogue
companies, which have added or may add cookware to existing or future product
lines. Many of our existing and potential competitors are larger and have
significantly greater financial, marketing, technological, and other resources
than we possess. We may not be able to compete effectively. See
"Business--Competition."
Risks Associated with Our Cookware Store Franchises
Our ability to operate our existing stores on a profitable basis is
dependent to some degree on the continued success of our franchised cookware
stores. If the franchisees do not provide the service required pursuant to
their franchise agreements with the company or experience an unfavorable change
in public perception, we may be materially adversely effected. Further, a
decline in the operations or profitability of the franchise cookware stores
could adversely affect our revenues since we derive a portion of our revenues
from certain minimum franchise fees and fees based upon a percentage of the
revenues of franchise cookware stores. See "Business--Strategy;" "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Franchise Operations."
<PAGE>
Lack of Written Contracts with Suppliers
We currently purchase products from over 300 suppliers. We do not have any
written contracts with our suppliers. If we cannot maintain our existing
relationships with these suppliers on terms similar to those currently
available, or if we experience any delay or difficulty in obtaining alternative
suppliers on comparable terms, then there could be an adverse affect on our
business.
Dependence on Existing Leased Locations in Shopping Malls
We currently lease all of our properties. We may not be able to comply
with the provisions of the current leases or renegotiate favorable lease terms
as they expire. Once the current leases expire, if we cannot renew the existing
leases, we may not be able to find favorable store sites for expansion or
negotiate leases on satisfactory terms and conditions for new sites. See
"Business--Properties."
Inability to Retain and Attract Key Executives
Our success depends upon the contributions of our senior management. We
believe that our future success will depend upon our ability to attract,
motivate, and retain highly skilled managerial, and marketing personnel. The
loss of our key executives or the inability to hire and retain qualified
personnel could have an adverse effect upon the company's business. The company
intends to carry key man life insurance on its chief executive officer, but no
other executive officers or technical personnel will be covered under such a
policy.
8
<PAGE>
Control by Current Officers and Directors; Relationship of Principal
Stockholders
Certain related persons currently own an aggregate of approximately 40% of
our common stock, 20% after this offering, and all but two of our directors are
or have been affiliated. As a result, Messrs. Danovitch, Lucaci, Dukoff,
Czarnecki and Jackson will be in a position to exercise significant influence
over the company and the election of our directors and otherwise essentially
control the outcome of all matters requiring stockholder approval. Global
Strategic Holdings, Inc. also owns an aggregate of approximately 40% of our
common stock prior to this offering and 20% after this offering. Thomas Tuttle,
a director of the company, is the investment advisor to Global Strategic
Holdings, Ltd. Additionally, we have entered into an advisory agreement with DDG
Management Services Corp., that will give it a significant advisory role with
respect to certain aspects of our business. David Danovitch, George Lucaci and
Donald Jackson, directors of the company, are also directors of DDG Management
Services Corp. Messrs. Lucaci, Dukoff Czarnecki and Jackson have entered into a
consent agreement with NASD Regulation, Inc. in which they consented to the
finding that they violated certain regulatory guidelines and rules. See
"Management -- Executive Officers, Directors and Key Employees" and "Certain
Relationships and Related Party Transactions."
Dilution in the Value of Your Shares
After giving effect to the sale of the 1,500,000 shares of common stock
under this offering at a price of $6.00 per share and the application of the
net proceeds therefrom, there will be a total of 3,022,041 shares of common
stock outstanding with a net tangible book value of $1.73 per share. This would
represent an immediate increase in net tangible book value of $2.95 to existing
shareholders and an immediate dilution of $4.27 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.
<PAGE>
The board of directors has the power to designate the issuance of up to
1,000,000 shares of undesignated preferred stock. The rights and preferences
for any series or class may be set by the board of directors at its sole
discretion and without the approval of the holders of common stock. The rights
and preferences of any such preferred stock may be superior to those of the
common stock, thus adversely affecting the rights of the holders of common
stock. The company currently has 320 shares of preferred stock outstanding
which resulted from the conversion of debt instruments that were privately
placed while we were in bankruptcy. While we have no present intention to issue
any additional shares of preferred stock, any such issuance could be used to
discourage, delay, or make more difficult a change in control of the company.
In addition, such preferred stock may have other rights, including economic
rights, senior to the common stock. As a result, the issuance of additional
shares of preferred stock could decrease the market value of the common stock.
See "Description of Securities--Preferred Stock."
Our Predecessor Entity Failed to Make Certain Required Securities Filings
Prior to filing for bankruptcy, our predecessor entity failed to make
certain regular disclosure filings that such entity was required to make under
the Securities Exchange Act of 1934. Although we will resume compliance with
the Securities Exchange Act of 1934 once we are subject to this law, we may be
subject to various sanctions, disabilities and damages as a result of our
previous non-compliance.
Negotiated Public Offering Price of the Common Stock
The public offering price of the common stock has been artificially
determined through negotiations between the company and the underwriter. The
public offering price bears no relationship to earnings, asset values, book
value or any other recognized criteria of value. See "Underwriting."
9
<PAGE>
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 Market listing requirements, trading would be conducted in the pink
sheets or on the OTC Bulletin Board. In the absence of the common stock being
quoted on the Nasdaq SmallCap Market, trading of the common stock would be
covered by Rule 15g-9 promulgated under the Securities Exchange Act of 1934 for
non-Nasdaq and non-exchange listed securities. Under this rule, broker-dealers
that recommend such securities to persons other than established customers and
accredited investors must make a special written suitability determination for
the purchaser and receive the purchaser's written agreement to a transaction
prior to sale. Securities are exempt from this rule if the market price is at
least $5.00 per share. If the common stock were subject to the regulations
applicable to penny stocks, the market liquidity for the securities would
likely be reduced by limiting the ability of broker-dealers to sell the
securities and the ability of stockholders to sell their securities in the
secondary market. There is no assurance that trading in our common stock will
not be subject to these or other regulations that would adversely affect the
market for such securities.
The Price of Our Common Stock May Fluctuate Which May Affect the Value of Your
Shares
From time to time, there may be significant volatility in the market price
of our common stock. Our quarterly operating results, changes in earnings
estimated by analysts, if any, changes in the general conditions of the quality
cookware industry, the economy or financial markets, or other developments
affecting our business could cause the market price of our common stock to
fluctuate substantially. In addition, in recent years the stock market has
experienced significant price and volume fluctuations. This volatility has had
a significant effect on the market prices of securities issued by many
companies for reasons unrelated to their operating performance.
Future Sales of Our Common Stock May Affect the Value of Your Shares
Our sale of substantial amounts of common stock in the public market
following this offering could lower the market price of our common stock. Of
the 3,022,041 shares of common stock to be outstanding after this offering
(assuming no exercise of outstanding options, warrants, conversion of the Class
B common stock or the over-allotment option), 1,500,000 shares will be freely
tradeable without restriction. Upon expiration of lock-up agreements entered
into by our officers, directors, and stockholders prior to the offering, an
additional 1,383,691 shares will become eligible for sale 13 months after the
closing of this offering, subject to the provisions of Rule 144. In addition,
the 138,350 shares of common stock held by certain stockholders that acquired
their shares as creditors of our predecessor entity pursuant to the plan of
reorganization are subject to certain registration rights as provided by the
plan of reorganization. See "Shares Eligible for Future Sale."
In addition, we intend to file a registration statement on Form S-8 with
respect to our common stock issuable upon exercise of options under the 1998
Equity Incentive Plan. The 1998 Equity Incentive Plan authorizes the issuance of
options for up to 180,000 shares of common stock. Currently, no options have
been issued under the 1998 Equity Incentive Plan. See "Management--1998 Equity
Incentive Plan." Upon filing of such registration statement, the holders of such
options may, subject to vesting requirements including certain performance
targets, exercise and sell their shares immediately without restriction, except
affiliates who are subject to certain volume limitations and manner of sale
requirements of Rule 144. See "Shares Eligible for Future Sale." Holders of
warrants to purchase 460,181 shares of our common stock are entitled to
registration rights with respect to such shares. Upon registration, such shares
may be sold in the market without limitation. In addition, pursuant to the plan
of reorganization the Company's predecessor has granted warrants to purchase
52,573 shares of common stock, exercisable at a price of $11.57 per share, to
the holders of all of the then outstanding warrants of such predecessor entity.
These warrants do not contain registration rights. See "Description of
Securities--Registration Rights." Sales of such shares of our common stock may
decrease the market price for the common stock. See "Underwriting."
10
<PAGE>
Risks Associated with Forward-Looking Statements
This prospectus contains certain statements that are considered
"forward-looking statements" within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
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.
11
<PAGE>
THE COMPANY
Rolling Pin Kitchen Emporium, Inc. (together with its wholly owned
subsidiaries, the "Company") operates a chain of specialty retail stores for
quality cookware and serving equipment, cooking accessories and certain select
food products as well as cookbooks and food-related publications. The Company
operates 19 Company-owned stores and 21 franchised locations under the
trademarks The Cookstore and Rolling Pin Kitchen Emporium, which are located
primarily throughout the Midwest and Southeast regions of the United States.
The Company's business is comprised of the cookware business of (i) its
predecessor entity, which was organized under the name The Gaylord Companies,
Inc. in Delaware on July 19, 1994 (the "Predecessor Entity"), and was
reorganized and renamed Home Retail Holdings, Inc. during the bankruptcy
reorganization pursuant to Chapter 11 of the United States Bankruptcy Code (the
"Bankruptcy Code") that was completed on August 12, 1998 (the "Reorganization")
and which operates four retail cookware stores in Ohio, and (ii) Aropi,
Incorporated, an Iowa corporation ("Aropi"), which operates 15 Company-owned
stores in eight states and 21 franchised stores in nine states. The Company
acquired Aropi on August 21, 1998. On September 15, 1998, the Company changed
its name from Home Retail Holdings, Inc. to Rolling Pin Kitchen Emporium, Inc.
See "Business."
The Company's goal is to build a consolidated enterprise with national
market reach through the acquisition and integration of independent quality
cookware businesses, the opening of new cookware stores in large markets, and
developing franchised cookware stores in targeted markets throughout the United
States. Although the Company has had preliminary discussions with
representatives of certain potential acquisition candidates, it currently does
not have any agreement with any other company with regard to any acquisitions.
The Company's stores range in size from approximately 1,600 square feet to
3,300 square feet and operate in regional retail malls. Each store offers a
wide range of products, from over 300 vendors in 12 distinct categories
including accessories, bakeware, books, cookware, cutlery, electronics, food,
furniture, gadgets, gifts, tableware and textiles. The Company intends to use
its existing stores as the basic store design prototype for most of its
anticipated expansion through Company-owned and franchised locations. The
Company has four stores currently operating under The Cookstore trademark in
Ohio and recently acquired Aropi which has 15 Company-owned stores operating
under the Rolling Pin Kitchen Emporium trademark in Alabama, Florida, Georgia,
Kentucky, Louisiana, South Carolina, Tennessee, and Virginia and 21 franchised
stores operating under the Rolling Pin Kitchen Emporium trademark in Arkansas,
Florida, Georgia, Illinois, Iowa, Kentucky, North Carolina, South Carolina, and
Tennessee. The Company expects to convert the four Company-owned stores in Ohio
currently operating under The Cookstore trademark to the Rolling Pin Kitchen
Emporium trademark in the near future.
The Company's principal executive offices are located at 4264 Winters
Chapel Road, Building B, Atlanta, Georgia 30360.
12
<PAGE>
USE OF PROCEEDS
If all 1,500,000 shares (the "Shares") of the Company's Class A Common
Stock (the "Common Stock") offered pursuant to this prospectus (the
"Prospectus") are sold (the "Offering"), the Company will receive gross proceeds
of approximately $9,000,000 (assuming the public offering price is $6.00, and
assuming the over-allotment option is not exercised). If the underwriters
("Underwriters") exercise the over-allotment option, the Company will receive an
additional $1,575,000. The estimated net proceeds of $7,380,000 were determined
after deduction of all commissions, discounts and expenses paid to the
Underwriters (estimated to be $1,170,000) and after all expenses of the Offering
(estimated to be $450,000). Pending the uses listed below, the net proceeds will
be invested in short-term, interest-bearing, investment grade securities.
The Company intends, in the following order of priority, to use the net
proceeds from this Offering approximately as follows:
<TABLE>
<CAPTION>
Amount Percentage
------------- -----------
<S> <C> <C>
Expansion of Business Operations
Opening of New Stores(1) ..................................... $2,250,000 30.49%
Acquisition of Existing Chains ............................... 1,000,000 13.55%
Expenses Associated with Selling New Franchises .............. 250,000 3.39%
Expand Alternative Distribution Channels ..................... 600,000 8.13%
---------- ------
Total -- Expansion of Business Operations ..................... $4,100,000 55.56%
Repayment of a portion of Existing Indebtedness(2)
Repayment of Interim Financing ............................... $ 562,500 7.62%
Paydown of Amounts Owed to Greenfield ........................ 593,750 8.05%
---------- ------
Total -- Repayment of Existing Indebtedness ................... $1,156,250 15.67%
---------- ------
Working capital and general corporate purposes ................ 1,780,000 24.12%
---------- ------
Redemption of Convertible Series A Preferred Stock(3) ......... $ 343,750 4.65%
TOTAL ......................................................... $7,380,000 100.00%
========== ======
</TABLE>
- ------------
(1) Assumes that 9 stores are opened over the next 18 months at an average cost
of $250,000 per store (including costs to stock inventory).
(2) The proceeds will be used to repay a portion of existing indebtedness with
Greenfield Commercial Credit, L.L.C. ("Greenfield") which bears interest
at three percentage points over the Prime Rate as published in the Wall
Street Journal and the aggregate amounts of $562,500 due to Gabledon, Ltd.
and Barajay, Inc., which includes principal of $500,000 plus accrued
interest of $62,500 during the term of the note. The $562,500 represents
the entire balance due to Gabledon, Ltd. and Barajay, Inc. Amounts due to
Liberty Bidco Investment Corporation ("Bidco") under that certain Business
Loan Agreement With Covenants, dated as of August 12, 1998, by and between
the Company and Bidco, as such agreement has been amended by that certain
First Amendment, dated August 20, 1998, by and between such parties (the
"First Amendment"), and as further amended by the Second Amendment, dated
November 1, 1998, by and between such parties (as so amended the "Loan
Agreement") are expected to be refinanced subsequent to the completion of
this Offering. The outstanding balance due Greenfield after the
application of the $593,750 is expected to be refinanced. The existing
indebtedness with Greenfield and Bidco was obtained to finance the
acquisition of Aropi in August 1998. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
(3) The Company will redeem 275 shares of Convertible Series A Preferred
Stock held by the Delacroix Foundation, Ltd. at the time of the Offering
for a redemption premium of 25% over the $1,000 par value of such shares.
DIVIDEND POLICY
Holders of the Common Stock are entitled to dividends only, as and if,
declared by the Company's Board of Directors, out of funds legally available
therefor. The Company has not yet paid any dividends and does not expect to do
so in the foreseeable future. The Company intends to use all retained earnings
for working capital and to finance the anticipated growth and expansion of its
business.
13
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
September 30, 1998: (i) on an actual basis; and (ii) on an adjusted basis,
giving effect to the proceeds and use of proceeds from the sale of the Common
Stock the Company offered pursuant to this Prospectus after deducting
underwriting discounts and commissions and estimated offering expenses:
<TABLE>
<CAPTION>
September 30, 1998
---------------------------------
Actual As Adjusted
--------------- ---------------
<S> <C> <C>
Long term debt less current portion(1) ................ $ 0 $ 0
Put option on Warrants ................................ 400,000 400,000
------------ ------------
Stockholders' equity:
Cumulative Preferred Stock, 1,000,000 shares authorized
320 issued and outstanding (actual) and 45,000 shares
(as adjusted); redeemable, convertible and bearing a
liquidation preference of $1,000 per share(2)......... 256,000 45,000
Class A Common Stock, par value $.01 per share,
20,000,000 shares authorized; 1,522,041 shares issued
and outstanding actual; 3,022,041 shares issued and
outstanding as adjusted(3)(4) ........................ 15,220 30,220
Class B Common Stock, par value $.01 per share,
154,951 shares issued and outstanding actual pro forma
and pro forma as adjusted(4) ......................... 1,550 1,550
Additional Paid-in Capital ............................ 64,000 7,479,000
Accumulated deficit ................................... (1,155,376) (1,288,126)
------------ ------------
Total stockholders equity (deficit) ................... (818,606) 6,611,394
------------ ------------
Total capitalization .................................. $ (418,606) $ 7,011,394
============ ============
</TABLE>
- ------------
(1) As of September 30, 1998, the current portion of obligations under long
term debt was approximately $4,110,000.
(2) Includes a discount of $64,000 (Actual), which is written off as a
preferred stock dividend (As Adjusted) with the preferred stock's initial
convertibility due to the Offering and reflects the redemption of 275
shares of Convertible Series A Preferred Stock for $343,750 with proceeds
from the Offering.
(3) Excludes (i) 92,595 shares of the Common Stock subject to warrants granted
to Bidco, exercisable at $0.01 per share (the "Bidco Warrants"), 40,602
shares of Common Stock subject to warrants granted to Bidco, exercisable at
165% of the public offering price (the "New Bidco Warrants"), 40,602 shares
of Common Stock subject to warrants granted to Greenfield, exercisable at
165% of the public offering price (the "Greenfield Warrants"), 52,573
shares of the Common Stock subject to warrants granted to all of the
holders of the outstanding warrants of the Predecessor Entity pursuant to
the Plan of Reorganization, exercisable at $11.57 per share (the "New
Warrants"), 29,261 shares of the Common Stock subject to warrants granted
to the holders of all of a certain class of securities of the Predecessor
Entity, exercisable at 80% of the public offering price (the "Individual
Warrants"), 8,875 shares of the Common Stock subject to warrants granted to
DLM Asset Management, Inc. and Spinnernet Financial Systems, Ltd.
exercisable at 165% of the public offering price (the "Financing
Warrants"), and 98,246 shares of the Common Stock subject to warrants
granted to JRP Consulting Corp. and Laux, Holmes & Company exercisable at
165% of the public offering price (the "Other Financing Warrants"); (ii)
180,000 shares of the Common Stock reserved for issuance pursuant to the
1998 Equity Incentive Plan; (iii) the exercise of the Underwriters'
over-allotment option; (iv) 154,551 shares of the Common Stock issuable
upon contingent conversion of the outstanding Class B Common Stock; and (v)
150,000 shares of the Common Stock subject to warrants granted to the
Underwriters, exercisable at 165% of the public offering price (the
"Underwriters' Warrants"). See "Description of Securities."
(4) The Class B Common Stock automatically converts into shares of Common Stock
upon the occurrence of certain events. See "Description of Securities."
14
<PAGE>
DILUTION
As of September 30, 1998, there were 1,522,041 shares of Common Stock
outstanding, having a negative net tangible book value per share of
approximately $(1.22). Net tangible book value per share represents the amount
of the Company's total tangible assets less its total liabilities, divided by
the number of shares of the Company's Common Stock outstanding.
After giving effect to the sale of the 1,500,000 shares of Common Stock
under this Offering at a price of $6.00 per share and the application of the
net proceeds therefrom (but assuming none of the options, warrants or shares of
Class B Common Stock are exercised), there would be a total of 3,022,041 shares
of Common Stock outstanding with a net tangible book value of approximately
$1.73 per share. This would represent an immediate increase in net tangible
book value of $2.95 per share to existing stockholders and an immediate
dilution of $4.27 per share to new investors. Dilution is determined by
subtracting net tangible book value per share after the Offering from the
amount paid by new investors per share of Common Stock. The following table
illustrates the per share dilution:
<TABLE>
<S> <C> <C>
Public offering price per share ............................... $ 6.00
Net tangible book value per share -- 09/30/98 actual ......... (1.22)
Increase attributable to new investors ....................... 2.95
------
Net tangible book value per share after Offering .............. 1.73
------
Dilution to new investors ..................................... $ 4.27
======
</TABLE>
The following table summarizes, on a pro forma basis, as of September 30,
1998, the difference between the existing stockholders and the new investors
with respect to the number of shares of Common Stock purchased from the
Company, the total consideration paid and the average price per share:
Shares Purchased
<TABLE>
<CAPTION>
Total Average Price
Number Percent Consideration Per Share
----------- ----------- --------------- --------------
<S> <C> <C> <C> <C>
Existing stockholders ......... 1,522,041 50.4% $ 1,695,500 $ 1.11
New investors ................. 1,500,000 49.6% 9,000,000 6.00
--------- ----- ----------- ------
Total ......................... 3,022,041 100.00% $10,695,500
========= ====== ===========
</TABLE>
The foregoing table assumes: (i) no exercise of the Underwriters'
over-allotment option; (ii) no exercise of the Underwriters' Warrants to
purchase 150,000 shares of Common Stock, exercisable at 165% of the public
offering price; (iii) no exercise of the Bidco Warrants to purchase 92,595
shares of Common Stock, exercisable at $0.01 per share, (a) New Bidco Warrants
to purchase 40,602 shares of Common Stock, exercisable at 165% of the public
offering price, (b) Greenfield Warrants to purchase 40,602 shares of Common
Stock, exercisable at 165% of the public offering price, (c) New Warrants to
purchase 52,573 shares of Common Stock, exercisable at $11.57 per share, (d)
Individual Warrants to purchase 29,261 shares of Common Stock, exercisable at
80% of the public offering price, (e) Financing Warrants to purchase 8,875
shares of Common Stock, exercisable at 165% of the public offering price, or (f)
Other Financing Warrants to purchase 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 September 30,
1998. As of September 30, 1998, there were 180,000 shares of Common Stock
reserved for issuance under the Incentive Plan. To the extent that any shares of
Common Stock are issued on exercise of any of these warrants or conversion of
the Class B Common Stock, or, possibly, options granted after September 30,
1998, there will be further dilution to new investors. See "Description of
Securities."
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
Third quarter (through August 12, 1998) ......... 0.23 0.13
On August 7, 1998, the last sale price for shares of the Predecessor
Entity's common stock as reported by the Nasdaq's OTC Bulletin Board was $0.17
per share. Since August 12, 1998, there has been no established public trading
market for the Predecessor Entity's common stock because the common stock was
exchanged for the Company's Common Stock. There is currently no trading market
for the Company's Common Stock. At November 1, 1998, there were approximately
343 holders of record of shares of Common Stock. See "Shares Eligible for
Future Sale."
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 on November 13, 1997 and operated under bankruptcy protection
during the first half of 1998. The Predecessor Entity began as a family business
operating a chain of bookstores and eventually expanded the franchise to include
cookware stores as well. The various operations were consolidated in a corporate
entity under the name Gaylord Companies, Inc. in July 1994. In October 1995, the
Predecessor Entity effected a public offering of its common stock. Although the
Predecessor Entity had expected to raise approximately $4 million to $5 million
in that offering to finance the expansion of its operations, net proceeds to the
Predecessor Entity totaled approximately $2 million. Management believes that
the failure to secure an appropriate level of capital, along with competitive
pressures from larger bookstore competitors and increased operating expenses as
a result of the additional expenses of operating as a public company resulted
in the bankruptcy.
In July 1998, the chain of bookstores previously operated by the Company
was sold in connection with a separate plan of reorganization. As a result, the
Company did not recognize a gain on the transfer of the bookstores in the
bankruptcy. Additionally, while the Predecessor Entity was in bankruptcy it
closed two stores with minimal costs since it occurred as part of the
reorganization process. In the future the Company expects that it will incur
significantly greater costs if it decides to close stores or discontinue
operations out of bankruptcy.
Overview
Notwithstanding the difficulties encountered by the Predecessor Entity,
management believes that the quality cookware industry has substantial growth
potential and that the cookware store business is an attractive business model
that is capable of generating consistent levels of sales and profitability.
Management believes that the potential market for the type of products
found in the Company's stores consists of nearly every home in the country.
According to estimates by the National Housewares Manufacturers Association,
annual retail sales of housewares are approximately $54 billion annually. The
higher-end segment (which the Company defines as its primary target market and
which includes such items as kitchen gadgets, tools, and accessories) captures
in excess of $1.8 billion in annual sales.
<PAGE>
Management believes that this industry niche is an attractive opportunity
for several reasons:
o Historically this market provides for higher gross profit margins
and higher average ticket sales than the broader-based housewares market,
which includes many more highly competitive, lower-end products.
o There are presently a limited number of companies of significant size
that appear to have targeted this market in a similar manner and approach to
the market as the Company anticipates doing.
o There appears to be a growing segment of the general population that
has a keen interest in cooking. The Company's stores intend to cater to the
high-end niche of the industry.
Business and Operational Model of the Company
The Company's business plan is based on the premise that retail success
today is a function of the traditional tenants of location, price, and promotion
combined with a disciplined operational and logistical infrastructure. The
Company recognizes that same-store sales growth is essential to the success of
any retail enterprise and the Company will continue to build a marketing
organization that is responsive to retail trends in general, and to local retail
demand in particular. The Company's ability to tailor each stores offerings to
meet the demands of a local market is essential to the continued success of the
stores. Traditional merchandising techniques are complemented by a constant use
of creative marketing efforts that focus on making the consumer's visit to the
store as much an entertainment experience as a shopping task.
The Company's commitment to operational focus means that its success is
dependent in large part on its ability to manage information systems, inventory
levels, distribution logistics, controlling shrinkage of inventory,
17
<PAGE>
purchasing efficiencies and effective customer service at the store level. In
order to achieve its goal, the Company expects to focus on operating
efficiencies and synergies by combining administrative functions. The Company
plans to manage costs through an expense control system that will
require an analysis of the cost benefits of each expenditure and thorough
analysis of the decision process for selecting new sites.
The Company is in the early stages of enhancing its operational and control
systems. The Company has recently begun implementing certain augmented reporting
and internal audit procedures necessary to assure the adequate flow of
information throughout the current organization and which will be capable of
serving the Company's needs as it grows. The Company plans to use a portion of
the proceeds of this Offering to improve its computer and point-of-sale systems
in order to more effectively implement these enhanced systems. The Company
believes that it will take approximately six months and cost approximately
$250,000 to fully establish and implement the planned operational and
informational systems. The Company believes that once implemented, the new
computer and reporting systems should serve its needs through its anticipated
growth during the next 12-18 months.
The Company believes its operating strategy will enable it to service its
anticipated debt levels after the Offering as well as enable the Company to
generate consistent levels of earnings in the future. In particular, the Company
intends to maintain tight expense controls, particularly at the corporate level.
Moreover, to improve operating margins the Company plans to rely on sources of
revenue from franchise fees, revenues derived from Internet sales, and revenues
derived from enhanced catalogue operations. The Company currently believes that
the maintenance of a ratio of franchised stores to Company-owned stores of 2:1
is an optimal ratio to cover corporate overhead while expanding Company
locations. Additionally, the Company intends to optimize the number of product
offerings or SKUs per store. The Company believes that by reducing the number of
SKUs per store, it will reduce the level of capital necessary to maintain
inventory, thereby increasing cash and ultimately profitability. Management
believes that as the Company's profitability improves, the increased internally
generated funds will enable it to pay down a portion of existing debt to a level
that will ultimately be refinanced or paid off with the proceeds of an
additional equity offering in the future. No assurances can be given that the
Company will be able to successfully implement its operating strategy.
Expansion
The Company plans to engage in an expansion program involving the opening
of new stores in both existing and new markets and the expansion or replacement
of existing stores with larger stores in certain locations. The Company
anticipates that as a result of this program, the total number of Company-owned
stores will increase from 19 stores at current, to approximately 28 stores by
November 1999, with total square footage of store space increasing from
approximately 42,000 square feet at present, to approximately 72,000 square
feet by November 1999. No assurance can be made that the Company will be able
to successfully implement its expansion plans. The average cost to open a new
store is approximately $250,000 (including costs to stock inventory).
The Company believes that the anticipated growth of the Company is
dependent, in large part, on the success of its store expansion program. As part
of its expansion program, the Company expects to open new stores which will be
patterned after the larger "Cookstore" format. It also intends to experiment
with a larger format store in certain markets, which would, if implemented, be
approximately 5,000 square feet in size. In determining whether to open new
stores (including larger format stores) in a particular market, the Company
expects to evaluate a number of factors, including the availability of prime
real estate and demographic information (such as data relating to income and
education levels, age and occupation).
The Company believes that because it does not rely heavily on a central
distribution center and since it does not rely on paid advertising to any
significant extent, it has the flexibility to enter a new market with only a
single store. The Company will consider opening additional stores in that
market, once the initial store has proven successful. The Company has already
begun to evaluate sites for additional stores in markets proximate to existing
locations.
Acquisition of Aropi
On August 21, 1998, the Company acquired Aropi for $2.6 million,
consisting of $800,000 in cash, two convertible promissory notes for $250,000
each and $1.3 million applied to certain indebtedness. The convertible
promissory notes bear interest at the rate of 8% and are mandatorily
convertible into Common Stock having a fair market value of $500,000 as of the
conversion date. Such shares shall not represent less than 2% of
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all of the issued and outstanding Common Stock on a fully diluted basis. The
convertible promissory notes are mandatorily convertible if the Company
completes an offering of its Common Stock prior to August 20, 1999 in which it
receives proceeds of at least $5,000,000 and the Company has a specified
capital structure as of the conversion date. The Company financed the
acquisition of Aropi by entering into the First Amendment with Bidco and the
Loan and Security Agreement with Greenfield. The estimated goodwill calculated
on the Aropi acquisition was approximately $1,004,877.
Franchise Operations
The Company operates 21 franchised stores under the Rolling Pin Kitchen
Emporium trademark in nine states including Arkansas, Florida, Georgia,
Illinois, Iowa, Kentucky, North Carolina, South Carolina and Tennessee. The
franchise agreements have an initial term of five to ten years and will be
automatically renewed for a five-year term with an additional option to renew
for two five-year terms upon certain conditions and terms. A few of the
franchise agreements are in the first renewal period, but most are in their
initial terms.
Each existing franchise agreement grants to the franchisee the right and
license to operate a franchised store in a specified territory. The franchise
agreements require that the franchisee construct or remodel, at its own
expense, and operate the franchised store in accordance with certain
requirements, standards and specifications prescribed by the Company, including
that the franchisee purchase certain initial equipment, fixtures and supplies
designated by the Company and promote and sell only products specified by the
Company. The Company, in turn, is obligated to provide the franchisee with,
among other things, advisory assistance in the operation of the franchised
store and assistance in connection with advertising and promotional programs.
In addition, in the event any franchisee wishes to accept an offer from a
third party to purchase an interest in the franchise that would have the effect
of transferring a controlling interest in the franchise, each franchise
agreement grants the Company a right of first refusal to purchase the interest
in such franchise.
For the year ended June 30, 1998, Aropi's revenues from its franchisees
totaled $466,519. Aropi historically attributed a significant portion of its
corporate overhead as being attributable to franchise-related expenses, which
resulted in the income from franchise operations being less than the expense
from such operations. The Company plans to re-evaluate this practice and
anticipates an allocation that tracks actual expenditures with respect to
franchise development and maintenance.
The Company
Results of Operations -- The Company
The Company operates a chain of specialty retail stores for quality
cookware and serving equipment. The Company's revenue is derived primarily from
the sale of cookware and serving equipment.
Fresh Start Reporting From August 12, 1998 To September 30, 1998 -- The
Company
The information presented below is presented on a fresh-start basis as of
August 12, 1998.
Net Revenues. From August 12 to September 30, net revenues were $728,767.
Cost of Goods Sold. For the period from August 12 to September 30, cost of
goods sold were approximately $436,628 representing approximately 60% of sales.
For the period from August 12 to September 30, general and administrative
expenses were $1,076,415 which includes $225,000 of professional fees.
Liquidity and Capital Resources -- The Company
The Company used $332,597 in net cash from operating activities from August
12 to September 30. Net cash used in investing activities was approximately
$2,125,000 during such period for the acquisition of Aropi. Net cash provided by
financing activities was $2,460,000 representing financing for the Aropi
acquisition. At September 30, 1998, the Company had a working capital deficit of
$2,325,490, with all debt being classified as current. See "Description of
Securities."
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Aropi, Inc.
Results Of Operations -- Aropi
Aropi operates a chain of specialty retail stores for quality cookware and
serving equipment. Aropi's revenue is derived primarily from the sale of
cookware and serving equipment. Aropi's fiscal year ended on June 30.
Results for Fiscal Year ended June 30, 1998 Compared To Fiscal Year
ended June 30, 1997 -- Aropi
Net Revenues. Net revenues decreased $262,543, or 4%, from $6.57 million
in 1997 to $6.31 million in 1998, 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 Aropi's existing
stores.
Cost of Sales. Cost of sales decreased approximatly $272,798, or 8.0%, from
$3.41 million in 1997 to $3.14 million in 1998. As a percentage of net revenues
the cost of sales decreased from 51.84% in 1997 to 49.68% in 1998 primarily due
to a change in accounting procedure which resulted in a one time decrease in
Aropi's freight components of cost of sales.
Operating Expenses. Operating expenses decreased approximately $87,826, or
2.75%, from $3.19 million in 1997 to $3.10 million in 1998. As a percentage of
net revenues, operating expenses increased from 48.50% to 49.13%, primarily due
to increases occuring in the ordinary course of business.
General and Administrative Expenses. General and administrative expenses
decreased $85,445, or 5.31%, from $1.61 million in 1997 to $1.52 million in
1998. As a percentage of net revenues, general and administrative expenses
decreased from 24.46% in 1997 to 24.13% in 1998. This decrease as a percentage
of net revenues was due to a decrease in overall rent expense.
Results For Fiscal Year ended June 30, 1997 Compared To Fiscal Year ended
June 30, 1996 -- Aropi
Net Revenues. Net revenues decreased $260,019, or 3.81%, from $6.83
million in 1996 to $6.57 million in 1997, primarily 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 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, primarily to repay debt. For
the year June 30, 1998, net cash used in financing activities was $176,703. At
June 30, 1998, Aropi had a working capital surplus of $958,754, and had $670,502
of long-term debt outstanding net of current maturities of $176,313.
Liquidity and Capital Resources
When the Company emerged from Bankruptcy on August 12, 1998, it had a
working capital deficit of $(105,044). At September 30, 1998, the Company had a
working capital deficit of $(2,325,490). The decrease in working capital of
$2,220,446 is primarily attributable to cash used by operations of $332,597, and
the addition of long-term assets in the Aropi acquisiton (fixed assets -
$352,891; goodwill - $1,004,877) which was financed by short-term debt.
Since emerging from Bankruptcy, the Company has utilized $332,597 in
operations, which was funded primarily by debt borrowing in excess of what was
needed to fund the Aropi acquisition. For the foreseeable future, the Company
intends to retain all earnings for use in the operation and expansion of its
business.
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The Company has not entered into any material commitments for capital
expenditures at this time. The Company's expansion program is likely to require
the Company to make capital expenditures for furniture and fixtures and
leasehold improvements on an ongoing basis of approximately $250,000 per new
store (including the costs of inventory).
The Company had deferred tax assets totaling $1,735,000, with $1,635,000
representing the tax effects of net operating loss carryforwards and the effect
of, book depreciation in excess of tax depreciation of approximately $100,000 as
of August 12, 1998 upon its emergence from bankruptcy. The Company has a full
valuation allowance as a reserve against such deferred tax assets. The net
operating loss carryforwards totaling approximately $4,087,000, expire in the
years 2009 through 2013. Annual utilization of the net operating loss
carryforwards will be restricted due to the ownership change in the plan of
reorganization. The Company would need to average annual taxable income of at
least $272,000 over the carryover period to fully utilize such deferred tax
assets.
Bidco Loan Agreement
In August 1998, the Company entered into the Loan Agreement with Bidco. The
Loan Agreement provided financing in the amount of $1,300,000 as contemplated by
the terms of the Plan of Reorganization. The First Amendment provided for an
additional $700,000 in financing that was used to fund the Aropi acquisition and
that is available for working capital purposes.
Borrowings under the Loan Agreement were used to repay the outstanding
balance owed by the Company under the Loan and Security Agreement, dated April
23, 1998, between the Company and Fremont Financial Corporation, a California
corporation ("Fremont"), as well as for working capital needs and general
corporate purposes. The Loan Agreement and First Amendment include restrictions
on, among other things, additional debt, capital expenditures, investments,
dividends and other distributions, mergers and acquisitions, and contains
covenants requiring the Company to meet a specified minimum current assets to
current liabilities ratio, and a minimum net worth test. As of the date hereof,
the Company is in compliance with all such financial covenants.
The Loan Agreement and First Amendment established a first security
interest in the current assets of the Company and a second security interest in
the current assets of Aropi, including, among other items, instruments,
furniture, accounts receivable and inventory. In addition, the First Amendment
provided Bidco with a second security interest in the stock of Aropi.
Pursuant to the Loan Agreement, the Company executed a Promissory Note
that bears interest, which is payable monthly, at the rate of three percentage
points over the Prime Rate as published in the Wall Street Journal on the first
of every month. The Promissory Note was amended pursuant to the First Amendment
to reflect the current amount of the loan which was $2,000,000. Pursuant to the
Loan Agreement, the Company issued the Bidco Warrants to purchase 92,595 shares
of Common Stock, exercisable at a price of $0.01 per share. Pursuant to the
First Amendment, the Company executed the New Bidco Warrants for the right to
purchase 40,602 shares of Common Stock, exercisable at 165% of the public
offering price, 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, Bidco has a right of first refusal on any mezzanine financing for a
three-year period and the Company is required to pay a prepayment penalty of
20% on any amount prepaid unless the entire balance is prepaid from the
proceeds of the Offering or a private placement by the Company. The Loan
Agreement and the First Amendment expire on January 31, 1999 and are required
to be paid in full by that time. Although no assurances can be given, the
Company currently anticipates that upon completion of the Offering, Bidco will
refinance the existing indebtedness for a term of three to five years and on
terms and conditions substantially similar to the current agreement. See
"Description of Securities -- Warrants."
As of November 1, 1998, there was an outstanding balance of $2,000,000 on
the Bidco loan.
Greenfield Loan Agreement
In August 1998, the Company entered into a Loan and Security Agreement
(the "Loan and Security Agreement") with Greenfield, that provided acquisition
financing in the amount of $2 million, of which $500,000 is pursuant to a
non-revolving bulge loan facility ("Bulge Loan") and $1.5 million is pursuant
to a revolving credit loan facility ("Term Facility").
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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's subordinated security interest in the current assets of the
Company and its subsidiaries, including, among other items, accounts
receivable, general intangibles, inventory, instruments, furniture, and other
property. In addition, Greenfield has a first security interest in the assets
and stock of Aropi.
Pursuant to the Loan and Security Agreement, the Company executed a
Revolving Credit Note that bears interest at the rate of interest which is three
percentage points above the Prime Rate as published in the Wall Street Journal
and a Bulge Loan Note that bears interest at a fixed 15% per annum rate. The
interest on each note is computed upon the basis of a 360 day year for the
actual number of days elapsed in a month. Pursuant to the Loan and Security
Agreement, the Company also executed the Greenfield Warrants granting Greenfield
the right to purchase 40,602 shares of Common Stock, exercisable at a price per
share equal to 165% of the public offering price. The Greenfield Warrants
contain registration rights for the shares received by the Greenfield pursuant
to such warrants. See "Description of Securities -- Warrants."
As of November 1, 1998, there was an outstanding balance of $500,000 under
the Bulge Loan and a balance of approximately $1.5 million under the Term
Facility. The outstanding balance on the Term Facility is to be repaid in full
no later than January 29, 1999. The outstanding balance on the Bulge Loan is
due December 31, 1998. The Company currently anticipates replacing the Term
Facility with a new secured facility proximate to or shortly after completion
of the Offering. The Bulge Loan as well as a portion of the Term Facility will
be repaid with a portion of the proceeds from the Offering. See "Use of
Proceeds."
Year 2000 Compliance
The Year 2000 ("Y2K") issue is the result of computer programs using two
digits to define the year, rather than four. Therefore, any of the Company's
computer programs that have time-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculations causing disruptions of operations, including among
other things, a temporary inability to process sales transactions, update
databases, produce management reports or engage in normal business activities.
The Company believes that its internal computer systems are fully Y2K
compliant. The Company operates certain accounting software at the corporate
level as well as inventory control and point-of-sale systems on the store and
corporate levels. The Company has completed a preliminary review and assessment
of its hardware and software and based on this preliminary review believes that
its systems will function properly in processing dates pertaining to the Year
2000. Additionally, the Company expects to upgrade its existing accounting
software package during 1999 and will only effect such upgrade with a system
that has been rated Y2K compliant. Management does not currently expect that
the costs related to the Y2K requirements will be material to the Company's
financial condition or results of operations. However, the Company's ability to
predict the costs associated with Y2K compliance is subject to some
uncertainties, and the Company may incur additional unexpected expenditures in
connection with Y2K compliance.
The Company will be dependent on its vendors and suppliers to ensure they
are Y2K compliant. The Company intends to require its vendors and suppliers to
confirm such compliance in agreements made with each of the vendors and
suppliers for services that could affect the Company. No assurance can be made
that vendors and suppliers will agree to such a requirement. Because of the
uncertainties involved, it is not possible to estimate the effect upon the
Company if any of its material vendors or suppliers are not Y2K compliant.
Treatment of Cost or Goods Sold
Traditionally the Company has included store occupancy and delivery
expenses in the cost of goods sold. Aropi has not historically included these
items in its calculation for cost of goods sold. Following the Offering the
Company will determine its future treatment of these items.
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.
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The Company expects to use a portion of the net proceeds of this Offering
for its acquisition and expansion program, and for working capital and general
corporate purposes. A portion of the proceeds may also be used for acquisitions
of complementary businesses; however, at this time the Company has no
definitive acquisition targets. The Company expects the proceeds from this
Offering will satisfy its operational and acquisition needs for the next 18-24
months. See "Use of Proceeds."
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BUSINESS
The Company
The Company operates a chain of specialty retail stores for quality
cookware and serving equipment, cooking accessories and certain select food
products as well as cookbooks and food-related publications. It operates 19
Company-owned stores and 21 franchised locations under the trademarks The
Cookstore and Rolling Pin Kitchen Emporium, which are situated primarily
throughout the Midwest and Southeast regions of the United States.
The Company's goal is to build a consolidated enterprise with national
market reach through the acquisition and integration of independent quality
cookware businesses, the opening of new cookware stores in large markets, and
developing franchised cookware stores in targeted markets throughout the United
States. Although the Company has had preliminary discussions with
representatives of various potential acquisition candidates, the Company
currently has no agreement with any company with regard to any acquisitions.
The Company's cookware stores range in size from approximately 1,600 square
feet to 3,300 square feet and operate in regional retail malls. Each store
offers a wide range of products, purchased from over 300 vendors in 12 distinct
categories including accessories, bakeware, books, cookware, cutlery,
electronics, food, furniture, gadgets, gifts, tableware and textiles. The
Company intends to use its existing stores as the basic store design prototype
for most of its anticipated expansion through Company-owned and franchised
locations. The Company has four stores currently operating under The Cookstore
trademark in Ohio and recently acquired Aropi that has 15 Company-owned stores
operating under the Rolling Pin Kitchen Emporium trademark in Alabama, Florida,
Georgia, Kentucky, Louisiana, South Carolina, Tennessee, and Virginia and 21
franchised stores operating under the Rolling Pin Kitchen Emporium trademark in
Arkansas, Florida, Georgia, Illinois, Iowa, Kentucky, North Carolina, South
Carolina, and Tennessee. The Company expects to convert the four Company-owned
stores in Ohio currently operating under The Cookstore trademark to the Rolling
Pin Kitchen Emporium trademark in the near future.
Industry Background
The Company believes numerous factors exist which create a favorable
environment for a consolidation within the quality cookware industry. As
businesses have become nationwide in scope, the need and demand for a
nationwide vendor supplying uniformly high-quality products and services has
increased.
Similarly, as brand consciousness among end users has increased in certain
industries, national brands have realized significant advantages in the
marketplace, such as the ability to differentiate their products and services,
allowing premium pricing and enhanced customer loyalty. Larger businesses
formed through mergers or acquisitions continue to achieve competitive
advantages by creating operating synergies through, among other things, the
elimination of redundant corporate functions and the use of information
technology to decrease cost and increase revenue. Furthermore, manufacturers
have developed an increased interest in dealing with large distributors, which
has enabled manufacturers to generate efficiency gains due to streamlined
production, distribution, and marketing operations.
The Company believes that its standard store format (between 1,600 - 3,300
square feet) works especially well in regional malls and strip shopping centers
and other select sites that can be classified as middle to upper income
shopping destinations because upper income consumers tend to have more
disposable income, which can be used to purchase more expensive cookware. The
Company's target areas for acquisition and expansion include regional shopping
malls located in suburban and urban core revitalization areas, smaller
specialty malls, and select, upper end in-line shopping centers. The Company
believes that due to the industry's highly fragmented nature, and the
relatively small number of companies, such as Williams-Sonoma, Inc., Bed Bath &
Beyond Inc. and Linens 'N Things, Inc., there are hundreds of prime locations
available for future store openings or acquisitions.
Competition
The specialty retail business is fragmented and highly competitive. The
Company's specialty retail stores compete with other retail stores, including
other specialty stores, so-called super stores, department stores, and
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mail order catalogs. Such competitors include: (i) upscale department stores,
which often carry many of the same product lines as the Company but do not
typically have the same depth or breadth of product selection or service; (ii)
specialty stores (such as specialty linens or housewares retailers), which
often have a depth of product selection but typically carry only a limited
portion of the product lines carried by the Company; and (iii) discount and
mass merchandise stores. In addition, the Company competes with many different
types of retail stores that sell many of the products sold by the Company. The
Company competes to a more limited extent with factory outlet stores that
typically offer limited quantities or limited lines of high quality
merchandise at discount prices. Certain of the Company's competitors have
greater financial, distribution and marketing resources than the Company. The
recent substantial sales growth in the mail order catalog industry has
encouraged the entry of many new competitors and an increase in competition
from established companies. The Company competes on the basis of merchandise
quality and customer service.
Strategy
The Company's goal is to become a leading national retailer of quality
cooking and serving equipment. In addition to opening new locations and sales
of franchises, the Company intends to acquire established local or regional
cookware operations and combine and integrate them into the existing
organization. In order to achieve its goal, the Company will focus on: (i)
identifying acquisition candidates that meet the Company's consolidation
criteria; (ii) opening new locations; (iii) selling new franchises to augment
the store brand in smaller markets; and (iv) achieving operating efficiencies
and synergies by combining administrative functions, eliminating redundant
facilities, implementing system and technology improvements in acquired
entities, and purchasing products in large volumes for both Company-owned and
franchise stores.
Identify and Pursue Strategic Consolidation Opportunities. The Company
plans to acquire companies with established sales presences in certain markets
and/or local brand names. The Company believes that the smaller-store, high-end
quality cookware industry is highly fragmented and often characterized by
family-owned smaller-store owner/operators who desire liquidity and may be
unable to gain the scale necessary to access the capital markets effectively or
to expand beyond a local or regional base. The Company plans to acquire such
operations with a combination of cash from the proceeds of this Offering and
Common Stock. Currently, the Company has no specific acquisition targets
identified. See "Use of Proceeds."
The Company plans to pursue acquisition opportunities in markets of at
least 250,000 population with fragmented competition that will benefit from
economies of scale. Within such markets, the Company intends to focus on the
acquisition of stores or chains having some or all of the following
characteristics: (i) stable cash flows and recurring revenue streams from
long-term operations or market presence; (ii) the ability to improve sales,
operations, and profitability through superior management techniques, access to
larger financial resources, and improved purchasing terms; (iii) long-term
growth prospects for products offered given the market demographics; (iv) a
strong "franchise" or presence in the communities served by the acquisition
candidate; (v) an ability to retain, promote, and motivate management teams;
(vi) favorable demographic trends within the local regions serviced; and (vii)
an under-penetrated market for products provided by the acquisition candidate.
Open new locations. The Company plans to open new stores in its current
Midwest and Southeast market areas. The Company will select locations for new
stores based on market and site demographics, the nature of local competition,
and the logistics of shipping and store operations. The approximate cost to
open a new store (including the costs of inventory) is $250,000.
The Company's strategy is to present the merchandise in an upscale and
fashionable setting. The full range of the stores' products are displayed and
stocked on the retail floor. The merchandise is arranged by category for
shopping convenience. Feature displays are arranged throughout the store
emphasizing seasonal products or particular themes.
Selling new franchises. The Company believes that franchising offers the
opportunity to deploy the cookware store model, and hence the Company's "brand,"
with no significant capital requirements. This franchise expansion will allow
brand expansion into markets that the Company determines would not support a
larger Company-owned store. The Company believes that in smaller markets, the
local franchisee is better positioned
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to commit the effort it takes to make a smaller store successful. The Company
will continue to use business brokers as a primary vehicle for franchise
development, but the Company will also augment its in-house commitment to
finding new markets and prospects. The Company expects franchise locations to
grow at about double the pace as the internally developed stores. Rolling Pin
Kitchen Emporium franchises are available in all states, except for California,
Hawaii, Indiana, Maryland, Minnesota, North Dakota, Rhode Island, South Dakota,
Washington, New York, Texas, and Wisconsin. The Company does not know when or if
it will ever make available franchises in these states.
Alternative Channels -- The Internet and Catalogs. The Company plans to
expand its existing catalog operation. The expanded catalog will be used in
selected direct mailing campaigns so as to develop a customer base that
complements the Company's existing market locations and develops brand
recognition in markets the Company does not currently have retail cookware
stores. The Company has an existing web site which generates a modest volume of
transactions. The Company expects that this electronic commerce vehicle will be
significantly expanded to capture that segment of the growing market that is
comfortable with, or prefers, purchasing products on the internet. The Company
will use a variety of marketing strategies designed to increase brand
recognition and awareness of the web site. This effort is an important
component of the brand identity strategy.
Operating efficiencies. The Company believes that it can achieve greater
operating efficiencies as it expands and acquires cookware chains, new stores,
and franchised locations. Such operating efficiencies include:
o Combining Administrative Functions. The Company plans to institute a
Company-wide management information system and to combine
administrative functions, such as financial reporting and finance,
insurance, employee benefits, and legal support, at the corporate
level.
o Implementing System and Technology Improvements. The Company believes
it will be able to increase the operating margin of existing stores and
acquired companies by using computerized inventory management and order
processing systems, computerized quotation and job costing systems and
computerized logistics and distribution systems. The Company believes
the implementation of such systems may significantly increase the speed
and accuracy of order processing at acquired companies, while
increasing inventory turns and providing measurement and analysis tools
that facilitate efficient operation.
o Using Volume Purchasing. The Company believes that if it is successful
in expanding its operations and acquiring more stores, then the Company
can achieve operating efficiencies through volume purchasing and should
benefit from favorable prices and rebates accruing as the result of
higher volume purchases. The Company plans to negotiate improved
arrangements with wholesalers and manufacturers to reduce inventory
levels of certain acquired companies, thereby allowing more efficient
operations by decreasing inventory holding costs and increasing
operating margins.
Reorganization of Predecessor
The Company is the successor entity to the Predecessor Entity, which filed
for bankruptcy on November 13, 1997 and operated under bankruptcy protection
during the first half of 1998. The Predecessor Entity began as a family
business operating a chain of bookstores and eventually cookware stores as
well. The various operations were consolidated in a corporate entity under the
name Gaylord Companies, Inc. in July 1994. In October 1995, the Predecessor
Entity effected a public offering of its common stock. Although the Predecessor
Entity had expected to raise approximately $4 million to $5 million in that
offering to finance the expansion of its operations, net proceeds to the
Predecessor Entity totaled approximately $2 million. Management believes that
the failure to secure an appropriate level of capital, along with competitive
pressures from larger bookstore competitors and increased operating expenses,
resulted in the bankruptcy.
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The Company formerly operated under the name The Gaylord Companies, Inc.,
which was reorganized in a Chapter 11 bankruptcy which was completed on August
12, 1998 (the "Effective Date"). In the Reorganization, the Company sold its
bookstore operations, closed two cookware stores, and brought in its current
management and was renamed Home Retail Holdings, Inc. On September 15, 1998,
the Company changed its name from Home Retail Holdings, Inc. to Rolling Pin
Kitchen Emporium, Inc.
Acquisition of Aropi
In August 1998, the Company acquired Aropi from Mr. Glenn Kaas for $2.6
million, consisting of $800,000 in cash, two notes each for $250,000 and
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 "Letter Agreement"). The entire amount
remaining under the Letter Agreement will be accelerated and become due and
payable upon the consummation of the Offering. The Company has also agreed to
make a good faith effort to deliver to Mr. Kaas a letter of credit in the
amount of $150,000 to secure a convertible promissory note in the amount of
$250,000. See "Certain Relationships and Related Party Transactions."
Aropi was founded in 1978 as Rolling Pin Kitchen Emporium, a sole
proprietorship, by members of Mr. Kaas' family. In 1981, Rolling Pin Kitchen
Emporium incorporated in the State of Iowa under the name "Aropi, Incorporated."
Aropi owned and operated 15 cookware stores in eight states and 21 franchised
stores in nine states. Aropi's stores offer on average 4,000 stock-keeping-units
("SKUs"), which are marketed to consumers with a keen interest in cooking and
feature categories that include cookware, cutlery, bakeware, books, food, and
associated accessories and gadgets. Aropi distinguishes itself from competition
by broader and deeper product offerings and a product mix that it believes is
continuously revised and revitalized. Aropi's stores, doing business under the
trademark Rolling Pin Kitchen Emporium, occupy primary locations in mid- and
upper-scale malls enjoying the status as a destination center as well as sales
to convenience and impulse buyers throughout the year, particularly during the
fourth quarter in correlation with the holiday season.
At the time Aropi was acquired, the Company appointed Mr. Kaas as
President, Chief Executive Officer and a director of the Company. Mr. Kaas had
entered into an employment agreement (the "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 and a signing bonus of $125,000 payable in twelve equal monthly
installments. On November 4, 1998, the Company's stockholders removed Mr. Kaas
from the Board of Directors of the Company, and the Board of Directors
terminated his employment as President and Chief Executive Officer of the
Company. Under the Employment Agreement, if Mr. Kaas is terminated without Cause
(as defined in the Employment Agreement) he is entitled to receive within 30
days of such termination, a lump sum equal to his base salary for 12 months plus
all amounts owed with respect to the signing bonus. If Mr. Kaas is terminated
with Cause (as defined), he is entitled to his unpaid salary as of the date of
termination. Following the Offering, Mr. Kaas, assuming conversion of the two
promissory notes, will own approximately 2% of the Common Stock and will have an
option to acquire an additional 5,000 shares of Common Stock received in
connection with the acquisition of Aropi.
Discontinued Operations
In the Reorganization, the Company sold six bookstores and closed two
cookware stores which were unprofitable and could not be restructured through
the reorganization process to become cost effective.
27
<PAGE>
Properties
The Company-owned stores are all in leased facilities. The Company does
not currently own any of the facilities where its stores are located. The
Company-owned stores (which do not include any franchise stores) are located in
the following markets:
Riverchase Galleria, Birmingham, Alabama
Aventura Mall, Aventura, Florida
Gulf View Square, Port Richey, Florida
Cumberland Mall, Atlanta, Georgia
Northlake Mall, Atlanta, Georgia
Phipps Plaza, Atlanta, Georgia
Gwinnett Place Mall, Duluth, Georgia
Town Center at Cobb, Kennesaw, Georgia
Fayette Mall, Lexington, Kentucky
The Mall at Cortana, Baton Rouge, Louisiana
Lakeside Shopping Center, Metairie, Louisiana
Lane Avenue Shopping Center, Columbus, Ohio
Summit Mall Shopping Center, Akron, Ohio
Worthington Mall, Worthington, Ohio
The Mall at Fairfield Commons, Beavercreek, Ohio
Haywood Mall, Greenville, South Carolina
2100 Hamilton Place Blvd., Chattanooga, Tennessee
Cool Springs Galleria, Franklin, Tennessee
Regency Square Mall, Richmond, Virginia
The Company's corporate headquarters is located at 4264 Winters Chapel
Road, Building B, Atlanta, Georgia 30360.
The Company's leases tend to be in locations that are considered mid- to
upper-end shopping malls and would also be characterized as both destination
and convenience driven. A majority of the Company's leases have a term of 10
years. The Company believes that its current corporate facilities are adequate
for the foreseeable future and that alternate facilities are readily available.
Franchise Regulation
The Company as a franchisor is also subject to federal and state
regulation in the states in which it offers franchises or where franchised
stores are currently operating. Federal regulations require that the Company
provide each prospective franchisee with a disclosure document that provides
information regarding the Company and the relevant provisions of the franchise
agreement and other ancillary contracts. In addition, certain state regulations
require that the franchisor be registered or be exempt from the applicable
registration requirements. Federal and state franchising laws prohibit certain
deceptive trade practices and, in some cases, impose fairness and
anti-discrimination standards on the Company.
Trademarks
The Company has been granted registered trademarks for each of "The
Cookstore" and "Rolling Pin Kitchen Emporium" with the United States Patent and
Trademark Office.
Employees
As of October 31, 1998, the Company had approximately 188 part-time
employees and approximately 34 full-time employees, of whom 34 were in
managerial positions and 188 were in sales positions. The Company believes that
the success of its business will depend, in part, on its ability to attract and
retain qualified personnel. The Company's employees are not covered by a
collective bargaining agreement, and the Company considers its relations with
its employees to be good.
Legal Proceedings
The Company is involved in various legal actions arising in the ordinary
course of business. The Company believes that none of these actions will have a
material adverse effect on its business, financial condition or results of
operations. The Predecessor Entity emerged from bankruptcy on August 12, 1998.
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>
John D. Critser ................. 43 President, Chief Executive Officer 1998
and Director
Gerald M. Czarnecki(1) .......... 58 Chairman of the Board of Directors 1998
Greg E. Dukoff .................. 34 Secretary, Interim Chief Financial Officer 1998
and Director
David E. Danovitch(2) ........... 36 Director 1998
Donald J. Jackson(1) ............ 47 Director 1998
George P. Lucaci(2) ............. 47 Director 1998
Thomas L. Tuttle (2) ............ 31 Director 1998
</TABLE>
- ------------
(1) Member of Compensation Committee.
(2) Member of Audit Committee.
John Critser was appointed President, Chief Executive Officer and director
of the Company on November 4, 1998. Prior to that he had been the Vice
President of Operations of the Company since September 1998. Between July 1994
and August 1998, Mr. Critser was a director, President and Chief Operating
Officer of the Gaylord Companies, Inc. and was President and Chief Operating
Officer of each of the Gaylord subsidiaries since November 1993. Prior to
joining Gaylord in July 1993, Mr. Critser held various positions including Vice
President of Store Operations with Eckerd Vision Group, a division of the
Eckerd Corporation.
Gerald Czarnecki has been Chairman of the Board of Directors of the
Company since August 1998. Since December 1995, Mr. Czarnecki has been the
Chairman and Chief Executive Officer of the Deltennium Group, Inc., a private
investment and management company. From September 1994 to November 1995, Mr.
Czarnecki was President and Chief Operating Officer of UNC Incorporated, an
aviation manufacturing and services company. From April 1993 to May 1994, he
was Senior Vice President of International Business Machines Corporation. From
1988 to April 1993, Mr. Czarnecki was part of an investor group headed by
former Treasury Secretary William E. Simon, with specific responsibility for
overseeing the affairs of HonFed Savings Bank, a bank located in Hawaii.
Greg Dukoff has been the Secretary and interim Chief Financial Officer of
the Company since May 1998. Since May 1998, he has also been the Administrator
of the Predecessor Entity, The Cookstore, Inc., and The Cookstore Worthington,
Inc. 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.
<PAGE>
David Danovitch has been a director of the Company since May 1998. Since
June 1997, Mr. Danovitch has been a Managing Director of DDG Management Services
Corp. an investment firm. From October 1997 to October 1998, Mr. Danovitch was a
Managing Director of Cambridge Holdings, L.L.C. From 1994 to 1997, he was a
principal of Snowden Capital, Inc., a New York City-based investment banking and
direct investment firm. From 1993 to 1994, he served as the chief of staff to
the Senior Vice President at International Business Machines Corporation.
Between 1990 and 1993, Mr. Danovitch was an attorney with the law firm of Jones,
Day, Reavis & Pogue.
Donald Jackson has been a director of the Company since August 1998. Mr.
Jackson has been a Managing Director of DDG Management Services Corp. since
June 1997. From October 1997 to October 1998, he was the President of Cambridge
Holdings, L.L.C. and 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 a Managing Director of DDG Management Services Corp. since June
1998. From June 1997 to October 1998, Mr. Lucaci was the Vice Chairman of
Cambridge Holdings, L.L.C. From June 1995 to June 1997, he was the Chief
Executive Officer of RiverBank Securities, a small broker-dealer firm. From
October 1992 to June 1995, he was the Managing Director of Normandy Asset
Management, a private international investor group.
29
<PAGE>
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
the position.
On August 4, 1998, NASD Regulation, Inc. ("NASD") accepted a Letter of
Acceptance, Waiver and Consent submitted by Donald Jackson and George Lucaci, in
which Messrs. Jackson and Lucaci consented to a finding by NASD that they had
solicited and sold securities prior to the time that a company that they
controlled (which company ultimately became a NASD member), and which was
involved in the sale of the securities involved in that transaction, was
approved for NASD membership, and collected investor checks in a manner that did
not comply with regulatory guidelines. Messrs. Jackson and Lucaci agreed to pay
a fine of $101,775 in the aggregate to NASD in connection with this matter. The
violations were identified during a routine audit subsequent to the company's
admission to membership by NASD.
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. John D. Critser
was appointed Chief Executive Officer on November 4, 1998, and will receive a
salary of $105,000.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Compensation Long-Term Compensation
----------------------------------------- -----------------------------
Awards
Name and Other Securities All Other
Principal Annual Underlying Compensation
Position Year Salary($) Bonus($) Compensation Options (#) ($)
- --------------------- ------ ----------- ---------- -------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
John D. Critser, 1997 134,623 -- -- -- --
President and Chief 1996 125,000 -- -- -- --
Executive Officer 1995 102,885 -- -- -- --
</TABLE>
- ------------
(1) Reflects compensation paid by the Predecessor Entity.
30
<PAGE>
Stock Option Grants
The following table sets forth information concerning the grant of stock
options made during 1998 to the former Chief Executive Officer:
<TABLE>
<CAPTION>
Number of Percent of Total
Securities Options Granted to
Underlying Options Employees in
Name Granted Fiscal Year Price Per Share Expiration Date
- ----------------------- -------------------- ------------------- ----------------- ----------------
<S> <C> <C> <C> <C>
Glenn Kaas(1) ......... 5,000 100% $ 6.00 August 20, 2000
</TABLE>
- ------------
(1) The options were granted as part of the purchase price for the acquisition
of Aropi. The options are exercisable immediately.
1998 Equity Incentive Plan
The Company adopted the Incentive Plan on July 10, 1998, in connection
with the Reorganization.
The Incentive Plan is designed to advance the interests of the Company by
enhancing its ability to attract and retain employees and others in a position
to make significant contributions to the success of the Company through
ownership of Common Stock. The Incentive Plan provides for the grant of
incentive stock options ("ISOs"), non-qualified stock options ("NQSOs"), stock
appreciation rights ("SARs"), restricted stock, unrestricted stock, deferred
stock grants, and performance awards, loans to participants in connection with
awards, supplemental grants and combinations of the above. A total of 180,000
shares of Common Stock are reserved for issuance under the Incentive Plan. The
maximum number of shares as to which options or SARs may be granted to any
participant in any one calendar year is 80,000. The shares of Common Stock
issuable under the Incentive Plan are subject to adjustment for stock dividends
and similar events. Awards under the Incentive Plan may also include provision
for payment of dividend equivalents with respect to the shares subject to the
award.
<PAGE>
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
31
<PAGE>
option or the SAR is exercised, the accompanying option or SAR, as the case may
be, will cease to be exercisable. An SAR granted in tandem with an ISO may be
exercised only when the market price of Common Stock subject to the option
exceeds the exercise price of such option. SARs not granted in tandem shall be
exercisable at such time, and on such conditions, as the Option Committee may
specify.
Restricted Stock. The Incentive Plan provides for awards of
nontransferable shares of restricted Common Stock subject to forfeiture. Awards
may provide for acquisition of restricted and unrestricted Common Stock for a
purchase price specified by the Option Committee, but in no event less than par
value. Restricted Common Stock is subject to repurchase at the original
purchase price, or to forfeiture if no cash was paid by the participant, if the
participant ceases to be an employee of the Company before the restrictions
lapse. Restricted securities shall become freely transferable upon the passage
of any applicable period of time and satisfaction of any conditions to vesting.
The Option Committee, in its sole discretion, may waive all or part of the
restrictions and conditions at any time.
The Incentive Plan also provides for deferred grants entitling the
recipient to receive shares of Common Stock in the future at such times, and on
such conditions, as the Option Committee may specify. Performance awards
entitling the recipient to receive cash or Common Stock following the
attainment of performance goals determined by the Option Committee may also be
granted. Performance conditions and provisions for deferred stock may also be
attached to other awards under the Incentive Plan.
A loan may be made under the Incentive Plan either in connection with the
purchase of Common Stock under an award or with the payment of any federal,
state and local tax with respect to income recognized as a result of an award.
The Option Committee will determine the terms of any loan, including the
interest rate (which may be zero). No loan may have a term exceeding ten years
in duration. In connection with any award, the Option Committee may also
provide for and grant a cash award to offset federal, state and local income
taxes or to make a participant whole for certain taxes.
Except as otherwise provided by the Option Committee, if a participant
dies, options and SARs held by such participant immediately prior to death, to
the extent then exercisable, may be exercised by the participant's executor,
administrator or transferee for a period of one year following such death (or
for the remainder of their original term, if less). Except as otherwise
determined by the Option Committee, options and SARs not exercisable at a
participant's death terminate at death. Outstanding awards of restricted Common
Stock must be transferred to the Company upon a participant's death and,
similarly, deferred Common Stock grants, performance awards and supplemental
awards to which a participant was not irrevocably entitled prior to death will
be forfeited, except as otherwise determined by the Option Committee.
In the case of termination of a participant's association with the Company
for reasons other than death, the following will apply: (i) options and SARs
remain exercisable, to the extent they were exercisable immediately prior to
termination, for three months (or for the remainder of their original term, if
less); (ii) shares of restricted Common Stock must be resold to the Company;
and (iii) other awards to which the participant was not irrevocably entitled
prior to termination will be forfeited, unless otherwise determined by the
Option Committee. If any such association is terminated due to the
participant's discharge for cause which, in the opinion of the Option
Committee, casts such discredit on the participant as to justify immediate
termination of any award under the Incentive Plan, such participant's options
and SARs may be terminated immediately.
In the event of a consolidation or merger in which the Company is not the
surviving corporation or which results in the acquisition of substantially all
of the Company's outstanding Common Stock by a single person or entity or by a
group of persons and/or entities acting in concert or in the event of the sale
or transfer of substantially all of the Company's assets, the Option Committee
may determine that (i) each outstanding option and SAR will become immediately
exercisable unless otherwise provided at the time of grant, (ii) each
outstanding share of restricted Common Stock will immediately become free of
all restrictions and conditions, (iii) all conditions on deferred grants,
performance awards and supplemental grants which relate only to the passage of
time and continued employment will be removed, and (iv) all loans under the
Incentive Plan will be forgiven. The Option Committee may also arrange to have
the surviving or acquiring corporation or affiliate assume any award held by a
participant or grant a replacement award. If the optionee is terminated after a
change in control without cause, or in the case of certain officers designated
from time to time by the Option Committee resigns under
32
<PAGE>
certain circumstances, within two years following the change in control, all
unvested options will immediately become fully vested, all options will be
exercisable for the shorter of four years or their original duration, and all
other awards will immediately become fully vested. If the Option Committee
makes no such determination, outstanding awards to the extent not fully vested
will be forfeited.
Employment Agreements
Mr. Critser, the President and Chief Executive Officer of the Company, has
entered into a one year employment agreement with the Company. Mr. Critser
receives an annual salary of $105,000 a year and a $700 monthly car allowance.
Mr. Kaas, the former Chief Executive Officer of the Company, had entered
into the Employment Agreement. The Board of Directors terminated Mr. Kaas'
position with the Company effective November 4, 1998. Under the Employment
Agreement, if Mr. Kaas is terminated without Cause (as defined in the
Employment Agreement) he is entitled to receive within 30 days of such
termination, a lump sum equal to his base salary for 12 months plus all amounts
owed with respect to a $125,000 signing bonus which was part of the Employment
Agreement. If Mr. Kaas is terminated with Cause (as defined), he is entitled to
his unpaid salary as of the date of termination.
Indemnification of Officers and Directors
The Company, to the fullest extent permitted by the provisions of Section
145 of the General Corporation Law of the State of Delaware, indemnifies, and
advances expenses to, any and all persons who is or was a party or is
threatened to be made a party to any threatened, pending or completed action,
suit, proceeding or claim, whether civil, criminal, administrative or
investigative, by reason of the fact that such person is or was or has agreed
to be a director or officer of the Company or while a director or officer is or
was serving at the request of the Company as a director, officer, partner,
trustee, employee or agent of any corporation, partnership, joint venture,
trust or other enterprise, including service with respect to employee benefit
plans, from and against any and all of the expenses, liabilities, or other
matters referred to in or covered by said section (including without limitation
attorneys fees and expenses). The indemnification provided by the Company is
not exclusive of any other rights to which those indemnified may be entitled
under any bylaw, agreement, vote of stockholders or disinterested directors or
otherwise, both as to action in their official capacity and as to action in
another capacity while holding such office, and shall continue as to a person
who has ceased to be a director, officer, employee, or agent and shall inure to
the benefit of the heirs, executors, and administrators of such a person. Any
person seeking indemnification by the Company is deemed to have met the
standard of conduct required for such indemnification unless the contrary shall
be established by a court of competent jurisdiction.
If the Delaware General Corporation Law is amended to authorize action
further eliminating or limiting the personal liability of directors, then the
liability of our directors will be eliminated or limited to the fullest extent
permitted by such statutes, as so amended. Any amendment, repeal or
modification of such provision shall be prospective only and shall not
adversely affect any right or protection of any of our directors existing at
the time of such amendment, repeal or modification.
Additionally, it is the position of the Commission that indemnification of
directors and officers for liabilities arising under the Securities Act of
1933, as amended (the "Securities Act") is against public policy and
unenforceable pursuant to Section 14 of the Securities Act.
33
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
The Company believes that the transactions set forth below were made on
terms no less favorable to it than could have been obtained from unaffiliated
third parties. All future transactions, including any loans between the Company
and any of its officers, directors, principal stockholders and their affiliates
will be approved by a majority of the Board of Directors, including a majority
of the disinterested outside directors, and will continue to be on terms no less
favorable to the Company than could be obtained from unaffiliated third parties.
The Home Retail Acquisition Corp. Junior Participation; The Merger
In March 1998, the Company and Cambridge Holdings, L.L.C. ("Cambridge")
entered into a Term Sheet that provided for the sale of the Company and its
subsidiaries as going concerns to Cambridge or its designee. Greenfield had
provided financing to the Company during the reorganization and the Term Sheet
originally envisioned that Greenfield would remain a lender to the Company
through the Effective Date and that Cambridge or its designee would provide
advisory services to the Company pursuant to an Advisory Agreement. However, it
became apparent to the Company and to Cambridge that it was in the best
interests of the Company for Greenfield to be paid out of its loan facility
with respect to the Company prior to the Effective Date and for Home Retail
Acquisition Corp. ("HRAC"), the designee of Cambridge, to assume a more active
advisory role in the business and perform in place of Cambridge under the
advisory agreement. As a result, HRAC arranged for Fremont to provide a loan
facility, the proceeds of which were used to repay Greenfield. The Advisory
Agreement was amended pursuant to a Stipulation and Order entered by the Court
on April 27, 1998. In order to ensure that the Fremont financing was sufficient
in amount to (i) repay Greenfield in full, and (ii) provide the Company with
sufficient working capital, the Court authorized HRAC to purchase participation
interests in the Fremont financing. As a result, HRAC purchased the HRAC Junior
Tranche, in the amount of $310,000.
Pursuant to the Plan of Reorganization, on the Effective Date, HRAC merged
with and into the Predecessor Entity with the Predecessor Entity being the
surviving corporation and simultaneously changing its name to Home Retail
Holdings, Inc. In consideration for the contribution of HRAC and the merger of
HRAC with the Company, and in complete satisfaction of the HRAC Junior Tranche,
and any amounts owed to HRAC prior to the confirmation date under the HRAC
Advisory Agreement, on the Effective Date the stockholders of HRAC received
1,383,691 shares of Common Stock. In addition, the Company assumed all of the
liabilities of HRAC.
The Reorganization
Pursuant to the Plan of Reorganization, the Company issued: (i) 1,522,041
shares of Common Stock, of which 1,383,691 shares were issued to the
shareholders of HRAC and 138,350 were issued to creditors with unsecured claims
against the Predecessor Entity; (ii) 85,777 shares of Class B Common Stock to
the holders of the Predecessor Entity's common stock; (iii) 69,174 shares of
Class B Common Stock to the holders of the Predecessor Entity's preferred
stock; (iv) 52,573 New Warrants; (v) 92,595 Bidco Warrants; and (vi) 29,261
Individual Warrants. These shares and warrants were issued pursuant to Section
1145(a) of the Bankruptcy Code which exempts the offer and sale of securities
under a plan of reorganization from registration under the Securities Act and
state laws if: (i) the securities are offered and sold under a plan of
reorganization; (ii) the securities offered are these of the debtor or an
affiliate of the debtor participating in a joint plan or of a successor to the
debtor under the plan; and (iii) the recipients of the securities must hold a
prepetition or administrative expense claim against the debtor or an interest
in the debtor, or principally in such exchange and partly for cash or property.
The Company believes that it satisfied all of the requirements of Section
1145(a) and as a result the securities and warrants issued pursuant to the Plan
of Reorganization were exempt from registration under the Securities Act and
state securities laws.
Other Transactions
Greg E. Dukoff is currently the Secretary, interim Chief Financial Officer
and a director of the Company. Mr. Dukoff is being compensated at a rate of
$8,333 per month for financial and administrative services rendered as an
independent consultant. Mr. Dukoff was President and a director of HRAC.
34
<PAGE>
In connection with the acquisition of Aropi, the Company granted Mr. Kaas
an option to purchase 5,000 shares of Common Stock at the price per share equal
to the public offering price. This option vested immediately. As a signing
bonus, Mr. Kaas was entitled to receive $125,000 paid in equal monthly payments
of approximately $10,417 per month for a period of 12 months commencing 60 days
after the closing of the acquisition. In addition, pursuant to a letter
agreement between the Company and Mr. Kaas, the Company agreed to pay Mr. Kaas
the aggregate amount of $100,000 on a monthly basis over a period of 12 months
commencing 60 days after the closing of the acquisition. The entire amount
remaining under the letter agreement will be accelerated and become due and
payable upon the consummation of the Offering. The Company also agreed to make
a good faith effort to deliver to Mr. Kaas a letter of credit in the amount of
$150,000 to secure a convertible promissory note in the amount of $250,000.
In August 1998, the Company entered into an agreement to lease its
executive offices from Glenn Kaas, formerly the President, Chief Executive
Officer and director of the Company. The annual rental to be paid by the
Company will equal $65,000 per year for the first 18 months of the lease, at
which time the base rent will be adjusted by calculating the change in the
Revised Consumer Price Index for All Urban Consumers published by the Bureau of
Labor Statistics of the United States Department of Labor for the United States
City Average, All Items ("CPI"), from the commencement date of the lease and as
of the twelfth month of the lease and adding that percentage to the percentage
arrived at by calculating the change in the CPI from the thirteenth month and
as of the eighteenth month of the lease. The base rent for the remaining term
of the lease will be adjusted by the sum of these two percentages. The lease
commences on September 1, 1998 and terminates two and one half years from the
commencement date.
Pursuant to a demand note, Amelar Investments, L.L.C., TJQL Investments,
LLC, Deltennium Group, Inc., and Sina Kinay, collectively, loaned $30,000 to
the HRAC on June 12, 1998 with an annual interest rate of 10.5%. This demand
note was later amended to be held by Tri-Family Investment Co., LLC. on behalf
of the aforementioned parties.
Control by Certain Directors
Certain related persons currently own an aggregate of approximately 40% of
the Common Stock, 20% after this Offering, and all but two of the Company's
directors are affiliated. As a result, Messrs. Danovitch, Lucaci, Dukoff,
Czarnecki and Jackson 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.
Global Strategic Holdings, Ltd. currently owns an aggregate of
approximately 40% of the Common Stock, 20% after this Offering. Thomas Tuttle,
a director of the Company, is the investment advisor to Global Strategic
Holdings, Ltd. and as such will be in a position to exercise significant
influence over the Company and the election of its directors and otherwise
essentially control the outcome of all matters requiring stockholder approval.
Advisory Agreement
Pursuant to the Plan of Reorganization, HRAC entered into an advisory
agreement with the Company which terminated on the Effective Date of the
Reorganization. DDG Management Services Corp. currently has an advisory
agreement with the Company to provide advisory and related services for the
lesser of three years from the Effective Date or until the Company has sustained
a market capitalization of at least $150 million for at least three months.
Under the advisory agreement, DDG Management Services Corp. receives $20,000 per
month, with payments to accrue until such time as the Company raises $4 million
in a public or private equity offering, after which all amounts that have
accrued including any interest thereon shall be paid and future payments shall
be made monthly. See "The Reorganization."
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<PAGE>
PRINCIPAL STOCKHOLDERS
As of November 2, 1998, the Company has outstanding 1,522,041 shares of
Common Stock held by 343 holders of record. The following table sets forth
certain information regarding the beneficial ownership of shares of Common
Stock as of November 2, 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% 3.3%
Greg Dukoff(3) ................................ 73,813 4.8% 2.4%
John Critser .................................. 8,937 * *
David Danovitch(4) ............................ 132,627 8.7% 4.4%
Donald Jackson(5) ............................. 219,108 14.4% 7.3%
George Lucaci(6) .............................. 219,108 14.4% 7.3%
Thomas Tuttle(7) .............................. 605,362 39.7% 20.0%
Global Strategic Holdings, Ltd. ............... 605,362 39.7% 20.0%
Amelar Investments, LLC ....................... 132,627 8.7% 4.4%
Alemer Productions, LLC ....................... 219,108 14.4% 7.3%
TJQL Investments, LLC ......................... 219,108 14.4% 7.3%
Deltennium Group, Inc. ........................ 100,830 6.6% 3.4%
All Directors and Executive Officers as a Group
(7 Persons) .................................. 1,359,785 89.3% 45.0%
</TABLE>
- ------------
* Less than one percent.
(1) Unless indicated otherwise, the address of the beneficial owners is,
Rolling Pin Kitchen Emporium, Inc., 4264 Winters Chapel Road, Building B,
Atlanta, Georgia 30360.
(2) Includes 100,830 shares held by Deltennium Group, Inc. Mr. Czarnecki is the
Chairman and Chief Executive Officer of Deltennium Group, Inc.
(3) Includes 72,063 shares held by Jamberry Lake Partners and 1,750 shares
which may be acquired upon the exercise of warrants. Mr. Dukoff is a
managing partner of Jamberry Lake Partners.
(4) Includes 132,627 shares held by Amelar Investments, LLC. Mr. Danovitch is a
manager of Amelar Investments, LLC.
(5) Includes 132,627 shares held by TJQL Investments, LLC. Mr. Jackson is a
manager of TJQL Investments, LLC.
(6) Includes 132,627 shares held by Alemer Productions, LLC. Mr. Lucaci is a
member of Alemer Productions, LLC.
(7) 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.
36
<PAGE>
DESCRIPTION OF SECURITIES
The authorized capital stock of the Company consists of 20,000,000 shares
of Class A Common Stock, par value $0.01 per share (referred to as "Common
Stock"), 154,951 shares of Class B Restricted Common Stock, par value $0.01 per
share (the "Class B Common Stock"), and 1,000,000 shares of Preferred Stock,
par value $0.01 per share ("Preferred Stock").
The following summary of certain terms of Company's capital stock
describes material provisions of, but does not purport to be complete and is
subject to and qualified in its entirety by, our Restated and Amended
Certificate of Incorporation, Bylaws and the Delaware General Corporation Law.
Common Equity Securities
The Common Stock and Class B Common Stock have the same rights, privileges
and preferences except that the Class B Common Stock (i) has no dividend or
liquidation rights except as required under the Delaware General Corporation
Law, and (ii) may not be transferable except by operation of law in the event of
the death, bankruptcy, or liquidation of the holder thereof. Subject to prior
dividend rights and sinking fund or redemption or purchase rights which may be
applicable to any outstanding preferred stock, the holders of Common Stock are
entitled to share ratably in such dividends, if any, as may be declared from
time to time by the Board of Directors in its discretion out of funds legally
available therefor. The holders of Common Stock are entitled to share ratably in
any assets remaining after satisfaction of all prior claims upon liquidation of
Company, including prior claims of any outstanding preferred stock.
Each share of Class B Common Stock shall be automatically converted into
one share of Common Stock (the "Conversion Rate") if any one of the following
events occurs (each, a "Trigger Event"): (i) the closing sale price of the
Common Stock for twenty (20) consecutive trading days as quoted on the Nasdaq
SmallCap Market or, if such shares are not trading on the Nasdaq SmallCap
Market, then on the principal market on which such shares shall then be trading
for twenty (20) consecutive trading days exceeds $11.57 per share of Common
Stock (the "Trigger Price"); or (ii) of a sale of all or substantially all the
assets of Company, a sale of all the equity interests of Company or a merger or
consolidation of Company with or into another entity in which Company is not
the surviving entity pursuant to which the holders of Common Stock would
receive, on a fully diluted basis after giving effect to the conversion of the
Class B Common Stock and any other convertible securities, consideration which
exceeds the Trigger Price, in each case subject to adjustment in the event of
any stock splits or other similar events. As soon as practicable after a
Trigger Event, Company shall give or cause notice to be given to each holder of
Class B Common Stock that the Class B Common Stock has been converted into
Common Stock, and such conversion shall be deemed to have occurred on the
sooner of the date of such notice and the date of such a merger or
consolidation, if any, constituting a Trigger Event. Each holder of shares of
Class B Common Stock outstanding immediately prior to the date of the Trigger
Event, upon surrender of the certificate or certificates representing such
shares to Company, shall receive in exchange therefor a certificate or
certificates representing the number of whole shares of Common Stock which such
holder shall be entitled to receive as provided herein. After the Trigger
Event, each certificate which represented outstanding shares of Class B Common
Stock, prior to such date, shall be deemed for all corporate purposes to
evidence the ownership of the shares of Common Stock as provided herein. No
dividend or other distribution payable with respect to the Common Stock shall
be paid to any holder of any certificate representing shares of Class B Common
Stock issued and outstanding immediately prior to such date until such holder
surrenders such certificate for exchange. All shares of Common Stock for and
into which shares of Class B Common Stock shall have been exchanged and
converted shall be deemed to have been issued in full satisfaction of all
rights pertaining to such exchanged and converted shares. Except for such
rights, the holder of certificate(s) representing shares of Class B Common
Stock issued and outstanding immediately prior to such date shall have no
rights with respect to such shares after such date other than to surrender such
certificate for conversion. The Company shall at all times reserve a sufficient
number of shares of authorized but unissued Common Stock for issuance upon
conversion of the Class B Common Stock. No share of Class B Common Stock may be
issued after a Trigger Event.
There are 1,522,041 shares of Common Stock and 154,951 shares of Class B
Common Stock issued and outstanding.
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<PAGE>
The holders of Common Stock and Class B Common Stock are entitled to one
vote per share on all matters to be submitted to a vote of the stock and are
not entitled to cumulative voting in the election of directors, which means
that the holders of the majority of the shares voting for the election of
directors can elect all of the directors then standing for election by the
holders of Common Stock. The holders of Common Stock and Class B Common Stock
have no preemptive or other subscription rights, and shares of Common Stock and
Class B Common Stock are not redeemable at the option of the holders, do not
have any conversion rights, and are not subject to call. The rights,
preferences and privileges of holders of Common Stock and Class B Common Stock
are subject to, and may be adversely affected by, the rights of holders of
shares of any series of preferred stock that the Company may designate and
issue in the future or which is currently outstanding.
Preferred Stock
The authorized but undesignated Preferred Stock may be issued from time to
time in one or more designated series or classes. The Board of Directors,
without approval of the stockholders, is authorized to establish the voting,
dividend, redemption, conversion, liquidation and other relevant provisions
that may be provided with respect to a particular series or class. The issuance
of Preferred Stock, while providing flexibility in connection with possible
acquisitions and other corporate purposes, could, among other things, adversely
affect the voting power of the holders of Common Stock and Class B Common Stock
and, under certain circumstances, make it more difficult for a third party to
acquire, or discourage a third party from acquiring, a majority of the
outstanding voting stock of the Company.
There are 320 shares of Convertible Series A Preferred Stock issued and
outstanding.
The holders of the Convertible Series A Preferred Stock have the right to
receive dividends of 6% per annum, payable in stock or cash at the Company's
discretion at the time of conversion. The holders have the right to convert each
share of Preferred Stock into Shares of Common Stock (based on $1,000 per share
of Preferred Stock) equal to the lesser of (a) 80% of the five day average
closing bid price for the Common Stock for the five trading days immediately
preceding the shares are converted, or (b) 150% of the five day average closing
bid price, as reported by Bloomberg, LP, for the Company's Common Stock for the
five trading day period following the Company's successful completion of its
secondary offering. The holders of the Convertible Series A Preferred Stock have
demand registration rights. As a result, the Company will exercise its
redemption rights and redeem 275 shares of Convertible Series A Preferred Stock
held by the Delacroix Foundation, Ltd. at the time of the Offering for a
redemption premium of 25% over the $1,000 par value of such shares.
Registration Rights
Registration rights were granted in connection with the issuance of the
Preferred Stock, Individual Warrants, Other Financing Warrants, Greenfield
Warrants, New Bidco Warrants and Bidco Warrants. The holders of the Individual
Warrants, Other Financing Warrants, Greenfield Warrants, New Bidco Warrants and
Bidco Warrants, or the shares of Common Stock issued on conversion of the such
warrants, have the right to unlimited incidental registrations for a period of
three years from the commencement of this Offering.
Warrants
New Warrants. Pursuant to the Plan of Reorganization, the Company granted
the New Warrants for the purchase of 52,573 shares of Common Stock, exercisable
at a price of $11.57 per share 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 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.
38
<PAGE>
Individual Warrants. Pursuant to the Plan of Reorganization, the Company
granted the Individual Warrants for the purchase of 29,261 shares of Common
Stock, exercisable at a price of 80% of the public offering price, to the
holders of all of the individual junior tranche of the Predecessor Entity. The
Individual Warrants are exercisable for a period of five-years, commencing on
August 20, 1998 and terminating on June 30, 2003. The Individual Warrants
contain anti-dilution provisions providing for adjustments of the exercise price
and the number of shares underlying the Individual Warrants upon the occurrence
of certain events, including any recapitalization, reclassification, stock
dividend, stock split, stock combination or similar transactions. For a period
of three years from the commencement of this Offering, the Individual Warrants
grant to the holder thereof certain registration rights with respect to the
Common Stock issuable upon the exercise of the Individual Warrants.
Bidco Warrants. The Company has granted warrants to Bidco for the purchase
92,595 shares of Common Stock. The Bidco Warrants are exercisable at a price of
$0.01 per share for a five-year period, commencing on August 12, 1998 and
terminating on August 12, 2003. 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 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 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
39
<PAGE>
offering price for a four-year period, commencing one year from the effective
date of this Offering. The Underwriters' Warrants contain anti-dilution
provisions providing for adjustments of the exercise price and the number of
shares underlying the Underwriters' Warrants upon the occurrence of certain
events, including any recapitalization, reclassification, stock dividend, stock
split, stock combination or similar transaction. The Underwriters' Warrants
grant to the holders thereof certain demand and "piggyback" registration rights
with respect to the Common Stock issuable upon the exercise of the
Underwriters' Warrants. See "Underwriting."
Other Financing Warrants. The Company has granted two warrants to JRP
Consulting Corp. and two warrants to Laux, Holmes & Company for the purchase of
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 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.
Financing Warrants. The Company has granted warrants to DLM Asset
Management and Spinnernet Financial Services, Ltd. for the purchase of 8,875
shares of Common Stock in the aggregate. The Financing Warrants are exercisable
at a price per share of 165% of the public offering price. The Financing
Warrants are exercisable for a period of three years, commencing on the
effective date of the Offering and terminating on August 31, 2003. The Financing
Warrants contain anti-dilution provisions providing for adjustments of the
exercise price and the number of shares underlying the Financing Warrants upon
the occurrence of certain events, including any recapitalization,
reclassification, stock dividend, stock split, stock combination or similar
transactions. For a period of three years from the commencement of this
Offering, the Financing Warrants grant to the holder thereof certain
registration rights with respect to the Common Stock issuable upon the exercise
of the Financing Warrants.
Transfer Agent and Registrar
Continental Stock Transfer and Trust Company is acting as transfer agent
and registrar for the Company's Common Stock.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this Offering, the Company will have 3,022,041
outstanding shares of Common Stock (assuming no exercise of outstanding
options, warrants or Underwriters' over-allotment option). Of these shares, the
1,500,000 shares sold to the public in this Offering will be freely tradable
without restrictions or further registration under the Securities Act, except
for any shares purchased by "affiliates" within the meaning of the Securities
Act, which will be subject to the resale limitations of Rule 144. The remaining
1,383,691 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
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<PAGE>
on the number of shares which may be sold under Rule 144 and the "broker's
transaction" requirement do not apply to restricted securities sold for the
account of a person who is not and has not been an "affiliate" (as that term is
defined in the Securities Act) of the Company during the three months prior to
the proposed sale and who has beneficially owned the securities for at least
two years.
Prior to the Offering, there has been no market for the Common Stock, and
no predictions can be made as to the effect, if any, that sales of shares under
Rule 144 or the availability of shares for sale will have on the market prices
prevailing from time to time. Sales of substantial amounts of Common Stock in
the public market following this Offering could lower the market price of the
Common Stock. Of the 3,022,041 shares of Common Stock to be outstanding after
this Offering (assuming no exercise of outstanding options, warrants or the
over-allotment option), 1,500,000 shares will be freely tradable without
restriction. Upon expiration of the lock-up agreements entered into by the
officers, directors and 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, 138,350 shares of
Common Stock are held by stockholders that acquired the shares as creditors
pursuant to the Plan of Reorganization. These stockholders have certain
registration rights as provided by the Plan of Reorganization.
In addition, the Company intends to file a registration statement on Form
S-8 with respect to the shares of Common Stock issuable upon exercise of
options under the Incentive Plan. The Incentive Plan authorizes the issuance of
options relating to up to 180,000 shares of Common Stock. Currently, no options
have been issued under the Incentive Plan. See "Management--1998 Equity
Incentive Plan." Upon filing of such registration statement, the holders of
such options may, subject to vesting requirements, exercise and sell their
shares immediately without restriction, except affiliates who are subject to
certain volume limitations and manner of sale requirements of Rule 144. Holders
of warrants to purchase 460,181 shares of Common Stock are entitled to certain
registration rights with respect to such shares. Upon registration, such shares
may be sold in the market 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."
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<PAGE>
UNDERWRITING
Subject to the terms and conditions set forth in the underwriting agreement
(the "Underwriting Agreement"), the Company has agreed to sell to each of the
underwriters named below (the "Underwriters"), and each of the Underwriters, for
whom Nutmeg Securities, Ltd. is acting as representative (the "Representative"),
has agreed to purchase, the number of shares of Common Stock set forth opposite
its name below. Under certain circumstances, the commitments of nondefaulting
Underwriters may be increased as set forth in the Agreement Among Underwriters.
Underwriter Number of Shares
- ------------------------- -----------------
Nutmeg Securities, Ltd.
TOTAL
The Underwriting Agreement provides that the obligations of the
Underwriters thereunder are subject to approval of certain legal matters by
counsel and to various other conditions. The nature of the Underwriters'
obligations are such that they are committed to purchase and pay for all of the
above shares of Common Stock if any are purchased. The Underwriters propose to
offer the shares of Common Stock directly to the public at the public offering
price set forth on the cover page of this Prospectus.
The Company has granted the Underwriters a 30-day over-allotment option to
purchase up to 225,000 additional shares of Common Stock at the public offering
price less the underwriting discount. The Underwriters may exercise such option
only to cover over-allotments made in connection with the sale of the shares of
Common Stock offered hereby.
The Company has also agreed to sell to the Underwriters, for nominal
consideration, warrants to purchase the number of shares of Common Stock equal
to 10% of the total number of shares of Common Stock sold in this Offering at a
price per share equal to 165% of the public offering price. The Underwriters'
Warrants will be exercisable for a period of four years commencing one year
from the effective date of this Offering and will contain certain demand and
"piggyback" registration rights with respect to the Common Stock issuable upon
the exercise of the Underwriters' Warrants. The Underwriters' Warrants are not
transferable (except to members of the syndicate and their affiliates). The
exercise price and the number of shares issuable upon exercise may, under
certain circumstances, be subject to adjustment pursuant to antidilution
provisions.
The Company has agreed to allow the Underwriters a commission of ten
percent (10%) of the public offering price of the shares of Common Stock.
Additionally, the Company will be paying the Underwriters, following the
closing of this Offering, a nonaccountable expense allowance equal to three
percent (3%) of the aggregate public offering price of the shares of Common
Stock, less any applicable deposits.
The Company has further agreed to indemnify the Underwriters against
certain liabilities, losses and expenses, including liabilities under the
Securities Act, or to contribute to payments that the Underwriters may be
required to make in respect thereof. The Company also has agreed to reimburse
the Underwriters for certain out-of-pocket expenses incurred in connection with
the Offering.
The Underwriters have advised the Company that they do not intend to make
sales to discretionary accounts.
The Company's officers, directors and 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
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<PAGE>
to purchase, and in that case they may purchase shares in the open market after
this Offering is completed to cover all or a part of their short position. The
Representative may also cover all or a portion of their short position, up to
225,000 shares, by exercising their over-allotment option described above and
on the cover of this Prospectus.
Prior to the Offering, there has not been an active trading market for the
Common Stock. Consequently, the public offering price of the Common Stock and
the terms of the Underwriters' Warrants (including the exercise price) have
been determined by negotiation between the Company and the Representative.
Among the factors considered in such negotiations were the history of, and the
prospect for, the Company's business, and assessment of the Company's
management, its past and present operations, the Company's development and the
general condition of the securities market at the time of the Offering. The
public offering price does not necessarily bear any relationship to the
Company's assets, book value, earnings or other established criteria of value.
Such price is subject to change as a result of market conditions and other
factors, and no assurance can be given that a public market for the Common
Stock will develop after the close of the Offering, or if a public market in
fact develops, that such public market will be sustained, or that the Common
Stock can be resold at any time at the offering or any other price.
LEGAL MATTERS
The validity of the issuance of the shares of Common Stock offered by this
Prospectus will be passed upon by Brown & Wood LLP, Washington, D.C. Certain
legal matters in connection with the Offering will be passed upon for the
Underwriters by Gersten, Savage, Kaplowitz & Fredericks, LLP, New York, New
York.
EXPERTS
The audited consolidated financial statements included elsewhere in this
Prospectus and in the Registration Statement have been audited by Feldman Sherb
Ehrlich & Co., P.C., certified public accountants, and Smith & Radigan,
certified public accountants, as indicated in their reports with respect
thereto, and are included herein in reliance upon the authority of said firms as
experts in giving said reports.
ADDITIONAL INFORMATION
The Company will be subject to the information requirements of the
Exchange Act, and, in accordance therewith files reports, proxy statements and
other information with the Commission. Such reports, proxy statements and other
information can be inspected and copied at the public reference facilities
maintained by the Commission at Judiciary Plaza Building, 450 Fifth Street,
N.W., Room 1024, Washington, D.C. 20549 and its regional offices located at 7
World Trade Center, 13th Floor, New York, New York 10048 and Citicorp Center,
500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511. Copies of
such materials can be obtained from the Commission at Judiciary Plaza, 450
Fifth Street, N.W. Washington, D.C. 20549, at prescribed rates. The Commission
maintains an Internet web site that contains reports, proxy and information
statements and other information regarding issuers that file electronically
with the Commission. The address of that site is http://www.sec.gov.
The Company intends to furnish to its stockholders annual reports
containing financial statements audited and reported upon by its independent
public accountants.
43
<PAGE>
ROLLING PIN KITCHEN EMPORIUM, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
<S> <C>
Page
Rolling Pin Kitchen Emporium, Inc.: -----
Independent Auditors' Report ............................................................. F-2
Consolidated Balance Sheet at August 12, 1998 ............................................ F-3
Notes to Consolidated Financial Statements ............................................... F-4
Gaylord Companies, Inc.:
Independent Auditors' Report ............................................................. F-9
Consolidated Balance Sheet at December 31, 1997 .......................................... F-10
Consolidated Statement of Operations for the years ended December 31, 1997 and 1996 ...... F-11
Consolidated Statement of Stockholders' Equity for the years ended December 31, 1997
and 1996 ............................................................................... F-12
Consolidated Statement of Cash Flows for the years ended December 31, 1997 and 1996 ...... F-13
Notes to Consolidated Financial Statements Unaudited Financial Statements ................ F-14
(Unaudited) Interim Financial Statements :
Consolidated Balance Sheet at September 30, 1998 (Unaudited) ............................. F-19
Consolidated Statements of Operations (Unaudited) of Rolling Pin Kitchen Emporium, Inc.
for the period August 12, 1998 to September 30, 1998 and of Gaylord Companies, Inc. for
the period January 1, 1998 to August 12, 1998 and the nine months ended September 30,
1997 ................................................................................... F-20
Consolidated Statements of Cash Flows (Unaudited) of Rolling Pin Kitchen Emporium, Inc.
for the period August 12, 1998 to September 30, 1998 and of Gaylord Companies, Inc. for
the period January 1, 1998 to August 12, 1998 and the nine months ended September 30,
1997 ................................................................................... F-21
Notes to Unaudited Financial Statements .................................................. F-22
Aropi Incorporated:
Independent Auditors' Report ............................................................. F-23
Balance Sheet at June 30, 1998 and 1997 .................................................. F-24
Statement of Income for the years ended June 30, 1998 and 1997 ........................... F-26
Statement of Stockholders' Equity for the years ended June 30, 1998 and 1997 ............. F-27
Statement of Cash Flows for the years ended June 30, 1998 and 1997 ....................... F-28
Notes to Financial Statements ............................................................ F-29
(Unaudited) Pro-forma Financial Statements:
Description of (Unaudited) Pro-forma Financial Statements ................................ F-33
(Unaudited) Pro-forma Condensed Consolidated Statement of Operations for the nine months
ended September 30, 1998 ................................................................. F-34
(Unaudited) Pro-forma Condensed Consolidated Statement of Operations for the year ended
December 31, 1997 ..................................................................... F-35
Notes to (Unaudited) Pro-forma Financial Statements ...................................... F-36
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Shareholders and Board of Directors
Rolling Pin Kitchen Emporium, Inc.
Atlanta, Georgia
We have audited the accompanying consolidated balance sheet of Rolling Pin
Kitchen Emporium, Inc. and subsidiaries as of August 12, 1998. This financial
statement is the responsibility of the Company's management. Our responsibility
is to express an opinion on this financial statement based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statement is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statement referred to above presents fairly,
in all material respects, the financial position of Rolling Pin Kitchen
Emporium, Inc. as of August 12, 1998 in conformity with generally accepted
accounting principles.
Feldman Sherb Ehrlich & Co., P.C.
Certified Public Accountants
New York, New York
October 30, 1998
F-2
<PAGE>
ROLLING PIN KITCHEN EMPORIUM, INC.
CONSOLIDATED BALANCE SHEET
AUGUST 12, 1998
ASSETS
CURRENT ASSETS:
Cash ................................................ $ 144,006
Accounts receivable - trade ......................... 5,183
Inventories ......................................... 777,991
Prepaid expenses and other current assets ........... 15,427
-----------
TOTAL CURRENT ASSETS ............................. 942,607
PROPERTY AND EQUIPMENT ............................... 299,323
REORGANIZATION VALUE IN EXCESS OF AMOUNTS ALLOCABLE TO
IDENTIFIABLE ASSETS ................................. 48,388
OTHER ASSETS ......................................... 174,103
-----------
$ 1,464,421
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses ....................... $ 147,651
Note payable ................................................ 900,000
-----------
TOTAL CURRENT LIABILITIES ................................ 1,047,651
PUT OPTION ON WARRANTS ....................................... 400,000
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par, 1,000,000 shares authorized,
none issued................................................ --
Common stock, $.01 par, authorized: Class A-20,000,000,
Class B-155,000; issued and outstanding :
Class A-1,522,041, Class B-154,951 ........................ 16,770
-----------
TOTAL STOCKHOLDERS' EQUITY ................................ 16,770
-----------
$ 1,464,421
===========
See notes to consolidated financial statements.
F-3
<PAGE>
ROLLING PIN KITCHEN EMPORIUM, INC.
NOTES TO CONSOLIDATED BALANCE SHEET
AUGUST 12, 1998
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Basis of Presentation
The financial statements of Rolling Pin Kitchen Emporium, Inc. (the
"Company") include the accounts of the Company and its subsidiaries. All
significant intercompany balances and transactions have been eliminated in the
consolidated financial statements. The Company is a specialty retailer of
quality cookware and serving equipment, with operations in Ohio, Indiana and
Kentucky.
(b) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that effect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
(c) Inventories
Inventories are stated at the lower of cost or market. Cost is determined
using the retail method and the FIFO method.
(d) Property and Equipment
Property and equipment are stated at cost. Property and equipment held
under capital leases are stated at the lower of the present value of minimum
lease payments at the beginning of the lease term or fair value at the
inception of the lease.
Depreciation of property and equipment is calculated using the
straight-line method over the estimated useful lives of the assets. Property
and equipment held under capital leases and leasehold improvements are
amortized using the straight-line method over the shorter of the lease term or
estimated useful life of the asset.
(e) Net Earnings (Loss) Per Share
The Company follows the provisions of Statement of Financial Accounting
Standards No. 128, "Earnings Per Share," which became effective for financial
statements with fiscal years ending after December 15, 1997. Basic earnings
(loss) per share is computed based on the weighted average number of common
shares outstanding after giving effect to preferred stock dividends.
(f) Fair Value of Financial Instruments
The carrying amounts reported in the balance sheet for cash, receivables,
accounts payable and accrued expenses approximate fair value based on the
short-term maturity of these instruments.
(g) Stock Based Compensation
The Company accounts for stock transactions in accordance with APB Opinion
No. 25, "Accounting For Stock Issued To Employees." In accordance with
Statement of Financial Accounting Standards No. 123, "Accounting For
Stock-Based Compensation," the Company has adopted the pro forma disclosure
requirements of Statement No. 123 in fiscal 1996.'
(h) Revenue Recognition
Revenue is recorded at the point of sale. Returns are estimated and
accrued.
(i) Cash Equivalents
The Company considers all highly liquid temporary cash investments with an
original maturity of three months or less to be cash equivalents.
F-4
<PAGE>
(j) Recently Issued Accounting Pronouncements
Upon its emergence from bankruptcy, the Company has adopted the provisions
of all recently issued accounting pronouncements. Such adoption does not have a
material impact on the Company's financial statements.
2. REORGANIZATION
On November 14, 1997, the Company filed a voluntary petition under Chapter
11 of the United States Bankruptcy code.
At the outset, the bankruptcy petition was organized to consolidate the
cases of the entities that comprised the bookstore operations in distinction
from those that comprised the cookstore operations.
The bookstore operations were disposed of under their own separate plan of
reorganization on July 1, 1998 and were accounted for as discontinued
operations.
On June 24, 1998, the entities comprising the cookstores filed a plan of
reorganization, which was confirmed by the Bankruptcy Court on July 10, 1998
and declared effective on August 12, 1998.
Under the plan, Home Retail Acquisition Corp. ("HRAC") (which is a secured
creditor of the cookstores by virtue of the its purchase of a junior
participation in the Company's debt from Fremont Financial), was merged into
the Company. On the effective date, all previous equity interests were
extinguished and the reorganized company issued a total of 1,522,041 shares of
Class A common stock, 154,951 shares of Class B common stock and a total of
174,429 warrants. HRAC received a total of 1,383,691 of the newly issued Class
A shares, thereby controlling the reorganized entity. Unsecured creditors of
the predecessor entity were issued 138,350 Class A common shares. Holders of
the predecessor's common stock were issued 85,777 shares of Class B common
stock and holders of the predecessor entity's preferred stock were issued
69,174 shares of Class B common stock.
In accordance with the American Institute of Certified Public Accountants'
Statement of Position 90-7, Financial Reporting by Entities in Reorganization
Under the Bankruptcy Code, the Company was required to adopt fresh-start
accounting as of August 12, 1998, after all material conditions required by the
Plan were satisfied. The Company was required to adopt fresh-start reporting
because the holders of the existing voting shares immediately prior to filing
and confirmation of the Plan received less than 50% of the voting shares of the
emerging entity, and its reorganization value was less than the total of its
post-petition liabilities and allowed claims. Under fresh-start accounting, all
assets and liabilities are restated to reflect their reorganization value,
which approximates fair value at the date of reorganization. The liabilities of
the reorganized Company consist of post-petition current liabilities, notes
payable to Liberty-Bidco in the amount of $1,300,000, reduced by a discount of
$400,000 and a put option of $400,000 related to 92,595 warrants issued to
Liberty-Bidco. In accordance with fresh-start accounting, the gain on
forgiveness of debt resulting from the bankruptcy proceedings was reflected on
the predecessor Company's statement of operations for the period January 1,
1998 to August 12, 1998. In addition, the accumulated deficit of the
predecessor Company at August 12, 1998 totaling $3,014,406 was eliminated, and
at August 12, 1998, the reorganized Company's financial statements reflect no
beginning retained earnings or deficit. Liabilities discharged in bankruptcy
totaled $1,572,215. This amount was recorded as an extraordinary gain on debt
forgiveness on the predecessor company's final statement of operations for the
period January 1, 1998 to August 12, 1998.
The reorganization value of the reorganized Company was determined in
consideration of several factors. Management believes the estimated fair value
of the emerging entity before considering liabilities approximates the amount a
willing buyer would pay for the assets of the entity immediately after the
restructuring. The Company determined that the fair value of the assets at
August 12, 1998 approximated carrying value. The excess of post-emergence
liabilities over the fair value of the assets, which totaled $48,388, is
recorded as "Reorganization Value in Excess of Amounts Allocable to
Identifiable Assets," which will be amortized as a charge to income over its
estimated life of 3 years.
F-5
<PAGE>
The effect of the reorganization on the Company's consolidated balance
sheet at August 12, 1998, is as follows:
<TABLE>
<CAPTION>
Pre-Confirmation Reorganized
Balance Sheet Balance Sheet
August 12, 1998 Adjustments August 12, 1998
------------------ --------------- ----------------
<S> <C> <C> <C>
Cash ............................................... $ 144,006 $ 144,006
Accounts receivable ................................ 5,183 5,183
Inventory .......................................... 777,991 777,991
Prepaids ........................................... 15,427 15,427
Fixed assets ....................................... 299,323 299,323
Reorganization value in excess of amounts .......... 43,888 48,388
Other assets ....................................... 174,103 174,103
------------ -----------
Total Assets ....................................... $ 1,416,033 $ 1,464,421
============ ===========
Accounts payable and accrued expenses .............. $ 147,651 $ 147,651
Line of credit ..................................... 900,000 900,000
Put option on warrants ............................. 400,000 400,000
------------ -----------
Total Liabilities .................................. 1,447,651 1,447,651
Stockholders' Equity:
Preferred stock .................................... 300,000 (300,000) 0
Common stock ....................................... 40,950 (40,950) 0
Common stock - Class A ............................. 0 15,220 15,220
Common stock - Class B ............................. 0 1,550 1,550
Paid in capital .................................... 2,641,838 (2,641,838) 0
Retained earnings .................................. (3,014,406) 3,014,406 0
------------ -----------
Total Stockholders' Equity ......................... (31,618) 16,770
------------ -----------
Total Liabilities and Stockholders' Equity ......... $ 1,416,033 $ 1,464,421
============ ===========
</TABLE>
3. PROPERTY AND EQUIPMENT
The following is a summary of property and equipment at August 12, 1998:
Depreciable
Life
-------------
Computers and equipment ......... 5 years $ 88,722
Leasehold improvements .......... (A) 103,023
Furniture and fixtures .......... 7 years 107,578
---------
$ 299,323
=========
(A) The lessor of useful life (on average 10 years) or over the lease term.
4. LOAN AGREEMENT
In April 1998, the Company obtained debtor-in-possession financing from
Fremont Financial Corporation which was repaid on August 12, 1998 with a
refinancing from Liberty-Bidco. The Liberty-Bidco financing totaled $1,300,000,
of which amount $1,053,000 was used to pay off Fremont, $160,000 was used to pay
financing costs and attorney fees and the $87,000 balance went to the Company.
The maturity date of the loan is January 1, 1999, and the loan bears interest at
three percent over prime. The loan contains a prepayment penalty of 20%, and is
secured by substantially all the assets of the Company. The loan contains a
number of negative covenants of which the principal financial covenants are to
maintain a ratio of current assets to current liabilities (as defined by
agreement) of 1.25 to 1.00, and minimum net worth (as defined by agreement) of
negative $150,000 through September 30, 1998, positive $100,000 through November
30, 1998 and positive $500,000 by December 1, 1998 and beyond.
In connection with the loan agreement, Liberty-Bidco received warrants to
purchase 92,595 shares of the Company's common stock for $.01 per share through
August 12, 2003. The warrants contain a put option which
F-6
<PAGE>
can require the Company to repurchase the warrants, or the stock obtained on
exercise, for the greater of $400,000 or the market value of the stock. The
Company has recorded $400,000 as a liability for the put option and a
corresponding discount to the note payable. The put option is not exercisable
until January 31, 2000.
The note discount is being amortized over the term of the debt using the
effective interest method and the financing costs are being amortized
straight-line over the debt term.
5. COMMITMENTS
Leases
In connection with the Bankruptcy Court's approval of the Company's plans
of reorganization, all previous future lease commitments were voided by the
court, and the Company selectively entered into new lease commitments for the
cookstore operations.
Future minimum lease payments under such noncancelable operating leases
are as follows:
Operating
Year ending December 31, leases
- ------------------------------------------ ----------
1998 .............................. $174,670
1999 .............................. 386,926
2000 .............................. 389,988
2001 .............................. 393,881
2002 .............................. 402,073
Later years, through 2006 ......... 617,042
6. INCOME TAXES
The Company accounts for income taxes under Statement of Financial
Accounting Standards No. 109.
The Company had deferred tax assets total $1,735,000, with $1,635,000
representing the tax effects of net operating loss carryforwards and the effect
of book depreciation in excess of tax depreciation of approximately $100,000 at
August 12, 1998. The Company has a full valuation allowance as a reserve
against such deferred tax assets. The net operating loss carryforwards totaling
approximately $4,087,000, expire in the years 2009 through 2013. Annual
utilization of the net operating loss carryforwards is restricted due to the
ownership change in the plan of reorganization.
7. WARRANTS
On August 20, 1998, the Company granted the following warrants: (i) Bidco
received a five year warrant to purchase 92,595 shares of the Common Stock,
exercisable at $0.01 per share, in connection with the Loan Agreement: (ii)
Bidco also received a five year warrant to purchase 40,602 shares of Common
Stock, exercisable at 165% of the public offering price, in connection with the
First Amendment to the Loan Agreement: (iii) Greenfield received a five year
warrant to purchase 40,602 shares of Common Stock, exercisable at 165% of the
public offering price; (iv) DLM Asset Management, Inc. and Spinnernet Financial
Systems, Ltd. received three year warrants to purchase in the aggregate 8,875
shares of Common Stock each exercisable at 165% of the public offering price;
and (v) JRP Consulting Corp. and Laux, Holmes & Company received five year
warrants to purchase in the aggregate 98,246 shares of Common Stock each
exercisable at 165% of the public offering price. The warrants were issued as
part of the financing agreements with Bidco and Greenfield.
Pursuant to the Plan of Reorganization, 52,573 warrants were issued to
previous warrant holders, exercisable for $11.57 until January 1, 1999 and
$14.40 until October 30, 1999. Also, 29,261 five year warrants were granted to
Junior Tranche participants, exercisable at 80% of the public offering price.
F-7
<PAGE>
8. ACQUISITION OF AROPI
On August 21, 1998, the Company acquired Aropi, Incorporated, an Atlanta,
Georgia based chain retailer of kitchen products. The purchase price was
$2,651,725, of which $1,957,317 went to the seller, composed of $1,457,317 in
cash and two convertible promissory notes of $250,000 each. The notes bear
interest at 8% per annum, with $250,000 due in February 1999 and $250,000 due in
August 1999. The remaining $694,408 was used to pay off certain indebtedness of
the seller. Acquisition costs were approximately $75,000. The fair value of
assets and liabilities acquired approximated book value. Goodwill recorded on
the acquisition was $1,004,877, and is computed as follows:
Fair Value of Assets Acquired:
Cash ....................................... $ 101,487
Accounts receivable ........................ 48,932
Inventory .................................. 1,897,451
Fixed assets ............................... 352,891
-----------
2,400,761
Fair Value of Liabilities Assumed:
Accounts payable and accrued expenses ...... 678,913
-----------
Net Assets Acquired .......................... 1,721,848
Purchase Price, including acquisition costs and
repayment of seller's indebtedness ........... 2,726,725
-----------
Goodwill ................................... $ 1,004,877
===========
The goodwill will be amortized over its estimated useful life of ten
years.
Upon the acquisition, the selling shareholder entered into an employment
agreement to serve as chief executive officer of the combined company. The
employment agreement is for a period of three years for base annual salary of
$105,000, $115,500 and $127,050. The selling shareholder will also receive a
bonus totalling $125,000, payable at the rate of $10,417 over the first twelve
months and has received 5,000 options to purchase common stock for $6.00 per
share expiring in August 2000. Additionally, the Company entered into a
two-and-a-half year lease for the rental of administrative offices from the
seller for base annual rent of $65,000. Upon consummation of the acquisition,
the administrative offices of the combined company were moved to this location.
The acquisition was financed with a second financing from Liberty-Bidco in
the amount of $700,000, under an amendment to the original $1,300,000 note, and
the balance under a new $2,000,000 loan facility with Greenfield Commercial
Credit, L.L.C., $500,000 of which is due on December 31, 1998 and $1,500,000
due on January 29, 1999. The Liberty-Bidco debt matures on January 1, 1999. The
interest rate on all the above debt is three percent over prime, except for the
$500,000 due on December 31, 1998, which bears interest at the rate of 15% per
annum.
9. STOCK OPTION PLAN
On July 10, 1998, in connection with the Plan of Reorganization, the
Company adopted the 1998 Equity Incentive Plan, to issue up to 180,000 options
or stock appreciation rights ("SAR's") to participants. No options or SARs have
been issued as of August 12, 1998.
F-8
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Shareholders and Board of Directors
Gaylord Companies, Inc. (Debtor-in-possession)
We have audited the accompanying consolidated balance sheet of Gaylord
Companies, Inc. and subsidiaries (Debtor-in-possession) as of December 31,
1997, and the related consolidated statements of operations, stockholders'
equity, and cash flows for the years ended December 31, 1997 and 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Gaylord Companies, Inc.
(Debtor-in-possession) as of December 31, 1997, and the results of its
operations and its cash flows for the years ended December 31, 1997 and 1996 in
conformity with generally accepted accounting principles.
As discussed in Note 2, the Company and all of its subsidiaries filed for
reorganization under Chapter 11 of the United States Bankruptcy Code on
November 14, 1997 emerging from bankruptcy and adopting "fresh start" reporting
on August 12, 1998. The accompanying consolidated financial statements do not
purport to reflect or provide for the consequences of the bankruptcy
proceedings. In particular, such financial statements do not purport to show
(a) as to assets, their realizable value on a liquidation basis or their
availability to satisfy liabilities; (b) as to liabilities subject to
compromise, the amounts that may be allowed for claims or contingencies, or the
status and priority thereof; (c) as to stockholder accounts, the effect of any
changes that may be made in the capitalization of the Company; or (d) as to
operations, the effect of any changes that may be made in its business.
Feldman Sherb Ehrlich & Co., P.C.
Certified Public Accountants
New York, New York
August 12, 1998
F-9
<PAGE>
GAYLORD COMPANIES, INC.
(DEBTOR-IN-POSSESSION)
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1997
<TABLE>
<S> <C>
ASSETS
CURRENT ASSETS:
Cash ................................................................................ $ 1,070,503
Accounts receivable - trade ......................................................... 15,118
Inventories ......................................................................... 889,996
Prepaid expenses and other current assets ........................................... 56,681
------------
TOTAL CURRENT ASSETS .............................................................. 2,032,298
PROPERTY AND EQUIPMENT ............................................................... 349,750
OTHER ASSETS ......................................................................... 8,700
------------
$ 2,390,748
============
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Liabilities Not Subject to Compromise:
Accounts payable and accrued expenses ............................................. $ 175,318
Liabilities Subject to Compromise:
Accounts payable and accrued expenses ............................................. 1,112,858
Sales and other taxes payable ..................................................... 89,357
Line of credit .................................................................... 1,297,547
Notes payable ..................................................................... 348,675
------------
3,023,755
Net liabilities of discontinued operations .......................................... 658,697
------------
Total current liabilities ........................................................... 3,682,452
STOCKHOLDERS' DEFICIT:
Cumulative preferred stock, par value $.01 per share; 1,500,000 shares authorized,
60,000 shares issued and outstanding ................................................ 300,000
Common stock, par value $.01 per share; 10,000,000 shares authorized, 4,095,000 shares
issued and outstanding .............................................................. 40,950
Additional paid-in-capital ........................................................... 2,641,838
Accumulated deficit .................................................................. (4,274,492)
------------
TOTAL STOCKHOLDERS' DEFICIT ....................................................... (1,291,704)
------------
$ 2,390,748
============
</TABLE>
See notes to consolidated financial statements.
F-10
<PAGE>
GAYLORD COMPANIES, INC.
(DEBTOR-IN-POSSESSION)
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Year ended December 31,
----------------------------------
1997 1996
--------------- ----------------
<S> <C> <C>
NET SALES ................................................ 3,724,157 $ 3,497,940
COST OF GOODS SOLD, including store occupancy and delivery
costs ................................................... 3,508,874 2,899,932
--------- ------------
GROSS PROFIT ............................................. 215,283 598,008
--------- ------------
OPERATING EXPENSES:
Selling, general and administrative ..................... 838,081 390,123
Non-cash imputed stock compensation ..................... 469,255 --
Depreciation and amortization ........................... 107,640 68,334
--------- ------------
1,414,976 458,457
--------- ------------
OPERATING INCOME (LOSS) .................................. (1,199,693) 139,551
---------- ------------
OTHER INCOME (EXPENSE):
Interest expense, net ................................... (79,710) (64,817)
Amortization of debt issue costs and discounts .......... (74,000) (149,986)
Other - net ............................................. (37,977) 37,409
---------- ------------
(191,687) (177,394)
---------- ------------
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE
INCOME TAXES ............................................ (1,391,380) (37,843)
PROVISION FOR INCOME TAXES ............................... (400,649) --
---------- ------------
LOSS FROM CONTINUING OPERATIONS .......................... (1,792,029) (37,843)
REORGANIZATION - PROFESSIONAL FEES ....................... (234,625) --
---------- ------------
LOSS BEFORE DISCONTINUED OPERATIONS ...................... (2,026,654) (37,843)
LOSS FROM DISCONTINUED OPERATIONS ........................ (1,224,845) (949,966)
---------- ------------
NET LOSS ................................................. (3,251,499) (987,809)
Preferred stock dividends ............................... (23,789) (36,000)
------------ ------------
NET LOSS TO COMMON SHAREHOLDERS .......................... $ (3,275,288) $ (1,023,809)
============ ============
BASIC LOSS PER COMMON SHARE:
Continuing .............................................. $ (0.53) $ (0.02)
Discontinued ............................................ (0.32) (0.31)
------------ ------------
$ (0.85) $ (0.33)
============ ============
WEIGHTED AVERAGE COMMON SHARES USED ...................... 3,870,000 3,103,957
============ ============
</TABLE>
See notes to consolidated financial statements.
F-11
<PAGE>
GAYLORD COMPANIES, INC.
(DEBTOR-IN-POSSESSION)
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
Preferred Stock Common Stock
--------------------- -----------------------
Shares Amount Shares Amount
-------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
BALANCE -- DECEMBER
31, 1995 ....................... 60,000 $300,000 2,750,000 $27,500
Sale of stock to consultant -- -- 300,000 3,000
Shares issued with note
payable ........................ -- -- 180,000 1,800
Shares issued for services ...... -- -- 170,000 1,700
Conversion of notes, net of
deferred debt issue costs -- -- 235,000 2,350
Dividends on preferred
stock ........................ -- -- -- --
Amortization of unearned
stock compensation ............ -- -- -- --
Net loss ....................... -- -- -- --
------ -------- --------- -------
BALANCE -- DECEMBER
31, 1996 ....................... 60,000 $300,000 3,635,000 $36,350
Sale of stock to consultant -- -- 160,000 1,600
Stock issuance to
consultant .................... -- -- 300,000 3,000
Amortization and write off
of unearned stock
compensation .................. -- -- -- --
Dividends on preferred
stock ......................... -- -- -- --
Write off of stock
receivable .................... -- -- -- --
Net loss ....................... -- -- -- --
------ -------- --------- -------
BALANCE -- DECEMBER
31, 1997 ....................... 60,000 $300,000 4,095,000 $40,950
====== ======== ========= =======
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Unearned Retained
Additional Stock Receivable Earnings
Paid-in Capital Compensation for Stock (deficit) Totals
----------------- -------------- -------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
BALANCE -- DECEMBER
31, 1995 ....................... $1,600,817 $ -- $ -- $ 24,591 $ 1,952,908
Sale of stock to consultant 297,000 -- (168,571) -- 131,429
Shares issued with note
payable ....................... 94,200 -- -- -- 96,000
Shares issued for services ...... 112,050 (110,000) -- -- 3,750
Conversion of notes, net of
deferred debt issue costs 234,871 -- -- -- 237,221
Dividends on preferred
stock ......................... -- -- -- (36,000) (36,000)
Amortization of unearned
stock compensation ............ -- 13,333 -- -- 13,333
Net loss ....................... -- -- -- (987,809) (987,809)
---------- ---------- ---------- ------------ ------------
BALANCE -- DECEMBER
31, 1996 ....................... $2,338,938 $ (96,667) $ (168,571) $ (999,218) $ 1,410,832
Sale of stock to consultant 155,900 (143,750) -- -- 13,750
Stock issuance to
consultant .................... 147,000 -- -- -- 150,000
Amortization and write off
of unearned stock
compensation ................. -- 240,417 -- -- 240,417
Dividends on preferred
stock ......................... -- -- -- (23,775) (23,775)
Write off of stock
receivable .................... -- -- 168,571 -- 168,571
Net loss ....................... -- -- -- (3,251,499) (3,251,499)
---------- ---------- ---------- ------------ ------------
BALANCE -- DECEMBER
31, 1997 ....................... $2,641,838 $ -- $ -- $ (4,274,492) $ (1,291,704)
========== ========== ========== ============ ============
</TABLE>
See notes to consolidated financial statements.
F-12
<PAGE>
GAYLORD COMPANIES, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended December 31,
----------------------------------
1997 1996
---------------- ---------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ....................................................... $ (3,251,499) $ (987,809)
Adjustments to reconcile net income (loss) to net cash provided (used) by
operating activities:
Loss from discontinued operations ..................................... 1,224,845 949,966
Reorganization items .................................................. 234,625 --
Depreciation and amortization ......................................... 107,640 193,208
Non cash imputed compensation expense ................................. 469,255 57,012
Amortization of discount on notes payable ............................. 74,000 10,667
Write off of goodwill ................................................. 114,933 --
Write off of investment ............................................... 125,000 --
Changes in assets and liabilities:
Decrease (increase) in accounts receivable ........................... 65,211 (38,232)
Decrease (increase) in other receivables ............................. 177,217 16,490
Decrease (increase) in inventory ..................................... 1,320,244 (399,788)
Decrease (increase) in prepaid expenses and other assets ............. 153,858 (96,668)
Decrease (increase) in other assets .................................. 18,277 11,136
Decrease (increase) in deferred income taxes ......................... 398,196 --
Increase (decrease) in accounts payable .............................. (1,008,331) 551,627
Increase (decrease) in sales and other taxes payable ................. (101,117) 11,171
Increase in net liabilities of discontinued operations ............... 489,776 --
------------ -----------
Net cash provided (used) by continuing operations .................. 612,130 278,780
Cash used for reorganization items .................................... (234,625) --
Net cash provided by discontinued operations .......................... (668,377) (949,966)
------------ -----------
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES (290,872) (671,186)
------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment ...................................... (34,915) (204,551)
Proceeds from sale of property and equipment ............................ -- 3,785
------------ -----------
NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES (34,915) (200,766)
------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock .................................. -- 69,721
Dividends paid .......................................................... (23,789) (36,000)
Proceeds (repayments) from notes payable ................................ (300,986) 204,000
Proceeds from bank debt ................................................. 1,297,547 395,000
Repayments of bank debt ................................................. (395,000) (463,770)
Proceeds from issuance of convertible notes ............................. -- 622,500
(Increase) decrease in restricted cash .................................. -- 250,000
------------ -----------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES 577,772 1,041,451
------------ -----------
NET INCREASE (DECREASE) IN CASH .......................................... 251,985 169,499
CASH AT BEGINNING OF YEAR ................................................ 818,518 649,019
------------ -----------
CASH AT END OF YEAR ...................................................... $ 1,070,503 $ 818,518
============ ===========
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Cash paid during the year for:
Interest .............................................................. $ 434,170 $ 318,612
============ ===========
Income taxes .......................................................... $ -- $ --
============ ===========
Non cash financing and investing activity:
Conversion of notes payable to common stock .......................... $ -- $ 352,500
============ ===========
Common stock issued for future services .............................. $ -- $ 112,500
============ ===========
Receivable for common stock .......................................... $ -- $ 168,571
============ ===========
</TABLE>
See notes to consolidated financial statements.
F-13
<PAGE>
GAYLORD COMPANIES, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Basis of Presentation
The financial statements of Gaylord Companies, Inc. (the "Company")
include the accounts of the Company and its subsidiaries. All significant
intercompany balances and transactions have been eliminated in the consolidated
financial statements. The Company is a specialty retailer of quality cookware
and serving equipment, with operations in Ohio, Indiana and Kentucky.
(b) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that effect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
(c) Inventories
Inventories are stated at the lower of cost or market. Cost is determined
using the retail method and the FIFO method.
(d) Property and Equipment
Property and equipment are stated at cost. Property and equipment held
under capital leases are stated at the lower of the present value of minimum
lease payments at the beginning of the lease term or fair value at the
inception of the lease.
Depreciation of property and equipment is calculated using the
straight-line method over the estimated useful lives of the assets. Property
and equipment held under capital leases and leasehold improvements are
amortized using the straight-line method over the shorter of the lease term or
estimated useful life of the asset.
(e) Net Earnings (Loss) Per Share
The Company follows the provisions of Statement of Financial Accounting
Standards No. 128, "Earnings Per Share," which became effective for financial
statements with fiscal years ending after December 15, 1997. Basic earnings
(loss) per share is computed based on the weighted average number of common
shares outstanding after giving effect to preferred stock dividends.
(f) Fair Value of Financial Instruments
The carrying amounts reported in the balance sheet for cash, receivables,
accounts payable and accrued expenses approximate fair value based on the
short-term maturity of these instruments.
(g) Stock Based Compensation
The Company accounts for stock transactions in accordance with APB Opinion
No. 25, "Accounting For Stock Issued To Employees." In accordance with
Statement of Financial Accounting Standards No. 123, "Accounting For
Stock-Based Compensation," the Company has adopted the pro forma disclosure
requirements of Statement No. 123 in fiscal 1996.
(h) Revenue Recognition
Revenue is recorded at the point of sale. Returns are estimated and
accrued.
(i) Cash Equivalents
The Company considers all highly liquid, temporary cash investments with
an original maturity of three months or less to be cash equivalents.
F-14
<PAGE>
2. PLAN OF REORGANIZATION
On November 14, 1997, the Company filed a voluntary petition under Chapter
11 of the United States Bankruptcy code.
At the outset, the bankruptcy petition was organized to consolidate the
cases of the entities that comprised the bookstore operations in distinction
from those that comprised the cookstore operations.
The bookstore operations were disposed of under their own separate plan of
reorganization on July 1, 1998 and are being accounted for as discontinued
operations.
On June 24, 1998, the entities comprising the cookstores filed a plan of
reorganization, which was confirmed by the Bankruptcy Court on July 10, 1998
and the Company emerged from bankruptcy on August 12, 1998.
Under the plan, Home Retail Acquisition Corp. ("HRAC") (which is a secured
creditor of the cookstores by virtue of the its purchase of a junior
participation in the Company's debt from Fremont Financial), will be merged
into the Company. On the effective date, all previous equity interests were
extinguished and the reorganized company issued a total of 1,522,041 shares of
Class A common stock, 154,951 shares of Class B common stock and a total of
174,429 warrants. HRAC will receive a total of 1,383,691 of the newly issued
Class A shares, thereby controlling the reorganized entity.
3. DISCONTINUED OPERATIONS
Shortly after its November 1997 bankruptcy filing, in connection with its
plans to return to financial viability, the Company reached a decision to
dispose of its bookstore operations.
In February 1998, certain principal managing shareholders proposed a plan
of reorganization for the bookstores whereby they would assume the bookstore
business, and proposed a formula for settlement of the liabilities.
In April 1998, United Magazine Corporation ("Unimag") a major creditor of
the bookstores put forth a competing plan, which was ultimately accepted by the
creditors and the Bankruptcy Court. The plan was finalized on July 1, 1998,
with all assets and liabilities of the bookstore business assumed by Unimag.
Under the terms of the plan, certain unimpaired claims, totaling approximately
$800,000 were paid by Unimag, impaired claims, totaling approximately
$1,700,000, were settled for a pro rata allocation of $110,000, and
approximately $187,000 which was due to Unimag, was waived by Unimag.
Upon sale to Unimag, the Company realized a gain on disposal of $556,473
representing an excess of liabilities over assets assumed of $1,216,893 (with
includes the assumption of the $387,547 balance on the Greenfield term loan)
and losses through to the disposal date of $660,420.
The following table presents the composition of the net liabilities of the
discontinued business at December 31, 1997.
Cash .............................................. $ 11,123
Accounts Receivable -- trade ...................... 48,787
Other Receivables ................................. 208,932
Inventories ....................................... 795,055
Prepaid expenses and other current assets ......... 414,762
Net property and equipment ........................ 220,573
Investment ........................................ 125,000
Goodwill .......................................... 114,933
Other ............................................. 3,801
-----------
Total Assets ...................................... 1,942,966
-----------
Liabilities not subject to compromise:
Accounts payable and accrued expenses .......... 117,369
Liabilities subject to compromise
Accounts payable and accrued expenses .......... 2,484,294
-----------
Total Payables ..................... ......... 2,601,663
-----------
Net liabilities of discontinued business .......... $ (658,697)
===========
F-15
<PAGE>
The revenues of the discontinued business were $8,790,813 for the year
ended December 31, 1997 and $9,804,454 for the year ended December 31, 1996.
4. PROPERTY AND EQUIPMENT
The following is a summary of property and equipment at December 31, 1997:
<TABLE>
<CAPTION>
Depreciable
Life
------------
<S> <C> <C>
Computers and equipment ........................... 5 years $ 211,732
Leasehold improvements ............................ 10 years 239,776
Furniture and fixtures ............................ 7 years 232,861
---------
684,369
Accumulated depreciation and amortization ......... 334,619
---------
$ 349,750
=========
</TABLE>
5. LOAN AGREEMENT
In April 1997, the Company entered into a loan and security agreement (the
"Agreement") with Greenfield Commercial Credit, L.L.C. (The "Lender"). Pursuant
to the agreement, the Lender established a revolving credit loan facility for
the Company in an amount of up to $1,000,000 (the "Revolving Credit Loan") and
advanced $350,000 at closing as a term loan (the "Term Loan"). The Term Loan
and Revolving Credit Loan are referred to as the "Loans".
The Revolving Credit Loan bore interest at the prime rate plus eight
percent per annum. The Term Loan bore interest at the prime rate plus five and
eight-five hundredths percent per annum the loans was due no later than October
20, 1997. The Loans were secured by a lien on substantially all of the
Company's assets. The Loans were guaranteed by the Company's Chairman of the
Board and Chief Executive Officer and such guarantee is secured by a third
mortgage on his principal residence. The proceeds of the loans were used
primarily to repay amounts owed to Bank One Columbus, N.A. and for working
capital purposes.
Upon the loans not being repaid on the due date, they went into default.
The balance on the revolving credit loan was $910,000 at December 31, 1997 and
$387,547 on the term loan (including interest). In April 1998, the Company
obtained debtor-in-possession financing form Fremont Financial Corporation
which was used to repay the revolving credit loan. The term loan was assumed
and settled by Unimag under its plan of reorganization for the bookstores in
May 1998.
<PAGE>
6. COMMITMENTS
Leases
In connection with the Bankruptcy Court's approval of the Company's plans
of reorganization, all previous future lease commitments were voided by the
court, and the Company selectively entered into new lease commitments for the
cookstore operations.
Future minimum lease payments under such noncancelable operating leases
are as follows:
Operating
Year ending December 31, leases
- ---------------------------------------------- ------------
1998 ....................................... $ 174,670
1999 ....................................... 386,926
2000 ....................................... 389,988
2001 ....................................... 393,881
2002 ....................................... 402,073
Later years, through 2006 .................. 617,042
Total rental expense for operating leases was $703,231 and $487,640 in
1997 and 1996, respectively.
F-16
<PAGE>
7. INCOME TAX EXPENSE (BENEFIT)
The Company accounts for income taxes under Statement of Financial
Accounting Standards No. 109.
The differences between income taxes computed by applying the statutory
federal income tax rate (35%) and income tax expense (benefit) in the
consolidated financial statements are:
<TABLE>
<CAPTION>
Years ended December 31,
-----------------------------------
1997 1996
----------------- ---------------
<S> <C> <C>
Tax benefit computed at statutory rate ......... $ (1,138,000) $ (346,000)
Change in valuation allowance .................. 398,196 --
Effect of permanent differences ................ 175,000 29,000
Other, net ..................................... 2,453 3,000
Tax benefit not recognized ..................... 963,000 314,000
------------- -----------
$ 400,649 $ --
============= ===========
</TABLE>
The Company had deferred tax assets total $1,610,000, with $1,510,000
representing the tax effects of net operating loss carryforwards and the effect
of, book depreciation in excess of tax depreciation of approximately $100,000 as
of December 31, 1997. The Company has a full valuation allowance as a reserve
against such deferred tax assets. The net operating loss carryforwards totaling
approximately $3,774,000, expire in the years 2009 through 2013. Annual
utilization of the net operating loss carryforwards will be restricted due to
the ownership change in the plan of reorganization.
8. STOCKHOLDERS' EQUITY
The Company completed an Initial Public Offering in November 1995, selling
a total of 750,000 shares of common stock for $3.00 per share, and 1,725,000
warrants at $0.10 per warrant. Net proceeds to the Company after underwriter
discounts and other expenses were approximately $1.4 million.
In April 1996, a consultant was issued options to purchase 300,000 shares
for $1.00 per share. These were subsequently exercised for cash of $89,000,
services valued at $42,429 and a non-interest bearing receivable totaling
$168,571. Such receivable has been written off as an expense during 1997, as
management deemed such amount to be uncollectible after many attempts to
collect.
<PAGE>
In November 1996, a consultant was issued 100,000 shares in exchange for a
fifteen month service agreement. Such shares were valued at $1.00 per share
(the fair market value), with the resulting charge being amortized over the
fifteen month term of the agreement, and the balance written off during 1997.
During 1996, an aggregate of 70,000 other shares were issued for services
to various parties, which were valued at their aggregate fair value of $15,000.
In February 1997, 150,000 shares were issued to a consultant, which were
valued at $1.00 per share, with the resulting charge expensed during 1997.
In March 1997, a consultant was issued 10,000 options exercisable at $.01
per share, which resulted in a $10,000 expense charge.
In September 1997, the Company issued 300,000 shares of common stock to a
consultant. The Company recorded a charge of $150,000 for the fair value of the
stock.
9. INITIAL PUBLIC OFFERING
The Company completed an Initial Public Offering in November 1995, selling
a total of 750,000 shares of common stock for $3.00 per share, and 1,725,000
warrants at $0.10 per warrant. The warrants initially entitled the holder to
purchase one share of Company common stock at $3.00 per share through October
30, 2000. At December 31, 1996, the total number of shares issuable upon the
exercise of such warrants has been increased to 2,756,917 and the exercise
price has been adjusted to $2.53 per share pursuant to anti-dilution
provisions. The warrants are redeemable by the Company at $0.05 per warrant,
generally, upon the common stock achieving
F-17
<PAGE>
certain price levels. Net proceeds to the Company after underwriter discounts
and other expenses were approximately $1.4 million. In connection with the
public offering, the underwriter received warrants which allow for the purchase
of (after adjustment for anti-dilution provisions) an aggregate 269,103 shares
at $3.01 per share at December 31, 1997.
10. CONVERTIBLE NOTES
In June 1996, the Company issued six month, unsecured, convertible notes
with an aggregate face of amount of $622,500, which bear interest at the rate
of 5% per annum, and are convertible into common stock at the rate of $1.50 per
share. Through December 31, 1996, $352,500 in principal was converted into
235,000 shares of common stock. Another $150,000 in principal was repaid in
January 1997, $60,000 was extended through June 1997 at an interest rate of
17.5% and $60,000 was presented for payment in March 1997 and became in default
upon not being repaid by the Company on March 27, 1997.
Costs associated with this financing, consisting of professional fees,
aggregated approximately $252,000. Such costs were amortized to expense over
the original term, with a pro rata amount of unamortized costs charged to paid
in capital upon conversions to stock.
11. NOTE PAYABLE
In November 1996, the Company borrowed $300,000 under an 18 month note
payable bearing interest at 8% per annum. The note is secured by the personal
guarantees of certain of the Companies principal shareholders, and will be
secured by all the assets of the Company upon the satisfaction of the Company's
bank debt and release of the associated security interest. In connection with
this borrowing, the Company issued 180,000 shares of common stock to the
lender. In accordance with Accounting Principles Board Opinion No. 14, the
proceeds were allocated between the debt and equity securities based on their
relative fair value, resulting in a note discount of $96,000, which is being
amortized to expense over the term of the note. The unamortized balance of the
discount is $21,325 at December 31, 1997.
F-18
<PAGE>
ROLLING PIN KITCHEN EMPORIUM, INC.
SEPTEMBER 30, 1998
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
<TABLE>
<S> <C>
ASSETS
CURRENT ASSETS:
Cash ............................................................................. $ 146,171
Accounts receivable -- trade ..................................................... 70,854
Inventories ...................................................................... 3,008,646
Prepaid expenses and other current assets ........................................ 45,427
------------
TOTAL CURRENT ASSETS ........................................................... 3,271,098
PROPERTY AND EQUIPMENT .............................................................. 623,900
REORGANIZATION VALUE IN EXCESS OF AMOUNTS ALLOCABLE TO IDEN TIFIABLE ASSETS ......... 45,721
GOODWILL ............................................................................ 988,129
OTHER ASSETS ........................................................................ 249,134
------------
$ 5,177,982
============
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable and accrued expenses ............................................ $ 1,486,588
Notes payable .................................................................... 4,110,000
------------
TOTAL CURRENT LIABILITIES ..................................................... 5,596,588
PUT OPTION ON WARRANTS .............................................................. 400,000
STOCKHOLDERS' DEFICIT:
Cumulative preferred stock, par value $.01 per share; 1,000,000 shares authorized,
320 shares redeemable, convertible and bearing a liquidation preference of
$1,000 per share ............................................................. 256,000
Common stock, par value $.01 per share, authorized: Class A-20,000,000 shares,
Class B-155,000; issued and outstanding:
Class A-1,522,041, Class B-154,951 .............................................. 16,770
Additional paid-in-capital ....................................................... 64,000
Accumulated (earnings) deficit ................................................... (1,155,376)
------------
TOTAL STOCKHOLDERS' DEFICIT .................................................... (818,606)
------------
$ 5,177,982
============
</TABLE>
See notes to consolidated financial statements.
F-19
<PAGE>
<TABLE>
<CAPTION>
ROLLING PIN KITCHEN EMPORIUM, INC. GAYLORD COMPANIES, INC.
(DEBTOR-IN-POSSESSION)
CONSOLIDATED STATEMENT OF OPERATIONS CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED) (UNAUDITED)
For the Period For the Period For the Nine
August 12, 1998 through January 1, 1998 through Months ended
September 30, 1998 August 12, 1998 September 30, 1997
------------------------- ------------------------- -------------------
<S> <C> <C> <C>
NET SALES .................................... $ 728,767 $ 1,454,274 $ 2,475,892
COST OF GOODS SOLD, including store occupancy
and delivery costs .......................... 436,628 1,191,423 2,228,303
------------- ----------- -------------
GROSS PROFIT ................................. 292,139 262,851 247,589
------------- ----------- -------------
OPERATING EXPENSES:
Selling, general and administrative ......... 1,076,415 733,272 1,029,935
Depreciation and amortization ............... 47,227 47,382 80,730
------------- ----------- -------------
1,123,642 780,654 1,110,665
------------- ----------- -------------
OPERATING INCOME (LOSS) ...................... (831,503) (517,803) (863,076)
------------- ----------- -------------
OTHER INCOME (EXPENSE):
Interest expense, net ....................... (184,842) (150,190) (115,534)
Amortization of debt discount ............... (160,000)
Franchise fees .............................. 20,969
------------- ----------- -------------
(323,873)
-------------
INCOME (LOSS) FROM CONTINUING
OPERATIONS .................................. (1,155,376) (667,993) (978,610)
REORGANIZATION ITEM - PROFESSIONAL FEES ...... -- (200,609) --
------------- ----------- -------------
LOSS BEFORE DISCONTINUED OPERATIONS .......... (1,155,376) (868,602) (978,610)
LOSS FROM DISCONTINUED OPERATIONS ............ -- (660,420) (1,495,820)
GAIN ON DISPOSAL OF DISCONTINUED
OPERATIONS .................................. -- 1,216,893 --
------------- ----------- -------------
INCOME (LOSS) BEFORE EXTRAORDINARY
GAIN ........................................ (1,155,376) (312,129) (2,474,430)
-------------
EXTRAORDINARY GAIN ON DEBT DISCHARGE ......... -- 1,572,215 --
------------- ----------- -------------
NET INCOME (LOSS) ............................ (1,155,376) 1,260,086 (2,474,430)
Preferred stock dividends ................... -- -- (27,000)
------------- ----------- -------------
NET INCOME (LOSS) TO COMMON SHAREHOLDERS ..... $ (1,155,376) $ 1,260,086 $ (2,501,430)
============= =========== =============
BASIC LOSS PER COMMON SHARE:
Continuing .................................. $ (0.69) $ (0.22) $ (0.26)
Discontinued ................................ -- (0.17) (0.40)
------------- ----------- -------------
$ (0.69) $ (0.40) $ (0.66)
============= =========== =============
WEIGHTED AVERAGE COMMON SHARES USED 1,676,992 3,870,000 3,735,000
============= =========== =============
</TABLE>
See notes to consolidated financial statements.
F-20
<PAGE>
<TABLE>
<CAPTION>
ROLLING PIN KITCHEN EMPORIUM, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
For the Period
August 12, 1998 through
September 30, 1998
-------------------------
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ..................................... $ (1,155,376)
Adjustments to reconcile net income (loss) to net
cash provided (used) by operating activities, net of
effects of acquisition:
(Gain) loss from discontinued operations ............. --
Reorganization items ................................. --
Amortization of note discount ........................ 160,000
Extraordinary gain on debt discharge ................. --
Depreciation and amortization ........................ 47,227
Non cash imputed compensation expense ................ --
Preferred shares issued to settle payables ........... 320,000
Changes in assets and liabilities:
Decrease (increase) in accounts receivable .......... (65,671)
Decrease (increase) in other receivables ............ --
Decrease (increase) in inventory .................... (333,204)
Decrease (increase) in prepaid expenses and
other assets ....................................... (30,000)
Decrease (increase) in other assets ................. (74,836)
Decrease (increase) in deferred income taxes ........ --
Increase (decrease) in accounts payable ............. 799,263
Increase (decrease) in sales and other taxes payable. --
Increase (decrease) in other current liabilities .... --
------------
Net cash provided (used) by continuing
operations ......................................... (332,597)
Cash used for reorganization items .................. --
Net cash provided by discontinued operations ........ --
------------
NET CASH PROVIDED (USED) BY
CONTINUING OPERATIONS ........................... (332,597)
------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash used for acquisition, net of cash acquired ....... (2,125,238)
Purchase of property and equipment .................... --
------------
NET CASH PROVIDED (USED) BY
INVESTING ACTIVITIES ............................ (2,125,238)
------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid ........................................ --
Proceeds from notes payable ........................... 2,460,000
Repayments of bank debt ............................... --
------------
NET CASH PROVIDED (USED) BY
FINANCING ACTIVITIES ............................ 2,460,000
------------
NET INCREASE (DECREASE) IN CASH ........................ 2,165
CASH AT BEGINNING OF PERIOD ............................ 144,006
------------
CASH AT END OF PERIOD .................................. $ 146,171
============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
GAYLORD COMPANIES, INC.
(DEBTOR-IN-POSSESSION)
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
For the Period For the Nine
January 1, 1998 through Months ended
August 12, 1998 September 30, 1997
------------------------- -------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ..................................... $ 1,260,086 $ (2,474,430)
Adjustments to reconcile net income (loss) to net
cash provided (used) by operating activities, net of
effects of acquisition:
(Gain) loss from discontinued operations ............. (556,473) 1,495,820
Reorganization items ................................. 200,609 --
Amortization of note discount ........................ -- --
Extraordinary gain on debt discharge ................. (1,572,215) --
Depreciation and amortization ........................ 80,730 141,967
Non cash imputed compensation expense ................ -- 82,724
Preferred shares issued to settle payables ........... -- --
Changes in assets and liabilities:
Decrease (increase) in accounts receivable .......... 9,935 305
Decrease (increase) in other receivables ............ -- (27,851)
Decrease (increase) in inventory .................... 112,005 163,347
Decrease (increase) in prepaid expenses and
other assets ...................................... 41,254 (307,639)
Decrease (increase) in other assets ................. (165,403) --
Decrease (increase) in deferred income taxes ........ -- 398,196
Increase (decrease) in accounts payable ............. (27,667) 628,865
Increase (decrease) in sales and other taxes payable. -- (106,480)
Increase (decrease) in other current liabilities .... -- 246,274
------------- ------------
Net cash provided (used) by continuing
operations ........................................ (617,139) 241,098
Cash used for reorganization items .................. (200,609) --
Net cash provided by discontinued operations ........ (376,610) (1,495,820)
------------- ------------
NET CASH PROVIDED (USED) BY
CONTINUING OPERATIONS ........................... (1,194,358) (1,254,722)
------------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash used for acquisition, net of cash acquired ....... -- --
Purchase of property and equipment .................... -- (15,225)
------------- ------------
NET CASH PROVIDED (USED) BY
INVESTING ACTIVITIES ............................ -- (15,225)
------------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid ........................................ -- (27,000)
Proceeds from notes payable ........................... 1,321,235 932,131
Repayments of bank debt ............................... (1,053,374) (434,994)
------------- ------------
NET CASH PROVIDED (USED) BY
FINANCING ACTIVITIES ............................ 267,861 470,137
------------- ------------
NET INCREASE (DECREASE) IN CASH ........................ (926,497) (799,810)
CASH AT BEGINNING OF PERIOD ............................ 1,070,503 818,518
------------- ------------
CASH AT END OF PERIOD .................................. $ 144,006 $ 18,708
============= ============
</TABLE>
See notes to consolidated financial statements.
F-21
<PAGE>
ROLLING PIN KITCHEN EMPORIUM, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
(UNAUDITED)
The accompanying financial statements are unaudited, but in the opinion of
management include all adjustments, consisting of normal recurring adjustments
necessary for a fair presentation of financial position and results of
operations and cash flows. The results of operations for any interim period are
not necessarily indicative of results to be achieved for a full fiscal year.
1. Preferred Stock:
During the period August 12, 1998 through September 30, 1998, the Company
issued 320 shares of preferred stock in exchange for certain liabilities
aggregating $320,000. The preferred stock pays no dividends and is
redeemable at the Company's option under certain conditions. The
preferred stock is convertible into common stock at 80% of the market
value of the common stock, but only upon the Company completing a public
offering. The Company has recorded a discount totaling $64,000 in
connection with this beneficial conversion feature. This discount will be
charged as a dividend at the time that the preferred stock first becomes
convertible.
F-22
<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-23
<PAGE>
AROPI, INCORPORATED
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
June 30
--------------------------------------
1998 1997
-------------------- ---------------
<S> <C> <C>
CURRENT ASSETS
Cash ....................................................... $ 17,448 $ 24,592
Accounts receivable, less allowance for doubtful accounts of
$15,000 in 1998 and $5,616 in 1997 ....................... 49,845 78,319
Prepaid expenses ........................................... 3,650 4,800
Inventories ................................................ 1,665,833 1,422,578
------------ ------------
TOTAL CURRENT ASSETS ..................................... 1,736,776 1,530,289
PROPERTY AND EQUIPMENT
Fixtures, equipment and leasehold improvements ............. l,599,612 1,582,953
Less allowance for depreciation ............................ (1,323,195) (1,167,841)
------------ ------------
276,417 415,112
OTHER ASSETS
Deposits ................................................... 785 785
Non-competition agreement, net of accumulated amortization
of $33,250 in 1998 and $23,750 in 1997 ................... 61,750 71,250
Loan acquisition cost, net of accumulated amortization of
$2,906 in 1998 and $224 in 1997 .......................... 15,868 18,550
------------ ------------
78,403 90,585
------------ ------------
$ 2,091,596 $ 2,035,986
============ ============
</TABLE>
F-24
<PAGE>
LIABILITIES AND STOCKHOLDERS EQUITY
<TABLE>
<CAPTION>
June 30
-------------------------------
1998 1997
-------------- --------------
<S> <C> <C>
CURRENT LIABILITIES
Line of credit ...................................... $ 50,000 $ 50,000
Accounts payable .................................... 430,804 211,282
Accrued expenses .................................... 120,905 93,395
Current portion of long-term debt ................... 176,313 165,632
---------- ----------
TOTAL CURRENT LIABILITIES ......................... 778,022 520,309
LONG-TERM DEBT
Notes payable - bank ................................ 283,903 360,000
Notes payable - others .............................. 50,000 50,000
Notes payable - former stockholder .................. 512,912 568,518
---------- ----------
846,815 978,518
Less current maturities ............................. 176,313 165,632
---------- ----------
670,502 812,886
STOCKHOLDERS' EQUITY:
Common stock - no par value ......................... 485,502 485,502
Authorized - 10,000 shares
Issued and outstanding - 372 shares
Preferred stock, non-voting - no par value: ......... 0 0
Authorized - 10,000 shares
Issued and outstanding - -0- shares
Additional paid-in capital .......................... 78,600 78,600
Retained earnings ................................... 578,970 638,689
---------- ----------
1,143,072 1,202,791
Less: Treasury stock ................................ (500,000) (500,000)
---------- ----------
643,072 702,791
---------- ----------
$2,091,596 $2,035,986
========== ==========
</TABLE>
See notes to financial statements.
F-25
<PAGE>
AROPI, INCORPORATED
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
June 30
-----------------------------
1998 1997
------------- -------------
<S> <C> <C>
NET SALES ...................................... $6,310,362 $6,572,905
COST OF SALES .................................. 3,134,668 3,407,466
---------- ----------
3,175,694 3,165,439
OPERATING EXPENSES
Selling expenses .............................. 1,577,796 1,580,177
General and administrative expenses ........... 1,522,491 1,607,936
---------- ----------
3,100,287 3,188,113
---------- ----------
OPERATING INCOME (LOSS) ........................ 75,407 (22,674)
OTHER INCOME (EXPENSE)
Franchise fees ................................ 466,519 587,469
Franchise expenses ............................ (610,644) (547,677)
Other income .................................. 53,999 40,662
Net loss on disposal of fixed assets .......... -0- (14,486)
---------- ----------
(90,126) 65,968
---------- ----------
NET INCOME (LOSS) BEFORE INCOME TAXES ......... (14,719) 43,294
INCOME TAXES .................................. -0- 2,952
---------- ----------
NET INCOME (LOSS) ............................. $ (14,719) $ 40,342
========== ==========
</TABLE>
See notes to financial statements.
F-26
<PAGE>
AROPI, INCORPORATED
STATEMENTS OF STOCKHOLDER'S EQUITY
<TABLE>
<CAPTION>
Common Paid-In Retained Treasury
Stock Capital Earnings Stock Total
----------- --------- ------------ -------------- -----------
<S> <C> <C> <C> <C> <C>
Stockholder's equity at June 30, 1996 ......... $485,502 $78,600 $ 598,347 $ (500,000) $ 662,449
Net income for the year ended
June 30, 1997 ................................ -0- -0- 40,342 -0- 40,342
-------- ------- --------- ---------- ---------
Stockholder's equity at June 30, 1997 ......... 485,502 78,600 638,689 (500,000) 702,791
Distributions ................................. -0- -0- (45,000) -0- (45,000)
Net loss for the year ended
June 30, 1998 ................................ -0- -0- (14,719) -0- (14,719)
-------- ------- --------- ---------- ---------
Stockholder's equity at June 30, 1998 ......... $485,502 $78,600 $ 578,970 $ (500,000) $ 643,072
======== ======= ========= ========== =========
</TABLE>
See notes to financial statements.
F-27
<PAGE>
AROPI, INCORPORATED
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Year Ended
June 30,
-----------------------------
1998 1997
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ................................................ $ (14,719) $ 40,342
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation and amortization .................................. 167,536 215,763
Loss on sale of fixed assets ................................... -0- 14,486
Decrease (increase) in:
Accounts receivable ........................................... 28,474 35,595
Inventory ..................................................... (243,255) 269,911
Deposits ...................................................... -0- 250
Prepaid expenses .............................................. 1,150 (4,800)
Increase (decrease) in:
Accounts payable and accrued expenses ......................... 247,032 (133,048)
---------- ----------
Total adjustments ............................................. 200,937 398,157
---------- ----------
Net cash provided by operating activities ................... 186,218 438,499
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of corporate fixed assets ............................... (16,659) (28,618)
Receipts from sale of fixed assets ............................... -0- 14,201
---------- ----------
Net cash used by investing activities ....................... (16,659) (14,417)
CASH FLOWS FROM FINANCING ACTIVITIES
Increase (decrease) in obligations in excess of cash ............. -0- (13,581)
Proceeds from long-term borrowing ................................ -0- 75,358
Repayments of long-term borrowing ................................ (131,703) (427,979)
Payment of loan acquisition costs ................................ -0- (18,774)
Repayments on line of credit-net ................................. -0- (50,000)
Distribution to stockholders ..................................... (45,000) -0-
---------- ----------
Net cash used by financing activities ....................... (176,703) (434,976)
---------- ----------
INCREASE (DECREASE) IN CASH ....................................... (7,144) (10,894)
CASH BALANCE AT BEGINNING OF YEAR ................................. 24,592 35,486
---------- ----------
CASH BALANCE AT END OF YEAR ....................................... $ 17,448 $ 24,592
========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid ..................................................... $ 89,065 $ 107,638
========== ==========
Income taxes paid ................................................. -0- $ 2,593
========== ==========
</TABLE>
See notes to financial statements.
F-28
<PAGE>
AROPI, INCORPORATED
NOTES TO FINANCIAL STATEMENTS
June 30, 1998
Note A -- Organization and Summary of Significant Accounting Policies
Organization
AROPI, Incorporated ("the Company") was incorporated in Iowa in July,
1981. The Company operates thirteen retail stores in the eastern United States
under the trade name of Rolling Pin Kitchen Emporium. These stores sell high
quality kitchen utensils. There were also twenty-one franchised stores at June
30, 1998.
Income Taxes
Effective July 1, 1994, the Company elected, with the unanimous consent of
its stockholders, to be taxed under the provisions of Subchapter S of the
Internal Revenue Code. Under those provisions, the Company is not subject to
federal and certain state corporate income taxes. Instead, the stockholder
includes the Company's taxable income in his individual income tax return.
Based on its financial position at July 1, 1994, the Company does not
anticipate any significant liability for built-in-gains taxes.
Income tax expense is recognized in the accompanying financial statements
for taxes paid to states in which the Company conducts business that do not
recognize S corporation status.
Revenue Recognition and Deferred Franchise Fees
Revenue from sales of individual franchises is recognized when
substantially all significant services to be provided by the Company have been
performed. Generally these services include assistance in site selection,
financing, advertising, training of personnel and provision of certain
inventory and equipment to provide a turnkey operation. Fees received in
advance of these services are recorded as deferred franchise fees. In addition
to the initial fees for the above services, the Company receives continuing
franchise fees based on a percentage of the franchise's gross revenues.
Inventories
Inventories are stated at the lower of cost or market using the first-in,
first-out (FIFO) method.
Property and Equipment
Property and equipment are stated at cost. Expenditures for new equipment
and replacements or betterments are capitalized while expenditures for normal
maintenance and repairs are charged to expense as incurred. When assets are
retired or otherwise disposed of, the related cost and accumulated depreciation
are removed from the accounts, and any gain or loss is credited or charged to
income.
Depreciation for leasehold improvements is computed using the
straight-line method over a period of ten years. Depreciation for fixtures and
equipment is computed using the straight-line method and accelerated methods
over the useful lives of the assets which range from three to seven years.
Depreciation expense was $155,354 and $206,039 for the years ended June 30,
1998 and 1997, respectively.
Intangible Assets
The Company is amortizing a non-competition agreement obtained from a
former stockholder (Note B) over the ten-year term of the agreement using the
straight-line method. Amortization expense was $9,500 for each of the years
ended June 30, 1998 and 1997.
The Company is amortizing loan acquisition costs over a seven-year term.
Amortization expense was $2,682 for the year ended June 30, 1998 and $224 for
the year ended June 30, 1997.
F-29
<PAGE>
AROPI, INCORPORATED
NOTES TO FINANCIAL STATEMENTS -- (Continued)
June 30, 1998
Note A -- Organization and Summary of Significant Accounting Policies
-- (Continued)
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Note B -- Line of Credit and Long-Term Debt
The Company has obtained a credit commitment from a bank in the amount of
$250,000 to be used for working capital. At June 30, 1998, $50,000 had been
drawn against the line of credit. The line of credit is secured by accounts
receivable, fixed assets and inventory and guaranteed by the stockholder.
Interest accrues on the working capital line at the prime rate plus one
percent. The prime rate was eight and one-half percent at June 30, 1998. The
line of credit is cross-collateralized with a note payable to the Small
Business Administration, as described below.
A summary of long-term debt is as follows:
<TABLE>
<CAPTION>
June 30,
-------------------------
1998 1997
----------- -----------
<S> <C> <C>
Notes Payable - Banks
Note payable to the Small Business Administration through a bank
as agent. The note is secured by accounts receivable and inventory
and guaranteed by the stockholder. Principal and interest pay-
ments of $7,430, including interest at 8.75%, are due monthly
through May 2002. The note is cross-collateralized with the line
of credit. ....................................................... $283,903 $360,000
-------- --------
Notes Payable - Others
Note payable to an individual bearing interest at 8% and payable in
1998. ............................................................ 50,000 50,000
-------- --------
Notes Payable - Former Stockholders
Note payable to a former stockholder, bearing interest at 9%, pay-
able in monthly principal and interest installments of $6,334
through December 31, 2004. ....................................... 372,998 413,435
69,045 76,530
Noncompetition agreement obligation to a former stockholder, evi-
denced by a note payable, bearing interest at 9%, payable in
monthly principal and interest installments of $1,203 through
December 31, 2004. ............................................... 70,869 78,553
-------- --------
Note payable to a former stockholder, bearing interest at 9%, pay-
able in monthly principal and interest installments of $1,172
through December 31, 2004. ....................................... 512,912 568,518
-------- --------
846,815 978,518
Less current portion ................................................ 176,313 165,632
-------- --------
$670,502 $812,886
======== ========
</TABLE>
F-30
<PAGE>
AROPI, INCORPORATED
NOTES TO FINANCIAL STATEMENTS -- (Continued)
June 30, 1998
Note B -- Line of Credit and Long-Term Debt -- (Continued)
Effective December 31, 1994, the Company repurchased one-hundred and
seventy-four shares of its common stock, representing all holdings of the
Company's stock by that individual, at a cost of $500,000. In connection
therewith, the company executed a $500,000 note payable to the former
stockholder and secured by the repurchased shares. Pursuant to the repurchase
agreement, the repurchased shares will be held in escrow and will be released
to the Company on a pro rata basis through December 2004 as payments are made
on the note payable.
Concurrent with the stock repurchase, the Company obtained the former
stockholder's agreement not to compete with the Company for a period of ten
years ending on December 31, 2004. In consideration for the former
stockholder's noncompetition agreement, the Company executed a $95,000 note
payable to the former stockholder. Also, concurrent with the stock repurchase,
certain existing obligations payable to the former stockholder on or before
June 30, 1998 were recast into a nine percent note payable in monthly
installments through 2004. These obligations are also secured by the
repurchased and escrowed shares.
The Company incurred interest expense of $87,388 and $111,315 for the
years ended June 30, 1998 and 1997, respectively, of which $48,908 and $49,661,
respectively, was paid to the former stockholder.
Future maturities of long-term debt are as follows:
Year Ending Former
June 30, Stockholder Others Total
- -------------- ------------- ----------- -----------
1999 $ 60,823 $115,490 $176,313
2000 66,526 71,456 137,982
2001 72,768 77,965 150,733
2002 79,595 68,992 148,587
2003 87,060 -0- 87,060
Thereafter 146,140 -0- 146,140
-------- -------- --------
$512,912 $333,903 $846,815
======== ======== ========
Note C -- Commitments
The Company has entered into lease agreements for retail mall space for
all of its company owned stores and for three of its franchised stores. The
leases for the franchised stores have been assigned or subleased to the
franchisees. The Company also leases space for its main office from the
stockholder of the Company on a month-to-month basis with the monthly rental
varying based on the prime rate. All leases for retail spaces provide for
annual base rent plus additional charges for selected services and percentage
rent based upon annual sales. The rent expense for office space and Company
owned stores was $1,064,075 for the year ended June 30, 1998 and $1,108,633 for
the year ended June 30, 1997. Rent paid to the stockholder was $43,650 for the
year ended June 30, 1998 and $36,500 for the year ended June 30, 1997.
The Company's future lease obligations for base rent for its company owned
stores is as follows:
Year Ending June 30, Stores
- ---------------------- -------------
1999 $ 644,261
2000 612,129
2001 605,033
2002 567,220
2003 393,691
Thereafter 265,787
----------
$3,088,121
==========
F-31
<PAGE>
AROPI, INCORPORATED
NOTES TO FINANCIAL STATEMENTS -- (Continued)
June 30, 1998
Note D -- Employee Benefit Plans
The Company sponsors a 401(k) plan which covers all eligible employees who
work one thousand hours or more during the year. Under the plan, each
participant has the right to defer up to fifteen percent of his or her
compensation, not to exceed certain annual limits set by the Internal Revenue
Service, by making a voluntary contribution to the plan. The Company's minimum
required matching contribution is one-half of the first six percent of
compensation deferred by the employee. Additional Company contributions are at
the discretion of management. The Company made matching contributions of
$16,687 and $19,894 and incurred additional plan expenses of $2,636 and $2,400
for the years ended June 30, 1998 and 1997, respectively.
Note E -- Subsequent Events
Subsequent to year-end, the stockholder of the Company sold all
outstanding shares of stock to a public company. Concurrent with the sale of
stock, all outstanding notes payable were repaid.
F-32
<PAGE>
ROLLING PIN KITCHEN EMPORIUM, INC.
UNAUDITED PRO-FORMA CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
The following unaudited pro-forma condensed consolidated statements of
operations present the pro-forma operating results of Rolling Pin Kitchen
Emporium, Inc. (the "Company") and Aropi, Inc. "(Aropi") as if the acquisition
of Aropi, which occurred on August 20, 1998 and is accounted for as a purchase
business acquisition, had occurred on January 1, 1997. Additionally, the pro
forma statements of operations include the operating results of the Company's
predecessor, the Gaylord Companies, Inc. for the year ended December 31, 1997
and for the period from January 1, 1998 through to the date of its emergence
from bankruptcy on August 12, 1998. Furthermore, the pro forma financial
statements include adjustments to reflect the effects of fresh start
accounting, which the Company adopted upon its emergence from bankruptcy, as if
such accounting had been adopted on January 1, 1997. The financial statements
of Aropi, which has a June 30 fiscal year end, have been recast for purposes of
these pro formas to place them on common basis with those of the Company.
The unaudited pro-forma condensed consolidated statements of operations do
not necessarily represent actual results that would have been achieved had the
companies been together from January 1, 1997 and fresh start accounting been
adopted as of that date, nor may they be indicative of future operations. These
unaudited pro-forma condensed consolidated financial statements should be read
in conjunction with the historical financial statements and notes thereto of
the respective companies.
F-33
<PAGE>
ROLLING PIN KITCHEN EMPORIUM, INC.
UNAUDITED PRO-FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
Rolling Pin The Gaylord
Kitchen Emporium, Inc. Companies, Inc.
(August 12, 1998 (January 1, 1998
to to
September 30, 1998) August 12, 1998)
------------------------ ------------------
<S> <C> <C>
NET SALES .................................. $ 728,767 $ 1,454,274
COST OF GOODS SOLD ......................... 436,628 1,191,423
------------ --------------
GROSS PROFIT ............................... 292,139 262,851
------------ --------------
OPERATING EXPENSES:
Selling, general and administrative ....... 1,076,415 733,272
Depreciation and amortization ............. 47,227 47,382
1,123,642 780,654
------------ --------------
OPERATING INCOME (LOSS) .................... (831,503) (517,803)
------------ --------------
OTHER INCOME (EXPENSE):
Interest expense, net ..................... (184,842) (150,190)
Amortization of debt issue costs and
discounts ................................ (160,000) --
Franchise fees ............................ 20,969 --
Franchise expenses ........................ -- --
------------ --------------
(323,873) (150,190)
------------ --------------
LOSS FROM CONTINUING
OPERATIONS ................................ (1,155,376) (667,993)
REORGANIZATION -- PROFESSIONAL
FEES ...................................... -- (200,609)
------------ --------------
LOSS BEFORE DISCONTINUED
OPERATIONS ................................ $ (1,155,376) $ (868,602)
============ ==============
NET LOSS PER SHARE ......................... $ (0.69)
============
WEIGHTED AVERAGE SHARES .................... 1,676,985
============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Aropi, Inc.
(January 1, 1998
Pro-Forma Adjustments
to --------------------------
August 20, 1998) Dr. Cr. Total
-------------------- ------------- ----------- ---------------
<S> <C> <C> <C> <C>
NET SALES .................................. $ 3,250,304 $ $ $ 5,433,345
COST OF GOODS SOLD ......................... 1,497,606 3,125,657
------------ ------------
GROSS PROFIT ............................... 1,752,698 2,307,688
------------ ------------
OPERATING EXPENSES:
Selling, general and administrative ....... 1,819,357 3,629,044
Depreciation and amortization ............. 66,956(1) 10,000
(2) 68,000 239,565
------------ ------------
1,886,313 3,868,609
------------ ------------
OPERATING INCOME (LOSS) .................... (133,615) (1,560,921)
------------ ------------
OTHER INCOME (EXPENSE):
Interest expense, net ..................... (41,133)(3) 195,000 (571,165)
Amortization of debt issue costs and
discounts ................................ -- (4) 400,000 (560,000)
Franchise fees ............................ 203,979 224,948
Franchise expenses ........................ (610,644) (610,644)
------------ ------------
(447,798) (1,516,861)
------------ ------------
LOSS FROM CONTINUING
OPERATIONS ................................ (581,413) (3,077,782)
REORGANIZATION -- PROFESSIONAL
FEES ...................................... -- (5) 200,609 --
------------ ------------
LOSS BEFORE DISCONTINUED
OPERATIONS ................................ $ (581,413) $ (3,077,782)
============ ============
NET LOSS PER SHARE ......................... $ (1.84)
============
WEIGHTED AVERAGE SHARES .................... 1,676,985
============
</TABLE>
See notes to pro-forma financial statements.
F-34
<PAGE>
ROLLING PIN KITCHEN EMPORIUM, INC.
UNAUDITED PRO-FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
The Gaylord
Companies, Inc. Aropi, Inc.
(historical) (historical)
----------------- -----------------
<S> <C> <C>
NET SALES .......................................... $ 3,724,157 $ 6,397,922
COST OF GOODS SOLD ................................. 3,508,874 3,231,302
------------- -----------
GROSS PROFIT ....................................... 215,283 3,166,620
------------- -----------
OPERATING EXPENSES:
Selling, general and administrative ............... 838,081 3,153,074
Non-cash imputed stock compensation ............... 469,255 --
Depreciation and amortization ..................... 107,640 (1)
--(2)
------------- ------------
1,414,976 3,153,074
------------- ------------
OPERATING INCOME (LOSS) ............................ (1,199,693) 13,546
------------- ------------
OTHER INCOME (EXPENSE):
Interest expense, net ............................. (79,710) --(3)
Amortization of debt issue costs and discounts .... (74,000) --(4)
Franchise fees .................................... -- 502,423
Franchise expenses ................................ -- (542,787)
Other - net ....................................... (37,977) 45,534
------------- ------------
(191,687) 5,170
------------- ------------
INCOME (LOSS) BEFORE INCOME TAXES ................. (1,391,380) 18,716
PROVISION FOR INCOME TAXES ........................ (400,649) --
------------- ------------
INCOME (LOSS) FROM CONTINUING
OPERATIONS ....................................... (1,792,029) 18,716
REORGANIZATION - PROFESSIONAL FEES (234,625) --
------------- ------------
INCOME (LOSS) BEFORE DISCONTINUED
OPERATIONS ....................................... (2,026,654) 18,716
PREFERRED STOCK DIVIDENDS ......................... (23,789) --
------------- ------------
INCOME (LOSS) FROM CONTINUING
OPERATIONS TO TO COMMON SHAREHOLDERS ............... $ (2,050,443) $ 18,716
============= ============
NET LOSS PER SHARE .................................
WEIGHTED AVERAGE SHARES ......................... ..
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Pro-Forma Adjustments
--------------------------
Dr. Cr. Total
------------- ----------- -----------------
<S> <C> <C> <C>
NET SALES .......................................... $ $ $ 10,122,079
COST OF GOODS SOLD ................................. 6,740,176
-------------
GROSS PROFIT ....................................... 3,381,903
-------------
OPERATING EXPENSES:
Selling, general and administrative ............... 3,991,155
Non-cash imputed stock compensation ............... 469,255
Depreciation and amortization ..................... 16,000
100,000 223,640
-------------
4,684,050
-------------
OPERATING INCOME (LOSS) ............................ (1,302,147)
-------------
OTHER INCOME (EXPENSE):
Interest expense, net ............................. 312,000 (391,710)
Amortization of debt issue costs and discounts .... 560,000 (634,000)
Franchise fees .................................... 502,423
Franchise expenses ................................ (542,787)
Other - net ....................................... 7,557
-------------
(1,058,517)
-------------
INCOME (LOSS) BEFORE INCOME TAXES ................. (2,360,664)
PROVISION FOR INCOME TAXES ........................ (400,649)
-------------
INCOME (LOSS) FROM CONTINUING
OPERATIONS ....................................... -- (2,761,313)
REORGANIZATION - PROFESSIONAL FEES ................ (5) 234,625 --
-------------
INCOME (LOSS) BEFORE DISCONTINUED
OPERATIONS ....................................... (2,761,313)
PREFERRED STOCK DIVIDENDS ......................... (23,789)
-------------
INCOME (LOSS) FROM CONTINUIN
OPERATIONS TO TO COMMON SHAREHOLDERS ............... $ (2,785,102)
=============
NET LOSS PER SHARE ................................ $ (1.66)
=============
WEIGHTED AVERAGE SHARES ........................... 1,676,985
=============
</TABLE>
See notes to pro-forma financial statements.
F-35
<PAGE>
ROLLING PIN KITCHEN EMPORIUM, INC.
NOTES TO UNAUDITED PRO-FORMA CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
On August 21, 1998, the Company acquired Aropi, Inc., an Atlanta, Georgia
based chain retailer of kitchen products, in a purchase business acquisition.
The purchase price was $2,651,725, of which $1,957,317 went to the seller,
composed of $1,457,317 in cash and two convertible promissory notes of $250,000
each. The remaining $694,408 was used to pay off certain indebtedness of the
seller. Acquisition costs were approximately $75,000. The fair value of assets
acquired was approximately $2,400,000 and the fair value of liabilities assumed
was approximately $679,000. Goodwill recorded on the acquisition was
$1,004,877, and is amortized over ten years.
The acquisition was financed with a second financing from Liberty-Bidco in
the amount of $700,000, under an amendment to the original $1,300,000 note, and
the balance under a new $2,000,000 loan facility with Greenfield Financial
Corp., $500,000 of which is due on December 31, 1998 and $1,500,000 due on
January 29, 1999. The Liberty-Bidco debt matures on January 1, 1999. All the
above debt bears interest and three percentage points over prime.
The following pro-forma adjustments are included in the accompanying
unaudited pro-forma condensed consolidated statements of operations for the
year ended December 31, 1997 and the nine months ended September 30, 1998:
(1) To record amortization of the reorganization value in excess of
amounts allocable to identifiable assets over a 3 year term for the
respective periods.
(2) To record amortization of the goodwill resulting from the Aropi
acquisition over a 10 year term for the respective periods.
(3) To record interest expense on the approximately $2,600,000 of
additional debt arising from the acquisition for the respective
periods.
(4) To amortize the $400,000 debt discount and $160,000 in financing
fees recorded on the initial Liberty-Bidco financing.
(5) To eliminate reorganization related expenses.
F-36
<PAGE>
[Photographs of various store locations]
<PAGE>
================================================================================
The Company has not authorized any dealer, salesperson or any other
person to give any information or to represent anything not contained in this
Prospectus. You must not rely on any unauthorized information. This Prospectus
does not offer to sell or buy any shares in any jurisdiction where it is
unlawful. The information in this Prospectus is current as of the date hereof.
-----------------------------------
TABLE OF CONTENTS
PROSPECTUS
Page
---------
Summary .................................. 3
Risk Factors ............................. 7
The Company .............................. 12
Use of Proceeds .......................... 13
Dividend Policy .......................... 13
Capitalization ........................... 14
Dilution ................................. 15
Management's Discussion and Analysis
of Financial Condition and Results of
Operations ............................ 17
Business ................................. 24
Management ............................... 29
Certain Relationships and Related Party
Transactions .......................... 34
Principal Stockholders ................... 36
Description of Securities ................ 37
Shares Eligible for Future Sale .......... 40
Underwriting ............................. 42
Legal Matters ............................ 43
Experts .................................. 43
Additional Information ................... 43
Index to Financial Statements ............ F-1
----------------------
Until ------------ , 1998, (25 days after the date of this Prospectus)
all dealers that buy, sell or trade these securities, whether or not
participating in this Offering, may be required to deliver a Prospectus. This
is in addition to the dealers' obligation to deliver a Prospectus when acting
as underwriters and with respect to their unsold allotments or subscriptions.
================================================================================
<PAGE>
================================================================================
1,500,000 Shares
Rolling Pin
Kitchen Emporium, Inc.
[GRAPHIC OMITTED]
Common Stock
----------------------
PROSPECTUS
---------------------
Nutmeg Securities, Ltd.
495 Post Road East
Westport, CT 06880
Telephone: 203-226-1857
Fax: 203-226-5343
----------------- , 1998
================================================================================
<PAGE>
PART II -- INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Company, to the fullest extent permitted by the provisions of Section
145 of the General Corporation Law of the State of Delaware, indemnifies, and
advances expenses to, any and all persons who is or was a party or is
threatened to be made a party to any threatened, pending or completed action,
suit, proceeding or claim, whether civil, criminal, administrative or
investigative, by reason of the fact that such person is or was or has agreed
to be a director or officer of the Company or while a director or officer is or
was serving at the request of the Company as a director, officer, partner,
trustee, employee or agent of any corporation, partnership, joint venture,
trust or other enterprise, including service with respect to employee benefit
plans, from and against any and all of the expenses, liabilities, or other
matters referred to in or covered by said section (including without limitation
attorneys fees and expenses). The indemnification provided by the Company is
not exclusive of any other rights to which those indemnified may be entitled
under any bylaw, agreement, vote of stockholders or disinterested directors or
otherwise, both as to action in their official capacity and as to action in
another capacity while holding such office, and shall continue as to a person
who has ceased to be a director, officer, employee, or agent and shall inure to
the benefit of the heirs, executors, and administrators of such a person. Any
person seeking indemnification by the Company is deemed to have met the
standard of conduct required for such indemnification unless the contrary shall
be established by a court of competent jurisdiction.
If the Delaware General Corporation Law is amended to authorize action
further eliminating or limiting the personal liability of directors, then the
liability of our directors will be eliminated or limited to the fullest extent
permitted by such statutes, as so amended. Any amendment, repeal or
modification of such provision shall be prospective only and shall not
adversely affect any right or protection of any of our directors existing at
the time of such amendment, repeal or modification.
Subsection (a) of Section 145 of the General Corporation Law of the State
of Delaware (the "DGCL") empowers a corporation to indemnify any person who was
or is a party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative
or investigative (other than an action by or in the right of the corporation)
by reason of the fact that he is or was a director, officer, employee or agent
of the corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by him in connection with such action, suit or proceeding if he acted
in good faith and in a manner he reasonably believed to be in or not opposed to
the best interests of the corporation, and, with respect to any criminal action
or proceeding, had no reasonable cause to believe his conduct was unlawful.
Subsection (b) of Section 145 empowers a corporation to indemnify any
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action, or suit by or in the right of the
corporation to procure a judgment in its favor by reason of the fact that such
person acted in any of the capacities set forth above, against expenses
(including attorneys' fees) actually and reasonably incurred by him in
connection with the defense or settlement of such action or suit if he acted in
good faith and in a manner he reasonably believed to be in or not opposed to
the best interests of the corporation, except that no indemnification may be
made in respect of any claim, issue or matter as to which such person shall
have been made to be liable to the corporation unless and only to the extent
that the Court of Chancery or the court in which such action or suit was
brought shall determine upon application that, despite the adjudication of
liability but in view of all the circumstances of the case, such person is
fairly and reasonably entitled to indemnity for such expenses which the Court
of Chancery or such other court shall deem proper.
Section 145 further provides that to the extent a director or officer of a
corporation has been successful on the merits or otherwise in the defense of
any action, suit or proceeding referred to in subsections (a) and (b) of
Section 145 in the defense of any claim, issue or matter therein, he shall be
indemnified against expenses (including attorneys' fees) actually and
reasonably incurred by him in connection therewith; that indemnification
provided for by Section 145 shall not be deemed exclusive of any other rights
to which the indemnified party may be entitled; that indemnification provided
for by Section 145 shall, unless otherwise provided when authorized or
ratified, continue as to a person who has ceased to be a director, officer,
employee or agent and shall
II-1
<PAGE>
inure to the benefit of such person's heirs, executors and administrators; and
empowers the corporation to purchase and maintain insurance on behalf of a
director or officer of the corporation against any liability asserted against
him and incurred by him in any such capacity, or arising out of his status as
such whether or not the corporation would have the power to indemnify him
against such liabilities under Section 145.
Section 102(b)(7) of the DGCL provides that a certificate of incorporation
may contain a provision eliminating or limiting the personal liability of a
director to the corporation or its stockholders for monetary damages for breach
of fiduciary duty as a director provided that such provision shall not
eliminate or limit the liability of a director: (i) for any breach of the
director's duty of loyalty to the corporation or its stockholders; (ii) for
acts or omissions not in good faith or which involve international misconduct
or a knowing violation of law; (iii) under Section 174 of the DGCL; or (iv) for
any transaction from which the director derived an improper personal benefit.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the expenses in connection with this
Registration Statement. All of such expenses are estimates, other than the
filing fees payable to the Securities and Exchange Commission.
<TABLE>
<S> <C>
Filing Fee -- Securities and Exchange Commission ......... 4,074
Nasdaq Listing Fee .................................... 7,800
Fees and Expenses of Accountants ...................... 75,000
Fees and Expenses of Counsel .......................... 250,000
Printing Expenses ..................................... 80,000
Miscellaneous Expenses ................................ 33,126
-------
Total .................................................... $450,000
</TABLE>
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
Set forth below is certain information concerning all sales of securities
by the Company within the past three years that were not registered under the
Securities Act:
(i) Reorganization.
Pursuant to the Plan of Reorganization, 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.
(ii) Private Placement.
On August 14, 1998, certain debt instruments issued to Tom Pittarese and
Christine Pittarese Guardians FBO Jennifer Pittarese under DTD June 18, 1998,
Mark Quinn, Mike Snow and the Delacroix Foundation, Ltd. in a private placement
while the Predecessor Entity was in bankruptcy were converted into 320 shares of
Convertible Series A Preferred Stock of the Company that are immediately
convertible into shares of Common Stock. Each share of the Covertible Series A
Preferred Stock may be converted into shares of the Company's Common Stock
(based on $1,000 per share of Preferred Stock) equal to the lessor of (a) 80% of
the five day average closing bid price for the Common Stock for the five trading
days immediately preceding the date the shares are converted, or (b) 150 of the
five day average closing bid price, as reported by Bloomberg, LP, for the
Company's Common Stock for the five trading day period following the Company's
successful completion of its secondary offering. The Company did not receive
compensation pursuant to the conversion of the debt instruments into the shares
of Convertible Series A Preferred Stock. The holders of the Convertible Series A
Preferred Stock have piggyback registration rights. As a result, the Company
will redeem the 275 shares of Convertible Series A Preferred Stock held by the
Delacroix Foundation, Ltd. at the time of the Offering for a redemption premium
of 25% over the $1,000 par value of such shares. The offer and sale of the
securities were exempt from registration under the Securities Act in reliance on
Section 4(2) thereof because the offers and sales were made to sophisticated
investors who had access to information about the Company and were able to bear
the risk of loss of their investment.
II-2
<PAGE>
(iii) Warrants.
In August, 1998, the Company granted the following warrants; (i) Bidco
received a warrant to purchase 92,595 shares of Common Stock, exercisable at
$0.01 per share, in connection with the Loan Agreement; (ii) Bidco also
received a warrant to purchase 40,602 shares of Common Stock, exercisable at
165% of the public offering price, in connection with the First Amendment;
(iii) Greenfield received a warrant to purchase 40,602 shares of Common Stock,
exercisable at 165% of the public offering price in connection with the Loan
and Security Agreement; (iv) JRP Consulting Corp. received a warrant to
purchase 23,737 shares of Common Stock and a second warrant to purchase 25,386
shares of Common Stock each exercisable at 165% of the public offering price;
(v) DLM Asset Management and Spinnernet Financial Services, Ltd. received
warrants to purchase an aggregate of 8,875 shares of Common Stock, exercisable
at 165% of the public offering price; and (vi) Laux, Holmes & Company received
a warrant to purchase 23,737 shares of Common Stock and a second warrant to
purchase 25,386 shares of Common Stock each exercisable at 165% of the public
offering price. These warrants were issued as part of the financing
arrangements with Bidco and Greenfield and, as such, did not involve additional
compensation to the Company. The offer and sale of the securities were exempt
from registration under the Securities Act in reliance on Section 4(2) thereof
because the offers and sales were made to sophisticated investors who had
access to information about the Company and were able to bear the risk of loss
of their investment.
ITEM 27. EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT
<S> <C>
1.1 Form of Underwriting Agreement.
**2.1 Stock Purchase Agreement, dated as of August 20, 1998, among Home Retail Holdings, Inc., Glenn
Kaas and Aropi, Incorporated.
2.2 Amended Plan of Reorganization of Gaylord Companies, Inc., The Cookstore, Inc., and The Cook-
store Worthington, Inc., dated June 24, 1998.
2.3 Disclosure Statement to the Amended Plan of Reorganization.
**3.1 Amended and Restated Certificate of Incorporation of the Company.
**3.2 Amended and Restated Bylaws of the Company.
*4.1 Specimen of Stock Certificate.
4.2 Form of Underwriters' Warrant, 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 JRP Consulting Corp. for the purchase of 23,737 shares
of Common Stock.
4.9 Warrant, dated August 20, 1998, issued to JRP Consulting Corp. for the purchase of 25,386 shares
of Common Stock.
4.10 Warrant, dated August 20, 1998, issued to Laux, Holmes & Company for the purchase of 23,737
shares of Common Stock.
4.11 Warrant, dated August 20, 1998, issued to Laux, Holmes & Company for the purchase of 25,386
shares of Common Stock.
*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 Cor-
poration, 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.
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
<S> <C>
**10.5 Employment Agreement, entered into as of August 20, 1998, between Home Retail Holdings, Inc.
and Glenn Kaas.
*10.6 Second Amendment to Business Loan Agreement with Covenants, dated November 1, 1998, by and
among Home Retail Holdings, Inc., The Cookstore, Inc., The Cookstore Worthington, Inc.
and Liberty Bidco Investment Corporation.
**21 List of Subsidiaries.
23.1 Consent of Feldman Sherb Ehrlich & Co., P.C., as certified public accountants.
23.2 Consent of Smith & Radigan, as certified public accountants.
*23.3 Consent of Counsel (filed under Exhibit 5.1).
**24 Power of Attorney (included in signature page).
27.1 Financial Data Schedule (December 31, 1997).
27.2 Financial Data Schedule (September 30, 1998).
</TABLE>
- ------------
* To be filed by amendment. All other exhibits are filed herewith.
** Previously filed on September 16, 1998.
ITEM 28. UNDERTAKINGS.
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which it offers or sells securities, a
post-effective amendment to this registration statement to:
(i) Include any prospectus required by Section 10(a)(3) of the Securities
Act.
(ii) Reflect in the prospectus any facts or events which, individually or
together, represent a fundamental change in the information in the registration
statement. Notwithstanding the foregoing, any increase or decrease in volume of
securities offered (if the total dollar value of securities offered would not
exceed that which was registered) and any deviation from the low or high end of
the estimated maximum offering range may be reflected in the form of prospectus
filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than a 20 percent change in the
maximum aggregate offering price set forth in the "Calculation of Registration
Fee" table in the effective registration statement.
(iii) Include any additional or changed material information on the plan
of distribution.
(2) That, for determining liability under the Securities Act, treat each
post-effective amendment as a new registration statement of the securities
offered, and the offering of the securities at that time to be the initial bona
fide offering.
(3) To file a post-effective amendment to remove from registration any of
the securities that remain unsold at the end of the offering.
(b) Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the small
business issuer pursuant to the foregoing provisions, or otherwise, the small
business issuer has been advised that in the opinion of the Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities (other
than the payment by the small business issuer of expenses incurred or paid by a
director, officer or controlling person of the small business issuer in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the small business issuer will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed
by the final adjudication of such issue.
(c) The undersigned registrant also hereby undertakes that, for determining any
liability under the Securities Act, the small business issuer will treat the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the small business issuer under Rule 424(b)(1), or (4), or
497(h) under the Securities Act as part of this registration statement as of
the time the Commission declared it effective.
II-4
<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 amendment to the registration statement to be signed on its behalf by the
undersigned, in the City of Atlanta, State of Georgia, on November 4, 1998.
ROLLING PIN KITCHEN EMPORIUM, INC.
By: /s/ JOHN D. CRITSER
-------------------------------------
President and Chief Executive Officer
In accordance with the requirements of the Securities Act of 1933, this
amendment to the registration statement has been signed by the following
persons in the capacities and on the dates stated.
<TABLE>
<CAPTION>
Name Title Date
- --------------------------------------------- ---------------------------------------- -----------------
<S> <C> <C>
/s/ JOHN D. CRITSER President, Chief Executive Officer and November 4, 1998
- --------------------------------- Director
John D. Critser
/s/ GERALD M. CZARNECKI Chairman of the Board and Director November 4, 1998
- ---------------------------------
Gerald M. Czarnecki
/s/ GREG E. DUKOFF Secretary, Interim Chief Financial November 4, 1998
- --------------------------------- Officer and Director
Greg E. Dukoff
/s/ DAVID E. DANOVITCH Director November 4, 1998
- ---------------------------------
David E. Danovitch
Director November 4, 1998
- ---------------------------------
Donald J. Jackson
/s/ GEORGE P.LUCACI Director November 4, 1998
- ---------------------------------
George P. Lucaci
/s/ THOMAS L. TUTTLE Director November 4, 1998
- ---------------------------------
Thomas L. Tuttle
</TABLE>
II-5
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
- ---------------------- -------------------------------------------------------------------------------------------------
<S> <C>
1.1 Form of Underwriting Agreement.
**2.1 Stock Purchase Agreement, dated as of August 20, 1998, among Home Retail Holdings, Inc., Glenn
Kaas and Aropi, Incorporated.
2.2 Amended Plan of Reorganization of Gaylord Companies, Inc., The Cookstore, Inc., and The Cook-
store Worthington, Inc., dated June 24, 1998.
2.3 Disclosure Statement to the Amended Plan of Reorganization.
**3.1 Amended and Restated Certificate of Incorporation of the Company.
**3.2 Amended and Restated Bylaws of the Company.
*4.1 Specimen of Stock Certificate.
4.2 Form of Underwriters' Warrant, 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 JRP Consulting Corp. for the purchase of 23,737 shares
of Common Stock.
4.9 Warrant, dated August 20, 1998, issued to JRP Consulting Corp. for the purchase of 25,386 shares
of Common Stock.
4.10 Warrant, dated August 20, 1998, issued to Laux, Holmes & Company for the purchase of 23,737
shares of Common Stock.
4.11 Warrant, dated August 20, 1998, issued to Laux, Holmes & Company for the purchase of 25,386
shares of Common Stock.
*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 Cor-
poration, Home Retail Holdings, Inc., The Cookstore, Inc., The Cookstore Worthington, Inc., and
Aropi, Incorporated.
**10.4 Loan and Security Agreement, dated August 20, 1998, among Greenfield Commercial Credit, L.L.C.,
Home Retail Holdings, Inc., The Cookstore, Inc., The Cookstore Worthington, Inc., and Aropi,
Incorporated.
**10.5 Employment Agreement, entered into as of August 20, 1998, between Home Retail Holdings, Inc.
and Glenn Kaas.
*10.6 Second Amendment to Business Loan Agreement with Covenants, dated November 1, 1998, by and
among Home Retail Holdings, Inc., The Cookstore, Inc., The Cookstore Worthington, Inc.
and Liberty Bidco Investment Corporation.
**21 List of Subsidiaries.
23.1 Consent of Feldman Sherb Ehrlich & Co., P.C., as certified public accountants.
23.2 Consent of Smith & Radigan, as certified public accountants.
*23.3 Consent of Counsel (filed under Exhibit 5.1).
**24 Power of Attorney (included in signature page).
27.1 Financial Data Schedule (December 31, 1997).
27.2 Financial Data Schedule (September 30, 1998).
</TABLE>
- ------------
* To be filed by amendment. All other exhibits are filed herewith.
** Previously filed on September 16, 1998.
<PAGE>
ROLLING PIN KITCHEN EMPORIUM, INC.
1,500,000 Shares of Common Stock
UNDERWRITING AGREEMENT
________________, 1998
Nutmeg Securities, Ltd.
495 Post Road East
Westport, Connecticut 06880
Gentlemen:
Rolling Pin Kitchen Emporium, Inc., a corporation organized under the
laws of the State of Delaware (the "Company") hereby confirms its agreement with
Nutmeg Securities, Ltd. ("Nutmeg"), as representative (the "Representative") of
the several underwriters listed on Schedule 1 annexed hereto (the
"Underwriters"), as set forth below.
The Company proposes to issue and sell to the Underwriters 1,500,000
shares of the Company's common stock, $.01 par value (the "Common Stock"). The
shares of Common Stock being sold by the Company are referred to as the "Firm
Shares." In addition, for the sole purpose of covering over-allotments from the
sale of the Firm Shares the Company proposes to grant to the Underwriters an
option to purchase an additional 225,000 shares of Common Stock (the "Firm
Option Shares" or the "Option Shares"), all as provided in section 2(c) of this
agreement (the "Agreement") and to issue to you the Representative's Warrant (as
defined in Section 2 hereof) to purchase certain further additional shares of
Common Stock. The Firm Shares and the Option Shares are collectively referred to
herein as either the "Shares" or the "Securities."
1. Representations and Warranties of the Company. The Company
represents and warrants to, and agrees with, the Underwriter that:
(a) A registration statement on Form SB-2 (File No.
333-63527), with respect to the Securities and the Representative's Warrant
Securities (as hereinafter defined), including a prospectus subject to
completion, has been filed by the Company with the Securities and Exchange
Commission (the "Commission") under the Securities Act of 1933, as amended (the
"Act "), and one or more amendments to that registration statement may have been
so filed. Copies of such
<PAGE>
registration statement and of each amendment heretofore filed by the Company
with the Commission have been delivered to the Underwriters. After the execution
of this Agreement, the Company will file with the Commission either (i) if the
registration statement, as it may have been amended, has been declared by the
Commission to be effective under the Act, a prospectus in the form most recently
included in that registration statement (or, if an amendment thereto shall have
been filed, in such amendment), with such changes or insertions as are required
by Rule 430A under the Act or permitted by Rule 424(b) under the Act and as have
been provided to and approved by the Underwriters prior to the execution of this
Agreement, or (ii) if that registration statement, as it may have been amended,
has not been declared by the Commission to be effective under the Act, an
amendment to that registration statement, including a form of prospectus, a copy
of which amendment has been furnished to and approved by the Underwriters prior
to the execution of this Agreement. The Company also may file a related
registration statement with the Commission pursuant to Rule 462(b) under the Act
for purposes of registering certain additional Securities, which registration
statement shall become effective upon filing with the Commission (the "Rule
462(b) Registration Statement"). As used in this Agreement, the term
"Registration Statement" means that registration statement, as amended at the
time it was or is declared effective, and any amendment thereto that was or is
thereafter declared effective, including all financial schedules and exhibits
thereto and any information omitted therefrom pursuant to Rule 430A under the
Act and included in the Prospectus (as hereinafter defined), together with any
Rule 462(b) Registration Statement; the term "Preliminary Prospectus" means each
prospectus subject to completion filed with the Registration Statement
(including the prospectus subject to completion, if any, included in the
Registration Statement at the time it was or is declared effective); and the
term "Prospectus" means the prospectus first filed with the Commission pursuant
to Rule 424(b) under the Act or, if no prospectus is so filed pursuant to Rule
424(b), the prospectus included in the Registration Statement. The Company has
caused to be delivered to the Underwriters copies of each Preliminary Prospectus
and has consented to the use of those copies for the purposes permitted by the
Act. If the Company has elected to rely on Rule 462(b) and the Rule 462(b)
Registration Statement has not been declared effective, then (i) the Company has
filed a Rule 462(b) Registration Statement in compliance with and that is
effective upon filing pursuant to Rule 462(b) and has received confirmation of
its receipt and (ii) the Company has given irrevocable instructions for
transmission of the applicable filing fee in connection with the filing of the
Rule 462(b) Registration Statement, in compliance with Rule 111 promulgated
under the Act or the Commission has received payment of such filing fee.
(b) The Commission has not issued any order preventing or
suspending the use of any Preliminary Prospectus. When each Preliminary
Prospectus and each amendment and each supplement thereto was filed with the
Commission it (i) contained all statements required to be stated therein, in
accordance with, and complied with the requirements of, the Act and the rules
and regulations of the Commission thereunder and (ii) did not include any untrue
statement of a material fact or omit to state any material fact necessary in
order to make the statements therein, in the light of the circumstances under
which they were made, not misleading. When the Registration Statement was or is
declared effective, it (i) contained or will contain all statements required to
be stated therein in accordance with, and complied or will comply with the
requirements of, the Act and the rules and regulations of the Commission
thereunder and (ii) did not or will not include any untrue statement of a
material fact or omit to state any material fact necessary to make the
statements therein not
2
<PAGE>
misleading. When the Prospectus and each amendment or supplement thereto is
filed with the Commission pursuant to Rule 424(b) (or, if the Prospectus or such
amendment or supplement is not required so to be filed, when the Registration
Statement containing such Prospectus or amendment or supplement thereto was or
is declared effective) and on the Firm Closing Date and any Option Closing Date
(as each such term is hereinafter defined), the Prospectus, as amended or
supplemented at any such time, (i) contained or will contain all statements
required to be stated therein in accordance with, and complied or will comply
with the requirements of, the Act and the rules and regulations of the
Commission thereunder and (ii) did not or will not include any untrue statement
of a material fact or omit to state any material fact necessary in order to make
the statements therein, in light of the circumstances under which they were
made, not misleading. The foregoing provisions of this paragraph (b) do not
apply to statements or omissions made in any Preliminary Prospectus, the
Registration Statement or the Prospectus or any amendment or supplement thereto
in reliance upon and in conformity with written information furnished to the
Company by the Underwriters specifically for use therein.
(c) The Company and Aropi, Incorporated, the Company's
wholly-owned subsidiary, are each duly organized and are validly existing as
corporations in good standing under the laws of their respective jurisdictions
of incorporation, and are duly qualified or authorized to transact business as
foreign corporations and are in good standing in each jurisdiction where the
ownership or leasing of its properties or the conduct of its businesses require
such qualification or authorization.
(d) The Company and its Subsidiary have full corporate power
and authority, and all necessary material authorizations, approvals, orders,
licenses, certificates and permits of and from all governmental regulatory
authorities, to own or lease its property and conduct its business as now being
conducted and as proposed to be conducted as described in the Registration
Statement and the Prospectus (and, if the Prospectus is not in existence, the
most recent Preliminary Prospectus).
(e) The Company does not own, directly or indirectly, an
interest in any corporation, partnership, limited liability company, joint
venture, trust or other business entity.
(f) The Company has an authorized, issued and outstanding
capitalization as set forth in the Prospectus (and, if the Prospectus is not in
existence, the most recent Preliminary Prospectus). All of the issued shares of
capital stock of the Company, including the Selling Shareholders Shares, have
been duly authorized and validly issued and are fully paid, nonassessable and
free of preemptive rights. There are no outstanding options, warrants or other
rights granted by the Company to purchase shares of its Common Stock or other
securities, other than as described in the Prospectus (and, if the Prospectus is
not in existence, the most recent Preliminary Prospectus). The Company Shares
have been duly authorized, by all necessary corporate action on the part of the
Company and, when the Company Firm Shares are issued and delivered to and paid
for by the Underwriter pursuant to this Agreement, the Firm Shares will be
validly issued, fully paid, nonassessable and free of preemptive rights and will
conform to the description thereof in the Prospectus (and, if the Prospectus is
not in existence, the most recent Preliminary Prospectus). No holder of
outstanding securities of the Company is entitled as such to any preemptive or
other right
3
<PAGE>
to subscribe for any of the Securities, and no person is entitled to have
securities registered by the Company under the Registration Statement or
otherwise under the Act other than as described in the Prospectus (and, if the
Prospectus is not in existence, the most recent Preliminary Prospectus).
(g) The capital stock of the Company conforms to the
description thereof contained in the Prospectus (and, if the Prospectus is not
in existence, the most recent Preliminary Prospectus).
(h) All issuances of securities of the Company have been
effected pursuant to an exemption from the registration requirements of the Act.
Except as previously disclosed in writing to the Representative, no compensation
was paid to or on behalf of any member of the National Association of Securities
Dealers, Inc. ("NASD"), or any affiliate or employee thereof, in connection with
any such issuance.
(i) The financial statements of the Company included in the
Registration Statement and the Prospectus (and, if the Prospectus is not in
existence, the most recent Preliminary Prospectus) fairly present the financial
position of the Company as of the dates indicated and the results of operations
of the Company for the periods specified. Such financial statements have been
prepared in accordance with accounting principles generally accepted in effect
in the United States of America, consistently applied, except to the extent that
certain footnote disclosures regarding unaudited interim periods may have been
omitted in accordance with the applicable rules of the Commission under the
Securities Exchange Act of 1934, as amended (the "1934 Act"). The financial data
set forth under the caption "Summary Financial Information" in the Prospectus
(and, if the Prospectus is not in existence, the most recent Preliminary
Prospectus) fairly present, on the basis stated in the Prospectus (or such
Preliminary Prospectus), the information included therein.
(j) Feldman, Sherb, Ehrlich & Co., P.C., and Smith & Radigan,
each of which have audited certain financial statements of the Company and
delivered their report with respect to the financial statements included in the
Registration Statement and the Prospectus (and, if the Prospectus is not in
existence, the most recent Preliminary Prospectus), are each independent public
accountants with respect to the Company as required by the Act and the
applicable rules and regulations thereunder.
(k) Since the respective dates as of which information is
given in the Registration Statement and the Prospectus (and, if the Prospectus
is not in existence, the most recent Preliminary Prospectus), (i) except as
otherwise contemplated therein, there has been no material adverse change in the
business, operations, condition (financial or otherwise), earnings or prospects
of the Company, whether or not arising in the ordinary course of business, (ii)
except as otherwise stated therein, there have been no transactions entered into
by the Company and no commitments made by the Company that, individually or in
the aggregate, are material with respect to the Company, (iii) there has not
been any change in the capital stock or indebtedness of the Company, and (iv)
there has been no dividend or distribution of any kind declared, paid or made by
the Company in respect of any class of its capital stock.
4
<PAGE>
(l) The Company has full corporate power and authority to
enter into and perform its obligations under this Agreement and the
Representative's Warrant Agreement (as hereinafter defined). The execution and
delivery of this Agreement and the Representative's Warrant Agreement have been
duly authorized by all necessary corporate action on the part of the Company and
this Agreement and the Representative's Warrant Agreement have each been duly
executed and delivered by the Company and each is a valid and binding agreement
of the Company, enforceable against the Company in accordance with its terms,
except as the enforceability thereof may be limited by bankruptcy, insolvency,
reorganization, fraudulent conveyance, moratorium and other similar laws
affecting creditors' rights generally and by general principles of equity
(regardless of whether enforcement is considered in a proceeding in equity or at
law), and except as rights to indemnity and contribution under this Agreement
may be limited by applicable law. The issuance, offering and sale by the Company
to the Underwriters of the Securities pursuant to this Agreement or the
Representative's Securities pursuant to the Representative's Warrant Agreement,
the compliance by the Company with the provisions of this Agreement and the
Representative's Warrant Agreement, and the consummation of the other
transactions contemplated by this Agreement and the Representative's Warrant
Agreement do not (i) require the consent, approval, authorization, registration
or qualification of or with any court or governmental or regulatory authority,
except such as have been obtained or may be required under state securities or
blue sky laws and, if the registration statement filed with respect to the
Securities (as amended) is not effective under the Act as of the time of
execution hereof, such as may be required (and shall be obtained as provided in
this Agreement) under the Act, or (ii) conflict with or result in a breach or
violation of, or constitute a default under, any material contract, indenture,
mortgage, deed of trust, loan agreement, note, lease or other material agreement
or instrument to which the Company is a party or by which the Company or any of
its property is bound or subject, or the certificate of incorporation or by-laws
of the Company, or any statute or any rule, regulation, judgment, decree or
order of any court or other governmental or regulatory authority or any
arbitrator applicable to the Company.
(m) No legal or governmental proceedings are pending to which
the Company is a party or to which the property of the Company is subject, and
no such proceedings have been threatened against the Company or with respect to
any of its property, except such as are described in the Prospectus (and, if the
Prospectus is not in existence, the most recent Preliminary Prospectus). No
contract or other document is required to be described in the Registration
Statement or the Prospectus or to be filed as an exhibit to the Registration
Statement that is not described therein (and, if the Prospectus is not in
existence, in the most recent Preliminary Prospectus) or filed as required.
(n) The Company is not in (i) violation of its certificate of
incorporation, by-laws or other governing documents, (ii) violation in any
material respect of any law, statute, regulation, ordinance, rule, order,
judgment or decree of any court or any governmental or regulatory authority
applicable to it, or (iii) default in any material respect in the performance or
observance of any obligation, agreement, covenant or condition contained in any
material contract, indenture, mortgage, deed of trust, loan agreement, note,
lease or other material agreement or instrument to which it is a party or by
which it or any of its property may be bound or subject, and no event has
occurred which with notice or lapse of time or both would constitute such a
default.
5
<PAGE>
(o) The Company currently owns or possesses adequate rights to
use all intellectual property, including all trademarks, service marks, trade
names, copyrights, inventions, know-how, trade secrets, proprietary
technologies, processes and substances, or applications or licenses therefor,
that are described in the Prospectus (and if the Prospectus is not in existence,
the most recent Preliminary Prospectus), and any other rights or interests in
items of intellectual property as are necessary for the conduct of the business
now conducted or proposed to be conducted by them as described in the Prospectus
(or, such Preliminary Prospectus), and, except as disclosed in the Prospectus
(and such Preliminary Prospectus), the Company is not aware of the granting of
any patent rights to, or the filing of applications therefor by, others, nor is
the Company aware of, nor has the Company received notice of, infringement of or
conflict with asserted rights of others with respect to any of the foregoing.
All such intellectual property rights and interests are (i) valid and
enforceable and (ii) to the best knowledge of the Company, not being infringed
by any third parties.
(p) The Company possesses adequate licenses, orders,
authorizations, approvals, certificates or permits issued by the appropriate
federal, state or foreign regulatory agencies or bodies necessary to conduct its
business as described in the Registration Statement and the Prospectus (and, if
the Prospectus is not in existence, the most recent Preliminary Prospectus),
and, except as disclosed in the Prospectus (and, if the Prospectus is not in
existence, the most recent Preliminary Prospectus), there are no pending or, to
the best knowledge of the Company, threatened, proceedings relating to the
revocation or modification of any such license, order, authorization, approval,
certificate or permit.
(q) The Company has good and marketable title to all of the
properties and assets reflected in the Company's financial statements or as
described in the Registration Statement and the Prospectus (and, if the
Prospectus is not in existence, the most recent Preliminary Prospectus), subject
to no lien, mortgage, pledge, charge or encumbrance of any kind, except those
reflected in such financial statements or as described in the Registration
Statement and the Prospectus (and such Preliminary Prospectus). Except as
disclosed in the Prospectus, the Company occupies its leased properties under
valid and enforceable leases conforming to the description thereof set forth in
the Registration Statement and the Prospectus (and such Preliminary Prospectus).
(r) The Company is not and does not intend to conduct its
business in a manner in which it would be an "investment company" as defined in
Section 3(a) of the Investment Company Act of 1940 (the "Investment Company
Act").
(s) The Company has obtained and delivered to the
Representative the agreements (the "Lock-up Agreements") with the officers,
directors and certain other security holders owning shares of Common Stock to
the effect that, among other things, each such person (i) will not, commencing
on the Effective Date and continuing for a period of thirteen (13) months
thereafter, without the prior written consent of the Representative, directly or
indirectly, publicly sell, offer or contract to sell or grant any option to
purchase, transfer, assign or pledge, or otherwise encumber, or dispose of any
shares of Common Stock now or hereafter owned by such person and that the
purchaser or transferee in any private sale agrees to be bound by the Lock Up
Agreement, and (ii) will comply with any additional restriction or condition on
the disposition of such Common Stock
6
<PAGE>
which may be required to qualify the offering of the Securities in any state in
accordance with the blue sky or securities laws of such state.
(t) No labor dispute with the employees of the Company exists,
is threatened or, to the best of the Company's knowledge, is imminent that could
result in a material adverse change in the condition (financial or otherwise),
business, prospects, net worth or results of operations of the Company, except
as described in or contemplated by the Prospectus (and, if the Prospectus is not
in existence, the most recent Preliminary Prospectus).
(u) The Company is insured by insurers of recognized
financial responsibility against such losses and risks and in such amounts as
are prudent and customary in the businesses in which it is engaged; the Company
has not been refused any insurance coverage sought or applied for; and the
Company has no reason to believe that it will not be able to renew its existing
insurance coverage as and when such coverage expires or to obtain similar
coverage from similar insurers as may be necessary to continue its business at a
cost that would not materially and adversely affect the condition (financial or
otherwise), business, prospects, net worth or results of operations of the
Company, except as described in or contemplated by the Prospectus (and, if the
Prospectus is not in existence, the most recent Preliminary Prospectus).
(v) The Representative's Warrant (as hereinafter defined) will
conform to the description thereof in the Registration Statement and in the
Prospectus (and, if the Prospectus is not in existence, the most recent
Preliminary Prospectus) and, when sold to and paid for by the Representative in
accordance with the Representative's Warrant Agreement, will have been duly
authorized and validly issued and will constitute valid and binding obligations
of the Company entitled to the benefits of the Representative's Warrant
Agreement. The shares of Common Stock issuable upon exercise of the
Representative's Warrant (the "Representative's Warrant Shares") have been duly
authorized and reserved for issuance upon exercise of the Representative's
Warrant by all necessary corporate action on the part of the Company and, when
issued and delivered and paid for upon such exercise in accordance with the
terms of the Representative's Warrant Agreement and the Representative's
Warrant, respectively, will be validly issued, fully paid, nonassessable and
free of preemptive rights and will conform to the description thereof in the
Prospectus (and, if the Prospectus is not in existence, the most recent
Preliminary Prospectus).
(w) Other than Mr. Brentley Kemps who will be compensated
directly by the Representative a finders fee not to exceed 1% of the aggregate
public offering price out of the Representative's compensation, no person has
acted as a finder in connection with, or is entitled to any commission, fee or
other compensation or payment for services as a finder for or for originating,
or introducing the parties to, the transactions contemplated herein and the
Company will indemnify the Underwriter with respect to any claim for finder's
fees in connection herewith. Except as set forth in the Registration Statement
and the Prospectus (and, if the Prospectus is not in existence, the most recent
Preliminary Prospectus), the Company has no management or financial consulting
agreement with anyone. No promoter, officer, director or stockholder of the
Company is, directly or indirectly, affiliated or associated with an NASD member
and no securities of the Company have been acquired by an NASD member, except as
previously disclosed in writing to the Representative.
7
<PAGE>
(x) The Company has filed all federal, state, local and
foreign tax returns which are required to be filed through the date hereof, or
has received extensions thereof, and has paid all taxes shown on such returns
and all assessments received by it to the extent that the same are material and
have become due.
(y) Neither the Company nor any director, officer, agent,
employee or other person associated with or acting on behalf of the Company has,
directly or indirectly: used any corporate funds for unlawful contributions,
gifts, entertainment, or other unlawful expenses relating to political activity;
made any unlawful payment to foreign or domestic government officials or
employees or to foreign or domestic political parties or campaigns from
corporate funds; violated any provision of the Foreign Corrupt Practices Act of
1977, as amended; or made any bribe, rebate, payoff, influence payment,
kickback, or other unlawful payment. No transaction has occurred between or
among the Company and any of its officers or directors or any affiliates of any
such officer or director, that is required to be described in and is not
described in the Registration Statement and the Prospectus.
(z) Neither the Company nor any of its officers, directors or
affiliates (as defined in the Regulations), has taken or will take, directly or
indirectly, prior to the completion of the Offering, any action designed to
stabilize or manipulate the price of any security of the Company, or which has
caused or resulted in, or which might in the future reasonably be expected to
cause or result in, stabilization or manipulation of the price of any security
of the Company, to facilitate the sale or resale of any of the Securities or the
Option Securities.
2. Purchase, Sale and Delivery of the Securities and the
Representative's Warrants.
(a) On the basis of the representations, warranties,
agreements and covenants herein contained and subject to the terms and
conditions herein set forth, the Company agrees to issue and sell to each
Underwriter and each Underwriter agrees, severally and not jointly, to purchase
from the Company the number of Firm Shares as set forth opposite its name on
Schedule 1 annexed hereto, at a purchase price of $_____ per share.
(b) Certificates in definitive form for the Firm Securities
that the Underwriters have agreed to purchase hereunder, and in such
denomination or denominations and registered in such name or names as the
Underwriters request upon notice to the Company at least 48 hours prior to the
Firm Closing Date, shall be delivered by or on behalf of the Company to the
Underwriters, against payment by or on behalf of the Underwriters of the
purchase prices therefor by certified or official bank check or checks drawn
upon or by a New York Clearing House bank and payable in next-day funds to the
order of the Company. Such delivery of and payment for the Firm Securities shall
be made at the offices of Counsel for the Underwriters, 101 East 52nd Street,
New York, New York at 9:30 A.M., New York City time on _________, 1998, or at
such other place, time or date as the Underwriters and the Company may agree
upon, such time and date of delivery against payment being herein referred to as
the "Firm Closing Date." The Company will make such certificates for the Firm
Securities available for checking and packaging by the Underwriters, at such
8
<PAGE>
offices as may be designated by the Representative, at least 24 hours prior to
the Firm Closing Date. In lieu of physical delivery, the closing may occur by
"DTC" delivery.
(c) For the purpose of covering any over-allotments in
connection with the distribution and sale of the Firm Securities as contemplated
by the Prospectus, the Company hereby grants to the Underwriter an option to
purchase any or all of the Company Option Shares, which options are exercisable
by the Representative on behalf of and for the account of the Underwriters. The
purchase price to be paid for any of the Option Shares shall be the same price
per share for the Firm Securities set forth above in paragraph (a) of this
section 2. The option granted hereby may be exercised as to all or any part of
the Option Shares from time to time within 45 calendar days after the Firm
Closing Date. The Underwriters shall not be under any obligation to purchase any
of the Option Shares prior to the exercise of such option. The Representative
may from time to time exercise the option granted hereby on behalf of the
Underwriters by giving notice in writing or by telephone (confirmed in writing)
to the Company setting forth the aggregate number of Option Shares as to which
the Underwriters are then exercising the option and the date and time for
delivery of and payment for such Option Shares. Any such date of delivery shall
be determined by the Underwriters but shall not be earlier than two business
days or later than three business days after such exercise of the option and, in
any event, shall not be earlier than the Firm Closing Date. The time and date
set forth in such notice, or such other time on such other date as the
Representative and the Company may agree upon, is herein called the "Option
Closing Date" with respect to such Option Shares. Upon exercise of the option as
provided herein, the Company shall become obligated to sell to the Underwriters,
and, subject to the terms and conditions herein set forth, each Underwriter
shall become obligated to purchase from the Company, the Option Shares as to
which the Underwriter is then exercising its option. If the option is exercised
as to all or any portion of the Option Shares, certificates in definitive form
for such Option Shares, and payment therefor, shall be delivered on the related
Option Closing Date in the manner, and upon the terms and conditions, set forth
in paragraph (b) of this section 2, except that reference therein to the Firm
Securities and the Firm Closing Date shall be deemed, for purposes of this
paragraph (c), to refer to such Option Shares and Option Closing Date,
respectively.
(d) On the Firm Closing Date, the Company will further issue
and sell to the Representative or, at the direction of the Representative, to
bona fide officers of the Underwriters, for an aggregate purchase price of $10,
warrants to purchase Common Stock (the "Representative's Warrant") entitling the
holders thereof to purchase an aggregate of 150,000 shares of Common Stock for a
period of four years, such period to commence on the first anniversary of the
Effective Date. The Representative's Warrant shall be exercisable at a price
equal to 165% of the public offering price of the Common Stock, and shall
contain terms and provisions more fully described herein below and as set forth
more particularly in the warrant agreement relating to the Representative's
Warrant to be executed by the Company on the Effective Date (the
"Representative's Warrant Agreement"), including, but not limited to, (i)
customary anti-dilution provisions in the event of stock dividends, split
mergers, sales of all or substantially all of the Company's assets, sales of
stock below then prevailing market or exercise prices and other events, and (ii)
prohibitions of mergers, consolidations or other reorganizations of or by the
Company or the taking by the Company of other action during the five-year period
following the Effective Date unless adequate provision is made
9
<PAGE>
to preserve, in substance, the rights and powers incidental to the
Representative's Warrant. As provided in the Representative's Warrant Agreement,
the Representative may designate that the Representative's Warrant be issued in
varying amounts directly to bona fide officers of the Underwriters. As further
provided, no sale, transfer, assignment, pledge or hypothecation of the
Representative's Warrant shall be made for a period of 12 months from the
Effective Date, except (i) by operation of law or reorganization of the Company,
or (ii) to the Underwriters and bona fide partners, officers of the Underwriters
and selling group members. The shares of Common Stock issuable upon exercise of
the Representative's Warrant are referred to herein as the "Representative's
Warrant Shares."
3. Offering by the Underwriters. The Underwriters propose to offer the
Firm Securities for sale to the public upon the terms set forth in the
Prospectus (the "Offering").
4. Covenants of the Company. The Company covenants and agrees with the
Underwriters that:
(a) The Company will use its best efforts to cause the
Registration Statement, if not effective at the time of execution of this
Agreement, to become effective as promptly as possible. If required, the Company
will file the Prospectus and any amendment or supplement thereto with the
Commission in the manner and within the time period required by Rule 424(b)
under the Act. During any time when a prospectus relating to the Securities is
required to be delivered under the Act, the Company (i) will comply with all
requirements imposed upon it by the Act and the rules and regulations of the
Commission thereunder to the extent necessary to permit the continuance of sales
of or dealings in the Securities in accordance with the provisions hereof and of
the Prospectus, as then amended or supplemented, and (ii) will not file with the
Commission any prospectus or amendment referred to in the first sentence of
section (a) (i) hereof, any amendment or supplement to such prospectus or any
amendment to the Registration Statement as to which the Underwriters shall not
previously have been advised and furnished with a copy for a reasonable period
of time prior to the proposed filing and as to which filing the Underwriters
shall not have given their consent. The Company will prepare and file with the
Commission, in accordance with the rules and regulations of the Commission,
promptly upon request by the Underwriters or counsel to the Underwriters, any
amendments to the Registration Statement or amendments or supplements to the
Prospectus that may be necessary or advisable in connection with the
distribution of the Securities by the Underwriters, and will use its best
efforts to cause any such amendment to the Registration Statement to be declared
effective by the Commission as promptly as possible. The Company will advise the
Underwriters, promptly after receiving notice thereof, of the time when the
Registration Statement or any amendment thereto has been filed or declared
effective or the Prospectus or any amendment or supplement thereto has been
filed and will provide evidence satisfactory to the Underwriters of each such
filing or effectiveness.
(b) The Company will advise the Underwriters, promptly after
receiving notice or obtaining knowledge thereof, of (i) the issuance by the
Commission of any stop order suspending the effectiveness of the Registration
Statement or any order preventing or suspending the use of any Preliminary
Prospectus or the Prospectus or any amendment or supplement thereto, (ii) the
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suspension of the qualification of any Securities for offering or sale in any
jurisdiction, (iii) the institution, threat or contemplation of any proceeding
for any such purpose or (iv) any request made by the Commission for amending the
Registration Statement, for amending or supplementing the Prospectus or for
additional information. The Company will use its best efforts to prevent the
issuance of any such stop order and, if any such stop order is issued, to obtain
the withdrawal thereof as promptly as possible.
(c) The Company will, in cooperation with counsel to the
Underwriters, arrange for the qualification of the Securities for offering and
sale under the blue sky or securities laws of such jurisdictions as the
Underwriters may designate and will continue such qualifications in effect for
as long as may be necessary to complete the distribution of the Securities.
(d) If, at any time when a prospectus relating to the
Securities is required to be delivered under the Act, any event occurs as a
result of which the Prospectus, as then amended or supplemented, would include
any untrue statement of a material fact or omit to state a material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading, or if for any other
reason it is necessary at any time to amend or supplement the Prospectus to
comply with the Act or the rules or regulations of the Commission thereunder,
the Company will promptly notify the Underwriters thereof and, subject to
section 4(a) hereof, will prepare and file with the Commission, at the Company's
expense, an amendment to the Registration Statement or an amendment or
supplement to the Prospectus that corrects such statement or omission or effects
such compliance.
(e) Intentionally left blank.
(f) The Company will, without charge, provide to the
Underwriters and to counsel for the Underwriters (i) as many signed copies of
the registration statement originally filed with respect to the Securities and
each amendment thereto (in each case including exhibits thereto) as the
Underwriters may reasonably request, (ii) as many conformed copies of such
registration statement and each amendment thereto (in each case without exhibits
thereto) as the Underwriters may reasonably request and (iii) so long as a
prospectus relating to the Securities is required to be delivered under the Act,
as many copies of each Preliminary Prospectus or the Prospectus or any amendment
or supplement thereto as the Underwriters may reasonably request.
(g) The Company, as soon as practicable, will make generally
available to its security holders and to the Underwriters an earnings statement
of the Company that satisfies the provisions of section 11 (a) of the Act and
Rule 158 thereunder.
(h) The Company will reserve and keep available for issuance
that maximum number of authorized but unissued shares of Common Stock which are
issuable upon exercise of any outstanding warrants and the Representative's
Warrant (including the underlying securities) outstanding from time to time.
(i) The Company will apply the net proceeds from the sale of
the Securities being
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<PAGE>
sold by it as set forth under "Use of Proceeds" in the Prospectus.
(j) Intentionally left blank.
(k) Prior to the Closing Date or the Option Closing Date (if
any), the Company will not, directly or indirectly, without prior written
consent of the Representative, issue any press release or other public
announcement or hold any press conference with respect to the Company or its
activities with respect to the Offering (other than trade releases issued in the
ordinary course of the Company's business consistent with past practices with
respect to the Company's operations).
(l) If, at the time that the Registration Statement becomes
effective, any information shall have been omitted therefrom in reliance upon
Rule 430A under the Act, then immediately following the execution of this
Agreement, the Company will prepare, and file or transmit for filing with the
Commission in accordance with Rule 430A and Rule 424(b) under the Act, copies of
the Prospectus including the information omitted in reliance on Rule 430A, or,
if required by such Rule 430A, a post-effective amendment to the Registration
Statement (including an amended Prospectus), containing all information so
omitted.
(m) The Company will cause the Securities to be included in
The Nasdaq Small Cap Market on the Effective Date and to maintain such listing
thereafter. The Company will file with The Nasdaq Small Cap Market all documents
and notices that are required by companies with securities that are traded on
The Nasdaq Small Cap Market.
(n) During the period of five years from the Firm Closing
Date, the Company will, as promptly as possible, not to exceed 135 days, after
each annual fiscal period render and distribute reports to its stockholders
which will include audited statements of its operations and changes of financial
position during such period and its audited balance sheet as of the end of such
period, as to which statements the Company's independent certified public
accountants shall have rendered an opinion and shall timely file all reports
required to be filed under the securities laws, including Form SR.
(o) During a period of three years commencing with the Firm
Closing Date, the Company will furnish to the Representative, at the Company's
expense, copies of all periodic and special reports furnished to stockholders of
the Company and of all information, documents and reports filed with the
Commission.
(p) The Company has appointed Continental Stock Transfer &
Trust Company as transfer agent for the Common Stock, subject to the Closing.
The Company will not change or terminate such appointment for a period of three
years from the Firm Closing Date without first obtaining the written consent of
the Representative. For a period of three years after the Effective Date, the
Company shall cause the transfer agent to deliver promptly to the Underwriters a
duplicate copy of the daily transfer sheets relating to trading of the
Securities. The Company shall also provide to the Representative, on a weekly
basis, copies of the DTC special securities positions listing report.
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(q) During the period of 180 days after the date of this
Agreement, the Company will not at any time, directly or indirectly, take any
action designed to or that will constitute, or that might reasonably be expected
to cause or result in, the stabilization of the price of the Common Stock to
facilitate the sale or resale of any of the Securities.
(r) The Company will not take any action to facilitate the
sale of any shares of Common Stock pursuant to Rule 144 under the Act if any
such sale would violate any of the terms of the Lock-up Agreements.
(s) Prior to the 120th day after the Firm Closing Date, the
Company will provide the Underwriters and their designees with six bound volumes
of the transaction documents relating to the Registration Statement and the
closing(s) hereunder, in form and substance reasonably satisfactory to the
Representative.
(t) The Company shall consult with the Representative prior to
the distribution to third parties of any financial information news releases or
other publicity regarding the Company, its business, or any terms of this
offering and the Underwriters will consult with the Company prior to the
issuance of any research report or recommendation concerning the Company's
securities. Copies of all documents that the Company or its public relations
firm intend to distribute will be provided to the Representative for review
prior to such distribution.
(u) The Company and the Underwriters will advise each other
immediately in writing as to any investigation, proceeding, order, event or
other circumstance, or any threat thereof, by or relating to the Commission or
any other governmental authority, that could impair or prevent the Offering.
Except as required by law or as otherwise mutually agreed in writing, neither
the Company nor the Underwriters will acquiesce in such circumstances and each
will actively defend any proceedings or orders in that connection.
(v) The Company shall first submit to the Representative
certificates representing the Securities for approval prior to printing, and
shall, as promptly as possible, after filing the Registration Statement with the
Commission, obtain CUSIP numbers for the Securities.
(w) The Company shall engage the Underwriters' counsel to
provide the Underwriters, at the closing of any sale of Securities hereunder and
thereafter on request, with an opinion, setting forth those states in which the
Common Stock may be traded in non-issuer transactions under the blue sky or
securities laws of the 50 states. The Company shall pay such counsel a one-time
fee of $10,000 for such opinions at the closing of the sale of the Firm
Securities.
(x) The Company will prepare and file a registration statement
with the Commission pursuant to section 12 of the 1934 Act, and will use its
best efforts to have such registration statement declared effective by the
Commission on an accelerated basis on the day after the Effective Date. For this
purpose the Company shall prepare and file with the Commission a General Form of
Registration of Securities (Form 8-A or Form 10).
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<PAGE>
(y) For so long as the Securities are registered under the
1934 Act, the Company will hold an annual meeting of stockholders for the
election of directors within 180 days after the end of each of the Company's
fiscal years and within 135 days after the end of each of the Company's fiscal
years will provide the Company's stockholders with the audited financial
statements of the Company as of the end of the fiscal year just completed prior
thereto. Such financial statements shall be those required by Rule 14a-3 under
the 1934 Act and shall be included in an annual report pursuant to the
requirements of such Rule.
(z) The Company will engage a financial public relations firm
reasonably satisfactory to the Representative on or before the Firm Closing
Date, and continuously engage such firm, or a substitute firm reasonably
acceptable to the Representative, for a period of twelve (12) months following
the Firm Closing Date.
(aa) The Company will take all necessary and appropriate
actions to be included in Standard and Poor's Corporation Descriptions or other
equivalent manual and to maintain its listing therein for a period of five (5)
years from the Effective Date. Such application shall be made on an accelerated
basis no more than two days following the Effective Date.
(bb) On or prior to the Effective Date, the Company will give
written instructions to the transfer agent for the Common Stock directing said
transfer agent to place stop-order restrictions against, and appropriate legends
advising of the Lock-up Agreements on, the certificates representing the
securities of the Company owned by the persons who have entered into the Lock-up
Agreements.
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<PAGE>
5. Expenses
(a) The Company shall pay all costs and expenses incident to
the performance of its obligations under this Agreement, whether or not the
transactions contemplated hereby are consummated or this Agreement is terminated
pursuant to section 10 hereof, including all costs and expenses incident to (i)
the preparation, printing and filing or other production of documents with
respect to the transactions, including any costs of printing the registration
statement originally filed with respect to the Securities and any amendment
thereto, any Preliminary Prospectus and the Prospectus and any amendment or
supplement thereto, this Agreement, the selected dealer agreement and the other
agreements and documents governing the underwriting arrangements and any blue
sky memoranda, (ii) all reasonable and necessary arrangements relating to the
delivery to the Underwriters of copies of the foregoing documents, and the costs
and expenses of the Underwriters in mailing or otherwise distributing the same
including telephone charges, duplications and other accountable expenses (iii)
the fees and disbursements of the counsel, the accountants and any other experts
or advisors retained by the Company, (iv) the preparation, issuance and delivery
to the Underwriters of any certificates evidencing the Securities, including
transfer agent's, warrant agent's and registrar's fees or any transfer or other
taxes payable thereon, (v) the qualification of the Securities under state blue
sky or securities laws, including filing fees and fees and disbursements of
counsel for the Underwriters relating thereto (such counsel fees shall be
$30,000, of which $7,500 was paid upon the commencement of blue sky filing,
together with the related filing fees) and any fees and disbursements of local
counsel, if any, retained for such purpose, (vi) the filing fees of the
Commission and the NASD relating to the Securities, (vii) the inclusion of the
Securities on The Nasdaq SmallCap Market and in the Standard and Poor's
Corporation Descriptions Manual, (viii) any "road shows" or other meetings with
prospective investors in the Securities, including transportation,
accommodation, meal, conference room, audio-visual presentation and similar
expenses, but not including such expenses for the Underwriters or their
representatives or designees
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<PAGE>
in excess of $15,000 and (ix) the publication of "tombstone advertisements" in
newspapers or other publications selected by the Representative, and the
manufacture of prospectus memorabilia. In addition to the foregoing, the Company
shall reimburse the Representative for its expenses on the basis of a
non-accountable expense allowance in the amount of 3.00% of the gross offering
proceeds to be received by the Company. The expense allowance, based on the
gross proceeds from the sale of the Firm Securities, shall be deducted from the
funds to be paid by the Representative in payment for the Firm Securities,
pursuant to section 2 of this Agreement, on the Firm Closing Date. To the extent
any Option Shares are sold, any remaining non-accountable expense allowance
based on the gross proceeds from the sale of the Option Shares shall be deducted
from the funds to be paid by the Representative in payment for the Option
Shares, pursuant to section 2 of this Agreement, on the Option Closing Date. The
Company warrants, represents and agrees that all such payments and
reimbursements will be promptly and fully made.
(b) Notwithstanding any other provision of this Agreement, if
the offering of the Securities contemplated hereby is terminated for any reason,
the Company agrees that, in addition to the Company paying its own expenses as
described in subparagraph (a) above, the Company shall reimburse the
Representative for its actual accountable out-of-pocket expenses (in addition to
blue sky legal fees and expenses referred to in subparagraph (a) above) net of
the $50,000 which has previously been advanced to the Representative, up to a
maximum of $75,000. Such expenses shall include, but are not to be limited to,
fees for the services and time of counsel for the Underwriters to the extent not
covered by clause (i) above, plus any additional expenses and fees, including,
but not limited to, travel expenses, postage expenses, duplication expenses,
long-distance telephone expenses, and other expenses incurred by the
Representative in connection with the proposed offering.
6. Intentionally left blank.
7. Conditions of the Underwriters' Obligations. The obligations of the
Underwriters to purchase and pay for the Firm Shares shall be subject, in the
Underwriters' sole discretion, to the accuracy of the representations and
warranties of the Company contained herein as of the date hereof and as of the
Firm Closing Date as if made on and as of the Firm Closing Date, to the accuracy
of the statements of the Company's officers made pursuant to the provisions
hereof, to the performance by the Company of its covenants and agreements
hereunder and to the following additional conditions:
(a) If the registration statement, as heretofore amended, has
not been declared effective as of the time of execution hereof, the registration
statement, as heretofore amended or as amended by an amendment thereto to be
filed prior to the Firm Closing Date, shall have been declared effective not
later than 5:30 P.M., New York City time, on the date on which the amendment to
such registration statement containing information regarding the initial public
offering price of the Securities has been filed with the Commission, or such
later time and date as shall have been consented to by the Underwriters; if
required, the Prospectus and any amendment or supplement thereto shall have been
filed with the Commission in the manner and within the time
16
<PAGE>
period required by Rule 424(b) under the Act, no stop order suspending the
effectiveness of the Registration Statement shall have been issued, and no
proceedings for that purpose shall have been instituted or threatened or, to the
knowledge of the Company or the Underwriters, shall be contemplated by the
Commission; and the Company shall have complied with any request of the
Commission for additional information (to be included in the Registration
Statement or the Prospectus or otherwise).
(b) The Underwriters shall have received an opinion, dated the
Firm Closing Date, of Brown & Wood LLP, counsel to the Company, to the effect
that:
(1) the Company has been duly organized and is
validly existing as a corporation in good standing under the laws of the
jurisdiction of its organization and is duly qualified to transact business as a
foreign corporation and is in good standing under the laws of each other
jurisdiction in which its ownership or leasing of any properties or the conduct
of its business requires such qualification, except where the failure to so
qualify would not have a materially adverse effect upon the Company;
(2) the Company has full corporate power and
authority to own or lease its property and conduct its business as now being
conducted and as proposed to be conducted, as described in the Registration
Statement and the Prospectus, and the Company has full corporate power and
authority to enter into this Agreement and the Representative's Warrant
Agreement and to carry out all the terms and provisions hereof and thereof to be
carried out by it;
(3) to the knowledge of such counsel, there are no
outstanding options, warrants or other rights granted by the Company to purchase
shares of its Common Stock, preferred stock or other securities other than as
described in the Prospectus; the Company Shares have been duly authorized and
the Representative's Warrant Shares have been duly reserved for issuance by all
necessary corporate action on the part of the Company and the Company Shares
when issued and delivered to and paid for by the Underwriters, pursuant to this
Agreement, the Representative's Warrant when issued and delivered and paid for
in accordance with this Agreement and the Representative's Warrant Agreement by
the Underwriters, and the Representative's Warrant Shares when issued upon
payment of the exercise price specified in the Representative's Warrant, will be
validly issued, fully paid, nonassessable and free of preemptive rights and will
conform to the description thereof in the Prospectus; to the knowledge of such
counsel, no holder of outstanding securities of the Company is entitled as such
to any preemptive or other right to subscribe for any of the Company Shares or
the Representative's Warrant Shares; and to the knowledge of such counsel, no
person is entitled to have securities registered by the Company under the
Registration Statement or otherwise under the Act other than as described in the
Prospectus;
(4) the execution and delivery of this Agreement and
the Representative's Warrant Agreement have been duly authorized by all
necessary corporate action on the part of the Company and this Agreement and the
Representative's Warrant Agreement have been duly executed and delivered by the
Company, and each is a valid and binding agreement of the Company, enforceable
against the Company in accordance with its terms, except as enforceability may
be
17
<PAGE>
limited by bankruptcy, insolvency, reorganization, fraudulent conveyance,
moratorium and other similar laws affecting creditors' rights generally and to
general principles of equity (regardless of whether enforcement is considered in
a proceeding in equity or at law) and except as rights to indemnity and
contribution under this Agreement and the Representative's Warrant Agreement may
be limited by applicable securities laws and the public policy underlying such
laws;
(5) the Representative's Warrant conform to the
description thereof in the Registration Statement and in the Prospectus and are
duly authorized and upon payment of the purchase price therefore specified in
Section 2(d) of this Agreement are validly issued and constitute valid and
binding obligations of the Company entitled to the benefits of the
Representative's Warrant Agreement; and the certificates representing the
Securities are in due and proper form under law;
(6) the statements set forth in the Prospectus under
the caption "Description of Securities" insofar as those statements purport to
summarize the terms of the capital stock and warrants of the Company, provide a
fair summary of such terms; the statements set forth in the Prospectus
describing statutes and regulations and the descriptions of the consequences to
the Company under such statutes and regulations are fair summaries of the
information set forth therein and are accurate in all material respects; the
statements in the Prospectus, insofar as those statements constitute summaries
of the contracts, instruments, leases or licenses referred to therein,
constitute a fair summary of those contracts, instruments, leases or licenses
and include all material terms thereof, as applicable;
(7) none of (A) the execution and delivery of this
Agreement and the Representative's Warrant Agreement, (B) the issuance, offering
and sale by the Company to the Underwriters of the Securities pursuant to this
Agreement and the Representative's Warrant Securities pursuant to the
Representative's Warrant Agreement, nor (C) the compliance by the Company with
the other provisions of this Agreement and the Representative's Warrant
Agreement and the consummation of the transactions contemplated hereby and
thereby, (1) requires the consent, approval, authorization, registration or
qualification of or with any court or governmental authority known to us, except
such as have been obtained and such as may be required under state blue sky or
securities laws or (2) conflicts with or results in a breach or violation of, or
constitutes a default under, any material contract, indenture, mortgage, deed of
trust, loan agreement, note, lease or other material agreement or instrument
known to such counsel to which the Company is a party or by which the Company or
any of its property is bound or subject, or the certificate of incorporation or
by-laws of the Company, or any material statute or any judgment, decree, order,
rule or regulation of any court or other governmental or regulatory authority
known to us applicable to the Company.
(8) to the knowledge of such counsel, (A) no legal or
governmental proceedings are pending to which the Company is a party or to which
the property of the Company is subject except those arising in the ordinary
course of business and fully covered by insurance and (B) no contract or other
document is required to be described in the Registration Statement or the
Prospectus or to be filed as an exhibit to the Registration Statement that is
not described therein or filed as required;
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<PAGE>
(9) the Company possesses adequate licenses, orders,
authorizations, approvals, certificates or permits issued by the appropriate
federal, state or local regulatory agencies or bodies necessary to conduct its
business as described in the Registration Statement and the Prospectus, and, to
the knowledge of such counsel, there are no pending or threatened proceedings
relating to the revocation or modification of any such license, order,
authorization, approval, certificate or permit, except as disclosed in the
Registration Statement and the Prospectus;
(10) The Company is not in violation or breach of, or
in default with respect to, any term of its certificate of incorporation or
by-laws, and to the knowledge of such counsel, the Company is not in (i)
violation in any material respect of any law, statute, regulation, ordinance,
rule, order, judgment or decree of any court or any governmental or regulatory
authority applicable to it, or (ii) default in any material respect in the
performance or observance of any obligation, agreement, covenant or condition
contained in any material contract, indenture, mortgage, deed of trust, loan
agreement, note, lease or other material agreement or instrument to which it is
a party or by which it or any of its property may be bound or subject, and no
event has occurred which with notice, lapse of time or both would constitute
such a default;
(11) the Shares have been approved for inclusion on
The Nasdaq SmallCap Market;
(12) to the knowledge of such counsel, neither the
Company is not in default in any material respect in the performance or
observance of any obligation, agreement, covenant or condition contained in any
material contract, indenture, mortgage, deed of trust, loan agreement, note,
lease or other material agreement or instrument to which it is a party or by
which it or any of its property may be bound or subject, and no event has
occurred which with notice, lapse of time or both would constitute such a
default;
(13) the statements in the Prospectus under the
caption "Description of Securities" in the Prospectus, insofar as such
statements purport to summarize the terms of the capital stock and warrants of
the Company, provide a fair summary of such terms; and the statements in the
Prospectus, insofar as those statements constitute matters of law or legal
conclusions, or summaries of the contracts, agreement instruments, leases or
licenses referred to therein, constitute a fair summary of those matters, legal
conclusions, contracts, agreement instruments, leases or licenses and include
all material terms thereof as applicable;
(14) the Registration Statement is effective under
the Act; any required filing of the Prospectus pursuant to Rule 424(b) has been
made in the manner and within the time period required by Rule 424(b); and no
stop order suspending the effectiveness of the Registration Statement or any
amendment thereto has been issued, and no proceedings for that purpose have been
instituted or threatened or, to the best knowledge of such counsel, are
contemplated by the Commission;
(15) the registration statement originally filed with
respect to the Securities and each amendment thereto and the Prospectus (in each
case, other than the financial statements
19
<PAGE>
and schedules and other financial and statistical information contained therein,
as to which such counsel need express no opinion) comply as to form in all
material respects with the applicable requirements of the Act and the rules and
regulations of the Commission thereunder; and
(16) the Company is not an "investment company" as
defined in Section 3(a) of the Investment Company Act and, if the Company
conducts its business as set forth in the Prospectus, it will not become an
"investment company" and will not be required to register under the Investment
Company Act; and
(d) Intentionally left blank.
20
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(e). A. At the time this Agreement is executed, the
Representative shall have received a letter, dated such date, addressed to the
Underwriters in form and substance satisfactory (including the non-material
nature of the changes or decreases, if any, referred to in clause (iii) below)
in all respects to the Representative and Representative's counsel, from Feldman
Sherb Ehrlich & Co., P.C. and Smith & Radigan:
i. confirming that they are independent certified
public accountants with respect to the Company within the meaning of the Act and
the applicable Rules and Regulations;
ii. stating that it is their opinion that the
financial statements of the Company included in the Registration Statement
comply as to form in all material respects with the applicable accounting
requirements of the Act and the Rules and Regulations thereunder and that the
Representative may rely upon the opinion of Feldman Sherb Ehrlich & Co., P.C.
and Smith & Radigan with respect to the financial statements included in the
Registration Statement;
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<PAGE>
iii. stating that, on the basis of a limited review
which included a reading of the latest available unaudited interim financial
statements of the Company, a reading of the latest available minutes of the
stockholders and board of directors and the various committees of the boards of
directors of the Company, consultations with officers and other employees of the
Company responsible for financial and accounting matters and other specified
procedures and inquiries (which, as to the interim financial statements included
in the Registration Statement, shall constitute a review as described in SAS No.
71, Interim Financial Statements), nothing has come to Feldman Sherb Ehrlich &
Co., P.C.'s attention which would lead them to believe that (A) the unaudited
financial statements of the Company included in the Registration Statement do
not comply as to form in all material respects with the applicable accounting
requirements of the Act and the Rules and Regulations or are not fairly
presented in conformity with generally accepted accounting principles applied on
a basis substantially consistent with that of the audited financial statements
of the Company included in the Registration Statement, or (B) at a specified
date not more than five (5) days prior to the Effective Date, there has been any
change in the capital stock or long-term debt of the Company, or any decrease in
the stockholders' equity or net current assets or net assets of the Company as
compared with amounts shown in the June 30, 1998 consolidated balance sheet
included in the Registration Statement, other than as set forth in or
contemplated by the Registration Statement, or, if there was any change or
decrease, setting forth the amount of such change or decrease, and (C) during
the period from June 30, 1998 to a specified date not more than five (5) days
prior to the Effective Date, there was any decrease (increase) in net revenues,
net income (loss) or in net earnings (loss) per common share of the Company, in
each case as compared with the corresponding period ending June 30, 1997, other
than as set forth in or contemplated by the Registration Statement, or, if there
was any such decrease, setting forth the amount of such decrease (increase);
iv. setting forth, at a date not later than five (5)
days prior to the Effective Date, the amount of liabilities of the Company;
v. stating that they have compared specific dollar
amounts, numbers of shares, percentages of revenues and earnings, statements and
other financial information pertaining to the Company set forth in the
Prospectus in each case to the extent that such amounts, numbers, percentages,
statements and information may be derived from the general accounting records,
including work sheets, of the Company and excluding any questions requiring an
interpretation by legal counsel, with the results obtained from the application
of specified readings, inquiries and other appropriate procedures (which
procedures do not constitute an examination in accordance with generally
accepted auditing standards) set forth in the letter and found them to be in
agreement;
vi. statements as to such other matters incident to
the transaction contemplated hereby as the Representative may request.
B. At the Closing Date and each Option Closing Date,
if any, the Representative shall have received from Feldman Sherb Ehrlich & Co.,
P.C., and Smith & Radigan a letter, dated as of the Closing Date or the Option
Closing Date, as the case may be, to the effect that they reaffirm that
statements made in the letter furnished pursuant to subsection A. of this
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Section 7(e), except that the specified date referred to shall be a date not
more than five (5) days prior to the Closing Date or the Option Closing Date, as
the case may be, and, if the Company has elected to rely on Rule 430A of the
Rules and Regulations, to the further effect that they have carried out
procedures as specified in clause (v) of subsection A of this Section 7(e) with
respect to certain amounts, percentages and financial information as specified
by the Representative and deemed to be a part of the Registration Statement
pursuant to Rule 430A(b) and have found such amounts, percentages and financial
information to be in agreement with the records specified in such clause (v).
(f) The representations and warranties of the Company
contained in this Agreement shall be true and correct as if made on and as of
the Firm Closing Date; the Registration Statement shall not include any untrue
statement of a material fact or omit to state any material fact required to be
stated therein necessary to make the statements therein not misleading, and the
Prospectus, as amended or supplemented as of the Firm Closing Date, shall not
include any untrue statement of a material fact or omit to state any material
fact necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading; and the Company shall
have performed all covenants and agreements and satisfied all conditions on its
part to be performed or satisfied at or prior to the Firm Closing Date.
(g) No stop order suspending the effectiveness of the
Registration Statement or any amendment thereto shall have been issued, and no
proceedings for that purpose shall have been instituted or threatened or
contemplated by the Commission.
(h) Subsequent to the respective dates as of which information
is given in the Registration Statement and the Prospectus, there shall not have
been any material adverse change, or any development involving a prospective
material adverse change, in the business, operations, condition (financial or
otherwise), earnings or prospects of the Company, except in each case as
described in or contemplated by the Prospectus (exclusive of any amendment or
supplement thereto).
(i) The Underwriters shall have received a certificate, dated
the Firm Closing Date, of the Chief Executive Officer and the Secretary of the
Company to the effect set forth in subparagraphs (f) through (h) above.
(j) The Common Stock shall be qualified in such jurisdictions
as the Underwriters may reasonably request pursuant to section 4(c), and each
such qualification shall be in effect and not subject to any stop order or other
proceeding on the Firm Closing Date.
(k) The Company shall have executed and delivered to the
Underwriters the Representative's Warrant Agreement and a certificate or
certificates evidencing the Representative's Warrant, in each case in a form
acceptable to the Underwriters.
(l) The Underwriters shall have received Lock-up Agreements
executed by the persons listed on Schedule 2 annexed hereto.
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<PAGE>
(m) The Underwriters shall have received on each Closing Date
a certificate from Selling Shareholders on such Closing Date to the affect that,
and the Underwriters shall be satisfied that, the representations and warranties
of Selling Shareholders contained in this Agreement are true and correct as if
made on and as of such Closing Date, and that Selling Shareholders have complied
with all agreements and satisfied all conditions on their part to be complied
with or satisfied at or prior to such Closing Date.
(n) The Selling Shareholders shall have delivered to the
Underwriters on or prior to the date hereof fully executed Custody Agreements.
Selling Shareholders shall also agree and consent to the entry of stop transfer
instructions with the Company's transfer agent against the transfer of shares
held by Selling Shareholders, except in compliance with the Custody Agreement
and this Agreement.
(o) On or before the Firm Closing Date, the Underwriters and
counsel for the Underwriters shall have received such further certificates,
documents, letters or other information as they may have reasonably requested
from the Company, the Selling Shareholders, and other security holders of the
Company.
All opinions, certificates, letters and documents delivered pursuant to
this Agreement will comply with the provisions hereof only if they are
reasonably satisfactory in all material respects to the Underwriters and counsel
for the Underwriters. The Company shall furnish to the Underwriters such
conformed copies of such opinions, certificates, letters and documents in such
quantities as the Underwriters and counsel for the Underwriters shall reasonably
request.
The obligation of the Underwriters to purchase and pay for any Option
Shares shall be subject, in its discretion, to each of the foregoing conditions
to purchase the Firm Securities, except that all references to the Firm
Securities and the Firm Closing Date shall be deemed to refer to such Option
Shares and the related Option Closing Date, respectively.
8. Indemnification and Contribution.
(a) The Company agrees to indemnify and hold harmless the
Underwriters, Selling Shareholders and each person, if any, who controls the
Underwriters or Selling Shareholders within the meaning of section 15 of the Act
or section 20 of the 1934 Act against any losses, claims, damages, or
liabilities, joint or several, to which the Underwriters, Selling Shareholders
or such controlling person may become subject under the Act or otherwise,
insofar as such losses, claims, damages or liabilities (or actions in respect
thereof) arise out of or are based upon:
(1) any untrue statement or alleged untrue statement
of any material fact contained in (A) the Registration Statement or any
amendment thereto, any Preliminary Prospectus or the Prospectus or any amendment
or supplement thereto or (B) any application or other document, or any amendment
or supplement thereto, executed by the Company or based upon written information
furnished by or on behalf of the Company filed in any jurisdiction in order to
qualify the Securities under the Blue Sky or securities laws thereof or filed
with the Commission or any
24
<PAGE>
securities association or securities exchange (each an "Application"), or
(2) the omission or alleged omission to state in such
Registration Statement or any amendment thereto, any Preliminary Prospectus or
the Prospectus or any amendment or supplement thereto, or any Application a
material fact required to be stated therein or necessary to make the statements
therein not misleading, and will reimburse, as incurred, the Underwriters and
such controlling person for any legal or other expenses reasonably incurred by
the Underwriters or such controlling person in connection with investigating,
defending against or appearing as a third-party witness in connection with any
loss, claim, damage, liability, action, investigation, litigation or proceeding;
provided, however, that the Company will not be liable in any such case to the
extent that any such loss, claim, damage or liability arises out of or is based
upon any untrue statement or alleged untrue statement or omission or alleged
omission made in such registration statement or any amendment thereto, any
Preliminary Prospectus, the Prospectus or any amendment or supplement thereto,
or any Application in reliance upon and in conformity with written information
furnished to the Company by the Underwriters specifically for use therein. This
indemnity agreement will be in addition to any liability which the Company may
otherwise have. The Company will not, without the prior written consent of the
Underwriters, or controlling person, settle or compromise or consent to the
entry of any judgment in any pending or threatened claim, action, suit or
proceeding in respect of which indemnification may be sought hereunder (whether
or not the Underwriters or any person who controls the Underwriters within
the meaning of section 15 of the Act or section 20 of the 1934 Act is a party to
such claim, action, suit or proceeding), unless such settlement, compromise or
consent includes an unconditional release of the Underwriters and each such
controlling person from all liability arising out of such claim, action, suit or
proceeding.
25
<PAGE>
(b) The Underwriters will indemnify and hold harmless the
Company, each of its directors, each of its officers who signed the Registration
Statement, and each person, if any, who controls the Company within the meaning
of section 15 of the Act or section 20 of the Exchange Act against, any losses,
claims, damages or liabilities to which the Company or any such director,
officer, or controlling person may become subject under the Act or otherwise,
but only insofar as such losses, claims, damages or liabilities (or actions in
respect thereof) arise out of or are based upon (i) any untrue statement or
alleged untrue statement of any material fact contained in the Registration
Statement or any amendment thereto, any Preliminary Prospectus or the Prospectus
or any amendment or supplement thereto, or any Application, or (ii) the omission
or the alleged omission to state therein a material fact required to be stated
in the Registration Statement or any amendment thereto, any Preliminary
Prospectus or the Prospectus or any amendment or supplement thereto, or any
Application, or necessary to make the statements therein not misleading, in each
case to the extent, but only to the extent, that such untrue statement or
alleged untrue statement or omission or alleged omission was made in reliance
upon and in conformity with written information furnished to the Company by the
Underwriters specifically for use therein; and, subject to the limitation set
forth immediately preceding this clause, will reimburse, as incurred, any legal
or other expenses reasonably incurred by the Company or any such director,
officer or controlling person in connection with investigating or defending any
such loss, claim, damage, liability or any action in respect thereof. This
indemnity agreement will be in addition to any liability which the Underwriters
may otherwise have.
(c) Promptly after receipt by an indemnified party under this
section 8 of notice
26
<PAGE>
of the commencement of any action, such indemnified party will, if a claim in
respect thereof is to be made against the indemnifying party under this section
8, notify the indemnifying party of the commencement thereof; but the omission
so to notify the indemnifying party will not relieve it from any liability which
it may have to any indemnified party otherwise than under this section 8. In
case any such action is brought against any indemnified party, and it notifies
the indemnifying party of the commencement thereof, the indemnifying party will
be entitled to participate therein and, to the extent that it may wish, jointly
with any other indemnifying party similarly notified, to assume the defense
thereof, with counsel satisfactory to such indemnified party; provided, however,
that if the defendants in any such action include both the indemnified party and
the indemnifying party and the indemnified party shall have reasonably concluded
that there may be one or more legal defenses available to it and/or other
indemnified parties which are different from or additional to those available to
the indemnifying party, the indemnifying party shall not have the right to
direct the defense of such action on behalf of such indemnified party or parties
and such indemnified party or parties shall have the right to select separate
counsel to defend such action on behalf of such indemnified party or parties.
After notice from the indemnifying party to such indemnified party of its
election so to assume the defense thereof and approval by such indemnified party
of counsel appointed to defend such action, the indemnifying party will not be
liable to such indemnified party under this section 8 for any legal or other
expenses, other than reasonable costs of investigation, subsequently incurred by
such indemnified party in connection with the defense thereof, unless (i) the
indemnified party shall have employed separate counsel in accordance with the
proviso to the next preceding sentence or (ii) the indemnifying party has
authorized the employment of counsel for the indemnified party at the expense of
the indemnifying party. After such notice from the indemnifying party to such
indemnified party, the indemnifying party will not be liable for the costs and
expenses of any settlement of such action effected by such indemnified party
without the consent of the indemnifying party.
(d) In circumstances in which the indemnity agreement provided
for in the preceding paragraphs of this section 8 is unavailable or insufficient
to hold harmless an indemnified party in respect of any losses, claims, damages
or liabilities (or actions in respect thereof), each indemnifying party, in
order to provide for just and equitable contribution, shall contribute to the
amount paid or payable by such indemnified party as a result of such losses,
claims, damages or liabilities (or actions in respect thereof) in such
proportion as is appropriate to reflect (i) the relative benefits received by
the indemnifying party or parties on the one hand and the indemnified party on
the other from the offering of the Securities or (ii) if the allocation provided
by the foregoing clause (i) is not permitted by applicable law, not only such
relative benefits but also the relative fault of the indemnifying party or
parties on the one hand and the indemnified party on the other in connection
with the statements or omissions or alleged statements or omissions that
resulted in such losses, claims, damages or liabilities (or actions in respect
thereof). The relative benefits received by the Company on the one hand and the
Underwriters on the other shall be deemed to be in the same proportion as the
total proceeds from the offering (net of underwriting discounts and commissions
but before deducting expenses) received by the Company bear to the total
underwriting discounts and commissions received by the Underwriters. The
relative fault of the parties shall be determined by reference to, among other
things, whether the untrue or alleged untrue statement of a material fact or the
omission or alleged omission to state a material fact relates to information
supplied by the
27
<PAGE>
Company or the Underwriters, the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such statement or omission,
and the other equitable considerations appropriate in the circumstances. The
Company and the Underwriters agree that it would not be equitable if the amount
of such contribution were determined by pro rata or per capita allocation or by
any other method of allocation that does not take into account the equitable
considerations referred to in the first sentence of this paragraph (d).
Notwithstanding any other provision of this paragraph (d), the Underwriters
shall not be obligated to make contributions hereunder that in the aggregate
exceeding the total public offering price of the Securities purchased by the
Underwriters under this Agreement, less the aggregate amount of any damages that
the Underwriters have otherwise been required to pay in respect of the same or
any substantially similar claim, and no person guilty of fraudulent
misrepresentation (within the meaning of section 11 (f) of the Act) shall be
entitled to contribution from any person who is not guilty of such fraudulent
misrepresentation. For purposes of this paragraph (d), each person, if any, who
controls an Underwriter within the meaning of section 15 of the Act or section
20 of the 1934 Act shall have the same rights to contribution as the
Underwriters, and each director of the Company, each officer of the Company who
signed the Registration Statement and each person, if any, who controls the
Company within the meaning of section 15 of the Act or section 20 of the 1934
Act, shall have the same rights to contribution as the Company.
9. Substitution of Underwriters.
If any Underwriter shall for any reason not permitted hereunder cancel
its obligations to purchase the Firm Securities hereunder, or shall fail to take
up and pay for the number of Firm Securities set forth opposite names in
Schedule 1 hereto upon tender of such Firm Securities in accordance with the
terms hereof, then:
(a) If the aggregate number of Firm Securities which such
Underwriter or Underwriters agreed but failed to purchase does not exceed 10% of
the total number of Firm Securities, the other Underwriter shall be obligated to
purchase the Firm Securities which such defaulting Underwriter agreed but failed
to purchase.
(b) If any Underwriter so defaults and the agreed number of
Firm Securities with respect to which such default or defaults occurs is more
than 10% of the total number of Firm Securities, the remaining Underwriter shall
have the right to take up and pay for the Firm Securities which the defaulting
Underwriter agreed but failed to purchase. If such remaining Underwriter does
not, at the Firm Closing Date, take up and pay for the Firm Securities which the
defaulting Underwriter agreed but failed to purchase, the time for delivery of
the Firm Securities shall be extended to the next business day to allow the
remaining Underwriter the privilege of substituting within twenty-four hours
(including nonbusiness hours) another underwriter or underwriters satisfactory
to the Company. If no such underwriter or underwriters shall have been
substituted as aforesaid, within such twenty-four hour period, the time of
delivery of the Firm Securities may, at the option of the Company, be again
extended to the next following business day, if necessary, to allow the Company
the privilege of finding within twenty-four hours (including nonbusiness hours)
another underwriter or underwriters to purchase the Firm Securities which the
defaulting Underwriter
28
<PAGE>
or Underwriters agreed but failed to purchase. If it shall be arranged for the
remaining Underwriter or substituted Underwriters to take up the Firm Securities
of the defaulting Underwriter as provided in this section, (i) the Company or
the underwriter shall have the right to postpone the time of delivery for a
period of not more than seven business days, in order to effect whatever changes
may thereby be made necessary in the Registration Statement or the Prospectus,
or in any other document or arrangements, and the Company agrees promptly to
file any amendments to the Registration Statement or supplements to the
Prospectus which may thereby be made necessary, and (ii) the respective numbers
of Firm Securities to be purchased by the remaining Underwriters or substituted
Underwriters shall be taken as the basis of the underwriting obligation for all
purposes of this agreement.
If in the event of a default by any Underwriter and the remaining
Underwriter shall not take up and pay for all the Firm Securities agreed to be
purchased by the defaulting Underwriter or substitute another underwriter or
underwriters as aforesaid, the Company shall not find or shall not elect to seek
another underwriter or underwriters for such Firm Securities as aforesaid, then
this Agreement shall terminate.
If, following exercise of the option provided in Section 3(c) hereof,
any Underwriter or Underwriters shall for any reason not permitted hereunder
cancel their obligations to purchase Option Shares at the Option Closing Date,
or shall fail to take up and pay for the number of Option Shares, which it
became obligated to purchase at the Option Closing Date upon tender of such
Option Shares in accordance with the terms hereof, then the remaining
Underwriters or substituted Underwriters may take up and pay for the Option
Shares of the defaulting Underwriters in the manner provided in Section 9(b)
hereof. If the remaining Underwriters or substituted Underwriters shall not take
up and pay for all such Option Shares, the Underwriters shall be entitled to
purchase the number of Option Shares for which there is no default or, at their
election, the option shall terminate, the exercise thereof shall be of no
effect.
As used in this Agreement, the term "Underwriter" includes any person
substituted for an Underwriter under this Section. In the event of termination,
there shall be no liability on the part of any non-defaulting Underwriter to the
Company, provided that the provisions of this Section 9 shall not in any event
affect the liability of any defaulting Underwriter to the Company arising out of
such default.
10. Survival. The respective representations, warranties, agreements,
covenants, indemnities and other statements of the Company, any of its officers
or directors and the Underwriter set forth in this Agreement or made by or on
behalf of them, respectively, pursuant to this Agreement shall remain in full
force and effect, regardless of (i) any investigation made by or on behalf of
the Company, any of its officers or directors, the Underwriter or any
controlling person referred to in section 8 hereof and (ii) delivery of and
payment for the Securities. The respective agreements, covenants, indemnities
and other statements set forth in sections 5 and 8 hereof shall remain in full
force and effect, regardless of any termination or cancellation of this
Agreement.
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<PAGE>
11. Termination.
(a) This Agreement may be terminated with respect to the Firm
Securities or any Option Shares in the sole discretion of the Underwriter by
notice to the Company given prior to the Firm Closing Date or the related Option
Closing Date, respectively, in the event that the Company shall have failed,
refused or been unable to perform all obligations and satisfy all conditions on
its part to be performed or satisfied under Section 7 hereunder at or prior
thereto or if at or prior to the Firm Closing Date or such Option Closing Date,
respectively:
(1) the Company sustains a loss by reason of
explosion, fire, flood, accident or other calamity, which, in the opinion of the
Underwriter, substantially affects the value of the properties of the Company or
which materially interferes with the operation of the business of the Company
regardless of whether such loss shall have been insured; there shall have been
any material adverse change, or any development involving a prospective material
adverse change (including, without limitation, a change in management or control
of the Company), in the business, operations, condition (financial or
otherwise), earnings or prospects of the Company, except in each case as
described in or contemplated by the Prospectus (exclusive of any amendment or
supplement thereto);
(2) any action, suit or proceeding shall be
threatened, instituted or pending, at law or in equity, against the Company, by
any person or by any federal, state, foreign or other governmental or regulatory
commission, board or agency wherein any unfavorable result or decision could
materially adversely affect the business, operations, condition (financial or
otherwise), earnings or prospects of the Company;
(3) trading in the Common Stock shall have been
suspended by the Commission, the NASD or on Nasdaq, or trading in securities
generally on the New York Stock Exchange shall have been suspended or minimum or
maximum prices shall have been established on either such exchange or quotation
system;
(4) a banking moratorium shall have been declared by
New York or United States authorities;
(5) there shall have been (A) an outbreak of
hostilities between the United States and any foreign power (or, in the case of
any ongoing hostilities, a material escalation thereof), (B) an outbreak of any
other insurrection or armed conflict involving the United States or (C) any
other calamity or crisis or material change in financial, political or economic
conditions, having an effect on the financial markets that, in any case referred
to in this clause (5), in the sole judgment of the Underwriter makes it
impracticable or inadvisable to proceed with the public offering or the delivery
of the Securities as contemplated by the Registration Statement;
(6) termination of this Agreement pursuant to this
section 10 shall be without liability of any party to any other party, except as
provided in section 5(b) and section 8 hereof.
30
<PAGE>
12. Information Supplied by the Underwriter. The statements set forth
in the first paragraph on page ___ , (as to the underwriting commitment of each
Underwriter) and the _____ and _______ paragraphs under the heading
"Underwriting" in any Preliminary Prospectus or the Prospectus (to the extent
such statements relate to the Underwriter) constitute the only information
furnished by the Underwriter to the Company for the purposes of section 8(a)
hereof. The Underwriter confirms that such statements (to such extent) are
correct.
13. Notices. All notice hereunder to or upon either party hereto shall
be deemed to have been duly given for all purposes if in writing and (i)
delivered in person or by messenger or an overnight courier service against
receipt, or (ii) send by certified or registered mail, postage paid, return
receipt requested, or (iii) sent by telegram, facsimile, telex or similar means,
provided that a written copy thereof is sent on the same day by postage paid
first-class mail, to such party at the following address:
To the Company: Rolling Pin Kitchen Emporium, Inc.
4264 Winters Chapel Road, Building B
Atlanta, Georgia 30360
Attn: Greg Dukoff
Fax: (770) 457-3110
To the Representative: Nutmeg Company, Ltd.
495 Post Road East
Westport, Connecticut 06880
Attn: Managing Director -
Corporate Finance Department
Fax: (203) 226-5343
or such other address as either party hereto may at any time, or from time to
time, direct by notice given to the other party in accordance with this section.
The date of giving of any such notice shall be, in the case of clause (i), the
date of the receipt; in the case of clause (ii), five business days after such
notice or demand is sent; and, in the case of clause (iii), the business day
next following the date such notice is sent.
14. Amendment. Except as otherwise provided herein, no amendment of
this Agreement shall be valid or effective, unless in writing and signed by or
on behalf of the parties hereto.
15. Waiver. No course of dealing or omission or delay on the part of
either party hereto in asserting or exercising any right hereunder shall
constitute or operate as a waiver of any such right. No waiver of any provision
hereof shall be effective, unless in writing and signed by or on behalf of the
party to be charged therewith. No waiver shall be deemed a continuing waiver or
31
<PAGE>
waiver in respect of any other or subsequent breach or default, unless expressly
so stated in writing.
16. Applicable Law. This agreement shall be governed by, and
interpreted and enforced in accordance with, the laws of the State of New York
without regard to principles of choice of law or conflict of laws.
17. Jurisdiction. Each of the parties hereto hereby irrevocably
consents and submits to the exclusive jurisdiction of the Supreme Court of the
State of New York and the United States District Court for the Southern District
of New York in connection with any suit, action or other proceeding arising out
of or relating to this Agreement or the transactions contemplated hereby, waives
any objection to venue in the County of New York, State of New York, or such
District and agrees that service of any summons, complaint, notice or other
process relating to such suit, action or other proceeding may be effected in the
manner provided by clause (ii) of Section 13.
18. Remedies. In the event of any actual or prospective breach or
default by either party hereto, the other party shall be entitled to equitable
relief, including remedies in the nature of rescission, injunction and specific
performance. All remedies hereunder are cumulative and not exclusive, and
nothing herein shall be deemed to prohibit or limit either party from pursuing
any other remedy or relief available at law or in equity for such actual or
prospective breach or default, including the recovery of damages.
19. Attorneys' Fees. The prevailing party in any suit, action or other
proceeding arising out of or relating to this Agreement or the transactions
contemplated hereby, shall be entitled to recover its costs and reasonable
attorneys' fees.
20. Severability. The provisions hereof are severable and in the event
that any provision of this Agreement shall be determined to be invalid or
unenforceable in any respect by a court of competent jurisdiction, the remaining
provisions hereof shall not be affected, but shall, subject to the discretion of
such court, remain in full force and effect, and any invalid or unenforceable
provision shall be deemed, without further action on the part of the parties
hereto, amended and limited to the extent necessary to render the same valid and
enforceable.
21. Counterparts. This agreement may be executed in counterparts, each
of which shall be deemed an original and which together shall constitute one and
the same agreement.
22. Successors. This agreement shall inure to the benefit of and be
binding upon the Underwriter, the Company and their respective successors and
assigns. Nothing expressed or mentioned in this Agreement is intended or shall
be construed to give any other person any legal or equitable right, remedy or
claim under or in respect of this Agreement or any provisions herein contained,
this Agreement and all conditions and provisions hereof being intended to be and
being for the sole and exclusive benefit of such persons and for the benefit of
no other person except that (i) the indemnities of the Company contained in
section 8 of this Agreement shall also be for the benefit of any person or
persons who control any Underwriter within the meaning of section 15 of the Act
or section 20 of the Exchange Act and (ii) the indemnities of the Underwriter
contained in
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<PAGE>
section 8 of this Agreement shall also be for the benefit of the directors of
the Company, the officers of the Company who have signed the Registration
Statement and any person or persons who control the Company within the meaning
of section 15 of the Act or section 20 of the Exchange Act. No purchaser of
Securities from the Underwriter shall be deemed a successor because of such
purchase.
23. Titles and Captions. The titles and captions of the articles and
sections of this Agreement are for convenience of reference only and do not in
any way define or interpret the intent of the parties or modify or otherwise
affect any of the provisions hereof.
24. Grammatical Conventions. Whenever the context so requires, each
pronoun or verb used herein shall be construed in the singular or the plural
sense and each capitalized term defined herein and each pronoun used herein
shall be construed in the masculine, feminine or neuter sense.
25. References. The terms "herein," "hereto," "hereof," "hereby," and
"hereafter," and other terms of similar import, refer to this Agreement as a
whole, and not to any Article, Section or other part hereof.
26. Entire Agreement. This Agreement embodies the entire agreement of
the parties hereto with respect to the subject matter hereof and supersedes any
prior agreement, commitment or arrangement relating thereto.
If the foregoing correctly sets forth our understanding, please
indicate your acceptance thereof in the space provided below for that purpose,
whereupon this letter shall constitute an agreement binding the Company and the
Underwriter.
Very truly yours,
ROLLING PIN KITCHEN EMPORIUM, INC.
By:
----------------------------------
Name: Greg Dukoff
Title: President
The foregoing agreement is hereby confirmed and accepted as of the date first
above written.
NUTMEG SECURITIES, LTD.
as representative of the several underwriters listed
on Schedule l annexed hereto
By:
--------------------------------------
Name: Daniel T. Guilfoile
33
<PAGE>
Title: Director Investment Banking
34
<PAGE>
Schedule 1
Underwriter Number of Shares
35
<PAGE>
SCHEDULE 2
SHAREHOLDER LOCK UP PERIOD
36
<PAGE>
UNITED STATES BANKRUPTCY COURT
SOUTHERN DISTRICT OF OHIO
EASTERN DIVISION
In re:
GAYLORD COMPANIES, INC. : Case No. 97-60560
Joint Administered With:
GAYLORD BOOK COMPANY, : Case No. 97-60562
GAYLORD'S, INC., : Case No. 97-60561
SAWWORTH BOOK COMPANY, : Case No. 97-60563
GAYLORD ENTERPRISES, INC., : Case No. 97-60564
THE COOKSTORE, INC., and : Case No. 97-60565
THE COOKSTORE WORTHINGTON, INC.; Case No. 97-60566
: Chapter 11
Debtors. : (Judge Caldwell)
AMENDED PLAN OF REORGANIZATION OF
GAYLORD COMPANIES, INC.,
THE COOKSTORE, INC., AND THE COOKSTORE
WORTHINGTON, INC., DATED JUNE 24,1998
-------------------------------------
Gaylord Companies, Inc. ("Gaylord Companies"), The Cookstore, Inc.
("TCI") and The Cookstore Worthington, Inc. ("TCWI") (Gaylord Companies, TCI and
TCWI sometimes referred to collectively as "Debtors"), Debtors and
Debtors-in-Possession, hereby propose the following Plan of Reorganization
pursuant to 11 U. S. C. ss. 1101 et seq.
ARTICLE I
DEFINITIONS
-----------
A. Defined Terms
When used in this Plan, the following terms shall have the meanings set
forth below, unless the context otherwise requires. Such meanings shall apply
equally to both the singular
<PAGE>
and plural forms of the defined term. Any capitalized term used but not
otherwise defined in this Plan shall have the meaning given to that term in the
Bankruptcy Code. Unless otherwise indicated, capitalized terms used in this Plan
shall refer to the terms as defined in this Article I.
"Administrative Expense" shall mean an actual, necessary cost or
expense of preserving the Debtors' Estates incurred after the Petition Date,
which is entitled to priority in this Case pursuant to sections 503(b) and
507(a)(1) of the Bankruptcy Code, including fees and expenses of Professionals
pursuant to sections 330 and 331 of the Bankruptcy Code and fees, if any, due to
the United States Trustee under 28 U.S.C. ss. 1930(a)(6).
"Allowed Claim" shall mean any Claim against the Debtors' Estates to
the extent that
(i) proof of the Claim was filed with the Court within the Claims
Bar Date if no objection is interposed to the Claim within any
permissible or extended period of time, but only to the extent
and in the amount set forth in the proof of Claim, or
(ii) if no proof of the Claim was filed, the Claim is deemed filed
pursuant to section 1111(a) of the Bankruptcy Code (the Claim is
listed in the Schedules filed pursuant to section 521(l) of the
Bankruptcy Code and is not listed as disputed, contingent or
unliquidated), but only to the extent and in the amount set forth in
the Schedules, or
(iii) a proof of the Claim was timely filed with the Court and, if
an objection to allowance of the Claim was interposed within any
permissible or extended period of time, the Claim is or has been
allowed by the Plan, Final Order of the Court, or written agreement
or stipulation between Debtors and the claimant.
"Allowed Secured Claim" shall mean that portion, if any, of an Allowed
Claim subject to offset under section 553 of the Bankruptcy Code or fully
secured by a lien, mortgage, security interest, encumbrance or other charge
against property of the Estate which charge is valid, duly perfected and
enforceable under applicable law, to the extent of the value, determined in
accordance with section 506(a) of the Bankruptcy Code, of the Creditor's
interest in the property.
2
<PAGE>
"Amelar Note" shall mean that certain demand note in the original
principal amount of $30,000, as it may be amended, payable by HRAC to Amelar
Investments L.L.C. or its designees, which note shall be assumed by the
Reorganized Parent.
"Assumed HRAC Obligations" shall mean the Amelar Note, the Gem
Debenture and the CH Note.
"Assumption Order" shall mean, collectively, any and all orders entered
by the Court authorizing the Debtors' assumption of unexpired leases or
executory contracts or both.
"Available Cash" shall mean, with respect to the Reorganized Company as
determined at the end of each fiscal year based upon the Reorganized Company's
audited financial statements, an amount equal to the sum of (a) the Reorganized
Company's net income after provision for income taxes for such fiscal year (and
excluding intercompany income) plus (b) to the extent that any of the following
previously have been deducted in determining such net income: (i) depreciation,
(ii) amortization of goodwill or other intangibles, (iii) deferred compensation,
(iv) any other non-cash charges to income and (v) the positive or negative
amount, as the case may be, of the difference between consolidated working
capital on the first day of the next fiscal year less projected consolidated
working capital on the last day of the next fiscal year, less (c) the sum of (i)
actual capital expenditures, (ii) any non-cash credits which were added in
determining net income, (iii) any principal, interest or other payments made
with respect to capital leases and indebtedness for borrowed money, including,
without limitation, under the financing arrangements between Fremont and TCI and
TCWI, and (iv) any management or advisory fees paid by the Reorganized Company.
For the avoidance of doubt, it is hereby confirmed that the term "Available
Cash" shall not include any income, losses or other items arising out of the
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<PAGE>
conduct of the business of Debtors' Affiliates or the sale of the assets owned
by or stock issued by any of Debtors' Affiliates.
"Available Cash Note" shall mean the unsecured and subordinated
promissory note, as it may be amended, to be issued by Reorganized Parent to
Arter & Hadden (or such other person or entity selected by the Debtors) for the
benefit of the holders of Allowed Unsecured Claims pursuant to Section IV
hereof.
"Avoiding Action" shall mean any action by the Debtors under sections
544, 545, 547, 548 or 550 of the Bankruptcy Code.
"Ballot" shall mean the form distributed to each holder of an impaired
Claim entitled to vote on the Plan on which an acceptance or rejection of the
Plan shall be indicated.
"Bankruptcy Code" shall mean Title 11 of the United States Code as
currently in effect as well as Sections 157, 158, 1334, 1408 through 1412, and
1452 of Title 28 of the United States Code.
"Bankruptcy Rules" shall mean the Federal Rules of Bankruptcy Procedure
as currently in effect.
"Cambridge" shall mean Cambridge Holdings, L.L.C., a limited liability
company organized under the laws of the state of Delaware.
"CH Note" shall mean that certain demand note in the original principal
amount of up to $450,000, as it may be amended, payable by HRAC to Cambridge or
its designees in connection
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<PAGE>
with certain transaction costs and expenses advanced by Cambridge to HRAC, which
CH Note shall be assumed by the Reorganized Parent.
"Case" shall mean, collectively, Case Numbers 97-60560, 97-60565 and
97-60566, commenced by voluntary petitions for relief under Chapter 11 of the
Bankruptcy Code filed with the Court on November 13, 1997. The term "Case" does
not include Case Numbers 97-60561 through 97-60564.
"Claim" shall have the meaning ascribed to it in section 101(5) of the
Bankruptcy Code.
"Claims Bar Date" shall mean (i) with respect to Claims by entities
other than governmental entities, March 17, 1998 and (ii) with respect to Claims
by governmental entities, May 12, 1998; each of the foregoing being the
applicable bar date by which a proof of Claim was required to have been filed in
the Case as established by Bankruptcy Rule 3003 or by Final Order of the Court.
"Class A Common Stock" shall mean the Class A Common Stock, $0.01 par
value per share, of the Reorganized Parent.
"Class B Common Stock" shall mean the Class B Restricted Common Stock,
$0.01 par value per share, of Reorganized Parent, each share of which shall
automatically convert into one share of Class A Common Stock only after (i) the
Class A Common Stock has traded at in excess of $11.57 per share for a period of
no less than 20 consecutive trading days or (ii) a sale of all or substantially
all the assets of Reorganized Parent, a sale of all the equity interests of
Reorganized Parent or a merger or consolidation of Reorganized Parent with or
into another entity in which Reorganized Parent is not the surviving entity
pursuant to which the holders of Class A Common
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<PAGE>
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 $11.57 per share, in each case subject to adjustment
in the event of any stock splits or similar events.
"Confirmation" shall mean entry of the Confirmation Order.
"Confirmation Date" shall mean the date on which the Confirmation Order
is entered.
"Confirmation Hearing" shall mean the hearing held by the Court to
consider confirmation of the Plan pursuant to section 1129 of the Bankruptcy
Code, as such hearing may be adjourned or continued from time to time.
"Confirmation Order" shall mean the Final Order entered by the Court
confirming the Plan pursuant to section 1129 of the Bankruptcy Code.
"Cookstore Debtors" shall mean TCI and TCWI.
"Court" shall mean the United States Bankruptcy Court for the Southern
District of Ohio, Eastern Division, or in the event such court ceases to
exercise jurisdiction over the Case, such court or adjunct thereof that
thereafter exercises jurisdiction over the Case, and any court having
jurisdiction to hear appeals from any such court.
"Creditor" shall have the meaning ascribed to it in section 101(10) of
the Bankruptcy Code.
"Debtors" shall mean, collectively, Gaylord Companies, TCI and TCWI in
their corporate capacities and as Debtors and Debtors-in-Possession in the Case.
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<PAGE>
"Debtors' Affiliates" shall mean, collectively, all of Debtors'
affiliates, as that term is defined in section 101(2) of the Bankruptcy Code,
including, without limitation, Gaylord Book Company, Gaylord's, Inc., Sawworth
Book Company, and Gaylord Enterprises, Inc., the estates of which are seeking to
reorganize pursuant to that certain Plan of Reorganization of United Magazine
Company with Regard to Bankruptcy Estates of Debtors Gaylord Book Company,
Sawworth Book Company, Gaylord's, Inc. and Gaylord Enterprises, Inc. Dated April
16, 1998 (May 1, 1998 Modification).
"Disclosure Statement" shall mean the Amended Disclosure Statement for
the Amended Plan of Reorganization of Gaylord Companies, Inc., The Cookstore,
Inc. and The Cookstore Worthington, Inc. Dated June 24, 1998, as may be amended
or modified from time to time.
"Disputed Claim" means a Claim against the Estate that is not an
Allowed Claim and either (a) an objection to the Claim has been filed by a party
in interest; or (b) the Claim appears on a schedule of disputed claims filed by
Debtors with the Court on or before the Effective Date.
"Effective Date", unless advanced or accelerated by HRAC in its sole
discretion, shall mean the later of the following dates, as calculated pursuant
to Bankruptcy Rule 9006: (a) a date no later than twenty (20) days following
Confirmation; (b) if an appeal from the Confirmation Order is timely filed, the
first business day on which implementation of the Plan has not been stayed
pending such appeal; and (c) the date on which the conditions specified in
Article VIII have been satisfied.
"Equity Interest" shall mean any equity interest in the Debtors,
including any equity security, as defined in section 101(16) of the Bankruptcy
Code, common stock, preferred stock,
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warrants, options, puts, calls or shares, and the right or power to acquire or
exercise rights with respect to the same, asserted by any person or entity.
"Estate" shall mean, collectively, the estates of each of the Debtors
created pursuant to section 541 of the Bankruptcy Code upon commencement of the
Case.
"Exit Financing Facility" shall mean the post-Effective Date term loan
and working capital revolving credit financing facility for the Reorganized
Company to be provided by Fremont or other lender selected by the Reorganized
Company upon terms and pursuant to agreements in form and substance acceptable
to Fremont (or such other lender), the Debtors and the Reorganized Company.
"Final Decree" means a final decree entered by the Court pursuant to
Bankruptcy Rule 3022.
"Final Order" shall mean an order of a court of appropriate
jurisdiction in the Case as to which (a) any appeal that has been taken has been
finally determined or dismissed, or (b) the time for appeal has expired and a
notice of appeal has not been timely filed.
"Financing Order" shall mean the Final Order Authorizing The Cookstore,
Inc. and The Cookstore Worthington Inc. to Obtain Secured Post-Petition Credit
entered on May 6, 1998.
"Financing Warrants" shall mean the Fremont Warrants and the Individual
Warrants.
"Fremont" shall mean Fremont Financial Corporation, a California
corporation.
"Fremont Allowed Secured Claim" shall mean the amount of Fremont's
Secured Claim pursuant to the Financing Order.
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"Fremont Senior Tranche" shall mean the Fremont Allowed Secured Claim
(excluding the HRAC Junior Tranche and the Individual Junior Tranche).
"Fremont Warrants" shall mean the warrants that expire on June 30, 2003
to purchase Class A Common Stock at a price of $.01 per share to be issued by
the Reorganized Parent to Fremont.
"Gem Debenture" shall mean that certain Debenture by HRAC to the order
of Global Strategic Holdings, Ltd. in the principal amount of up to $300,000
with a maturity date of October 1, 1998.
"General Secured Claim" shall mean any Claim, to the extent reflected
in the Schedules or a proof of claim as a Secured Claim, which is secured by a
lien on collateral to the extent of the value of such collateral, as determined
in accordance with section 506(a) of the Bankruptcy Code, or, in the event that
such Claim is subject to setoff under section 553 of the Bankruptcy Code, to the
extent of such setoff.
"Greenfield" shall mean Greenfield Commercial Credit, L.L.C.
"HRAC" shall mean Home Retail Acquisition Corp., a Delaware
corporation.
"HRAC Advisory Agreement" shall mean the Advisory Agreement, as
amended, between Cambridge and the Debtors under the Term Sheet (which Advisory
Agreement has been assigned by Cambridge to HRAC) pursuant to which HRAC agreed
to act as an advisor to the Debtors and the Debtors agreed to pay to HRAC, among
other things, $30,000 per month for such services.
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<PAGE>
"HRAC Junior Tranche" shall mean the junior tranche of the Fremont
Allowed Secured Claim that HRAC purchased from Fremont pursuant to those certain
Subordinated, Last-out Participation Agreements between Fremont and HRAC in an
amount not less than $250,000, as amended, restated, modified and supplemented.
"Individual Junior Participants" shall mean any or all of the persons
(other than HRAC) who are party to one or more of those certain Subordinated,
Last-Out Participation Agreements each dated as of April 28, 1998 with Fremont,
as amended, restated, modified and supplemented.
"Individual Junior Tranche" shall mean the junior tranche of the
Fremont Allowed Secured Claim in the collective amount of $250,000 which were
purchased from Fremont pursuant to those certain Subordinated, Last-Out
Participation Agreements each dated as of April 28, 1998 between each of the
Individual Junior Participants and Fremont, as amended, restated, modified and
supplemented.
"Individual Warrants" shall mean the warrants, expiring June 30, 2003
to purchase Class A Common Stock at a price of $4.00 per share to be issued by
the Reorganized Parent to the Individual Junior Participants.
"Ingram" shall mean Ingram Book Company, a division of Ingram
Industries, Inc.
"IRS" shall mean the Department of the Treasury, Internal Revenue
Service.
"Merger" shall mean the merger of HRAC into Gaylord Companies pursuant
to the Merger Agreement.
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"Merger Agreement" means the Merger Agreement and Plan of
Recapitalization dated June __, 1998, between HRAC and Gaylord Companies.
"New Securities" shall mean, collectively, Class A Common Stock, Class
B Common Stock, New Warrants, Financing Warrants and Available Cash Note.
"New Warrants" shall mean the warrants, expiring October 30, 1998, to
purchase Class A Common Stock at the initial exercise price of $11.57 per share
to be issued to the holders of Allowed Equity interests in Class 9 pursuant to
Article IV hereof The New Warrants shall be redeemable for $.05 per Warrant in
the event the Class A Common Stock has traded at $12.00 per share for a period
of no less than 20 consecutive trading days.
"Other Equity Interests" shall mean all Equity Interests in the Debtors
other than the holders of common stock of Gaylord Companies.
"Petition Date" shall mean November 13, 1997, the date Debtors
commenced the Case.
"Plan" shall mean this Amended Plan of Reorganization of Gaylord
Companies, Inc., The Cookstore, Inc. and The Cookstore Worthington, Inc. dated
June 24, 1998, proposed by Debtors, as may hereafter be amended or modified.
"Priority Claim" shall mean any Claim, other than a Claim for
Administrative Expense, entitled to priority under section 507(a) of the
Bankruptcy Code.
"Priority Tax Claim" shall mean any Claim of a governmental unit of the
kind specified in sections 502(i) and 507(a)(8) of the Bankruptcy Code.
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"Professional" shall mean any and all attorneys, accountants,
appraisers, consultants, or other persons retained by or on behalf of Debtors
pursuant to order of the Court.
"Record Date" means the business day that is five days after the
Confirmation Date.
"Reorganized Company" shall mean, collectively, Reorganized Parent and
the Reorganized Cookstore Companies.
"Reorganized Cookstore Companies" shall mean the Cookstore Debtors as
reorganized under this Plan.
"Reorganized Parent" shall mean the surviving entity Home Retail
Holdings, Inc. (f/k/a Gaylord Companies, Inc.), the successor in interest
following the Merger.
"Schedules" shall mean the schedules filed by Debtors with the Clerk of
the Court pursuant to Bankruptcy Rule 1007, as may be modified or amended from
time to time.
"Substantial Consummation" shall have the meaning ascribed to it in 11
U.S.C. ss. 1101(2).
"Term Sheet" shall mean that certain Term Sheet entered into by and
between the Debtors and Cambridge dated February 26, 1998, as approved by the
Court pursuant to the Court's Order Granting Debtor's Motion for Authority to
Enter Into and Perform Term Sheet, as amended, entered in the Case on or about
March 6, 1998.
"Term Sheet Transaction" shall mean the transactions described in and
contemplated by the Term Sheet.
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"Unclassified Claims" shall mean Claims described in Article 11 and
Section III(E) of this Plan.
"Unsecured Claim" means any Claim that is neither secured by property
of the Estate nor entitled to priority under section 507 or other applicable
provision of the Bankruptcy Code.
"Unsecured Creditor" shall mean any Creditor that is the holder of an
Unsecured Claim.
B. Undefined Terms
Unless otherwise indicated, terms used in this Plan that are defined in
the Bankruptcy Code and not in this Plan have the meanings ascribed to such
terms in the Bankruptcy Code. The rules of construction contained in this
Bankruptcy Code and Bankruptcy Rules apply to this Plan.
ARTICLE II
----------
TREATMENT OF ADMINISTRATIVE
EXPENSE CLAIMS AND PRIORITY TAX CLAIMS
--------------------------------------
A. Administrative Expense Claims
1. In General. Except to the extent that any entity entitled to payment
of any Allowed Administrative Expense Claim agrees to a different treatment, and
except as provided in Section II(A)(2) and (3) below, each holder of an Allowed
Administrative Expense Claim shall receive cash in an amount equal to such
Allowed Administrative Expense Claim on the later of the Effective Date and the
date such Administrative Expense Claim becomes an Allowed Administrative Expense
Claim, or as soon thereafter as is practicable; provided, however, that (1)
Allowed Administrative Expense Claims representing liabilities or other
obligations incurred in the ordinary course of business by the Debtors shall be
paid in full (and any such other
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obligations shall be performed) by the Reorganized Company in the ordinary
course of business in accordance with the terms and subject to the conditions of
any agreements governing, instruments evidencing or other documents relating to,
such transactions and (2) any Claim for Administrative Expense held or asserted
by an entity against the bankruptcy estate(s) of the Debtors' Affiliates shall
not be impaired hereby, and any such claim for Administrative Expenses held or
asserted against such other estate(s) shall be reduced by the amount paid to
such entity pursuant to the terms of the Plan.
2. Professional Compensation and Expense Reimbursement Claims. All
entities seeking an award by the Court of compensation for services rendered or
reimbursement of expenses incurred through and including the Confirmation Date
under sections 503(b)(2), 503(b)(3), 503(b)(4) or 503(b)(5) of the Bankruptcy
Code (a) shall file their respective final applications for allowances of
compensation for services rendered and reimbursement of expenses incurred
through the Confirmation Date within 30 days after the Effective Date and (b) if
granted such an award by the Court, shall be paid in full in such amounts as are
allowed by the Court (i) on the later of the Effective Date or the date such
Administrative Expense Claim becomes an Allowed Administrative Expense Claim, or
as soon thereafter as is practicable or (ii) upon such other terms as may be
mutually agreed upon between such holder of an Allowed Administrative Expense
Claim and the Debtors or, on and after the Effective Date, the Reorganized
Company. All professional fees for services rendered in connection with the Case
and the Plan after the Confirmation Date, including, without limitation, those
relating to the occurrence of the Effective Date and the resolution of Disputed
Claims, shall be paid by the Reorganized Company upon receipt of an invoice or
on such other terms as the Reorganized Company may agree to, without the need
for further Court authorization or entry of a Final
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<PAGE>
Order, absent an objection by the Reorganized Company. In the event the
Reorganized Company objects to such fees, the matter shall be resolved by the
Bankruptcy Court upon motion of such professional.
3. Payment of Statutory Fees. All fees payable pursuant to section 1930
of title 28 of the United States Code shall be paid on the later of the
Effective Date or such other date as specified in invoices therefor received by
the Debtors or Reorganized Company.
B. Priority Tax Claims
Except to the extent that a holder of an Allowed Priority Tax Claim has
been paid by the Debtors prior to the Effective Date or agrees to a different
treatment, each holder of an Allowed Priority Tax Claim shall receive, at the
sole option of Reorganized Company (a) cash in an amount equal to such Allowed
Priority Tax Claim on the later of the Effective Date and the date such Priority
Tax Claim becomes an Allowed Priority Tax Claim, or as soon thereafter as is
practicable, or (b) equal annual cash payments in an aggregate amount equal to
such Allowed Priority Tax Claim, together with interest at a fixed annual rate
equal to 7%, over a period through the sixth anniversary of the date of
assessment of such Allowed Priority Tax Claim, or upon such other terms
determined by the Court to provide the holder of such Allowed Priority Tax Claim
deferred cash payments having a value, as of the Effective Date, equal to such
Allowed Priority Tax Claim.
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ARTICLE III
-----------
CLASSIFICATION OF CLAIMS AND EQUITY INTERESTS
---------------------------------------------
As described in Article V(D) hereof and in the Disclosure Statement,
effective on the Effective Date, HRAC shall be merged into Gaylord Companies.
Gaylord Companies shall be the sole surviving entity of the merger, and shall be
Reorganized Parent hereunder. In addition, TCI and TCWI shall be substantively
consolidated with Gaylord Companies only for, purposes of distributions under
the Plan. Accordingly, allowed Claims against and Equity Interests in any one or
more of the estates of Gaylord Companies, TCI and TCWI are classified in this
Plan as if there were a single Estate, although TCI and TCWI shall maintain
their separate existence.
All Allowed Claims are placed in the classes set forth below, or, where
applicable, are treated as Unclassified Claims as discussed in Articles II and
III(E) of this Plan. Unless expressly provided otherwise, an Allowed Claim that
is properly included in more than one class is in a class to the extent it meets
the description of such class and is in a different class to the extent it meets
the description of such different class.
A. Secured Claims
Class 1: Fremont, as sole owner of the Fremont Senior Tranche.
Class 2: HRAC, as owner of the HRAC Junior Tranche.
Class 3: Individual Junior Participants, as owners of the Individual
Junior Tranche.
Class 4: holders of all other Allowed Secured Claims whose Claims are
not included in Classes 1, 2 or 3.
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B. Priority Claims
Class 5: the Allowed Claims of Unsecured Creditors entitled to
priority pursuant to sections 507(a)(3) or 507(a)(4) of the
Bankruptcy Code.
C. Unsecured Claims
Class 6: the unsecured Allowed Claim of any Creditor not included in
any other class, including, without limitation, the
"deficiency" portion of any Allowed Secured Claims, but not
including Unclassified Claims treated elsewhere in the Plan.
D. Equity Interests
Class 7: the Equity Interests of holders of common shares of Gaylord
Companies.
Class 8: the Equity Interests of holders of preferred shares of
Gaylord Companies.
Class 9: the Equity Interests of holders of warrants for the purchase
of common shares of Gaylord Companies.
Class 10: all other Equity Interests in the Debtors not included in
Class 7, 8 or 9.
E. Unclassified Claims
Section 1123(a)(1) of the Bankruptcy Code provides that certain Claims,
including Claims for Administrative Expenses for unpaid post-Petition Date goods
and services (Bankruptcy Code section 507(a)(1) Claims) and Claims for Allowed
Unsecured Claims of governmental units (Bankruptcy Code Section 507(a)(8)
Claims), shall not be designated into classes. The Unclassified Claims described
herein are treated in Article II of the Plan.
ARTICLE IV
----------
TREATMENT OF CLAIMS AND EQUITY INTERESTS
----------------------------------------
Allowed Claims in the following classes shall receive the following
treatment in complete satisfaction of all such Allowed Claims.
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<PAGE>
Class 1: Class 1 is unimpaired by the Plan. Consequently, Fremont is
conclusively presumed to have accepted the Plan and is not entitled to vote to
accept or reject the Plan.
On the Effective Date, all outstanding obligations due to Fremont under
the Financing Order shall be either (x) repaid in full in cash or (y) repaid
pursuant to the Exit Financing Facility such that Fremont shall receive from the
Reorganized Company, in complete satisfaction of the Fremont Senior Tranche, the
full amount of the Fremont Senior Tranche either (i) in cash on the Effective
Date, or (ii) as may otherwise be agreed by and between Fremont, HRAC, and the
Debtors or the Reorganized Company. In addition, Fremont shall receive in
connection with the Exit Financing Facility Fremont Warrants exercisable to
purchase 92,595 shares of Class A Common Stock at the exercise price of $.01 per
share. The Debtors acknowledge and agree that the obligation of Fremont to
extend the Exit Financing Facility is subject to the terms of the commitment
letter dated March 26, 1998 to Cambridge and that the terms of the Plan shall
not affect or modify the obligation of Fremont to extend the Exit Financing
Facility.
Class 2: Class 2 is impaired by the Plan. Consequently, HRAC shall be
entitled to vote to accept or reject the Plan.
On the Effective Date, HRAC shall be merged into Gaylord Companies, as
more fully described in Article V below. In consideration for the contribution
of HRAC and the merger of HRAC with Gaylord Companies, and in complete
satisfaction of the HRAC Junior Tranche and any amounts owed to HRAC prior to
the Confirmation Date on account of the HRAC Advisory Agreement, the
shareholders of HRAC shall receive on the Effective Date 1,383,684 shares of
Class A Common Stock of Reorganized Parent which, on the Effective Date giving
effect to the exercise of the New Warrants and before the exercise of any
Financing Warrants, shall be equal
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<PAGE>
to eighty percent (80%) of the issued and outstanding shares of Class A Common
Stock and Class B Common Stock of Reorganized Parent. In addition the
Reorganized Parent will assume the liabilities of HRAC under the Assumed HRAC
Obligations.
Class 3: Class 3 is unimpaired by the Plan. Consequently, each holder
of an Allowed Claim in Class 3 is conclusively presumed to have accepted the
Plan and is not entitled to vote to accept or reject the Plan.
On the Effective Date, all outstanding obligations due to the
Individual Junior Participants and the security interests granted to the holders
of such Claims shall be restructured as a subordinated loan facility in an
amount equal to the outstanding amount of the Individual Junior Tranche and such
holders otherwise will be rendered unimpaired. In partial consideration for the
restructure of such obligations, each holder of an Allowed Claim in Class 3
shall also receive its pro rata percentage of the Individual Warrants
exercisable for 29,261 shares of Class A Common Stock of the Reorganized Parent
at the exercise price of $4.00 per share.
Class 4: Class 4 is unimpaired by the Plan. Consequently, each holder
of an Allowed General Secured Claim is conclusively presumed to have accepted
the Plan and is not entitled to vote to accept or reject the Plan.
At the sole option of Reorganized Company, (i) an Allowed General
Secured Claim shall be reinstated and rendered unimpaired in accordance with
section 1124(2) of the Bankruptcy Code, (ii) a holder of an Allowed General
Secured Claim shall receive cash in an amount equal to such Allowed General
Secured Claim, including any interest on such Allowed General Secured Claim
required to be paid pursuant to section 506(b) of the Bankruptcy Code, on the
later of the Effective Date and the date such General Secured Claim becomes
Allowed, or as
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<PAGE>
soon thereafter as is practicable, or (iii) a holder of an Allowed General
Secured Claim shall receive the collateral securing its Allowed General Secured
Claim and any interest on such Allowed General Secured Claim required to be paid
pursuant to section 506(b) of the Bankruptcy Code, in full and complete
satisfaction thereof on the later of the Effective Date and the date such
General Secured Claim becomes Allowed, or as soon thereafter as is practicable.
The legal, equitable and contractual rights of the holders of Allowed General
Secured Claims, if any exist, are not altered by the Plan.
Class 5: Class 5 is unimpaired by the Plan. Consequently, each holder
of an Allowed Claim in Class 5 is conclusively presumed to have accepted the
Plan and is not entitled to vote to accept or reject the Plan.
Each holder of an Allowed Claim in Class 5 shall receive cash in an
amount equal to such Allowed Claim on the later of the Effective Date or the
date such Allowed Claim becomes an Allowed Claim, or as soon thereafter as is
practicable.
Class 6: Class 6 is impaired by the Plan. Consequently, each holder of
an Allowed Claim in Class 6 shall be entitled to vote to accept or reject the
Plan.
On the Effective Date, each holder of an Allowed Claim in Class 6 shall
receive from Reorganized Parent in complete satisfaction of the Allowed Claim,
the following:
(i) An amount equal to its pro rata share, as compared to all
other holders of Allowed Claims in Class 6, of the Available Cash
Note. Pursuant to the Available Cash Note, distributions shall be
made by Reorganized Parent from Available Cash in the maximum amount
of $30,000 per year for five (5) years beginning on
20
<PAGE>
January 30, 1999 and continuing on each January 30 through January
30, 2003, so long as Reorganized Parent has Available Cash. To the
extent that there is insufficient Available Cash to pay any
installment with respect to the Available Cash Note, then
Reorganized Parent's obligation to make such installment payment for
that year shall be extinguished.
(ii) Shares of Class A Common Stock in Reorganized Parent in an
amount equal to such holder's pro rata share, as compared to all
other holders of Allowed Claims in Class 6, of eight percent (8%) of
the issued and outstanding Class A Common Stock and Class B Common
Stock of Reorganized Parent on the Effective Date giving effect to
the exercise of the New Warrants and before the exercise of the
Financing Warrants. Such shares of Class A Common Stock shall not be
transferable until the earlier of six months after the Effective
Date or the closing date of a registered public offering by the
Reorganized Parent. Holders of such shares shall have the right for
six months after the Effective Date to register such shares for sale
in a registered public offering; provided that if any such holder
determines not to include such shares in such a registered public
offering, such holder shall be obliged to agree to any lock-up
requested by any underwriter of such public offering. If such
registered public offering is underwritten, holders who wish to
register such shares must sell such shares on the basis provided in
any underwriting arrangements and execute any documents reasonably
required in connection with such underwriting arrangements.
Class 7: Class 7 is impaired by the Plan. Consequently, each holder of
an Allowed Equity Interest in Class 7 shall be entitled to vote to accept or
reject the Plan.
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<PAGE>
Following the conversion of Other Equity Interests to common shares of
Gaylord Companies as provided for in Class 10 below and after the merger of HRAC
with and into the Gaylord Companies, the common shares of Gaylord Companies
shall be extinguished, and the holders of an Allowed Equity Interest in Class 7
shall receive their pro rata share of the number of shares of Class B Common
Stock equal to eight per cent (8%) of the number of the issued and outstanding
shares of Class A Common Stock and Class B Common Stock of Reorganized Parent as
of the Effective Date giving effect to the exercise of the New Warrants and
before the exercise of the Financing Warrants.
Class 8: Class 8 is impaired by the Plan. Consequently, each holder of
an Allowed Equity Interest in Class 8 shall be entitled to vote to accept or
reject the Plan.
All issued and outstanding shares of preferred stock in Gaylord
Companies as of the Effective Date shall be converted to common stock of Gaylord
Companies. Following the merger of HRAC with the Gaylord Companies, such common
shares of Gaylord Companies shall be extinguished and the holders of Allowed
Equity Interests in Class 8 shall receive their pro rata share of the number of
shares of Class B Common Stock equal to four percent (4%) of the number of the
issued and outstanding shares of Class A Common Stock and Class B Common Stock
of Reorganized Parent as of the Effective Date giving effect to the exercise of
the New Warrants and before the exercise of the Financing Warrants.
Class 9: Class 9 is impaired by the Plan. Consequently, each holder of
an Allowed Equity Interest in Class 9 shall be entitled to vote to accept or
reject the Plan.
All outstanding warrants for the purchase of common shares of Gaylord
Companies shall be deemed cancelled and become null and void (without further
act or action by any party).
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<PAGE>
52,573 New Warrants at the exercise price, of $11.57 shall be distributed pro
rata to the holders of Allowed Claims in Class 9. The New Warrants shall not be
exercisable or transferable until six months after the Effective Date.
Class 10: Class 10 is impaired by the Plan. Consequently, each holder
of an Allowed Equity Interest in Class 10 shall be entitled to vote to accept or
reject the Plan.
All Equity Interests in the Debtors not treated in Class 7, 8 or 9
hereof shall be converted, pursuant to the terms of the applicable agreement (be
it a put, or other applicable right, including without limitation, any right to
issue new warrants), to preferred or common shares of Gaylord Companies, as
provided in such agreement or, at the option of the holder of any Class 10
Equity Interest, extinguished. If converted to preferred shares of Gaylord
Companies, the interests of the holder of such shares then shall be subject to
the further conversion provided for holders of Equity Interests in Class 8
hereof. If converted to common shares of Gaylord Companies, the interests of the
holder of such shares then shall be subject to the treatment provided for
holders of Equity Interests in Class 7 hereof.
ARTICLE V
---------
MEANS FOR IMPLEMENTATION OF THE PLAN
------------------------------------
A. Distributions Provided for in the Plan
Payments under the Plan shall be funded from any cash or property held,
received or obtained by the Debtors and/or the Reorganized Company, from loans
made or capital contributed by, or arranged through the efforts of, Fremont,
HRAC, the Individual Junior Participants or certain other parties, or from funds
generated by the Reorganized Company's
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<PAGE>
future operations, at the sole option of the Reorganized Company. On the
Effective Date, the Debtors and/or Reorganized Company will cause to be
available for distribution shares of Class A and Class B Common Stock of
Reorganized Parent.
B. Exit Financing Facility
On or prior to the Effective Date, the Debtors or Reorganized Company,
as the case may be, shall enter into the Exit Financing Facility. On and after
the Effective Date, the Reorganized Company shall be deemed to have assumed,
without any action or execution of any document, all obligations arising under
the Exit Financing Facility. As partial consideration for providing the Exit
Financing Facility, Fremont or such other lender providing the Exit Financing
Facility shall receive Fremont Warrants as provided in Article IV of the Plan.
C. Subordinated Loan Facility
On or prior to the Effective Date, the Debtors or Reorganized Company,
as the case may be, shall enter into a subordinated loan facility with the
Individual Junior Participants or other lenders designated by the Debtors or
Reorganized Company, in the aggregate original principal amount equal to
Individual Junior Tranche. As partial consideration for providing such
subordinated loan facility, the Individual Junior Participants shall receive
Individual Warrants as provided in Article IV of the Plan.
D. Merger of HRAC and Gaylord Companies
Effective on the Effective Date, HRAC shall be merged into Gaylord
Companies. Gaylord Companies shall be the sole surviving entity of the merger,
and shall be Reorganized Parent hereunder pursuant to the terms of the Merger
Agreement.
24
<PAGE>
E. Issuance of New Securities
1. On the Effective Date, the authorized capital stock of Reorganized
Parent will consist of 20,000,000 shares of Class A Common Stock, par value
$0.01 per share, 154,951 shares of Class B Restricted Common Stock, par value
$0.01 per share and one million (1,000,000) shares of Serial Preferred Stock,
par value $0.01 per share.
2. The issuance of the following securities and notes by Reorganized
Parent is hereby authorized without further act or action under applicable law,
regulation, order or rule except to the extent expressly set forth in this Plan:
(1) 1,522,034 shares of Class A Common Stock;
(2) 175,429 shares of Class A Common Stock to be reserved until
such time as the Class B Common Stock converts to Class A
Common Stock pursuant to the terms of this Plan;
(3) 154,951 shares of Class A Common Stock to be reserved until
such time as the holders of the New Warrants, the Fremont
Warrants and the Individual Warrants exercise such warrants;
(4) 180,000 shares of Class A Common Stock to be reserved in
connection with any employee equity incentive plans as may be
instituted by the Reorganized Company in its discretion;
(5) 154,951, shares of Class B Common Stock;
(6) 52,573 New Warrants;
(7) 92,595 Fremont Warrants;
(8) 29,261 Individual Warrants; and
(9) Available Cash Note;
3. The shares of Class A Common Stock issued pursuant to this Plan
shall be subject to dilution arising from the issuance of shares by Reorganized
Parent of Class A Common Stock as may be authorized or required, from time to
time, by operation or exercise of the New
25
<PAGE>
Warrants and Financing Warrants, conversion of the Class B Common Stock to Class
A Common Stock and such other issuances of Class A Common Stock by Reorganized
Parent as may be directed by the Board of Directors of Reorganized Parent from
time to time in accordance with Reorganized Parent's bylaws and certificate of
incorporation.
4. On the Effective Date, Reorganized Parent shall (i) issue an
aggregate of 1,383,684 shares of Class A Common Stock to the shareholders of
HRAC and 138,350 shares of Class A Common Stock to the holders of Allowed Claims
in Class 6; (ii) issue an aggregate of 85,777 shares of Class B Common Stock to
the holders of Allowed Claims in Class 7 and issue an aggregate of 69,174 shares
of Class B Common Stock to the holders of Allowed Claims in Class 8; (iii) issue
52,573 New Warrants; (iv) issue 121,856 Financing Warrants; (v) reserve for the
issuance of 175,429 shares of Class A Common Stock to effectuate the provisions
of the New Warrants and Financing Warrants; (vi) reserve for the issuance of
154,951 shares of Class A Common Stock upon conversion of the Class B Common
Stock; (vii) reserve for the issuance of 180,000 shares of Class A Common Stock
in connection with any employee equity incentive plans as may be instituted by
the Reorganized Company in its discretion; (viii) issue the Available Cash Note;
and (ix) assume the Assumed HRAC Obligations. All shares of Class A and Class B
Common Stock to be issued pursuant to this Plan shall be, upon issuance, fully
paid and non-assessable and shall be subject to dilution as set forth in Article
IV hereof, and the holders thereof shall have no preemptive or other rights to
subscribe for additional shares.
F. Cancellation and Surrender of Existing, Securities and Agreements
1. On the Effective Date, the promissory notes, share certificates,
bonds and other instruments evidencing any Claim, except to the extent contrary
to and not consistent with the
26
<PAGE>
treatment of the Fremont Allowed Secured Claim, and the Allowed General Secured
Claims, pursuant to Article IV hereof, or Equity Interest, shall be deemed
cancelled without further act or action under any applicable agreement, law,
regulation, order or rule and the obligations of the Debtors under the
agreements, indentures and certificates of designations governing such Claims
and Equity Interests, as the case may be, shall be discharged.
2. Each holder of a promissory note, share certificate, bond or other
instrument evidencing a Claim, except to the extent contrary to and not
consistent with the treatment of the Fremont Allowed Secured Claim and the
Allowed General Secured Claims pursuant to Article IV hereof, or Equity
Interest, shall surrender such promissory note, share certificate, bond or
instrument to Reorganized Parent, unless such requirement is waived by
Reorganized Parent. No distribution of property hereunder shall be made to or on
behalf of any such holders unless and until such promissory note, share
certificate, bond or instrument is received by Reorganized Parent or the
unavailability of such promissory note, share certificate, bond or instrument is
established to the reasonable satisfaction of Reorganized Parent or such
requirement is waived by Reorganized Parent. The Reorganized Parent may require
any holder that is unable to surrender or cause to be surrendered any such
promissory notes, share certificates, bonds or instruments to deliver an
affidavit of loss and indemnity and/or furnish a bond in form and substance
(including, without limitation, with respect to amount) reasonably satisfactory
to the Reorganized Parent. Any holder that fails within the later of one year
after the Effective Date and the date of Allowance of its Claim or Equity
Interest (i) if possible, to surrender or cause to be surrendered such
promissory note, share certificate, bond or instrument; (ii) if requested, to
execute and deliver an affidavit of loss and indemnity reasonably satisfactory
to the Reorganized Parent and (iii) if requested, to furnish a bond reasonably
satisfactory to the Reorganized Parent, shall be
27
<PAGE>
deemed to have forfeited all rights, claims and causes of action against the
Debtors and Reorganized Parent and shall not participate in any distribution
hereunder. Notwithstanding the foregoing, the Debtors and Reorganized Parent
shall be deemed to waive the requirements of this Section V(F) as to any holder
whose Claim is expressly Allowed pursuant to the Confirmation Order.
G. Continuation of Bankruptcy Injunction or Stays
All injunctions or stays provided for in the Chapter 11 Cases under
sections 105 or 362 of the Bankruptcy Code, or otherwise, and in existence on
the Confirmation Date, shall remain in full force and effect until the Effective
Date.
H. Reverting of Assets
(a) The property of the Estates shall revert to the Reorganized Company
on the Effective Date.
(b) From and after the Effective Date, the Reorganized Company may
operate the Debtors' business, shall have full authority to incur and pay
post-Petition Date and post-Confirmation Date obligations, and may use, acquire
and dispose of property, free of any restrictions imposed under the Bankruptcy
Code.
(c) As of the Effective Date, all property of the Debtors and
Reorganized Company shall be free and clear of all liens, claims and interests
of holders of Claims and Equity Interests, except as provided in the Plan.
28
<PAGE>
(d) As of the Effective Date, the Reorganized Company shall have the
right to compromise Claims without further Court order.
I. General Release of Liens
Except as otherwise provided in the Plan, in the treatment of the
Individual Junior Tranche or in the Exit Financing Facility, or in any contract,
instrument, indenture or other agreement or document created in connection with
the Plan or the implementation thereof, on the Effective Date, all mortgages,
deeds of trust, liens or other security interests against property of the
Estates are hereby released, and all the right, title and interest of any holder
of such mortgages, deeds of trust, liens or other security interests will revert
to Reorganized Company or the Debtors as applicable, and the successors and
assigns thereof.
J. Compensation and Benefit Programs
All employment and severance practices and policies, and all
compensation and benefit plans, policies and programs of the Debtors applicable
to their directors, officers or employees, including, without limitation, all
savings plans, retirement plans, health care plans, severance benefit plans,
incentive plans, workers' compensation programs and life, disability and other
insurance plans are treated either as executory contracts under the Plan
pursuant to Article VI hereof or as permitted under applicable non-bankruptcy
law.
K. Retiree Benefits
Payments, if any, due to any person for the purpose of providing or
reimbursing payments for retired employees and their spouses and dependents for
medical, surgical, or hospital care benefits, or benefits in the event of
sickness, accident, disability, or death under any
29
<PAGE>
plan, fund or program (through the purchase of insurance or otherwise)
maintained or established in whole or in part by the Debtors prior to the
Petition Date shall be continued for the duration of the period the Debtors have
obligated themselves to provide such benefits, subject to any and all fights of
the Debtors under applicable law. Notwithstanding the foregoing, the Debtors
intend to reject the Supplemental Executive Retirement Program of Gaylord
Companies on or before the Confirmation Date.
L. Breaches
In the event any of the Debtors or the Reorganized Company breaches any
of its obligations under this Plan, the Debtors and the Reorganized Company
shall have sixty (60) days from the receipt of written notice of such breach
from the holder of an Allowed Claim to sure such breach.
M. Pre-Payment of Allowed Claims
In the event the Debtors or the Reorganized Company is able to pre-pay
any Allowed Claim, the Debtors and the Reorganized Company shall have the
absolute right, in their sole discretion, to pre-pay all or a portion of any
class of Allowed Claims at any time, so long as each claimant in the class is
paid the same proportional amount. Any prepayment shall be without penalty.
N. Bylaws and Amended Certificates of Incorporation
The respective bylaws and certificates of incorporation of the
Reorganized Company shall be amended and restated as of the Effective Date to
the extent necessary (a) to prohibit the issuance of nonvoting equity securities
as required by section 1123(a)(6) of the Bankruptcy
30
<PAGE>
Code, subject to further amendment of such certificate of incorporation and
bylaws as permitted by applicable law and (b) to effectuate the provisions of
the Plan, in each case without any further action by the stockholders or
directors of the Debtors or the Reorganized Company.
O. Corporate Action
The following is hereby deemed to be authorized and approved in all
respects, without any requirement or further action by the stockholders or
directors of the Debtors or Reorganized Company, as if such actions had been
taken by unanimous action of the stockholders and directors of the Debtors or
the Reorganized Company, as applicable: (i) the adoption of the Reorganized
Company's bylaws and certificate of incorporation, (ii) the initial selection of
directors and officers of Reorganized Company, (iii) the distribution of cash
and the issuance and distribution of New Securities, (iv) the approval of the
Merger, (v) the ratification of the Merger Agreement and (vi) all other
corporate action to be taken or required by the Debtors or Reorganized Company,
as applicable, to effectuate the Plan and all agreements and transactions
provided for or contemplated by the Plan.
ARTICLE VI
----------
TREATMENT OF EXECUTORY CONTRACTS AND UNEXPIRED LEASES
-----------------------------------------------------
A. Assumption or Rejection of Executory Contracts and Unexpired Leases
On the Effective Date, all executory contracts and unexpired leases of
the Debtors shall be rejected by the Debtors pursuant to the provisions of
sections 365 and 1123 of the Bankruptcy Code, except: (i) any executory contract
or unexpired lease that is the subject of a separate motion to assume filed
pursuant to section 365 of the Bankruptcy Code by the Debtors before the
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<PAGE>
entry of the Confirmation Order, (ii) executory contracts and unexpired leases
listed on Exhibit E to the Disclosure Statement, and (iii) all executory
contracts or unexpired leases assumed under this Plan or by order of the
Bankruptcy Court entered before the Confirmation Date and not subsequently
terminated pursuant to an order of the Bankruptcy Court. The Debtors reserve the
right to amend, alter or modify Exhibit E at any time prior to the Confirmation
Hearing. The Debtors will provide notice of any amendments to Exhibit E to the
parties to the executory contracts or unexpired leases affected thereby.
B. Cure of Defaults
Except as may otherwise be agreed to by the parties, within 60 days
after the Effective Date, the Reorganized Company shall cure any and all
undisputed defaults under any executory contract or unexpired lease assumed
pursuant to the Plan in accordance with section 365(b)(1) of the Bankruptcy
Code. All disputed defaults that are required to be cured shall be cured either
within 30 days of the entry of a Final Order determining the amount, if any, of
the Debtors' or Reorganized Company's liability with respect thereto, or as may
otherwise be agreed to by the parties.
C. Bar Date for Filing Proofs of Claims Relating to Executory Contracts
and Unexpired Leases Rejected Pursuant to the Plan
Claims based on executory contracts or unexpired leases that were
rejected on or prior to the Claims Bar Date that were not filed by that date
shall be disallowed and forever barred. Claims arising out of the rejection of
an executory contract or unexpired lease designated for rejection under the Plan
must be filed with the Court and served upon the Debtors or Reorganized Company
or as otherwise may be provided in the Confirmation Order by no later than 30
days after the notice of entry of an order approving such rejection. Any Claims
not filed
32
<PAGE>
within such time will be forever barred from assertion against the Debtors,
their Estates, the Reorganized Company and their property, and the holders
thereof shall not be entitled to any distribution under this Plan or otherwise
from the Debtors or Reorganized Company. Claims required to be filed pursuant to
a Final Order entered prior to the Confirmation Date shall be forever barred and
disallowed if not filed within the time specified in such Final Order. Unless
otherwise ordered by the Court, all Claims arising from the rejection of
executory contracts and unexpired leases shall be treated as General Unsecured
Claims under the Plan.
ARTICLE VII
-----------
SUBSTANTIVE CONSOLIDATION FOR PLAN PURPOSES
-------------------------------------------
A. Substantive Consolidation for Plan Purposes
Except as expressly provided in the Plan, the Debtors and each
Reorganized Company shall continue to maintain their separate corporate
existence for all purposes other than the treatment of Claims under the Plan.
This Plan shall serve as a motion seeking entry of an order substantively
consolidating the Estates of the Debtors. Pursuant thereto, on the Effective
Date, (i) all intercompany Claims by and among the Debtors shall be eliminated;
(ii) all assets and liabilities of the Debtors shall be merged and treated as
though they were merged; (iii) all prepetition guarantees, indemnifications or
similar financial assurances of or assumptions by one Debtor of any obligation
of another Debtor shall be eliminated; (iv) any obligation of any Debtor and all
guarantees or assumptions, indemnifications or similar financial assurances
thereof by one or more of the Debtors shall be deemed to be one obligation of
the consolidated Debtors; provided, however, that where one or more of the
Debtors that is an obligor has been released of its obligations by operation of
applicable law or agreement, each Debtor shall be deemed
33
<PAGE>
released; (v) any Claims filed or to be filed or scheduled respecting any such
obligation shall be deemed one Claim against the consolidated Debtors; and (vi)
each and every Claim filed in the individual chapter 11 case of any of the
Debtors shall be deemed filed against the consolidated Debtors in the
consolidated Case and shall be deemed a single obligation of all of the Debtors
under the Plan. On the Confirmation Date, but subject to the occurrence of the
Effective Date, and in accordance with the terms of the Plan and the
consolidation of the assets and liabilities of the Debtors, all Claims based
upon guarantees of collection, payment or performance made by the Debtors as to
the obligations of another Debtor or of any other party shall be discharged,
released and of no further force and effect; provided, however, that nothing
herein shall affect the obligations of each of the Debtors under the Plan.
B. Order Granting Substantive Consolidation
Unless an objection to substantive consolidation is made in writing by
any Creditor affected by the Plan as herein provided on or before the date that
is fixed by the Court as the last date on which acceptances to this Plan may be
received, or such other date as may be fixed by the Court, the cases shall be
substantively consolidated by the Court as provided in the Confirmation Order.
In the event any such objections are timely filed, a hearing with respect
thereto shall be scheduled by the Court, which hearing may, but need not,
coincide with the hearing to consider confirmation of the Plan.
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<PAGE>
ARTICLE VIII
------------
CONFIRMATION AND EFFECTIVE DATE
-------------------------------
A. Conditions Precedent to Effectiveness
The Plan shall not become effective until the following conditions
precedent shall have occurred:
1. The Confirmation Order shall have been entered and shall contain the
following provisions:
(a) except with respect to an entity that is an underwriter as
defined in Bankruptcy Code section 1145(b), section 5 of the Securities Act of
1933 (15 U.S.C. Section 77(d)), or any state or local law requiring registration
for the offer or sale of a security or registration or licensing of an issuer
of, underwriter of, or broker or dealer in securities, does not apply to the
transactions provided for in this Plan; provided, however, that in the event the
Court should refuse to enter a Confirmation Order that is deemed to include such
a finding, the Debtors shall have the option of withdrawing the Plan or
proceeding without the Bankruptcy Code section 1145 qualification, and
(b) acceptance of the Plan has been made in good faith and in
compliance with the applicable provisions of the Bankruptcy Code as contemplated
by section 1125(e) of the Bankruptcy Code.
2. There shall be no stay in effect with respect to the Confirmation
Order;
35
<PAGE>
3. The Reorganized Company shall have credit available under the Exit
Financing Facility to provide the Reorganized Company with financing sufficient
to meet its cash obligations under the Plan and its business requirements as of
and after the Effective Date;
4. All actions, documents and agreements necessary to implement shall
have been effected or executed and delivered; and
5. Each of the Plan documents and the New Securities shall have been
effected or executed and delivered.
ARTICLE IX
----------
OBJECTIONS TO CLAIMS
--------------------
The Debtors and the Reorganized Company shall be entitled to file
objections to proofs of claim at any time prior to the closing of the Case.
Notwithstanding any other provision of the Plan specifying a date or time for
payment or distributions, payments and distributions in respect of any Claim
which as of such date is disputed, unliquidated, or contingent shall not be made
until such Claim becomes an Allowed Claim whereupon such payments and
distributions shall be made promptly or as otherwise provided for in the Plan.
In the event that, at the time a payment is to be made to holders of Claims in a
specific class, a Claim that would otherwise be a Claim in that class remains
disputed, unliquidated or contingent, the Reorganized Company shall reserve from
its distribution to said class an amount estimated to be sufficient to pay the
amount of such disputed, unliquidated and contingent Claims. The Reorganized
Company shall distribute the appropriate amount to the holder of such disputed,
unliquidated and contingent Claims at such time, if any, as those Claims become
Allowed Claims.
36
<PAGE>
ARTICLE X
---------
PROVISIONS REGARDING VOTING
AND DISTRIBUTIONS UNDER THE PLAN
--------------------------------
A. Voting of Claims
Each holder of an Allowed Claim in an impaired Class which retains or
receives property under the Plan shall be entitled to vote separately to accept
or reject the Plan and indicate such vote on a duly executed and delivered
Ballot as provided in such order as is entered by the Court establishing certain
procedures with respect to the solicitation and tabulation of votes to accept or
reject the Plan, or any other order or orders of the Court.
B. Nonconsensual Confirmation
If any impaired Class entitled to vote shall not accept the Plan by the
requisite statutory majorities provided in sections 1126(c) or 1126(d) of the
Bankruptcy Code, as applicable, the Debtors and the Reorganized Company reserve
the right (a) to undertake to have the Court confirm the Plan under section
1129(b) of the Bankruptcy Code and (b) to amend the Plan to the extent necessary
to obtain entry of the Confirmation Order.
C. Method of Distributions Under the Plan
1. In General. Subject to Bankruptcy Rule 9010, all distributions under
the Plan shall be made by the Reorganized Company to the holder of each Allowed
Claim at the address of such holder as listed on the Schedules as of the Record
Date, unless the Debtors or Reorganized Company have been notified in writing of
a change of address, including, without limitation, by the filing of a proof of
claim or notice of transfer of claim filed by such holder that provides an
address for such holder different from the address reflected on the Schedules.
37
<PAGE>
2. Distributions of Cash. Any payment of cash made by the Reorganized
Company pursuant to the Plan shall be made by check drawn on a domestic bank.
3. Timing of Distributions. Any payment or distribution required to be
made under the Plan on a day other than a business day shall be made on the next
succeeding business day.
4. Fractional Cents. Whenever any payment of a fraction of a cent would
otherwise be called for, the actual payment shall reflect a rounding of such
fraction to the nearest whole cent (rounding down in the case of .50 or less and
rounding up in the case of more than .50).
5. Fractional Shares, New Warrants, Financing Warrants. No fractional
shares of Class A Common Stock, Class B Common Stock or fractional New Warrants,
Fremont Warrants, Individual Warrants or cash in lieu thereof shall be
distributed under the Plan. When any distribution on account of an Allowed Claim
pursuant to the Plan would otherwise result in the issuance of a number of
shares of Class A Common Stock, Class B Common Stock, Fremont Warrants,
Individual Warrants or New Warrants that is not a whole number, the actual
distribution of shares of Class A Common Stock, Class B Common Stock, Fremont
Warrants, Individual Warrants or New Warrants shall be rounded up to the nearest
whole number. The total number of shares of Class A Common Stock, Class B Common
Stock, Fremont Warrants, Individual Warrants or New Warrants to be distributed
to a Class of Claims shall be adjusted as necessary to account for the rounding
provided in this Section XC5.
6. Unclaimed Distributions. Any distributions under the Plan that are
unclaimed for a period of one year after distribution thereof shall be revested
in the Reorganized Company and any entitlement of any holder of any Claim or
Equity Interest to such distributions shall be extinguished and forever barred.
38
<PAGE>
7. Distributions to Equity Interest Holders as of the Record Date. As
of the close of business on the Record Date, the transfer ledgers (for Equity
Interests) shall be closed, and there shall be no further changes in the record
holders of any Equity Interests. Debtors and Reorganized Company shall have no
obligation to recognize any transfer of any Equity Interests occurring after the
Record Date. Debtors and Reorganized Company shall instead be entitled to
recognize and deal for all purposes under the Plan (except as to voting to
accept or reject the Plan) with only those record holders stated on the transfer
ledgers as of the close of business on the Record Date.
ARTICLE XI
----------
PROVISIONS REGARDING RELEASES, INJUNCTIONS AND DISCHARGE
--------------------------------------------------------
A. Injunction
The Confirmation Order shall provide for, and shall operate as, an
injunction against the commencement or continuation of any action to collect,
recover, or offset from any of the Debtors or the Reorganized Company, or any
property of any of the Debtors or the Reorganized Company, any Claim or Equity
Interest that is treated in this Plan except as otherwise permitted by this Plan
or by Final Order of the Court. The Court shall have jurisdiction to determine
and award damages for any violation of the injunction provided for in this Plan
or the Confirmation Order, including, without limitation, compensatory damages,
professional fees, expenses and costs, and exemplary damages for any willful
violation of the injunction.
39
<PAGE>
B. Discharge of Debtors
Except as otherwise expressly provided in section 1141 of the
Bankruptcy Code or the Plan, the distributions made pursuant to and in
accordance with the applicable terms and conditions of the Plan are in full and
final satisfaction, settlement, release and discharge as against the Debtors of
any debt that arose before the Effective Date and any debt of a kind specified
in section 502(g), 502(h), or 502(i) of the Bankruptcy Code and all Claims and
Equity Interests of any nature, including, without limitation, any interest
accrued thereon from and after the Petition Date, whether or not (i) a proof of
Claim or Equity Interest based on such debt, obligation or equity interest is
filed or deemed filed under section 501 of the Bankruptcy Code, (ii) such Claim
or Equity Interest is Allowed under section 502 of the Bankruptcy Code or (iii)
the holder of such Claim or Equity Interest, has accepted the Plan.
ARTICLE XII
-----------
MANDATORY PLAN PROVISIONS;
COMPLIANCE WITH LOCAL BANKRUPTCY RULE
-------------------------------------
A. Prohibition on Issuance of Nonvoting Equity Securities
The Debtors' charters shall, and is hereby deemed (i) to provide that
nonvoting equity securities in the Debtors may not be issued, and (ii) to
provide, as to the classes of security possessing voting power, for an
appropriate distribution of such power among the classes, including, in the case
of any class of equity securities having a preference over another class with
respect to dividends, adequate provisions for the election of directors
representing such preferred class in the event of default in payment of such
dividends.
40
<PAGE>
B. Post-Confirmation Reports
Pursuant to the terms of Local Bankruptcy Rule 3020-2, six (6) months
after entry of the Confirmation Order, or within such other time as the Court
may direct, the Reorganized Company, or such other party as the Court may
designate, shall file and serve, pursuant to Local Bankruptcy Rules 9013-3 and
3020-2, a report setting forth the actions taken and progress made toward
consummation of the Plan until the Final Decree is entered. Thereafter any
Creditor may request information regarding disbursement under the Plan from
Debtors or the Reorganized Company in writing.
ARTICLE XIII
------------
RETENTION OF JURISDICTION
-------------------------
After Confirmation and until entry of a Final Order under section 350
of the Bankruptcy Code, the Court shall retain and have exclusive jurisdiction
and authority for all purposes as allowed under the Bankruptcy Code and other
applicable law including, without limitation, proceedings that relate to:
(a) to hear and determine any and all objections to the allowance of
any Claims or any controversies as to the classification of any Claims; provided
that only Debtors and the Reorganized Company may file objections to Claims;
(b) to hear and determine any and all applications by Professionals for
compensation and reimbursement of expenses;
41
<PAGE>
(c) to hear and determine any and all pending applications for the
rejection and disaffirmance of executory contracts and unexpired leases, and fix
and allow any Claims resulting therefrom;
(d) to liquidate any Disputed Claims;
(e) to enforce the provisions of the Plan, including the injunction,
exculpation and releases provided for in the Plan;
(f) to hear and determine any and all applications, adversary
proceedings, contested matters and litigated matters;
(g) to enable the Debtors to prosecute any and all proceedings which
have been or may be brought prior to the Effective Date to set aside liens or
encumbrances and to recover any transfers, assets, properties, or damages to
which the Debtors may be entitled under applicable provisions of the Bankruptcy
Code or any federal, state, or local laws;
(h) to correct any defect, cure any omission, or reconcile any
inconsistency in the Plan or in the Confirmation Order as may be necessary to
carry out its purpose and the intent of the Plan;
(i) to determine any Claim or liability to a governmental unit which
may be asserted as a result of the transactions contemplated herein;
(j) to hear and determine matters concerning state, local, and federal
taxes in accordance with sections 364, 505 and 1146 of the Bankruptcy Code; and
42
<PAGE>
(k) to determine such other matters as may be provided for in the
Confirmation Order or as may be authorized under the provisions of the
Bankruptcy Code.
Whether or not a Final Order closing this Case has been entered
pursuant to section 350 of the Bankruptcy Code, following Substantial
Consummation the Court shall retain concurrent jurisdiction only to correct any
defect, cure any omission, or reconcile any inconsistency in this Plan or the
Confirmation Order, as may be necessary to carry out the purposes and intent
thereof. For the avoidance of doubt, following Substantial Consummation of the
Plan the Court shall not retain jurisdiction with respect to the Exit Financing
Facility.
ARTICLE XIV
-----------
MISCELLANEOUS
-------------
A. Provisions Applicable to All Claims
The payment, distributions and other treatments provided in respect of
each Allowed Claim pursuant to the terms of this Plan shall be in complete
satisfaction, discharge and release of each such Claim or Equity Interest,
unless otherwise specifically provided herein.
B. Reservation of Debtors' Rights
Unless otherwise specifically provided in this Plan, neither the filing
of nor Confirmation of this Plan shall be interpreted or deemed to waive
Debtors' rights under the Bankruptcy Code or other applicable, law to assert any
cause of action or to otherwise seek relief, including pursuant to any Avoiding
Action against any person or entity.
43
<PAGE>
C. Effectuating Documents and Further Transactions
Each of the Debtors or Reorganized Company, as the case may be, is
authorized to execute, deliver, file or record such contracts, instruments,
releases, indentures and other agreements or documents and take such actions as
may be necessary or appropriate to effectuate and further evidence the terms and
conditions of the Plan and any notes or securities issued pursuant to the Plan.
D. Exemption from Transfer Taxes
Pursuant to section 1146(c) of the Bankruptcy Code, the issuance,
transfer or exchange of notes or equity securities under the Plan, the creation
of any mortgage, deed of trust or other security interest, the making or
assignment of any lease or sublease, or the making or delivery of any deed or
other instrument of transfer under, in furtherance of, or in connection with the
Plan, including, without limitation, any merger agreements or agreements of
consolidation, deeds, bills of sale or assignments executed in connection with
any of the transactions contemplated under the Plan shall not be subject to any
stamp, real estate transfer, mortgage recording or other similar tax.
E. Exculpation
None of the Debtors, the Reorganized Debtors, the Creditors' Committee,
Cambridge, HRAC nor any of their respective members, officers, directors,
employees, advisors or agents shall have or incur any liability to any holder of
a Claim or Equity Interest for any act or omission in connection with, related
to, or arising out of, the Cases, the pursuit of confirmation of the Plan, the
consummation of the Plan or the administration of the Plan or the property to be
44
<PAGE>
distributed under the Plan, except for willful misconduct or gross negligence,
and, in all respects, the Debtors, the Reorganized Company, the Creditors'
Committee, Cambridge, HRAC and each of their respective members, officers,
directors, employees, advisors and agents shall be entitled to rely upon the
advice of counsel with respect to their duties and responsibilities under the
Plan.
F. Amendment or Modification of the Plan
Alterations, amendments or modifications of the Plan may be proposed in
writing by the Debtors at any time prior to the Confirmation Date, provided that
the Plan, as altered, amended or modified, satisfies the conditions of sections
1122 and 1123 of the Bankruptcy Code, and the Debtors shall have complied with
section 1125 of the Bankruptcy Code. The Plan may be altered, amended or
modified at any time after the Confirmation Date and before substantial
consummation, provided that the Plan, as altered, amended or modified, satisfies
the requirements of sections 1122 and 1123 of the Bankruptcy Code and the Court,
after notice and a hearing, confirms the Plan, as altered, amended or modified,
under section 1129 of the Bankruptcy Code. A holder of a Claim or Equity
Interest that has accepted the Plan shall be deemed to have accepted the Plan,
as altered, amended or modified, if the proposed alteration, amendment or
modification does not materially and adversely change the treatment of the Claim
or Equity Interest of such holder. The Debtors may, without notice to holders of
Claims or Equity Interests insofar as it does not materially and adversely
affect the interests of any such holders, correct any defect or omission in this
Plan and any exhibit hereto, in the Disclosure Statement and any exhibit thereto
or in any other document in connection with this Plan or the Disclosure
Statement.
45
<PAGE>
G. Severability
In the event that the Bankruptcy Court determines, prior to the
Confirmation Date, that any provision in the Plan is invalid, void or
unenforceable, such provision shall be invalid, void or unenforceable with
respect to the holder or holders of such Claims or Equity Interests as to which
the provision is determined to be invalid, void or unenforceable. The
invalidity, voidness or unenforceability of any such provision shall in no way
limit or affect the enforceability and operative effect of any other provision
hereof.
H. Revocation or Withdrawal of the Plan
The Debtors reserve the right to revoke or withdraw the Plan prior to
the Confirmation Date. If the Debtors revoke or withdraw the Plan prior to the
Confirmation Date, then the Plan shall be deemed null and void. In such event,
nothing contained herein shall constitute or be deemed a waiver or release of
any claims by or against the Debtors or any other party or to prejudice in any
manner the fights of the Debtors or any party in any further proceedings
involving the Debtors.
I. Binding Effect
The provisions of this Plan shall bind the Debtors, the Reorganized
Company, the Creditors, and any successor or assign including a Chapter 7 or
Chapter 11 trustee, and shall bind any person or entity asserting a Claim
against any of the Debtors or the Estate, and any person or entity asserting an
Equity Interest in any of the Debtors, whether or not the Claim or Equity
Interest is impaired Under this Plan, and whether or not such person or entity
has accepted the Plan.
46
<PAGE>
Columbus, Ohio
Dated: June 24, 1998
Gaylord Companies, Inc.
/s/ John D. Critser
-----------------------------------
By: John D. Critser
Its: President
The Cookstore, Inc.
/s/ John D. Critser
-----------------------------------
By: John D. Critser
Its: President
The Cookstore Worthington, Inc.
/s/ John D. Critser
-----------------------------------
By: John D. Critser
Its: President
47
<PAGE>
UNITED STATES BANKRUPTCY COURT
SOUTHERN DISTRICT OF OHIO
EASTERN DIVISION
In re:
GAYLORD COMPANIES, INC. : Case No. 97-60560
Joint Administered With:
GAYLORD BOOK COMPANY, : Case No. 97-60562
GAYLORD'S, INC., : Case No. 97-60561
SAWWORTH BOOK COMPANY, : Case No. 97-60563
GAYLORD ENTERPRISES, INC., : Case No. 97-60564
THE COOKSTORE, INC., and : Case No. 97-60565
THE COOKSTORE WORTHINGTON, INC.; Case No. 97-60566
: Chapter 11
Debtors. : (Judge Caldwell)
NOTICE OF ERRATA IN THE AMENDED DISCLOSURE STATEMENT AND
AMENDED PLAN OF REORGANIZATION OF GAYLORD COMPANIES, INC.,
THE COOKSTORE, INC. AND THE COOKSTORE WORTHINGTON, INC.,
DATED JUNE 24, 1998
TO: All Creditors, Equity Security Holders and Parties In Interest
On June 24, 1998, Gaylord Companies, Inc., The Cookstore, Inc. and The
Cookstore Worthington, Inc, (collectively, the "Debtors") filed an Amended Plan
of Reorganization (the "Amended Plan") and an Amended Disclosure Statement (the
"Amended Disclosure Statement'). Upon further review, the Debtors have
discovered the following errors in the Amended Disclosure Statement and Amended
Plan.
(1) Page 35 of the Amended Disclosure Statement and page 19 of the
Amended Plan, in the discussion of the treatment of Class 7
Equity Interest Holders, should be amended as follows (new text
in bold face, removed text bracketed):
<PAGE>
... the common shares of Gaylord Companies shall be
extinguished, and the holders of an Allowed Equity
Interest in Class 7 shall receive their pro rata
share of 85,777 shares of Class B Common Stock [equal
to eight percent (8%) of the number of the issued and
outstanding shares of Class A Common Stock and Class
B Common Stock of Reorganized Parent as of the
Effective Date giving effect to the exercise of the
New Warrants and before the exercise of the Financing
Warrants.]
The documents should state that the holders of Class 7 Equity
Interests will receive their pro rata shares of 85,777 shares
of Class B Common Stock. This is equal to approximately five
percent (5%) rather than eight percent (8%) of the number of
issued and outstanding shares of Class A Common Stock and
Class B Common Stock of the Reorganized Parent after the
Effective Date giving effect to the exercise of the new
Warrants and before the exercise of the Financing Warrants.
This is currently reflected at page 47 of the Amended
Disclosure Statement and page 23 of the Amended Plan.
(2) On page 9 of the Amended Plan, the definition of "New
Warrants" should state that the warrants expire October 30,
1999 rather than October 30, 1998.
(3) On page 22 of the Amended Plan, section V.E.2.(2) should read
as follows:
174,429 shares of Class A Common Stock to be
reserved until such time as the holders of the New
Warrants, the Fremont Warrants and the Individual
Warrants exercise such warrants.
(4) On page 23 of the Amended Plan section V.E.2.(3) should read
as follows:
154,951 shares of Class A Common Stock to be
reserved until such time as the Class B Common Stock
converts to Class A Common Stock pursuant to the
terms of this Plan.
2
<PAGE>
Dated: July 2, 1998
Respectfully submitted,
/s/ Daniel R. Swetnam
--------------------------------------
Daniel R. Swetnam (0011022)
Victoria E. Powers (0054589)
Schottenstein, Zox & Dunn, L.P.A.
41 South High Street, Ste. 2600
Columbus, Ohio 43215
(614) 462-2700
Case Attorneys for the Debtors
CERTIFICATE OF SERVICE
----------------------
The undersigned hereby certifies that a copy of the foregoing Notice of
Errata in the Amended Disclosure Statement and Amended Plan of Reorganization of
Gaylord Companies, Inc., The Cookstore, Inc. and The Cookstore Worthington,
Inc., Dated June 24, 1998 was served upon Nick V. Cavalieri, Esq., Arter &
Hadden, One Columbus, 10 W. Broad Street, Columbus, Ohio 43215, counsel for the
Official Committee of Unsecured Creditors, and to all creditors, equity security
holders and other parties in interest upon which the Amended Disclosure
Statement and Amended Plan dated June 24, 1998 were served, by depositing the
same with the U. S. Postal Service, regular U. S. mail, postage pre-paid, this
2nd day of July, 1998.
/s/ Daniel R. Swetnam
-----------------------------------------
Daniel R. Swetnam
3
<PAGE>
UNITED STATES BANKRUPTCY COURT
SOUTHERN DISTRICT OF OHIO
EASTERN DIVISION
In re:
GAYLORD COMPANIES, INC. : Case No. 97-60560
Joint Administered With:
GAYLORD BOOK COMPANY, : Case No. 97-60562
GAYLORD'S, INC., : Case No. 97-60561
SAWWORTH BOOK COMPANY, : Case No. 97-60563
GAYLORD ENTERPRISES, INC., : Case No. 97-60564
THE COOKSTORE, INC., and : Case No. 97-60565
THE COOKSTORE WORTHINGTON, INC.; : Case No. 97-60566
: Chapter 11
Debtors. : (Judge Caldwell)
AMENDED DISCLOSURE STATEMENT FOR AMENDED
PLAN OF REORGANIZATION OF GAYLORD
COMPANIES, INC., THE COOKSTORE, INC. AND
THE COOKSTORE WORTHINGTON, INC., DATED JUNE 24,1998
Daniel R. Swetnam (0011022)
E. James Hopple (0019298)
Victoria E. Powers (0054589)
Susan K. Cliffel (0046915)
Daniel M. Anderson (0067041)
Schottenstein, Zox & Dunn Co., LPA
41 South High Street, Suite 2600
Columbus, Ohio 43215
(614) 221-3211
Case Attorneys for Debtors
THE BANKRUPTCY COURT HAS EXPEDITED THE CONFIRMATION PROCESS. BALLOTS WITH
RESPECT TO THE PLAN MUST BE COMPLETED AND FILED WITH (i) THE CLERK OF THE UNITED
STATES BANKRUPTCY COURT FOR THE SOUTHERN DISTRICT OF OHIO, EASTERN DIVISION, 170
NORTH HIGH STREET, COLUMBUS, OHIO 43215 BY 4:00 P.M. ON JULY 8, 1998 AND SERVED
ON (ii) SCHOTTENSTEIN, ZOX & DUNN CO., LPA, 41 SOUTH HIGH STREET, SUITE 2600,
COLUMBUS, OHIO 43215, ATTENTION: VICTORIA E. POWERS SO THAT THE BALLOT IS
RECEIVED BY COUNSEL FOR DEBTORS BY 5:00 P.M. ON JULY 8,1998.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C>
I. INTRODUCTION ..................................................................................... 1
II. THE DEBTORS ...................................................................................... 5
A. History ...................................................................................... 5
B. Directors and Officers ....................................................................... 7
C. Events Leading to the Filing of the Petition ................................................. 8
D. Current Operations ........................................................................... 9
1. Financial Results ....................................................................... 9
2. Significant Chapter 11 Events............................................................ 9
a. Professionals ....................................................................... 9
b. Joint Administration ................................................................ 11
c. Pre-Petition Date Wages ............................................................. 11
d. Authorization to Enter Into the Term Sheet and Advisory Agreement ................... 12
e. Use of Cash Collateral and take out of Greefield .................................... 12
f. Fremont Financing and Amendment of Advisory Agreement ............................... 13
g. Bar Date ............................................................................ 13
h. Bookstores .......................................................................... 13
i. Leases .............................................................................. 14
E. Business Plan ................................................................................ 14
1. Sponsor and Management .................................................................. 14
2. Competition ............................................................................. 15
3. Business Strategy ....................................................................... 15
4. Store Location Strategy ................................................................. 16
5. Potential Acquisition Strategy .......................................................... 16
6. Internal Growth Strategy ................................................................ 16
7. Background of Members of the Sponsor and Management of Reorganized Company .............. 16
III. THE ESTATE
A. Assets ....................................................................................... 19
1. Cookstore Debtors ....................................................................... 19
2. Gaylord Companies ....................................................................... 20
B. Liabilities .................................................................................. 20
1. Administrative Expense .................................................................. 20
2. Secured Claims .......................................................................... 20
3. Priority Claims other than Administrative Expenses ...................................... 21
4. General Unsecured Claims ................................................................ 21
IV. SUMMARY OF THE PLAN .............................................................................. 22
A. Classification of Claims and Equity Interests ................................................ 22
A. Secured Claims ............................................................................... 22
B. Priority Claims .............................................................................. 23
C. Unsecured Claims ............................................................................. 23
D. Equity Interests ............................................................................. 23
E. Unclassified Claims .......................................................................... 23
</TABLE>
ii
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
B. Treatment of Claims and Equity Interests ..................................................... 24
1. Secured Claims .......................................................................... 24
2. Priority Claims ......................................................................... 26
3. Unsecured Claims ........................................................................ 26
4. Equity Interests ........................................................................ 27
C. Description and Treatment of Unclassified Claims ............................................. 29
1. Description of Unclassified Claims ...................................................... 29
2. Filing Unclassified Claims .............................................................. 31
D. Means for Implementation of the Plan ......................................................... 32
1. Conditions Precedent to Effectiveness of Plan ........................................... 32
2. Objections to Claims .................................................................... 33
3. Voting of Claims ........................................................................ 33
4. Nonconsensual Confirmation .............................................................. 34
5. Method of Distribution Under the Plan ................................................... 34
a. In General .......................................................................... 34
b. Distributions of Cash ............................................................... 34
c. Timing of Distributions ............................................................. 34
d. Fractional Cents .................................................................... 34
e. Fractional Shares, New Warrants, Fremont Warrants, Individual Warrants .............. 34
f. Unclaimed Distributions ............................................................. 35
g. Distributions to Equity Interest Holders as of the Record Date ...................... 35
h. Injunction .......................................................................... 35
i. Discharge of Debtors ................................................................ 36
6. Source of Funds ......................................................................... 36
7. Financing ............................................................................... 36
8. Merger of HRAC and Gaylord Companies .................................................... 37
9. Issuance of New Securities and Cancellation of Existing Securities and Agreements ....... 37
10. Operation of Business ................................................................... 38
11. The Reorganized Company ................................................................. 39
12. Breaches ................................................................................ 39
13. Pre-Payment of Allowed Claims ........................................................... 39
14. Continuation of Bankruptcy Injunction or Stays .......................................... 39
15. Reverting of Assets ..................................................................... 39
16. General Release of Liens ................................................................ 40
17. Compensation and Benefit Programs ....................................................... 40
18. Retiree Benefits ........................................................................ 40
19. Amended Bylaws and Amended Certificates of Incorporation ................................ 40
V. DISCLOSURES REQUIRED BY 11 U.S.C. 1129(a)(4) AND (5) ............................................. 41
VI. TREATMENT OF EXECUTORY CONTRACTS AND UNEXPIRED LEASES ............................................ 42
VII. FEASIBILITY ...................................................................................... 43
</TABLE>
iii
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
VIII. ALTERNATIVES TO CONFIRMATION AND CONSUMMATION OF THE PLAN
A. Sale of Individual Stores .................................................................... 44
B. Chapter 11 Liquidation ....................................................................... 44
C. Conversion to Chapter 7 ...................................................................... 44
D. Dismissal Alternative ........................................................................ 45
IX. LIQUIDATION ANALYSIS ............................................................................. 45
X. PENDING AND ANTICIPATED LITIGATION ............................................................... 46
XI. SECURITIES LAWS MATTERS .......................................................................... 47
A. Bankruptcy Code Exemptions From Registration Requirements .................................... 47
B. Initial Offer and Sale of Plan Securities .................................................... 47
C. Subsequent Transfers of Plan Securities ...................................................... 48
XII. FEDERAL TAX CONSEQUENCES ......................................................................... 50
XIII.CONFIRMATION ..................................................................................... 51
A. Confirmation Procedure ....................................................................... 51
B. Effect of Confirmation ....................................................................... 53
XIV. RISK FACTORS ..................................................................................... 54
XV. DESCRIPTION OF CAPITAL STOCK ..................................................................... 61
XVI. MERGER ........................................................................................... 64
XVII.EQUITY INCENTIVE PLAN ............................................................................ 64
XVIII.CONCLUSION ...................................................................................... 65
</TABLE>
iv
<PAGE>
EXHIBITS
Exhibit A .................Gaylord Companies, Inc.'s and Cookstore Debtors'
Amended Plan of Reorganization dated June 24, 1998
Exhibit B .................Form 10-KSB of Gaylord Companies, Inc. for the period
ending December 31, 1996
Exhibit C .................Financial Report of Cookstore Debtors for 1997
Exhibit D .................Term Sheet, Advisory Agreement and Related Documents
Exhibit E .................Schedule of Treatment of Executory Contracts and
Unexpired Leases
Exhibit F .................Projected Financial Operations of Reorganized Company
Exhibit G .................Liquidation Analysis
Exhibit H .................Merger Agreement
Exhibit I .................1998 Equity Incentive Plan
v
<PAGE>
INTRODUCTION
Pursuant to section 1125 of the Bankruptcy Code, Debtors Gaylord
Companies, Inc. ("Gaylord Companies"), The Cookstore, Inc. ("TCI") and The
Cookstore Worthington, Inc. ("TCWI") (sometimes referred to collectively as
"Debtors") furnish this Amended Disclosure Statement for Amended Plan of
Reorganization of Gaylord Companies, Inc., The Cookstore, Inc. and The Cookstore
Worthington, Inc., Dated June 24, 1998 (the "Disclosure Statement") to each
known Creditor and Equity Interest holder of Debtors for purposes of (1)
providing those entities with adequate information regarding Amended Plan of
Reorganization of Gaylord Companies, Inc., The Cookstore, Inc. and The Cookstore
Worthington, Inc., Dated June 24, 1998 (the "Plan") to make an informed judgment
concerning acceptance or rejection of the Plan, and (2) soliciting acceptances
of the Plan. A copy of the Plan is appended hereto as Exhibit A.
ALL HOLDERS OF CLAIMS AND/OR EQUITY INTERESTS WITH RESPECT TO DEBTORS
ARE ENCOURAGED TO REVIEW THE FULL TEXT OF THE PLAN AND TO READ CAREFULLY THIS
ENTIRE DISCLOSURE STATEMENT, INCLUDING ALL EXHIBITS. PARTICULAR ATTENTION SHOULD
BE GIVEN TO THOSE PROVISIONS OF THE PLAN IMPAIRING THE RIGHTS OF CREDITORS AND
EQUITY INTEREST HOLDERS.
DEBTORS BELIEVE THAT THE PLAN IS IN THE BEST INTERESTS OF CREDITORS.
ALL CREDITORS ENTITLED TO VOTE ON THE PLAN ARE URGED TO VOTE IN FAVOR OF THE
PLAN. CREDITORS ENTITLED TO VOTE ON THE PLAN SHOULD HAVE RECEIVED A BALLOT IN
THE SOLICITATION PACKAGE CONTAINING THIS DISCLOSURE STATEMENT. EACH SUCH
CREDITOR WHO WISHES TO VOTE ON THE PLAN SHOULD (1) COMPLETE THE BALLOT, AND (2)
MAIL THE ORIGINAL TO:
CLERK OF THE UNITED STATES BANKRUPTCY COURT
SOUTHERN DISTRICT OF OHIO, EASTERN
DIVISION 170 NORTH HIGH STREET
COLUMBUS, OHIO 43215
1
<PAGE>
AND A COPY TO:
SCHOTTENSTEIN, ZOX & DUNN
41 SOUTH HIGH STREET
COLUMBUS, OHIO 43215
ATTENTION: VICTORIA E. POWERS, ESQ.
IN ORDER FOR A BALLOT TO BE COUNTED, IT MUST BE RECEIVED BY THE CLERK
ON OR BEFORE JULY 8, 1998. BALLOTS RECEIVED AFTER THAT DATE WILL NOT BE COUNTED.
ONLY BALLOTS RECEIVED BY HAND OR MAIL DELIVERY WILL BE COUNTED. BALLOTS RECEIVED
BY FACSIMILIE WILL NOT BE COUNTED. A CREDITOR NEED NOT CAST A BALLOT TO RECEIVE
A DISTRIBUTION UNDER THE PLAN.
ANY BALLOT THAT IS NOT EXECUTED WILL BE CONSIDERED NULL AND VOID AND
WILL NOT BE COUNTED. ANY EXECUTED BALLOT IN WHICH BOTH THE ACCEPTANCE AND
REJECTION BOXES ARE CHECKED SHALL BE DEEMED TO CONSTITUTE AN ACCEPTANCE OF THE
PLAN. ANY EXECUTED BALLOT THAT DOES NOT INDICATE EITHER AN ACCEPTANCE OR
REJECTION OF THE PLAN SHALL ALSO BE DEEMED TO CONSTITUTE AN ACCEPTANCE OF THE
PLAN.
THE STATEMENTS IN THIS DISCLOSURE STATEMENT ARE MADE AS OF THE DATE
HEREOF UNLESS ANOTHER TIME IS EXPRESSLY SPECIFIED HEREIN. THIS DISCLOSURE
STATEMENT MAY NOT BE RELIED UPON FOR ANY PURPOSE OTHER THAN TO DETERMINE WHETHER
TO ACCEPT OR REJECT THE PLAN. NOTHING CONTAINED IN THIS DISCLOSURE STATEMENT
SHALL CONSTITUTE, OR BE DEEMED TO CONSTITUTE, ADVICE ON THE TAX OR OTHER LEGAL
EFFECTS OF ANY REORGANIZATION ON CREDITORS OR EQUITY INTEREST HOLDERS IN
CONNECTION WITH SUCH REORGANIZATION.
THE INFORMATION IN THIS DISCLOSURE STATEMENT IS INCLUDED FOR THE
PURPOSE OF SOLICITING ACCEPTANCE OF THE PLAN. IT IS NOT TO BE CONSTRUED AS
ADMISSIONS OR STIPULATIONS, BUT RATHER AS STATEMENTS MADE IN SETTLEMENT
NEGOTIATIONS. THE INFORMATION WAS PROVIDED BY DEBTORS. UNLESS OTHERWISE STATED
HEREIN, THE ASSET VALUES CONTAINED IN THIS DISCLOSURE STATEMENT WERE CALCULATED
BY DEBTORS' PRESIDENT OR DEBTORS' CHIEF FINANCIAL OFFICER. REPRESENTATIVES OF
2
<PAGE>
HRAC HAVE PREPARED THE ATTACHED FINANCIAL FORECASTS BASED UPON HRAC'S OBJECTIVES
FOR THE REORGANIZED COMPANY AND HRACS ESTIMATES OF ITS FUTURE BUSINESS. DEBTORS'
COUNSEL IS UNAWARE OF ANY ERRORS OR OMISSIONS WITH RESPECT TO THE CALCULATIONS
OR FORECASTS. HOWEVER, DEBTORS' COUNSEL HAS NOT UNDERTAKEN ANY SEPARATE ANALYSIS
OF DEBTORS' PRESENT OR FUTURE FINANCIAL POSITION OR OTHERWISE VERIFIED THE
INFORMATION CONTAINED IN THIS DISCLOSURE STATEMENT.
This Disclosure Statement was conditionally approved by order of the
Court entered June 24, 1998. The Court will consider final approval of this
Disclosure Statement at the Confirmation Hearing. Approval of this Disclosure
Statement does not, however, constitute a determination by the Court as to the
fairness or merits of the Plan.
This Disclosure Statement and the ballot are the only documents
authorized by the Court to be used in connection with the solicitation of
acceptances or rejections of the Plan. Except as included in this Disclosure
Statement, no representations about Debtors or the Reorganized Company,
including without limitation, the value of property, Creditor Claims, or future
business operations, are authorized by the Court. This Disclosure Statement and
the Plan are operative only as to the Debtors. The Debtors' Affiliates are
proceeding pursuant to that certain Plan of Reorganization of United Magazine
Company with regard to the Debtor's Affiliates dated April 16, 1998 (May 1, 1998
Modification).
IF THE PLAN IS CONFIRMED, IT WILL BE BINDING ON ALL CREDITORS AND
EQUITY INTEREST HOLDERS OF DEBTORS, REGARDLESS OF WHETHER THE CREDITOR OR EQUITY
INTEREST HOLDER HAS VOTED FOR OR AGAINST THE PLAN OR FILED A PROOF OF CLAIM OR
EQUITY INTEREST.
THE COURT HAS SCHEDULED A HEARING ON CONFIRMATION OF THE PLAN FOR
10:00 A.M. ON JULY 10, 1998 BEFORE THE HONORABLE CHARLES M. CALDWELL, UNITED
STATES BANKRUPTCY JUDGE, UNITED STATES BANKRUPTCY COURT, AT 170 NORTH HIGH
STREET, COLUMBUS, OHIO. NOTICE SETTING FORTH THE TIME AND DATE OF THE
CONFIRMATION HEARING HAS BEEN DISTRIBUTED WITH THIS DISCLOSURE STATEMENT. THE
3
<PAGE>
CONFIRMATION HEARING MAY BE ADJOURNED FROM TIME TO TIME BY THE COURT WITHOUT
FURTHER NOTICE EXCEPT FOR AN ANNOUNCEMENT OF THE ADJOURNED DATE MADE AT THE
CONFIRMATION HEARING.
ANY OBJECTION TO CONFIRMATION OF THE PLAN MUST BE MADE IN WRITING AND
SPECIFY IN DETAIL THE NAME AND ADDRESS OF THE OBJECTOR, ALL GROUNDS FOR THE
OBJECTION AND THE AMOUNT OF THE CLAIM OR SIZE AND TYPE OF EQUITY INTEREST IN
GAYLORD COMPANIES HELD BY THE OBJECTOR. ANY SUCH OBJECTION MUST BE FILED WITH
THE CLERK OF THE COURT AND SERVED SO THAT IT IS RECEIVED BY THE FOLLOWING
PARTIES ON OR BEFORE JULY 8, 1998 AT 4:00 P.M.:
Schottenstein, Zox & Dunn, Co. LPA
Attorneys for Debtor
41 South High Street
Columbus, Ohio 43215-6106
Attn: Daniel R. Swetnam, Esq.
Arter & Hadden
Attorneys for Creditors' Committee
One Columbus
10 W. Broad Street
Columbus, Ohio 43215-3422
Attn: Nick V. Cavalieri, Esq.
Hahn & Hessen LLP
Attorneys for HRAC
350 Fifth Avenue
New York, New York 10118
Attn: Jeffrey L. Schwartz, Esq.
Office of the United States Trustee
170 North High Street, 2nd Floor
Columbus, Ohio 43215
4
<PAGE>
II. THE DEBTORS
A. History
TCI and TCWI (the "Cookstore Debtors") are wholly owned subsidiaries
of Gaylord Companies. The Cookstore Debtors are specialty retailers of quality
cookware and serving equipment, cooking accessories and certain select food
products as well as cookbooks and food-related publications (the "Cookstores").
On the Petition Date the Cookstores were located in six regional
retail malls in Ohio, Indiana and Kentucky*. The Cookstores are each
approximately 3,300 square feet in size, with each offering approximately 5,000
different types of products, including products from over 200 vendors. The
Cookstores offer product lines in twelve distinct categories, including
accessories, bakeware, books, cookware, cutlery, electronics, food, furniture,
gadgets, gifts, tableware and textiles.
- ---------------------------
* Two stores are to be closed by August 5, 1998, see infra.
5
<PAGE>
The following table sets forth information relating to each of the
Cookstore Debtors:
<TABLE>
<CAPTION>
Date of
Debtor Incorporation Store Location Store Opening
====================================================================================================================
<S> <C> <C> <C>
The Cookstore, Inc. 1981 Lane Avenue Shopping October 1981
Center, Columbus, Ohio
Summit Mall December 1994
Akron, Ohio
*Castleton Square Mall December 1996
Indianapolis, IN
*Florence Mall December 1996
Florence, KY
The Cookstore 1993 Worthington Mall, December 1993
Worthington, Inc. Worthington, Ohio
The Mall at November 1994
Fairfield Common,
Beavercreek, OH
</TABLE>
- ---------------------------
* To be closed by August 5, 1998.
In the Cookstores, the Debtors present merchandise in what the Debtors
believe is an upscale and fashionable setting. A full range of product is
displayed and stocked on the retail floor. Merchandise is arranged by category
for shopping convenience and every item is tagged with its current retail price.
Feature displays are arranged throughout the store emphasizing seasonal products
or particular themes.
As noted above, the Cookstore Debtors are wholly owned subsidiaries of
Gaylord Companies. Gaylord Companies' stock became publicly traded stock on
November 7, 1995. Until late 1997, Gaylord Companies filed periodic reports and
statements with the Securities and Exchange Commission. Attached hereto as
Exhibit B is a copy of Gaylord Companies, Inc.'s Form 10-KSB for the period
ending December 31, 1996. This Form 10-KSB contains additional information about
the Cookstore Debtors and Gaylord Companies. Other reports filed by Gaylord
Companies are also available for public inspection. There have been material
changes to Gaylord Companies' business since Exhibit B was filed with the
Securities and Exchange Commission, including but not limited to those changes
described in this Disclosure Statement.
6
<PAGE>
B. Directors and Officers
On the Petition Date, the Debtors' Boards of Directors in each case
consisted of George Gaylord, John Gaylord and John D. Critser. In addition,
Martin Licht was a Director of Gaylord Companies. John Gaylord served as
Chairman of each of the Debtors. George Gaylord served as Senior Chairman. At
present, each of the Debtors has three Directors: David E. Danovitch, John D.
Critser and Greg E. Dukoff.
David E. Danovitch is a Director of Gaylord Companies, TCI and TCWI.
He became a Director as of May 1, 1998, upon the termination of John Gaylord as
an officer of the Debtors and the resignation of John Gaylord as a Director of
the Debtors. He is a Director of HRAC and a principal of Cambridge. Mr.
Danovitch is serving as interim Chief Financial Officer until a permanent Chief
Financial Officer of the Debtors is selected.
John D. Critser is President, Vice President, Treasurer and a Director
of Gaylord Companies, TCI and TCWI. He served as President of Gaylord Companies,
TCI and TCWI from November 1993 through May 1998. Mr. Critser is a first cousin
of John Gaylord, Mr. Critser is presently subject to an employment agreement
with Gaylord Companies which will be rejected prior to or at the Confirmation
Date. Mr. Critser has agreed to serve in a transitional capacity after the
Confirmation Date, at which time the need for his services will be evaluated
consistent with the needs and means of the Reorganized Company.
Greg E. Dukoff is Secretary and a Director of Gaylord Companies, TCI
and TCWI. He became a Director as of May 1, 1998 upon the termination of John
Gaylord as an officer of the Debtors and upon the resignation of John Gaylord as
a Director of the Debtors. Mr. Dukoff is being compensated by the Debtors 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
after the Confirmation Date consistent with the needs of the Reorganized
Company. Mr. Dukoff is President and a Director of HRAC.
Mr. Critser and Mr. Dukoff are presently shareholders of Gaylord
Companies. Their Equity Interests are more fully described below.
It is anticipated that the composition of the Board of Directors will
change on the Effective Date as more fully described below.
7
<PAGE>
C. Events Leading to the Filing of the Petition
The specialty retail kitchenware and cookware business is highly
competitive. The Cookstore Debtors compete against a wide variety of stores,
including department and speciality stores, as well as mail order catalogs. The
Debtors' primary national competitors for specialized kitchen products are
Williams-Sonoma, Inc. and Lechters, Inc. In addition, the Debtors compete with
other well-known stores such as Linens & Things, Bed Bath & Beyond, and Bath and
Bodyworks. Many of these competitors have greater financial, distribution,
advertising and marketing resources than do the Debtors.
The following chart compares certain performance levels at the
Cookstores over two years:
1996 1997
---- ----
Sales $3,497,940 $3,724,157
Cost of Goods Sold, including store 1,835,709 2,018,684
occupancy and delivery costs
Gross Profit 1,662,231 1,705,473
Store Operating Expense 1,065,545 1,614,166
Store Level Income $ 596,686 $ 91,307
This chart does not include costs for Equity Interest, administrative
overhead or depreciation and amortization. When such items are included, the
Debtors incurred substantial losses in each of these years. Attached as Exhibit
C is a statement reflecting financial performance of the Cookstore Debtors in
1997. More detailed information about the Cookstore Debtors' operations in 1996
and 1997 is set forth in Exhibits B and C.
In April, 1997, Gaylord Companies entered into a Loan and Security
Agreement (as amended, the "Greenfield Loan Agreement") with Greenfield. Under
the Greenfield Loan Agreement, Greenfield advanced the sum of $350,000 pursuant
to a Term Loan Note and agreed to advance up to an additional $1,000,000
pursuant to a Revolving Credit Note. The Greenfield Loan Agreement was
guaranteed by each of the Cookstore Debtors, by Debtors' Affiliates Gaylord Book
Company, Gaylord's, Inc., Sawworth Book Company and Gaylord Enterprises, Inc.
8
<PAGE>
(collectively, the "Bookstore Debtors"), as well as by John Gaylord personally.
The financing with Greenfield matured by its own terms on October 20, 1997.
Throughout the summer and fall of 1997 Gaylord Companies had hoped to
raise additional funds through one or more placements of securities. At the same
time, several suppliers had stopped shipping merchandise, and the Cookstore
Debtors were in arrears on most of their leases. Several landlords had commenced
actions to recover possession of the leased premises. Unfortunately, Gaylord
Companies was not able to raise additional funds. On November 3, 1997,
Greenfield commenced an action in the Franklin County Court of Common Pleas
seeking, inter, alia, the appointment of a receiver for Gaylord Companies, the
Debtors and the Bookstore Debtors. Attempts to resolve matters with Greenfield
were unsuccessful. Accordingly, Gaylord Companies and each of its subsidiaries
commenced their Chapter 11 cases on November 13, 1997.
D. Current Operations
1. Financial Results
Since the Petition Date, the Cookstore Debtors have continued to
operate the Cookstores.
In a normal year, approximately 30% of the Cookstore Debtors' annual
sales will occur in November and December. However, because certain suppliers
had already stopped shipments, and because the Cookstore Debtors did not have
cash on hand, as of the Petition Date the inventory levels were not at the
desired levels. Christmas 1997 sales suffered accordingly.
Since January, 1998, the Cookstore Debtors' sales have continued to
suffer from a lack of inventory. The Cookstore Debtors project that assuming
confirmation of the Plan, same store sales in 1998 will be slightly below 1997
levels.
2. Significant Chapter 11 Events
a. Professionals
The Debtors engaged the law firm Schottenstein, Zox & Dunn ("SZD") as
their counsel in these cases. By Order Approving Application for Appointment of
Counsel to Debtors and Debtors-In-Possession entered January 16, 1998, the Court
approved the retention of SZD. SZD had no prior connection with the Debtors.
9
<PAGE>
Under the Order Authorizing Retention of SZD, the Debtors and the
Bookstore Debtors have made payments to be held as a retainer, and SZD is
authorized to apply 85% of fees and 100% of expenses on a monthly basis. As of
March 31, 1998, SZD had accrued time and expenses totaling $206,599.87, and had
received the total sum of $195,950. 10 from the Debtors and Bookstore Debtors.
From April 1, 1998 forward, SZD has kept a separate record of time and expenses
for the Debtors and the Bookstore Debtors. SZD anticipates that its time and
expenses, for April 1, 1998 until the Confirmation Date in the Debtors Case will
be approximately $80,000. SZD has received the sum of $10,000 as an additional
retainer.
The Debtors also engaged the accounting firm Longanbach, Giusti, Kuck &
Hornberger ("LGKH') to perform certain limited services. The retention was
approved by Order Approving Application of Debtors for Authority to Employ
Longanbach, Giusti, Kuck & Hornberger as Accountants entered January 16, 1998.
In December, 1997, an Official Committee of Unsecured Creditors (the
"Committee") was appointed. At the outset, the Committee, which includes
creditors of the Bookstore Debtors, was comprised of the following entities:
Ralph C. Liebert Family Trust #2, FBD Michelle M. Liebert; Glimcher Properties,
Limited Partnership; United Magazine Company; Gator Forest Partners; Random
House; Villaware Mfg. Co.; Portmeirion USA and The Map Store, Inc. As of the
date of this Disclosure Statement, the Committee consists of Glimcher
Properties, Limited Partnership; Gator Forest Partners and Villaware
Manufacturing Co. The Committee engaged the law firm of Arter & Hadden as its
counsel. The retention was approved by Order Granting Application for
Appointment of Counsel for The Official Unsecured Creditors' Committee of
Debtors and Debtors-In-Possession entered January 16, 1998.
The Debtors and the Bookstore Debtors have made payments to A&H to be
held as a retainer, and A&H is authorized to apply 85% of fees and 100% of
expenses on a monthly basis. As of March 31, 1998, A&H had accrued time and
expenses totaling $__________ and had received the total sum of $__________ from
the Debtors and the Bookstore Debtors. From April 1, 1998 forward, A&H has kept
a separate record of time and expenses for the Debtors and the Bookstore
Debtors. A&H anticipates that its time and expenses, for April 1, 1998 until the
Confirmation Date for the Debtors will be approximately $__________ A&H has
received the sum of $4,500 as an additional retainer since April 1, 1998.
10
<PAGE>
Below is a summary of the professionals that have been retained by
order of the Court, the amount of any retainers paid to these professionals to
date, the fees and expenses incurred through March 31, 1998, and an estimate of
the amount of fees and expenses that will be incurred by these professionals
from April 1, 1998 through the Confirmation Date. The estimated fees and
expenses represent these professionals' best estimate and the actual fees and
expenses incurred by these professionals may be higher or lower.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
Name Retained by Description of Fees and Retainer Paid Estimated Fees Retainer Paid
Services Expenses Through March and Expenses Since April
Incurred 31, 1998 Incurred from 1, 1998
Through March April 1, 1998
31, 1998 Through the
Confirmation
Date
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Schottenstein, Debtors Bankruptcy $206,599.87 $195,950.10 $80,000.00 $10,000.00
Zox & Dunn Co., Counsel
LPA
- -----------------------------------------------------------------------------------------------------------------------
Longanbach, Debtors Accounting $ 9,613.85 $ 7,500.00 $2,500.00 $ 0
Giusti Kuck &
Homberger
- -----------------------------------------------------------------------------------------------------------------------
Arter & Hadden Creditors' Bankruptcy $ __ $ __ $ __ $4,500.00
Committee Counsel
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
b. Joint Administration
On November 14, 1997, the Debtors obtained an order of the Court
authorizing their separate chapter 11 cases to be jointly administered as the
Case for procedural purposes only.
c. Pre-Petition Date Wages
On November 14, 1997, the Court entered an Order Authorizing Debtor to
Pay Pre-Petition Employee Compensation, Related Taxes and Benefits, to Reimburse
Pre-Petition Employee Business Expenses and to Maintain Payroll Account and
Payroll Services. As a result, employees were paid (or reimbursed expenses) up
to $4,000 per employee for pre-petition services, which services were rendered
generally within the two week period prior to the filing date. The total amount
paid by Debtors was approximately $25,000.
11
<PAGE>
d. Authorization to Enter Into the Term Sheet and Advisory Agreement
On February 26, 1998, the Debtors filed a Motion to Enter Into and
Perform a Term Sheet with Cambridge. Following a hearing on March 5, 1998, the
Court entered an Order granting the Motion. The Term Sheet was negotiated by and
among Cambridge and the Debtors and the Committee and provided the foundation
for the Plan. In general terms, the Term Sheet provides for the sale of the
Debtors as going concerns to Cambridge or its designee. Pursuant to the terms of
the Term Sheet, if certain conditions in the Term Sheet are not satisfied, then
Cambridge may, at its option, terminate all of its obligations under and in
connection with the Term Sheet.
The Term Sheet originally envisioned that Greenfield would remain a
lender to the Debtors through the Effective Date and that Cambridge and/or its
designee or affiliate would provide advisory services to the Debtors pursuant to
an Advisory Agreement. However, it became apparent to the Debtors and to
Cambridge that it was in the best interests of the Debtors' Estates for
Greenfield to be paid out of its loan facility with respect to the Debtors prior
to the Effective Date and for HRAC, an affiliate of Cambridge, to assume a more
active advisory role in the business of the Debtors 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 the
Greenfield Allowed Secured Claim and induce Greenfield to enter into a
termination and waiver of all claims against the Debtors. 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) take out Greenfield and (ii) provide the Cookstore Debtors with
sufficient working capital, the Court authorized Cambridge or its designees to
purchase participation interests in the Fremont Financing of not less than
$500,000 or more than $1,000,000. These participants now comprise the Class 2
and Class 3 claimants under the Plan, whose treatment is more particularly
described below.
A copy of the Term Sheet, the Advisory Agreement as amended, and
related documents are attached hereto collectively as Exhibit D.
e. Use of Cash Collateral and Release by Greenfield
Through a series of Motions and Orders, at the inception of the cases
the Debtors were authorized to continue their use of cash collateral (as defined
at Section 363(a) of the Bankruptcy Code) in which both the Debtors and
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<PAGE>
Greenfield claimed an interest. As the cases proceeded, it became clear that the
Debtors would be unable to survive utilizing cash collateral alone. Accordingly,
as noted above, after executing the Term Sheet Agreement, representatives of
Cambridge sought and obtained Chapter 11 Financing for the Debtors through
Fremont, an asset-based lender. As part of such Chapter 11 Financing, the
Debtors' obligations to Greenfield were satisfied and Greenfield released its
claims and liens against the Debtors. The Fremont Financing is more particularly
described below.
f. Fremont Financing and Amendment of Advisory Agreement
On April 8, 1998, the Cookstore Debtors moved for authority to enter
into and perform a commitment letter for DIP Financing with Fremont. An Interim
Order authorizing the Cookstore Debtors to obtain such financing was entered by
the Court on April 16, 1998. Final authority was granted by order dated May 6,
1998. Under the terms of the financing, Fremont and the Cookstore Debtors
entered into an asset-based revolving credit facility secured by all property of
the Debtors. Greenfield's claims against those entities were satisfied under the
Fremont Financing and its claims released. As the amount necessary to satisfy
Greenfield and provide the Cookstore Debtors with sufficient working capital was
greater than Fremont was willing to lend on the available collateral, HRAC and
the Individual Junior Participants purchased junior participation in the Fremont
Financing. Under the Proposed Plan, Fremont is treated as a Class I claimant;
HRAC and the Individual Junior Participants are treated as Class 2 and 3
claimants, respectively.
g. Bar Date
By order dated December 1, 1997, the Court entered an Order fixing
March 17, 1998 as the last day for filing proofs of claim or interest with
respect to Unsecured Claims. The bar date for governmental entities to file
proofs of Claim was May 12, 1998.
h. Bookstores
As reflected in the Term Sheet, Cambridge had no interest in the
Bookstore Debtors, as a result, the creditors of the Bookstore Debtors
negotiated a separate plan of reorganization for those entities. However, as a
function of the Debtors' operations, certain intercompany claims, both
pre-and-post petition, have arisen in the ordinary course of business. As a
result the Cookstore Debtors and the Bookstore Debtors entered into a
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<PAGE>
Stipulation and Order approved by the Court on May 4, 1998. Under the
Stipulation, the parties waived any pre-petition intercompany claims and
reserved their respective rights as to administrative claims, which they agreed
to resolve in good faith. In any event, the Debtors believe the amount of such
intercompany claims is not substantial.
i. Leases
After Court approval of the Term Sheet and Advisory Agreement, HRAC and
the Debtors sought to renegotiate certain provisions of the Debtors' Leases.
Negotiations regarding two locations, Florence, Kentucky and Indianapolis,
Indiana were unsuccessful and those leases were rejected by Order of the Court
dated May 6, 1998 and a Modified Agreed Order dated June 11, 1998. In addition,
it is anticipated that the lease relating to the Debtors' headquarters location
will be rejected prior to the Confirmation Date.
E. Business Plan
1. Sponsor and Management
Cambridge Holdings, L.L.C. ("Cambridge" or the "Sponsor") has agreed to
sponsor the Debtors' plan. Through the acquisition and integration of various
retail companies and related businesses in markets throughout the United States,
Cambridge hopes that the Reorganized Company will have a substantial position in
the high-end cookware and related markets.
Cambridge is a merchant banking firm headquartered in New York City. It
specializes in working with companies in misunderstood or neglected industries
and misunderstood or improperly financed asset classes. For example, during
1996-1997, Cambridge raised approximately $1.5 billion to acquire assets and
operating entities in the shipping (primarily gas and oil transport) industry.
These acquisitions were financed through operating companies and structures
similar to those contemplated in this transaction.
In addition to capital, Cambridge provides services to entities in
which it or its principals have an interest, such as management of the
acquisition process, balance-sheet management (e.g. securitization, access to
capital markets - debt and equity) and management of the public offering
process. In addition to Mr. Danovitch, who will continue as a Director, on the
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<PAGE>
Effective Date several principals of Cambridge will assume board positions of
the Reorganized Company and will maintain an active role in its strategic,
financial, and related planning activities.
Cambridge anticipates the following principals will be involved in the
Reorganized Company in the respective capacities described in paragraph 7 below:
David E. Danovitch; Donald Jackson, Cambridge's President and Chief Operating
Officer with overall responsibility for its investment banking activities; and
George Lucaci, Vice Chairman of Cambridge, in charge of all capital
markets-related activities. Gerald Czarnecki, a veteran general manager and
corporate turnaround specialist, will serve as Chairman of the Reorganized
Company. Thomas Tuttle, the President of Global Strategic Holdings, Ltd., an
investment fund that has invested in previous Cambridge-sponsored transactions
(and that is the holder of the GEM Debenture) will serve as a Director of the
Reorganized Company.
Cambridge will have an advisory contract in substance comparable to the
existing HRAC Advisory Agreement (the precise terms of which are still to be
determined), with the Reorganized Company for a minimum period of the lesser of
three years or until the Reorganized Company has sustained a market
capitalization of at least $150 million for at least three months. It is
anticipated that under the advisory contract Cambridge will receive $20,000 per
month, with payments to accrue until such time as the Reorganized 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.
2. Competition
Current competitors in the target market segment include discount
stores, department stores, other gourmet specialty store chains and franchised
specialty stores, as well as mail order and internet sales. There are
significant competitors, many of whom will be better capitalized than the
Reorganized Company.
3. Business Strategy
The Reorganized Company's goal is to become a specialty chain operation
selling kitchenware to the retail consumer throughout the United States. The
concept is that of a store that sells tools for serious cooks. The Reorganized
Company will endeavor to provide the consumer with a wide assortment of products
while focusing on better quality items. It will endeavor to achieve the status
15
<PAGE>
of a national chain through a combination of acquisitions and internal growth
through the opening of new store locations and franchising.
4. Store Location Strategy
To reach target customers and an evolving customer base, the
Reorganized Company will seek to locate its stores in major shopping areas that
offer an abundance of customer traffic. To date, the Sponsor believes that the
best locations have been in regional malls with major store anchors, surrounded
by single family homes, preferably in high income areas. The Reorganized
Company's internal growth expansion plans are to enter markets where there is no
direct, specialty store competitor so in most cases the Reorganized Company
opens the first store of its kind in the market.
5. Potential Acquisition Strategy
Initially, the Reorganized Company expects to grow through acquisition
of other chains of retail cookstores. Although they have commenced preliminary
negotiations with some potential acquisition candidates, and HRAC has executed a
non-binding term sheet with an entity which owns and/or franchises in excess of
forty stores, at this time the Debtors have no binding agreements with any such
candidates, and there can be no assurance they will complete any proposed
acquisitions.
6. Internal Growth Strategy
Although it is anticipated that the early phase growth will be
primarily effected through acquisition of existing chains, the Reorganized
Company also plans to open an additional 10-15 stores in the year 1999. The
stores will be opened either in existing markets or new markets with no category
competition. In addition, the Sponsor intends to actively assist the Reorganized
Company to pursue franchising of additional locations.
7. Background of Members of the Sponsor and Management of Reorganized
Company as of the Effective Date.
David E. Danovitch, Managing Director, Cambridge Holdings. As described
earlier, Mr. Danovitch is currently serving as Director and interim Chief
Financial Officer of the Debtors. On the Effective Date, he will continue to
serve as a Director and interim Chief Financial Officer until a permanent CFO is
selected. Mr. Danovitch is responsible for Cambridge's principal-based and
16
<PAGE>
leveraged finance activities outside of the shipping and liquid assets areas.
Prior to joining Cambridge, he was a principal of Snowden Capital, Inc., a New
York City-based investment banking and direct investment firm. From 1993-1994,
he was a member of the new senior management team at IBM, serving as -the chief
of staff to the IBM Senior Vice President responsible for implementing the
company's worldwide downsizing, refocusing, and re-engineering. Between 1990 and
1993, Mr. Danovitch was with the law firm of Jones, Day, Reavis & Pogue. From
1988 to 1990, he was an executive officer of the National Council of Savings
Institutions. From 1986 to 1988, he was at the First National Bank of Boston.
Members of Mr. Danovitch's family are partners in a partnership that will be a
shareholder of the Reorganized Parent.
Dona1d J Jackson, President & Chief Operating Officer, Cambridge
Holdings. Mr. Jackson will serve as a Director of the Reorganized Company. Mr.
Jackson has over thirteen years of experience in the financial markets and is
Cambridge's chief operating officer. Prior to joining Cambridge, he was a
founder and the former President of RiverBank Securities, a small broker-dealer
based in New York City. Mr. Jackson's financial background is in institutional
fixed income sales and distribution and fixed income arbitrage. Prior to forming
RiverBank in 1995, Mr. Jackson was a private investor. He started his career at
Salomon Brothers in 1984 where he developed his expertise in fixed income
markets. Mr. Jackson has also held managerial positions at Prudential Securities
Inc., Union Bank of Switzerland, and Nomura Securities International.
George P. Lucaci, Vice Chairman, Cambridge Holdings. Mr. Lucaci will
serve as a Director of the Reorganized Company. Mr. Lucaci is the former Chief
Executive Officer of RiverBank Securities, LLC, and has been in the global fixed
income markets for over 18 years in trading, sales, and finance. He has held
management and line positions at Citibank, Merrill Lynch, and Nomura Securities
as a foreign exchange and arbitrage trader, mortgage product manager and head of
U.S. fixed income sales. He directs all of Cambridge's capital market
activities. At Merrill Lynch, he was responsible for the distribution of all
generic and derivative mortgage products for 16 offices nationwide.
Gerald M. Czarnecki, Chairman - The Dellennium Group, Inc., Mr.
Czarnecki will serve as Chairman of the Board of the Reorganized Company. From
September 1994-November 1995, Mr. Czarnecki was President & COO of UNC
17
<PAGE>
Incorporated, a diverse aviation manufacturing and services concern. Between
April 1993-May 1994, he was IBM Senior Vice President in charge of the
reorganization, reengineering, and right-sizing of the diversified computer
company. Between October 1988-April 1993, he was part of an investor group
headed by former Treasury Secretary William E. Simon, with specific
responsibility for overseeing the affairs of HonFed Bank, a $3 billion bank
located in Hawaii.
Thomas Tuttle, President -Gem Investment Advisors, Inc. Mr. Tuttle will
serve as Director of the Reorganized Company. He is currently the President of
GEM Investment Advisors, Inc., a New York based investment advisory firm, which
itself and through its affiliates maintains substantial investment stakes in a
number of public and private companies including; Sun Cut Floral Network, Inc.,
Home Retail Acquisition Corp., Austin Computer Systems, Welder-Heyer Energy I
and 2d Interactive. Prior to forming GEM Investment Advisors, Mr. Tuttle worked
for Morgan Stanley, ultimately resigning as the Indonesian Country Manager. He
received his undergraduate degree from Princeton University and graduated as a
Baker Scholar and recipient of the Henry Ford II and Thomas and Edna Wolfe Award
from-the Harvard Business School.
Greg E. Dukoff, Principal - CH Equity Partners, L.P., a private equity
partnership in the process of formation. Mr. Dukoff will continue to serve as
Secretary of Gaylord Companies, TCI and TCWI. He has formerly held senior
management positions with ABN AMRO Bank and Prudential Securities. Mr. Dukoff is
an officer of HRAC, is an existing shareholder of Gaylord Companies and will be
a shareholder in Reorganized Parent. In addition, members of Mr. Dukoff's family
are partners in a partnership that will be a shareholder of Reorganized Parent.
Mr. Dukoff will not be a Director of the Reorganized Company on and after the
Effective Date.
John D. Critser, President - Gaylord Companies, Inc. Mr. Critser has
been President of Gaylord Companies since its inception in July 1994 and has
been President of each of its subsidiaries since November 1993. Prior to joining
the Debtors in July 1993, Mr. Critser was Vice President of Store Operations for
Eckerd Vision Group, a division of the Eckerd Corporation. Mr. Critser joined
Eckerd Corporation in 1983 as an operations manager and served as a Vice
President of the Eckerd Vision Group since February 1991. Mr. Critser is
presently subject to an employment agreement with Gaylord Companies which will
be rejected prior to or at the Confirmation Date. Mr. Critser has agreed to
18
<PAGE>
serve in a transitional capacity after the Confirmation Date, at which time the
need for his services will be evaluated consistent with the needs and means of
the Reorganized Company. Mr. Critser will not be a Director of the Reorganized
Company on and after the Effective Date.
HRAC and each of the Directors, with the exception of Mr. Dukoff, is an
affiliate of Cambridge. After Confirmation, the Reorganized Company's board of
directors will be divided into three classes, with each class of directors to
serve three-year staggered terms (after their initial terms). Mr. Jackson will
be elected as a Class I director for an initial one-year term expiring in 1999.
Messrs. Lucaci and Danovitch will be elected as Class II directors for an
initial two-year term expiring in 2000. Messrs. Tuttle and Czarnecki will be
elected as Class III directors for an initial three-year term expiring in 2001.
III. THE ESTATE
A. Assets
1. Cookstore Debtors
The Cookstore Debtors' Schedules state that the inventory held by the
Cookstore Debtors, as of the Petition Date, had an aggregate value of
approximately $1,024,500. Excluding supplies and "RTV' inventory, the Cookstore
Debtors' Schedules showed other assets as of the Petition Date aggregating
approximately $332,000 (for computer equipment, furniture and fixtures, and
leasehold improvements). Except with respect to ongoing operations, however,
these assets are of little or no value. Other assets as of the Petition Date
include a registered trademark for "The Cookstore" as well as possible proceeds
of Avoiding Actions. The value of the registered trademark is unknown. The
Debtors have not yet completed an analysis of possible Avoiding Actions, and are
unaware of any significant possible preference actions pursuant to section 547
of the Bankruptcy Code. The Debtors have made no determination at this time as
to whether they will assert Avoiding Actions against any party.
The Cookstore Debtors own no real estate. All locations are operated
under leases with varying maturity dates. The leases do not have economic value
in and of themselves.
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<PAGE>
2. Gaylord Companies
As the parent company, Gaylord Companies held no inventory as of the
Petition Date. The schedules list Gaylord Companies' total assets as about
$283,000. On the Petition Date, Gaylord Companies had close to $143,000 in cash,
accounts receivable of just over $4,000, approximately $26,000 in computer
equipment, and approximately $90,000 in prepaid consulting, legal and financial
expenses. The balance of Gaylord Companies' assets was comprised of supplies
($2,600), furniture and fixtures ($1,300), the cash value of insurance policies
($11,000), and a lease deposit ($2,900). In addition, the Gaylord Companies was
the owner of each of the subsidiaries and was party to a license agreement with
Little Professor Book Company, which is now an asset of the Bookstore Debtors.
These items were of an unknown value.
B. Liabilities
The following is an estimate of the Debtors' liabilities. Except for
Administrative Expenses, the liabilities are stated as of the Petition Date.
1. Administrative Expense
The bankruptcy proceedings of Gaylord Companies and each of its six
subsidiaries have been jointly administered. As a result, professional fees are
not separated by case. Further, as of the present date, detailed applications
for allowance of professional fees have not been filed. However, the Debtors
estimate their administrative expenses with respect to professional fees as set
forth in Section IID2a of this Disclosure Statement.
In addition, under its Stipulation with the Bookstore Debtors, the
Debtors could have liability, but they believe that any such liability will not
be substantial.
As of June 10, 1998, the Sponsor believes the Debtors were current, or
by the Effective Date would be current, with all material items which could give
rise to an administrative expense claim.
2. Secured Claims
Substantially all of the Debtors' assets are subject to a blanket lien
and security interest in favor of Fremont. The Fremont Allowed Secured claim, as
of June 10, 1998, was approximately $1,071,000, of which $571,000 is the Fremont
Senior Tranche and the balance of $500,000 the HRAC Junior Tranche and the
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<PAGE>
Individual Junior Tranche. It is anticipated that these amounts will increase by
the Confirmation Date as a result of the Debtors' business requirements. This
claim is secured by assets of the Cookstores Debtors. The Debtors are unaware
of, nor do their schedules reflect, any other valid and perfected secured claims
(other than equipment leases that will either be assumed or rejected by the
Debtors).
3. Priority Claims other than Administrative Expenses
The Debtors paid pre-petition wages of up to $4,000 per person. The
Debtors do not anticipate any priority claims for wages.
The Debtors' priority claims consist of certain sales taxes and
personal property taxes. The Debtors owe sales taxes for sales occurring in the
month of October, 1997 and the first thirteen days of November, 1997. The
Debtors estimate that the principal amount of the sales tax liability will be
approximately $17,000. In addition, the relevant taxing authorities may seek to
assert claims for penalties and interest, as Unsecured Claims, in the amount of
approximately $8,500.
The Debtors also owe personal property taxes for certain pre-petition
periods. The Debtors estimate that the amount which will be due for personal
property taxes will be approximately $62,000.
4. General Unsecured Claims
The bar date for filing proofs of Claim (other than Claims of
governmental entities) was March 17, 1998. The bar date for filing proofs of
Claim for governmental entities was May 12, 1998. The Debtors have not yet
reviewed all of the claims filed, and accordingly, the following is the Debtors'
estimate of general unsecured claims. The Debtors estimate general unsecured
claims in the amount of approximately $1,545,500, of which approximately
$607,250 constitutes Claims against Gaylord Companies and $938,250 constitutes
Claims against the Cookstore Debtors.
The above estimate includes approximately $175,000 in pre-petition
lease arrearages. The above amount does not include any amount for rejection
claims that would arise upon the rejection of leases and executory contracts.
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The Cookstore Debtors have initiated negotiations with their landlords,
seeking agreements with the landlords to obtain concessions on both pre-petition
arrearages or future rent. As of the date of this Disclosure Statement, letters
reflecting agreement in principle have been received from four of the six
landlords of the Cookstore Debtors, and the Debtors have rejected the other two
store leases (with respect to the Florence, Kentucky and Indianapolis, Indiana
locations of the Cookstore Debtors). In addition, the Debtors intend to reject
the lease for their headquarters location.
5. Retirement Plans, etc.
Other than the Supplemental Executive Retirement Plan effective August
1, 1996 of the Gaylord Companies, Inc. and employment agreements with John
Gaylord, John Critser and George Gaylord, the Debtors are not party to any
retirement or employment agreements. The Debtors intend to reject the foregoing
Supplemental Executive Retirement Plan and employment agreements.
IV. SUMMARY OF THE PLAN
The following is a brief description of significant provisions of the
Plan. This summary only highlights certain provisions of the Plan and is not a
substitute for a full and complete reading of the Plan. A copy of the Plan is
appended hereto as Exhibit A. Creditors and parties-in-interest are referred to
the Plan for a more thorough discussion of the provisions of the Plan. In the
case of any discrepancy between the terms of the Plan and the discussion of the
Plan in this Disclosure Statement, the terms of the Plan shall govern.
A. Classification of Claims and Equity Interests.
As more fully described below, the Debtors are seeking in connection
with the Plan the substantive consolidation of the estates of the Debtors for
Plan purposes only. As a result thereof, for Plan purposes the Debtors will be
treated as if they were a single corporate and economic entity and the Creditors
of each Debtor will be treated as a Creditor of the substantively consolidated
group of Debtors. At the same time, there will be no merger, as a matter of law,
between Gaylord Companies or either of the Cookstore Debtors, which shall
maintain their separate legal existence.
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The Plan places all allowed Claims and Equity Interests in the classes
set forth below, or, where applicable, treats allowed Claims as Unclassified
Claims, as discussed in Article II and Section III(E) of the Plan. Unless
expressly provided otherwise, an Allowed Claim that is properly included in more
than one class is in a class to the extent it meets the description of such
class and is in a different class to the extent it meets the description of such
different class.
A. Secured Claims
Class 1: Fremont, as sole owner of the Fremont Senior Tranche.
Class 2: HRAC, as owner of the FRAC Junior Tranche.
Class 3: Individual Junior Participants, as owners of the
Individual Junior Tranche.
Class 4: holders of all other Allowed Secured Claims whose Claims
are not included in Classes 1, 2 or 3.
B. Priority Claims
Class 5: the Allowed Claims of Unsecured Creditors entitled to
priority pursuant to sections 507(a)(3) or 507(a)(4)
of the Bankruptcy Code.
C. Unsecured Claims
Class 6: the unsecured Allowed Claim of any Creditor not
included in any other class, including, without
limitation, the "deficiency" portion of any Allowed
Secured Claims, but not including Unclassified Claims
treated elsewhere in the Plan.
D. Equity Interests
Class 7: the Equity Interests of holders of common shares of
Gaylord Companies.
Class 8: the Equity Interests of holders of preferred shares of
Gaylord Companies.
Class 9: the Equity Interests of holders of warrants for the
purchase of common shares of Gaylord Companies.
Class 10: all other Equity Interests in the Debtors not included in
Class 7, 8 or 9.
E. Unclassified Claims
Section 1123)(a)(1) of the Bankruptcy Code provides that certain
Claims, including Claims for Administrative Expenses for unpaid post-Petition
Date goods and services (Bankruptcy Code Section 507(a)(1) Claims and Claims for
Allowed Unsecured Claims of governmental units (Bankruptcy Code Section
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507(a)(8) Claims), shall not be designated into classes. The Unclassified Claims
treated in the Plan are described below.
B. Treatment of Claims and Equity Interests
The Plan provides that Allowed Claims in the following classes shall
receive the treatment set forth below in complete satisfaction of all such
Allowed Claims.
1. Secured Claims
Class 1: Class I is not impaired. Fremont is the holder of the Fremont
Senior Tranche, which is the senior tranche of certain funding provided to the
Cookstore Debtors by Fremont pursuant to the Financing Order. As of the
Effective Date, the Debtors estimate that the Allowed Amount of the Fremont
Senior Tranche will be $671,000.
Pursuant to the Plan, on the Effective Date, all outstanding
obligations due to Fremont under the Financing Order shall be either (x) repaid
in full in cash or (y) repaid pursuant to the Exit Financing Facility such that
Fremont shall receive, in complete satisfaction of the Fremont Senior Tranche,
the full amount of the Fremont Senior Tranche either (i) in cash on the
Effective Date, or (ii) as may otherwise be agreed by and among Fremont,
Cambridge, and the Debtors or the Reorganized Company. In addition, Fremont
shall receive in connection with the Exit Financing Facility Fremont Warrants
exercisable to purchase 92,595 shares of Class A Common Stock at an exercise
price of $.01 per share.
Class 2: Class 2 is impaired. HRAC is the holder of the HRAC Junior
Tranche, which is currently a $280,000 junior tranche of the funding provided to
the Cookstore Debtors by Fremont pursuant to the Financing Order, but may be
increased by the Effective Date.
The HRAC Junior Tranche will be satisfied as part of the total
treatment of HRAC under the Plan.
Pursuant to the Plan, on the Effective Date, HRAC shall be merged into
Gaylord Companies. In consideration for the contribution of HRAC and the merger
of HRAC with Gaylord Companies, and in complete satisfaction of the HRAC Junior
Tranche and any amounts owed to HRAC prior to the Confirmation Date on account
of the HRAC Advisory Agreement, the shareholders of HRAC shall receive on the
Effective Date 1,383,684 shares of Class A Common Stock of Reorganized Parent
which, on the Effective Date giving effect to the exercise of the New Warrants
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and before the exercise of any Financing Warrants, shall be equal to eighty
percent (80%) of the issued and outstanding shares of Class A Common Stock and
Class B Common Stock of Reorganized Parent. In addition, the Reorganized Parent
will assume the Assumed HRAC Obligations.
Class 3: Class 3 is not impaired. The Individual Junior Participants
are holders of the Individual Junior Tranche, which represents certain junior
tranches of the funding provided to the Cookstore Debtors by Fremont pursuant to
the Financing Order.
Pursuant to the Plan, on the Effective Date, all outstanding
obligations due and security interests granted to the Individual Junior
Participants shall be restructured as a subordinated loan facility in an amount
equal to the outstanding amount of the Individual Junior Tranche and such
holders otherwise will be rendered unimpaired. In partial consideration for the
restructure of such obligations, each holder of an Allowed Claim in Class 3
shall also receive its pro rata percentage of the 29,261 Individual Warrants
exercisable for 29,261 shares of Class A Common Stock of the Reorganized Parent
at the exercise price of $4.00 per share.
Class 4: Class 4 is not impaired. The Allowed General Secured Claims in
this class consist of all Allowed Secured Claims other than the Fremont Senior
Tranche, the HRAC Junior Tranche and the Individual Junior Tranche. Based upon
the Debtors' Schedules and the proofs of claim filed in the Case, the Debtors
are unaware of any Allowed Claim in this Class (other than equipment leases to
be either assumed or rejected by the Debtors).
Pursuant to the Plan, at the sole option of Reorganized Company, (i) an
Allowed General Secured Claim shall be reinstated and rendered unimpaired in
accordance with section 1124(2) of the Bankruptcy Code, (ii) a holder of an
Allowed General Secured Claim shall receive cash in an amount equal to such
Allowed General Secured Claim, including any interest on such Allowed General
Secured Claim required to be paid pursuant to section 506(b) of the Bankruptcy
Code, on the later of the Effective Date and the date such General Secured Claim
becomes Allowed, or as soon thereafter as is practicable, or (iii) a holder of
an Allowed General Secured Claim shall receive the collateral securing its
Allowed General Secured Claim and any interest on such Allowed General Secured
Claim required to be paid pursuant to section 506(b) of the Bankruptcy Code, in
full and complete satisfaction thereof on the later of the Effective Date and
the date such General Secured Claim becomes Allowed, or as soon thereafter as is
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practicable. The legal, equitable and contractual rights of the holders of
Allowed General Secured Claims, if any exist, are not altered by the Plan.
2. Priority Claims
Class 5: Class 5 is not impaired. Allowed Claims in Class 5 are Claims
which are entitled to priority in accordance with section 507(a) of the
Bankruptcy Code (other than Administrative Expense Claims and Priority Tax
Claims). Such Claims include (i) unsecured claims for accrued employee
compensation earned within 90 days prior to the Petition Date to the extent of
$4,000 per employee and (ii) contributions to employee benefit plans arising
from services rendered within 180 days prior to the commencement of the Case,
but only for each such plan to the extent of (a) the number of employees covered
by such plan multiplied by $4,000, less (b) the aggregate amount paid to such
employees from the Estates for wages, salaries or commissions. The Debtors
estimate that the aggregate of Priority Claims will be approximately $0.
Each holder of an Allowed Claim in Class 5 shall receive a cash payment
in complete satisfaction of the Allowed Claim.
3. Unsecured Claims
Class 6: Class 6 is impaired. The Claims in Class 6 consist of the
unsecured Allowed Claims of any Creditor not included in any other class,
including, without limitation, the "deficiency" portion of any Allowed Secured
Claim, but not including Unclassified Claims treated elsewhere in the Plan. The
Debtors estimate that Allowed Claims in Class 6 will aggregate between
approximately $1,545,000 and $1,750,000 exclusive of claims arising as a result
of the rejection of executory contracts and leases, and insider wage claims,
where such insiders agreed to waive any priority status.
On the Effective Date, each holder of an Allowed Claim in Class 6 shall
receive from the Reorganized Parent in complete satisfaction of the Allowed
Claim, the following:
(i) An amount equal to its pro rata share, as compared to all other
holders of Allowed Claims in Class 6, of the Available Cash Note. Pursuant to
the Available Cash Note, distributions shall be made by the Reorganized Parent
from Available Cash in the maximum amount of $30,000 per year for five (5) years
beginning on January 30, 1999 and continuing on each January 30 through January
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30, 2003., so long as the Reorganized Parent has Available Cash. To the extent
that there is insufficient Available Cash to pay any installment with respect to
the Available Cash Note, then the Reorganized Parent's obligation to make such
installment payment for that year shall be extinguished; and
(ii) Shares of Class A Common Stock in the Reorganized Parent in an
amount equal to such holder's pro rata share, as compared to all other holders
of Allowed Claims in Class 6, of eight percent (8%) of the issued and
outstanding Class A Common Stock and Class B Common Stock of the Reorganized
Parent on the Effective Date giving effect to the exercise of the New Warrants
and before the exercise of any Financing Warrants.
Each holder of an Allowed Claim in this class will receive its pro rata
portion of the Available Cash Note and will receive its pro rata portion of
138,350 shares of Class A Common Stock of the Reorganized Parent. Such shares of
Class A Common Stock shall not be transferable until the earlier of six months
after the Effective Date or the closing date of a registered public offering by
the Reorganized Parent. Holders of such shares shall have the right for six
months after the Effective Date to register such shares for sale in a registered
public offering; provided that if any such holder determines not to include such
shares in such a registered public offering, such holder shall be obliged to
agree to any lock-up requested by any underwriter of such public offering. If
such registered public offering is underwritten, holders who wish to register
such shares must sell such shares on the basis provided in any underwriting
arrangements and execute any documents reasonably required in connection with
such underwriting arrangements.
Article XV of this Disclosure Statement contains a description of the
Class A Common Stock.
4. Equity Interests
Class 7: Class 7 is impaired. Class 7 consists of the Equity Interests
of holders of common shares of Gaylord Companies.
Pursuant to the Plan and following the conversion of Other Equity
Interests to common shares of Gaylord Companies as provided for in Class 10
below and the merger of HRAC with and into the Gaylord Companies, the common
shares of Gaylord Companies shall be extinguished, and the holders of Allowed
Equity Interests in Class 7 shall receive their pro rata share of the number of
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shares of Class B Common Stock equal to eight percent (8%) of the number of the
issued and outstanding shares of Class A Common Stock and Class B Common Stock
of the Reorganized Parent as of the Effective Date giving effect to the exercise
of the New Warrants and before the exercise of any Financing Warrants. Article
XV of this Disclosure Statement contains a description of the Class B Common
Stock.
Class 8: Class 8 is impaired. Class 8 consists of the Equity Interests
of holders of preferred shares of Gaylord Companies.
Pursuant to the Plan, all issued and outstanding shares of preferred
stock in Gaylord Companies as of the Effective Date shall be converted to common
stock of Gaylord Companies. Following such conversion, such common shares of
Gaylord Companies shall be extinguished and the holders of Allowed Equity
Interests in Class 8 shall receive their pro rata share of the number of shares
of Class B Common Stock equal to four percent (4%) of the number of the issued
and outstanding shares of Class A Common Stock and Class B Common Stock of the
Reorganized Parent as of the Effective Date giving effect to the exercise of the
New Warrants. Article XV of this Disclosure Statement contains a description of
the Class B Common Stock.
Class 9: Class 9 is impaired. Class 9 consists of the Equity Interests
of holders of warrants for the purchase of common shares of Gaylord Companies.
Pursuant to the Plan, all outstanding warrants for the purchase of
common shares of Gaylord Companies shall be deemed cancelled and become null and
void (without further act or action by any party). 52,573 New Warrants for
52,573 shares of Reorganized Parent at the initial exercise price of $11.57
shall be distributed pro rata to the holders of Allowed Claims in Class 9. The
New Warrants shall not be exercisable or transferable until six months after the
Effective Date.
Class 10: Class 10 is impaired. Class 10 consists of all other Equity
Interests in the Debtors not included in Classes 7, 8 or 9.
Pursuant to the Plan, all Equity Interests in the Debtors not treated
in Classes 7, 8 or 9 hereof shall be converted, pursuant to the terms of the
applicable agreement (be it a put, or other applicable right, including without
limitation, any right to issue new warrants), to preferred or common shares of
Gaylord Companies, as provided in such agreement or, at the option of the holder
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of any Class 10 Equity Interest, extinguished. If converted to preferred shares
of Gaylord Companies, the interests of the holder of such shares then shall be
subject to the further conversion provided for holders of Equity Interests in
Class 8 hereof. If converted to common shares of Gaylord Companies, the
interests of the holder of such shares then shall be subject to the treatment
provided for holders of Equity Interests in Class 7 hereof
C. Description and Treatment of Unclassified Claims
1. Description of Unclassified Claims.
Administrative Expense Claims are Claims constituting a cost or expense
of administration of the Cases allowed under sections 503(b) and 507(a)(1) of
the Bankruptcy Code. Such Claims include any actual and necessary costs and
expenses of preserving the estates of the Debtors, any actual and necessary
costs and expenses of operating the business of the Debtors and any indebtedness
or obligations incurred or assumed by the Debtors in connection with the conduct
of their business including, without limitation, for the acquisition or lease of
property or an interest in property or the rendition of services, all
compensation and reimbursement of expenses to the extent Allowed by the
Bankruptcy Court under section 330 or 503 of the Bankruptcy Code, and any fees
or charges assessed against the estates of the Debtors under Section 1930 of
chapter 123 of title 28 of the United States Code.
The Debtors estimate the aggregate amount of Administrative Expense
Claims against the Estate as of the Effective Date (excluding professional fees
described in Section II D 2 of this Disclosure Statement) will be, $210,000.00,
including June rental payments and $15,000.00 in fees to the Office of the
United States Trustee for fees for the first quarter of 1998 and thereafter. As
of June 1, 1998, the Debtors were generally current (within thirty (30) days) on
all other matters that could give rise to a material Administrative Expense
Claim.
Pursuant to the Plan, except to the extent that any entity entitled to
payment of any Allowed Administrative Expense Claim agrees to a different
treatment, and except as provided in Article II(A)(2) and (3) of the Plan, each
holder of an Allowed Administrative Expense Claim shall receive cash in an
amount equal to such Allowed Administrative Expense Claim. on the later of the
Effective Date and the date such Administrative Expense Claim becomes an Allowed
Administrative Expense Claim, or as soon thereafter as is practicable; provided,
however, that (1) Allowed Administrative Expense Claims representing liabilities
or other obligations incurred in the ordinary course of business by the Debtors
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shall be paid in full (and any such other obligations shall be performed) by the
Reorganized Company in the ordinary course of business in accordance with the
terms and subject to the conditions of any agreements governing, instruments
evidencing or other documents relating to, such transactions and (2) any Claim
for Administrative Expense held or asserted by an entity against the bankruptcy
estate(s) of the Debtors' Affiliates shall not be impaired hereby, and any such
claim for Administrative Expenses held or asserted against such other estate(s)
shall be reduced by the amount paid to such entity pursuant to the terms of the
Plan.
Under the Plan, all entities seeking an award by the Court of
compensation for services rendered or reimbursement of expenses incurred through
and including the Confirmation Date under sections 503(b)(2), 503(b)(3),
503(b)(4) or 503(b)(5) of the Bankruptcy Code (a) shall file their respective
final applications for allowances of compensation for services rendered and
reimbursement of expenses incurred through the Confirmation Date within 30 days
after the Effective Date and (b) if granted such an award by the Court, shall be
paid in full in such amounts as are allowed by the Court (i) on the later of the
Effective Date or the date such Administrative Expense Claim becomes an Allowed
Administrative Expense Claim, or as soon thereafter as is practicable or (ii)
upon such other terms as may be mutually agreed upon between such holder of an
Allowed Administrative Expense Claim and the Debtors or, on and after the
Effective Date, the Reorganized Company. Under the Plan, all professional fees
for services rendered in connection with the Case and the Plan after the
Confirmation Date, including, without limitation, those relating to the
occurrence of the Effective Date and the resolution of Disputed Claims, shall be
paid by the Reorganized Company upon receipt of an invoice or on such other
terms as the Reorganized Company may agree to, without the need for further
Court authorization or entry of a Final Order, absent an objection by the
Reorganized Company. In the event the Reorganized Company objects to such fees,
the matter shall be resolved by the Bankruptcy Court upon motion of such
professional.
Under the Plan, all fees payable pursuant to section 1930 of title 28
of the United States Code shall be paid on the later of the Effective Date or
such other date as specified in invoices therefor received by the Debtors or
Reorganized Company for fees incurred through and including entry of the Final
Decree.
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Priority Tax Claims are Claims for taxes entitled to priority in
payment under section 507(a)(8) of the Bankruptcy Code. The Debtors estimate
that the amount of Priority Tax Claims that have not previously been paid
pursuant to orders of the Court and thus will be required to be paid will be
approximately $80,000.
Each holder of an Allowed Priority Tax Claim shall receive, at the sole
option of Reorganized Company, (a) cash in an amount equal to such Allowed
Priority Tax Claim on the later of the Effective Date and the date such Priority
Tax Claim becomes an Allowed Priority Tax Claim, or as soon thereafter as is
practicable, or (b) equal annual cash payments in an aggregate amount equal to
such Allowed Priority Tax Claim, together with interest at a fixed annual rate
equal to 7%, over a period through the sixth anniversary of the date of
assessment of such Allowed Priority Tax Claim, or upon such terms determined by
the Court to provide the holder of such Allowed Priority Tax Claim deferred cash
payments having a value, as of the Effective Date, equal to such Allowed
Priority Tax Claim.
2. Filing Unclassified Claims.
The Plan provides that the claims bar date for filing all Claims or
applications for payment of Professionals for fees, costs and disbursements
incurred through the Confirmation Date shall be thirty (30) days from the
Effective Date (the "Professionals Claim Bar Date"). Such Claims or applications
must be filed with the Court and must also be served upon counsel for the
Debtors and upon the Office of the United States Trustee. All Professionals must
have filed their requests for approval of their fees, costs and disbursements
incurred through the Confirmation Date by the Professionals Claims Bar Date or
be forever barred from asserting the same. All fees, costs and disbursements
incurred by and paid to any Professional must be allowed and authorized for
payment by an order of the Court or such fees, costs and disbursements shall be
disgorged by such Professional and returned to the Debtors or the Reorganized
Company, as appropriate.
The Plan further provides that any fees, costs and disbursements
incurred by any Professional in connection with this Case for any time period
subsequent to the Confirmation Date may be paid by the Reorganized Company
without further order of the Court. In the event of a dispute between the
Reorganized Company and a Professional regarding the amount or timing of payment
of any fees, costs or disbursements that may accrue subsequent to the
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Confirmation Date, the Plan provides that such dispute may be heard by the Court
upon the application of such Professional.
Persons or entities other than Professionals asserting Claims entitled
to priority under section 507(a)(1) of the Bankruptcy Code must file such Claims
or applications for payment with the Court within thirty (30) days of the
Effective Date for the amounts asserted to be due through the Confirmation Date,
unless such Claims or applications for payment were required to be filed earlier
pursuant to a Final Order entered prior to Confirmation. A copy of each such
Claim or application for payment shall also be served upon counsel for the
Debtors and the United States Trustee. Any Claim or request for Administrative
Expense that is not so filed and served shall be disallowed and forever barred.
Persons or entities asserting Claims based on assumed or rejected
executory contracts or unexpired leases should refer to Article VI of the Plan
and Article VI of this Disclosure Statement.
D. Means for Implementation of the Plan
1. Conditions Precedent to Effectiveness of Plan
The Plan shall not become effective until the following conditions
precedent shall have occurred:
1 The Confirmation Order shall have been entered which provides that:
(a) except with respect to an entity that is an underwriter as
defined in Bankruptcy Code Section 1145(b), section 5 of the Securities Act of
1933, as amended, (15 U.S.C. Section 77(d)), or any state or local law requiring
registration for the offer or sale of a security or registration or licensing of
an issuer of, underwriter of, or broker or dealer in securities, does not apply
to the transactions provided for in the Plan; provided, however, that in the
event the Court should refuse to enter a Confirmation Order that is deemed to
include such a finding, the Debtors shall have the option of withdrawing the
Plan or proceeding without the Bankruptcy Code section 1145 qualification; and
(b) acceptance of the Plan has been made in good faith and in
compliance with the applicable provisions of the Bankruptcy Code as contemplated
by Section 1125(e) of the Bankruptcy Code.
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2 There shall be no stay in effect with respect to the Confirmation
Order;
3 The Reorganized Company shall have credit available under the Exit
Financing Facility to provide the Reorganized Company with financing sufficient
to meet its cash obligations under the Plan and its business requirements as of
and after the Effective Date;
4 All actions, documents and agreements necessary to implement the Plan
shall have been effected or executed and delivered, and
5 Each of the Plan documents and the New Securities shall have been
effected or executed and delivered.
2. Objections to Claims
Under the Plan, the Debtors and the Reorganized Company shall be
entitled to file objections to proofs of claim at any time prior to the closing
of the Case. Notwithstanding any other provision of the Plan specifying a date
or time for payment or distributions, payments and distributions in respect of
any Claim which as of such date is disputed, unliquidated, or contingent shall
not be made until such Claim becomes an Allowed Claim whereupon such payments
and distributions shall be made promptly or as otherwise provided for in the
Plan. In the event that, at the time a payment is to be made to holders of
Claims in a specific class, a Claim that would otherwise be a Claim in that
class remains disputed, unliquidated or contingent, the Reorganized Company
shall reserve from its distribution to said class an amount estimated to be
sufficient to pay the amount of such disputed, unliquidated and contingent
Claims. The Reorganized Company shall distribute the appropriate amount to the
holder of such disputed, unliquidated and contingent Claims at such time, if
any, as those Claims become Allowed Claims.
3. Voting of Claims
Under the Plan, each holder of an Allowed Claim in an impaired Class
which retains or receives property under the Plan shall be entitled to vote
separately to accept or reject the Plan and indicate such vote on a duly
executed and delivered Ballot as provided in such order as is entered by the
Court establishing certain procedures with respect to the solicitation and
tabulation of votes to accept or reject the Plan, or any other order or orders
of the Court.
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4. Nonconsensual Confirmation
Under the Plan, if any impaired Class entitled to vote shall not accept
the Plan by the requisite statutory majorities provided in sections I 126(c) or
I 126(d) of the Bankruptcy Code, as applicable, the Debtors and the Reorganized
Company reserve the right (a) to undertake to have the Court confirm the Plan
under section 1129(b) of the Bankruptcy Code and (b) to amend the Plan to the
extent necessary to obtain entry of the Confirmation Order.
5. Method of Distributions Under the Plan
a. In General. Under the Plan, subject to Bankruptcy Rule 9010, all
distributions under the Plan shall be made by the Reorganized Company to the
holder of each Allowed Claim at the address of such holder as listed on the
Schedules as of the Record Date, unless the Debtors or Reorganized Company have
been notified in writing of a change of address, including, without limitation,
by the filing of a proof of claim or notice of transfer of claim filed by such
holder that provides an address for such holder different from the address
reflected on the Schedules to the Plan.
b. Distributions of Cash. Under the Plan, any payment of cash made by
the Reorganized Company pursuant to the Plan shall be made by check drawn on a
domestic bank.
c. Timing of Distributions. Under the Plan, any payment or distribution
required to be made under the Plan on a day other than a business day shall be
made on the next succeeding business day.
d. Fractional Cents. Under the Plan, whenever any payment of a fraction
of a cent would otherwise be called for, the actual payment shall reflect a
rounding of such fraction to the nearest whole cent (rounding down in the case
of .50 or less and rounding up in the case of more than .50).
e. Fractional Shares, New Warrants, Fremont Warrants, Individual
Warrants. Under the Plan, no fractional shares of Class A Common Stock, Class B
Common Stock or fractional New Warrants, Fremont Warrants or Individual Warrants
or cash in lieu thereof shall be distributed under the Plan. When any
distribution on account of an Allowed Claim pursuant to the Plan would otherwise
result in the issuance of a number of shares of Class A Common Stock, Class B
Common Stock, Fremont Warrants, Individual Warrants or New Warrants that is not
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a whole number, the actual distribution of shares of Class A Common Stock, Class
B Common Stock, Fremont Warrants, Individual Warrants or New Warrants shall be
rounded up to the nearest whole number. The total number of shares of Class A
Common Siock, Class B Common Stock, Fremont Warrants, Individual Warrants or New
Warrants to be distributed to a Class of Claims shall be adjusted as necessary
to account for the rounding provided in this Section IVDe.
f. Unclaimed Distributions
Under the Plan, any distributions under the Plan that are unclaimed for
a period of one year after distribution thereof shall be reinvested in the
Reorganized Company and any entitlement of any holder of any Claim or Equity
Interest to such distributions shall be extinguished and forever barred.
g. Distributions to Equity Interest Holders as of the Record Date
Under the Plan, as of the close of business on the Record Date, the
transfer ledgers (for Equity Interests) shall be closed, and there shall be no
further changes in the record holders of any Equity Interests. Debtors and
Reorganized Company shall have no obligation to recognize any transfer of any
Equity Interests occurring after the Record Date. Debtors and Reorganized
Company shall instead be entitled to recognize and deal for all purposes under
the Plan (except as to voting to accept or reject the Plan) with only those
record holders stated on the transfer ledgers (for Equity Interests) as of the
close of business on the Record Date.
h. Injunction
Under the Plan, the Confirmation Order shall provide for, and shall
operate as, an injunction against the commencement or continuation of any action
to collect, recover, or offset from any of the Debtors or the Reorganized
Company, or any property of any of the Debtors or the Reorganized Company, any
Claim or Equity Interest that is treated in this Plan except as otherwise
permitted by the Plan or by Final Order of the Court. The Court shall have
jurisdiction to determine and award damages for any violation of the injunction
provided for in this Plan or the Confirmation Order, including, without
limitation, compensatory damages, professional fees, expenses and costs, and
exemplary damages for any willful violation of the injunction.
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i. Discharge of Debtors
Under the Plan, except as otherwise expressly provided in section 1141
of the Bankruptcy Code or the Plan, the distributions made pursuant to and in
accordance with the applicable terms and conditions of the Plan are in full and
final satisfaction, settlement, release and discharge as against the Debtors of
any debt that arose before the Effective Date and any debt of a kind specified
in section 502(g), 502(h), or 502(i) of the Bankruptcy Code and all Claims and
Equity Interests of any nature, including, without limitation, any interest
accrued thereon from and after the Commencement Date, whether or not (i) a proof
of Claim or Equity Interest based on such debt, obligation or equity interest is
filed or deemed filed under section 501 of the Bankruptcy Code, (ii) such Claim
or Equity Interest is Allowed under section 502 of the Bankruptcy Code or (iii)
the holder of such Claim or Equity Interest has accepted the Plan.
6. Source of Funds
The payments to be made as provided in the Plan shall be made, at the
sole option of the Reorganized Company, from any cash or property held,
received, or obtained by Debtors and/or the Reorganized Company as of the
Confirmation Date, from funds generated by the Reorganized Company's future
operations, and from loans made or capital contributed by Fremont, HRAC, the
Individual Junior Participants and/or certain other parties. HRAC has received a
May 22, 1998 letter of intent from an investment banking firm, Nutmeg
Securities, Ltd. ("Nutmeg Securities") for a firm commitment underwriting to
raise approximately $8,000,000. Under the letter with Nutmeg Securities, HRAC is
obligated to pay (a) a $15,000 fee upon the filing of the Plan; (b) a $10,000
fee upon the Substantial Consummation of the Plan; and (c) a $25,000 fee upon
the filing of a registration statement with respect to the equity offering to be
underwritten by Nutmeg Securities. As an alternative source of funding HRAC
itself has received commitments from twelve broker-dealers for approximately
$7.8 million conditioned on an effective registration statement.
7. Financing
On or prior to the Effective Date, the Debtors and/or the Reorganized
Company, as the case may be, shall enter into (1) the Exit Financing Facility
and (2) a subordinated loan facility with the Individual Junior Participants or
other lenders designated by the Debtors or Reorganized Company in the aggregate
original principal amount equal to the Individual Junior Tranche. As partial
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consideration for these loan facilities, Fremont will receive Fremont Warrants
and the Individual Junior Participants will receive Individual Warrants. In
addition to the foregoing, the Sponsor is seeking an interim financing facility
in an amount necessary to accomplish its objectives pending the offering
described above.
8. Merger of HRAC and Gaylord Companies
On the Effective Date, HRAC shall be merged into Gaylord Companies.
Gaylord Companies shall be the sole surviving entity of the merger, and shall be
the Reorganized Parent hereunder pursuant to the terms of the Merger Agreement.
Pursuant to the Merger Agreement, Reorganized Parent shall assume all of the
liabilities of HRAC, including the Assumed HRAC Obligations. A copy of the
Merger Agreement is annexed as Exhibit "H".
9. Issuance of New Securities and Cancellation of Existing Securities
and Agreements
Pursuant to the Plan, Reorganized Parent is authorized to issue the
following New Securities: (i) an aggregate of 1,383,684 shares of Class A Common
Stock to the shareholders of HRAC and 138,350 shares of Class A Common Stock to
the holders of Allowed Claims in Class 6; (ii) an aggregate of 85,777 shares of
Class B Common Stock to the holders of Allowed Claims in Class 7 and an
aggregate of 69,174 shares of Class B Common Stock to the holders of Allowed
Claims in Class 8, (iii) 52,573 New Warrants; (iv) 121,856 Financing Warrants,
(vi) the Available Cash Note and the Gem Debenture. In addition, pursuant to the
Plan the Reorganized Company shall reserve for the issuance of 175,429 shares of
Class A Common Stock to effectuate the provisions of the New Warrants, Fremont
Warrants and Individual Warrants and 180,000 shares of Class A Common Stock to
be issued in connection with one or more employee equity incentive plans of
Reorganized Parent. All shares of Class A and Class B Common Stock to be issued
pursuant to this Plan shall be, upon issuance, fully paid and non-assessable and
shall be subject to dilution as set forth in Article IV of the Plan, and the
holders thereof shall have no preemptive or other rights to subscribe for
additional shares.
Under the Plan, on the Effective Date, the promissory notes, share
certificates, bonds and other instruments evidencing any Claim, except to the
extent contrary to and not consistent with the treatment of the Fremont Allowed
Secured Claim, the Allowed General Secured Claims or Equity Interests, shall be
deemed cancelled without further act or action under any applicable agreement,
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law, regulation, order or rule and the obligations of the Debtors under the
agreements, indentures and certificates of designations governing such Claims
and Equity Interests, as the case may be, shall be discharged.
Pursuant to the Plan, each holder of a promissory note, share
certificate, bond or other instrument evidencing such a Claim, except to the
extent contrary to and not consistent with the treatment of the Fremont Allowed
Secured Claim, the Allowed General Secured Claims or Equity Interests, shall
surrender such promissory note, share certificate, bond or instrument to the
Reorganized Company, unless such requirement is waived by the Reorganized
Company. No distribution of property shall be made to or on behalf of any such
holders unless and until such promissory note, share certificate, bond or
instrument is received by the Reorganized Company or the unavailability of such
promissory note, share certificate, bond or instrument is established to the
reasonable satisfaction of the Reorganized Company or such requirement is waived
by the Reorganized Company. The Reorganized Company may require any holder that
is unable to surrender or cause to be surrendered any such promissory notes,
share certificates, bonds or instruments to deliver an affidavit of loss and
indemnity and/or furnish a bond in form and substance (including, without
limitation, with respect to amount) reasonably satisfactory to the Reorganized
Company. Any holder that fails within the later of one year after the Effective
Date and the date of Allowance of its Claim or Equity Interest (i) if possible,
to surrender or cause to be surrendered such promissory note, share certificate,
bond or instrument; (ii) if requested, to execute and deliver an affidavit of
loss and indemnity reasonably satisfactory to the Reorganized Company and (iii)
if requested, to furnish a bond reasonably satisfactory to the Reorganized
Company, shall be deemed to have forfeited all rights, claims and causes of
action against the Debtors and the Reorganized Company, and shall not
participate in any distribution hereunder. Notwithstanding the foregoing, the
Debtors and Reorganized Company shall be deemed to waive the requirements of
this Article IV as to any holder whose Claim is expressly Allowed pursuant to
the Confirmation Order.
10. Operation of Business
Under the Plan, after the Effective Date, the Reorganized Company shall
provide the holders of Allowed Claims the respective treatments set forth
herein, as applicable. The Debtors' operations shall be carried on by the
Reorganized Company, and the Reorganized Company shall have full authority to
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operate Debtors' businesses and to incur and pay post-Petition Date and
post-Confirmation obligations.
11. The Reorganized Company
HRAC's interest in pursuing the Term Sheet Transaction stems in part
from the status of Gaylord Companies as a publicly traded company. Accordingly,
the Reorganized Parent will seek to retain its status as a publicly traded
company and recommence its required filings. (The Debtors have been delinquent
respecting a number of public filings). HRAC intends to pursue opportunities
with other businesses related to the business of the Cookstore Debtors with the
intention of bringing other operations under the Reorganized Company's ownership
in order to take advantage of synergies between the Cookstore business and
businesses in related fields.
12. Breaches
Under the Plan, in the event any of the Debtors or the Reorganized
Company breaches any of its obligations under the Plan, the Debtors and the
Reorganized Company shall have sixty (60) days from the receipt of written
notice of such breach from the holder of an Allowed Claim to cure such breach.
13. Pre-Payment of Allowed Claims
Under the Plan, in the event the Debtors or the Reorganized Company is
able to pre-pay any Allowed Claim, the Debtors and the Reorganized Company shall
have the absolute right, in their sole discretion, to pre-pay all or a portion
of any class of Allowed Claims at any time, so long as each claimant in the
class is paid the same proportional amount. Any pre-payment shall be without
penalty.
14. Continuation of Bankruptcy Injunction or Stays.
Under the Plan, all injunctions or stays provided for in the Cases
under sections 105 or 362 of the Bankruptcy Code, or otherwise, and in existence
on the Confirmation Date, shall remain in full force and effect until the
Effective Date.
15. Reverting of Assets.
(a) Under the Plan, the property of the Estates shall revert
in the Reorganized Company on the Effective Date.
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(b) Under the Plan, as of the Effective Date, all property of
the Debtors and the Reorganized Company shall be free and clear of all liens,
claims and interests of holders of Claims and Equity Interests, except as
provided in the Plan.
(c) Under the Plan, as of the Effective Date, the Reorganized
Company shall have the right to compromise Claims without further Court order.
16. General Release of Liens. Except as otherwise provided in the Plan,
in the treatment of the Individual Junior Tranche or in the Exit Financing
Facility, or in any contract, instrument, indenture or other agreement or
document created in connection with the Plan or the implementation thereof, on
the Effective Date, all mortgages, deeds of trust, liens or other security
interests against property of the Estates will be released, and all the right,
title and interest of any holder of such mortgages, deeds of trust, liens or
other security interests will revert to Reorganized Company or the Debtors, as
applicable, and the successors and assigns thereof.
17. Compensation and Benefit Programs. Under the Plan, all employment
and severance practices and policies, and al! compensation and benefit plans,
policies and programs of the Debtors applicable to their directors, officers or
employees, including, without limitation, all savings plans, retirement plans,
health care plans, severance benefit plans, incentive plans, workers'
compensation programs and life, disability and other insurance plans will be
treated either as executory contracts under the Plan Pursuant to Article VI
thereof or as permitted under applicable non-bankruptcy law.
18. Retiree Benefits. Under the Plan, payments, if any, due to any
person for the purpose of providing or reimbursing payments for retired
employees and their spouses and dependents for medical, surgical, or hospital
care benefits, or benefits in the event of sickness, accident, disability, or
death under any plan, fund or program (through the purchase of insurance or
otherwise) maintained or established in whole or in part by the Debtors prior to
the Petition Date shall be continued for the duration of the period the Debtors
have obligated themselves to provide such benefits, subject to any and all
rights of the Debtors under applicable law. Notwithstanding the foregoing, the
Debtors intend to reject the Supplemental Executive Retirement Program of
Gaylord Companies on or before the Confirmation Date.
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19. Amended Bylaws and Amended Certificates of Incorporation. Under the
Plan and after giving effect to the Merger, the respective bylaws and
certificates of incorporation of the Reorganized Company shall be amended and
restated as of the Effective Date to the extent necessary (a) to prohibit the
issuance of nonvoting equity securities as required by section 1123(a)(6) of the
Bankruptcy Code, subject to further amendment of such certificate of
incorporation and bylaws as permitted by applicable law and (b) to effectuate
the provisions of the Plan, in each case without any further action by the
stockholders or directors of the Debtors or the Reorganized Company.
V. DISCLOSURES REQUIRED BY 11 U.S.C. 1129(a)(4) AND (5)
Section 1129(a)(4) of the Bankruptcy Code provides that a Plan can be
confirmed only if any payment made or to be made by Debtors or by a person
issuing securities or acquiring property under the Plan for services or for
costs and expenses in or in connection with the Case or in connection with the
Plan and incident to the Case, has been approved by, or is subject to approval
of the Court as reasonable. Section IV of the Plan meets the requirement of
section 1129(a)(4) of the Bankruptcy Code.
Section I 129(a)(5) of the Bankruptcy Code conditions Confirmation on
disclosure of the identity and affiliations of any individual proposed to serve
after Confirmation as a director, officer or voting trustee of the surviving
entity. Section 1129(a)(5) further requires that (i) appointment to or
continuance in such office of such individual be consistent with the interests
of Creditors and holders of Equity Interests and with public policy, and (ii)
the Debtors disclose the identity of any insider who will be employed or
retained by the reorganized Debtors and the nature of any compensation for such
insider.
After confirmation, the directors of the Debtors will be those
individuals described in Section IIE7 of this Disclosure Statement. The officers
of the Debtors, who are described in Section IIB and IIE7, will continue to
serve in those capacities consistent with the needs of the Reorganized Company.
In the event HRAC makes an acquisition prior to or after the Effective Date, in
accordance with its business plan, one or more officers of the acquired entity
could become officers and/or directors of the Reorganized Company. Certain other
officers, employees and affiliates of Cambridge will be shareholders in
Reorganized Parent.
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The Debtors submit that the appointment of the above-named individuals
is in the best interests of Creditors and the disclosure thereof and other
disclosure set forth in this Disclosure Statement is in full compliance with
Section 1129(a)(5) of the Bankruptcy Code.
VI. TREATMENT OF EXECUTORY
CONTRACTS AND UNEXPIRED LEASES
Under the Plan, on the Effective Date, all executory contracts and
unexpired leases of the Debtors shall be rejected by the Debtors pursuant to the
provisions of sections 365 and 1123 of the Bankruptcy Code, except: (i) any
executory contract or unexpired lease that is the subject of a separate motion
to assume filed pursuant to section 365 of the Bankruptcy Code by the Debtors
before the entry of the Confirmation Order; (ii) executory contracts and
unexpired leases listed on Exhibit E, and (iii) all executory contracts or
unexpired leases assumed under this Plan or by order of the Bankruptcy Court
entered before the Confirmation Date and not subsequently terminated pursuant to
an order of the Bankruptcy Court. Under the Plan, the Debtors reserve the right
to amend, alter or modify Exhibit E at any time prior to the Confirmation
Hearing. The Debtors will provide notice of any amendments to Exhibit E to the
parties to the executory contracts or unexpired leases affected thereby.
Under the Plan, except as may otherwise be agreed to by the parties,
within 60 days after the Effective Date, the Reorganized Company shall cure any
and all undisputed defaults under any executory contract or unexpired lease
assumed pursuant to the Plan in accordance with section 365(b)(1) of the
Bankruptcy Code. All disputed defaults that are required to be cured shall be
cured either within 30 days of the entry of a Final Order determining the
amount, if any, of the Debtors' or Reorganized Company's liability with respect
thereto, or as may otherwise be agreed to by the parties.
Under the Plan, claims based on executory contracts or unexpired leases
that were rejected on or prior to the Claims Bar Date that were not filed by
that date shall be disallowed and forever barred. Claims arising out of the
rejection of an executory contract or unexpired lease designated for rejection
under the Plan must be filed with the Court and served upon the Debtors or
Reorganized Company or as otherwise may be provided in the Confirmation Order by
no later than 30 days after the notice of entry of an order approving such
rejection. Under the Plan, any Claims not filed within such time will be forever
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barred from assertion against the Debtors, their estates, the Reorganized
Company and their property, and the holders thereof shall not be entitled to any
distribution under this Plan or otherwise from the Debtors or Reorganized
Company. Claims required to be filed pursuant to a Final Order entered prior to
the Confirmation Date shall be forever barred and disallowed if not filed within
the time specified in such Final Order. Under the Plan, unless otherwise ordered
by the Bankruptcy Court, all Claims arising from the rejection of executory
contracts and unexpired leases shall be treated as General Unsecured Claims
under the Plan.
VII. FEASIBILITY
Based on information provided by HRAC more particularly described
herein, and on operations prior to the commencement of the case, the Debtors
anticipate that Debtors and the Reorganized Company will have sufficient cash to
fund payments under the Plan from cash generated by operations, from cash or
other assets on hand at Confirmation, from the Exit Financing Facility and from
the proceeds of certain financial accommodations to be obtained by the
Reorganized Company.
Attached as Exhibit F are pro forma projected financial statements of
the Reorganized Company for the period July 1, 1998 through December 31, 1998.
These projections were prepared by HRAC and are based on the best estimates of
HRAC in light of its knowledge of Debtors' current market conditions, past
experience, and other factors, all of which are subject to change and any of
which may cause the actual results to differ from the projections. While the
Debtors do not have any information that the projections do not accurately
reflect a good faith estimate of the Reorganized Company's future cash flow, the
projections are not in any way guaranteed by Debtors. The projections show that
the Plan is feasible assuming the Reorganized Company meets the projections. If
Reorganized Company does not meet its projections, they would seek to borrow
funds sufficient to meet their needs and (as described herein) it is Sponsor's
intent to raise additional equity as soon as possible. However, there can be no
assurance that the Reorganized Company will successfully raise additional equity
or debt financing.
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VIII. ALTERNATIVES TO CONFIRMATION
AND CONSUMMATION OF THE PLAN
The Debtors have evaluated numerous reorganization alternatives to the
Plan. After studying these alternatives, the Debtors have concluded that the
Plan provisions for continuation of operations present the best alternative and
will maximize recoveries by holders of Claims and Equity Interests, assuming
that the conditions to the Effective Date are achieved. Accordingly, if the Plan
is not confirmed, the following alternatives could occur:
A. Sale of Individual Stores
The Debtors have analyzed whether a higher return to Creditors could be
secured through a sale of the business of the Debtors on a breakup basis, e.g.,
through sales of individual stores, and have concluded that the business of the
Debtors enjoys a considerable enhanced value as a single operating unit because
of the overall integration of its system and discounts from volume purchases and
centralized operations. Thus, a breakup of the business of the Debtors would not
likely result in an aggregative higher return to Creditors than that to be
distributed pursuant to the Plan.
B. Chapter 11 Liquidation
An alternative plan providing for a Chapter 11 liquidation would
contemplate an orderly wind-down of the business and liquidation under the
control of the Debtors' existing management or a liquidation officer appointed
by the Bankruptcy Court. Similar to the reasons discussed below respecting a
conversion to Chapter 7, the Debtors believe that a Chapter 11 liquidation would
not result in any distribution to holders of Claims or interests, other than the
holders of the Fremont Allowed Secured Claims and that even such holders would
likely receive a recovery of less than 100%.
C. Conversion to Chapter 7
If the Plan is not confirmed, the Chapter 11 Case may be converted to
Chapter 7 of the Bankruptcy Code. A trustee would be appointed to liquidate the
assets of the Debtors for distribution to the Creditors in accordance with the
priorities established by the Bankruptcy Code. The Debtors believe that in a
Chapter 7 liquidation, before Creditors receive any distributions, additional
administrative expenses would be incurred through the appointment of a trustee
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and employment of additional professionals to assist the trustee. The Debtors
believe that the holders of Fremont Allowed Secured Claims would receive a
recovery of less than 100%, and that no other holders of Claims or Equity
Interests would receive any distribution.
D. Dismissal Alternative
Dismissal of the Chapter 11 Cases would have the effect of restoring
(or attempting to restore) all parties to the status quo ante. Upon dismissal,
the Debtors would lose the protection of the Bankruptcy Code, thereby requiring
at the very least, an extensive and time consuming negotiation process and
resulting in costly and protracted litigation in various jurisdictions.
Dismissal of the Chapter 11 Cases would also permit Fremont to foreclose upon
the assets of the Debtors which are subject to its liens. Therefore, the Debtors
believe that dismissal of the Chapter 11 Cases is not a viable alternative to
the Plan.
For the reasons described in this Disclosure Statement, the Debtors
believe that the distributions to each Class of impaired Claims and Equity
Interests under the Plan will be greater and will be received earlier than the
distributions which might be received after a sale of individual business
divisions, a Chapter 11 liquidation, a Chapter 7 liquidation or a dismissal of
the Case of the Debtors. The Debtors believe that if the conditions to the
Effective Date occur, the Plan maximizes the property available for distribution
and any alternative would result in lesser recoveries.
IX. LIQUIDATION ANALYSIS
Debtors believe that Confirmation and implementation of the Plan will
provide greater distributions to Creditors than would liquidation of Debtors
under Chapter 7 of the Bankruptcy Code. Should the Case convert to Chapter 7, a
trustee would be appointed to liquidate Debtors' assets and administer the
estate. In such event, the proceeds of the liquidation would be used first to
pay in full all Allowed Secured Claims against Debtors, the Administrative
Expenses of the Chapter 7 case, the Administrative Expenses of the superseded
Chapter 11 Case, and all other Priority Claims. The remaining proceeds, if any,
would be distributed to the unsecured Creditors on a pro rata basis.
The Debtors estimate that liquidation of their assets would yield
nothing for creditors except for the holders of the Fremont Allowed Secured
Claim. Attached as Exhibit G is a liquidation analysis. Given the amount of
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Administrative Expenses and Priority Claims, together with the expenses of a
Chapter 7 trustee, nothing would remain to make any distribution whatsoever to
holders of Unsecured Claims. Therefore, Debtors believe that the general
unsecured Creditors as well as priority claimants will receive more under the
Plan than they would in the other alternatives described above. (Creditors
should also note that, typically, no distribution is made in a Chapter 7 case
until all of the assets of the estate and all Claims have been liquidated. This
process could take one or more years.)
The Debtors know of no alternative to the proposed Plan, other than a
Chapter 7 liquidation. The Plan is the only plan of reorganization that has been
proposed.
X. PENDING AND ANTICIPATED LITIGATION
Debtors were parties to the following actions which were still pending
on the date of this Disclosure Statement:
1. Greenfield Commercial Credit, L.L.C. v. Gaylord Companies, Inc., et
al., Case No. 97CVH-11-9881 (Franklin County. Common Pleas) (action on Loan
Agreement). In connection with the entry of the Financing Order, Greenfield's
obligation was satisfied and Greenfield delivered a release to the Debtors.
2. Century Graphics v. Gaylord Companies, Inc., Case No. 9711CVF-036582
(Franklin County Municipal County. (collection action)
3. M&I First National Leasing v. Gaylord Companies,- Case No.
97-CVH-109660 (Franklin County Court of Common Pleas) (replevin action).
4. The Cincinnati Enquirer v. Gaylord Company, Inc. d/b/a Little
Profession, Case No. 97-CV-29175 (Hamilton County Municipal Court) (collection
action).
5. UAP - COLUMBUS JV 32132 v. The Cookstore Inc., et al. Case No.
97-CVH-077380 (Franklin County Common Pleas) (forcible entry and detainer action
and claim for rent).
6. The Western and Southern Life Insurance Co. v. The Cookstore, Inc.,
Case No. 97-C01278 (Boone County, Kentucky) (Forcible entry and detainer
action).
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All of these actions, with the exception of the first, which has been
settled, will be stayed as to any further proceedings against the Debtors if not
otherwise settled pursuant to the Plan.
The Reorganized Company will have the authority to commence any
Avoiding Action, and to object to any Claim, until the Case is closed. Any
proceeds from such actions will be retained by the Reorganized Company to fund
their operations and the Plan.
XI. SECURITIES LAWS MATTERS
A. Bankruptcy Code Exemptions From Registration Requirements.
No registration statement will be filed under the Securities Act of
1933, as amended (the "Securities Act"), or any state securities laws with
respect to the offer and distribution under the Plan of Class A Common Stock,
Class B Common Stock, Available Cash Notes, Financing Warrants and New Warrants
(collectively, the "Plan Securities"). The Debtors believe that the provisions
of Section 1145(a)(1) exempt the offer and distribution of the Plan Securities
from federal and state securities registration requirements.
B. Initial Offer and Sale of Plan Securities.
Section 1145(a)(1) of the Bankruptcy Code exempts the offer and sale of
securities under a plan of reorganization from registration under the Securities
Act and state laws if three principal requirements are satisfied (i) the
securities must be offered and sold under a plan of reorganization; (ii) the
Securities must be securities of the debtor, of an affiliate participating in a
joint plan with the debtor 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 Debtors believe that the
offer and sale of the Plan Securities under the Plan satisfies the requirements
of Section 1145(a)(1) of the Bankruptcy Code and are, therefore, exempt from
registration under the Securities Act and state securities laws.
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C. Subsequent Transfers of Plan Securities.
In general, all resales and subsequent transactions in the Plan
Securities distributed under the Plan will be exempt from registration under the
Securities Act pursuant to Section 4(l) of the Securities Act, unless the holder
thereof is deemed to be an "underwriter" with respect to such securities, an
"affiliate" of the issuer of such securities or a "dealer". Section 1145(b) of
the Bankruptcy Code defines four types of "underwriters":
(i) persons who purchase a claim against, an interest in or a claim for
administrative expense against the debtor with a view to distributing
any security received in exchange for such a claim or interest
("accumulators");
(ii) persons who offer to sell securities offered under a plan for the
holders of such securities ("distributors"),
(iii) persons who offer to buy securities from the holders of such
securities, if the offer to buy is (a) with a view to distributing such
securities and (b) made under a distribution agreement; and
(iv) a person who is an "issuer" with respect to the securities, as the
term "issuer" is defined in Section 2(l1) of the Securities Act.
Under Section 2(11) of the Securities Act, an "issuer" includes any
"affiliate" of the issuer, which means any person directly or indirectly through
one or more intermediaries controlling, controlled by or under common control
with the issuer. Under Section 2(12) of the Securities Act, a "dealer" is any
person who engages either for all or part of his or her time, directly or
indirectly, as agent, broker or principal, in the business of offering, buying,
selling or otherwise dealing or trading in securities issued by another person.
Whether or not any particular person would be deemed to be an "underwriter" or
an "affiliate" with respect to any Plan Security or to be a "dealer" would
depend upon various facts and circumstances applicable to that person.
Accordingly, the Debtors express no view as to whether any person would be an
"underwriter" or an "affiliate" with respect to any Plan Security or would be a
"dealer".
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The Securities and Exchange Commission (the "Commission") has taken the
position that resales by accumulators and distributors of securities distributed
under a plan or reorganization who are not affiliates of the issuer of such
securities are exempt from registration under the Securities Act if effected in
"ordinary trading transactions". The staff of the Commission has indicated in
this context that a transaction by such non-affiliates may be considered an
"ordinary trading transaction" if it is made on an exchange or in the
over-the-counter market and does not involve any of the following factors:
(i) (a) concerted action by the recipients of securities issued under a
plan in connection with the sale of such securities or (b) concerted
action by distributors on behalf of one or more such recipients in
connection with such sales;
(ii) the use of informational documents concerning the offering of the
securities prepared or used to assist in the resale of such securities,
other than a bankruptcy court-approved disclosure statement and
supplements thereto, and documents filed with the Commission pursuant
to the Securities Exchange Act of 1934 (the "Exchange Act"); or
(iii) the payment of special compensation to brokers and dealers in
connection with the sale of such securities designed as a special
incentive to the resale of such securities (other than the compensation
that would be paid pursuant to arm's-length negotiations between a
seller and a broker or dealer, each acting unilaterally, not greater
than the compensation that would be paid for a routine similar-sized
sale of similar securities of a similar issuer).
The views of the Commission on the matter have not, however, been
sought by the Debtors and, therefore, no assurance can be given regarding the
proper application of the "ordinary trading transaction" exemption described
above. Any person intending to rely on such exemption is urged to consult his or
her own counsel as to the applicability thereof to his or her circumstances.
Rule 144, promulgated under the Securities Act, provides an exemption
from registration under the Securities Act for certain limited public resales of
unrestricted securities by "affiliates" of the issuer of such securities. Rule
144 allows a holder of unrestricted securities that is an affiliate of the
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issuer of such securities to sell, without registration, within any three-month
period a number of shares of such unrestricted securities that does not exceed
the greater of one percent (1%) of the number of outstanding securities in
question or the average weekly trading volume in the securities in question
during the four calendar weeks preceding the date on which notice of such sale
was filed pursuant to Rule 144, subject to the satisfaction of certain other
requirements of Rule 144 regarding the manner of sale, notice requirements and
the availability of current public information regarding the issuer. The Debtors
believe that, pursuant to Section I 1145(c) of the Bankruptcy Code, the Plan
Securities will be unrestricted securities for purposes of Rule 144.
GIVEN THE COMPLEX NATURE OF THE QUESTION OF WHETHER A PARTICULAR PERSON
MAY BE AN UNDERWRITER OR AFFILIATE, THE DEBTORS MAKE NO REPRESENTATIONS
CONCERNING THE RIGHT OF ANY PERSON TO TRADE IN THE PLAN SECURITIES. THE DEBTORS
RECOMMEND THAT HOLDERS OF CLAIMS AND INTERESTS CONSULT THEIR OWN COUNSEL
CONCERNING WHETHER THEY MAY FREELY TRADE SUCH SECURITIES.
State securities laws generally provide registration exemptions for
subsequent transfer by a bona-fide owner for his or her own account and
subsequent transfers to institutional or accredited investors. Such exemptions
are generally expected to be available for subsequent transfers of the Plan
Securities.
THE DEBTORS DO NOT PRESENTLY INTEND TO SUBMIT ANY NO-ACTION OR
INTERPRETATIVE REQUESTS TO THE COMMISSION WITH RESPECT TO ANY SECURITIES LAWS
MATTERS.
XII. FEDERAL TAX CONSEQUENCES
Neither the Debtors or Reorganized Company intend to request (x) a
ruling (whether prior or subsequent to the Effective Date) from the IRS or (y)
an opinion (whether prior or subsequent to the Effective Date) from legal
counsel, in each case regarding the tax consequences of the Plan. The tax
consequences of the Plan may vary based on individual circumstances. Therefore,
this Disclosure Statement renders no advice on the tax consequences of
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implementation of this Plan to any Creditor, to the Debtor, or to holders of
Equity Interests. Each such party is urged to consult such party's tax advisor
as to the consequences of the Plan, including any consequences under state and
local tax laws.
Debtors filed a Federal Income Tax Return for the calendar year ending
1996. Debtors are unaware of any audits or other investigation of that or any
prior return. Debtors have not yet filed tax returns for 1997.
XIII. CONFIRMATION
A. Confirmation Procedure
As indicated above, the purpose of this Disclosure Statement is to
provide Creditors with adequate information to enable them to make an informed
decision regarding the merits of the Plan. The Court has conditionally approved
this Disclosure Statement. Section 1128 of the Bankruptcy Code requires the
Court, after notice, to hold a further hearing on Confirmation. Final approval
of this Disclosure Statement will be considered at the Confirmation Hearing. The
Bankruptcy Code, moreover, contemplates Creditor voting with regard to Chapter
11 plans of reorganization. The following section summarizes the voting and
Confirmation requirements in Chapter 11 proceedings. This summary constitutes
neither a complete recital of all Bankruptcy Code requirements regarding voting
and Confirmation nor a conclusive statement of Creditor rights. Any Creditor
with questions concerning voting, Confirmation or other matters should seek the
advice of counsel.
Pursuant to section 1129 of the Bankruptcy Code, in order to confirm
the Plan, the Court must find, among other things, that: (1) the Plan complies
with the applicable provisions of the Bankruptcy Code; (2) Debtors have complied
with the applicable provisions of the Bankruptcy Code; (3) Debtors proposed the
Plan in good faith and not by any means forbidden by law; (4) Debtors have made
the disclosure required by Section 1125 of the Bankruptcy Code; (5) the Plan has
been accepted by the requisite vote of Creditors; (6) the Plan is feasible and
Confirmation is not likely to be followed by liquidation; (7) the Plan is in the
best interests of the Creditors by providing Creditors on account of such Claims
or interests property of a value, as of the Effective Date, that is not less
than the amount that such Creditor would receive or retain in a Chapter 7
liquidation; (8) all fees and expenses required under 28 U.S.C. 1930 as
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determined by the Court at the hearing on Confirmation have been paid or the
Plan provides for payment of such fees on the Effective Date; and (9) the Plan
addresses Priority Claims.
As noted above, one of the conditions to Confirmation is that the Plan
be accepted by the requisite votes of Creditors in order to be confirmed by the
Court. Section 1129 of the Bankruptcy Code requires that each class of Claims
accept the Plan by the requisite majorities, or that the class be unimpaired
under the Plan and deemed to have accepted the Plan without solicitation.
Pursuant to the Bankruptcy Code, therefore, only Creditors holding Claims
classified as Allowed Claims which are impaired under the Plan are entitled to
vote to accept or reject the Plan. Generally, a class is "impaired" unless the
legal, equitable, or contractual rights attached to the Allowed Claims of that
class are unaltered by the Plan or the Plan proposes to cure pre-petition
defaults, reinstate maturities, and compensate the holder of such claim for any
damages or proposes payment in full in cash. Certain of the classes described in
the Plan are impaired, and holders of the Allowed Claims in such impaired
classes are entitled to vote to accept or reject the Plan.
The majorities required for acceptance by an impaired class relate both
to amount of the Allowed Claims in the class and the number of members in the
class that actually vote for acceptance or rejection of the Plan. An impaired
class is deemed to have accepted the Plan if the holders of at least two thirds
(2/3) in dollar amount and more than one-half (1/2) in number of the Allowed
Claims of the class vote to accept the Plan. Only holders of Allowed Claims
entitled to vote who actually do vote to accept or reject the Plan are counted
in this tabulation; holders of Allowed Claims who do not vote are not counted. A
Creditor's vote may be disregarded to the extent the Court determines that
Debtors did not solicit or procure the Creditor's acceptance or rejection in
good faith.
If the Plan is accepted by all classes impaired under the Plan, the
Plan will be confirmed provided that the Court finds that the Plan satisfies the
other conditions set forth in section 1129(a) of the Bankruptcy Code. If,
however, the voting members of an impaired class do not vote for acceptance of
the Plan, the Court must conclude that each holder of a Claim in an impaired
class has either accepted the Plan or will receive property of a value, as of
the Effective Date, not less than the amount such Creditor would receive if the
Case were a case under Chapter 7 of the Bankruptcy Code.
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The Plan may be confirmed even though it is not accepted by all
impaired classes to the extent: (1) at least one impaired class accepts the
Plan; (2) the Plan is "fair and equitable" as to those impaired classes not
accepting the Plan; (3) the Plan does not "discriminate unfairly" against any
impaired class electing not to accept the Plan, and (4) the Plan meets the "cram
down" conditions set forth in section 1129(b) of the Bankruptcy Code. The "fair
and equitable" standard requires, among other things, that (a) no holder of any
Claim or Equity Interest in any class junior to any dissenting class of
unsecured Claims receive or retain any property on account of such Claim or
Equity Interest unless the dissenting class of unsecured Claims receives full
compensation for its Allowed Claims, and (b) the members of any dissenting class
of secured claims either retain their liens and receive deferred cash payments
with a value as of the Effective Date of the Plan equal to the value of their
interests in the Debtors' property or otherwise receive the "indubitable
equivalent" of the value of their secured claims. The requirement that the Plan
not "discriminate unfairly" simply means that a dissenting class must be treated
substantially the same as other classes of equal rank. To the extent necessary,
if at all, the Debtors will seek to rely on the cramdown provisions of the
Bankruptcy Code.
B. Effect of Confirmation
Upon the Effective Date, the Debtors, the Reorganized Company, each
Creditor, and each holder of an Equity Interest will be bound by the provisions
of the Plan regardless of whether or not the Claim or Equity Interest of such
Creditor or holder of an Equity Interest is impaired under the Plan, whether or
not such Creditor or holder of an Equity Interest filed a proof of Claim or a
proof of Claim was deemed filed, whether or not the Claim or Equity Interest is
allowed by the Court, or whether or not such Creditor or holder of an Equity
Interest voted to accept the Plan. Except as otherwise specifically provided in
the Plan, upon the Effective Date, all property dealt with by the Plan will be
free and clear of all Claims and Equity Interests. The rights afforded under the
Plan and the treatment of Claims and Equity Interests will be exchanged for and
in complete satisfaction, discharge, and release of, all Claims (including
post-Petition Date interest on Claims) and Equity Interests.
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XIV. RISK FACTORS
A. Acquisition Strategy; Impact on Operations Results; Need for Capital.
The Reorganized Company's strategy includes acquisitions of retail
cookware businesses and other companies complementary to its business. The
success of any such acquisition will depend on many factors, including the
Reorganized Company's ability to identify suitable acquisition candidates, the
purchase price, the availability and terms of financing, and management's
ability to effectively integrate the acquired businesses into the Reorganized
Company's operations. Significant competition for acquisition opportunities
exists in the retail cookware industry, which may significantly increase the
costs of and decrease the opportunities for acquisitions. Although the
Reorganized Company is actively pursuing potential acquisitions, there can be no
assurance that any acquisition will be consummated. No assurances can be given
that the Reorganized Company will be able to operate any acquired businesses
profitably or otherwise successfully implement its expansion strategy. There can
be no assurance that the Reorganized Company will be able to hire, train and
integrate qualified employees, locate and obtain favorable store sites for new
stores, and adapt its management information and other operational systems, to
the extent necessary to grow in a profitable manner. The Reorganized Company may
finance future acquisitions and planned internal growth through borrowings or
the issuance of debt or equity securities. There can be no assurances that
future lenders to the Reorganized Company will extend credit, or extend credit
on favorable terms. There can be no assurance that the Reorganized Company will
be able to raise additional equity. In the event that the Reorganized Company
fails to obtain additional financing when required, such failure could result in
the modification, delay or abandonment of some or all of the Reorganized
Company's development and expansion plans. Any such modification, delay or
abandonment is likely to have a material adverse effect on the Reorganized
Company's business, which could adversely affect the value of the Reorganized
Company's securities and the warrants issued pursuant to the Plan and may limit
the Reorganized Company's ability to make principal and interest payments on its
indebtedness including the Available Cash Note and the Gem Debenture. Further,
any issuance of equity securities could have a significant dilutive effect on
the holders of Class A Common Stock and Class B Common Stock. Such acquisitions
may result in increased costs, significant goodwill and increases in the amount
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of depreciation and amortization expense and could also result in write downs of
purchased assets, all of which could adversely affect the Reorganized Company's
operating results in future periods. In the event that the reorganized Company's
plans for expansion are not successful, there could be a material adverse affect
on the Reorganized Company's business.
B. Operating History
The Debtors incurred substantial losses in 1996 and 1997 and in 1998 to
date. There can be no assurance that the Reorganized Company's future operations
will be profitable. The Reorganized Company may, in fact, continue to incur
losses for the foreseeable future.
C. Ability to Service Indebtedness
The Debtors currently are not able to, and there can be no assurance
that the Reorganized Company will be able to, generate sufficient cash flow to
meet required interest and principal payments associated with its indebtedness.
If the Reorganized Company is unable to generate sufficient cash flow to meet
its debt obligations, the Reorganized Company may be required to renegotiate the
payment terms or to refinance all or a portion of its indebtedness, to sell
assets or to obtain additional financing. If the Reorganized Company is unable
to refinance such indebtedness, substantially all of the Reorganized Company's
debt would be in default and could be declared immediately due and payable. For
instance, the Gem Debenture is due and payable on October 1, 1998.
D. Suppliers
Although the Cookstore Debtors currently acquire their products from
over 200 suppliers, certain suppliers of well-known products are particularly
important to the Cookstore Debtors' ability to offer the quality of products
necessary to implement the Reorganized Company's strategy. These suppliers are
not obligated to continue to furnish products to the Reorganized Company. The
Reorganized Company does not have any written contracts with its suppliers. In
the event that the Reorganized Company cannot maintain its existing
relationships with its suppliers on terms no less advantageous than currently
available, or experiences any delay or difficulty in obtaining alternative
suppliers on comparable terms, then there could be a material adverse affect on
the Reorganized Company's business.
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E. Control by Current Officers and Directors; Relationship of Principal
Shareholders
Cambridge and its affiliates will own an aggregate of approximately 80%
of the Reorganized Company's Class A Common Stock and all but two of the
Reorganized Company's directors are principals of Cambridge. Messrs. Czarnecki
and Tuttle may be deemed to be affiliates of Cambridge. As a result, Cambridge
will be in a position to exercise significant influence over the Reorganized
Company and the election of the Reorganized Company's directors and otherwise
essentially control the outcome of all matters requiring shareholder approval.
F. Leases
The Debtors currently lease all of their properties. No assurance can
be given that the Reorganized Company will be able to find favorable store sites
for expansion and negotiate leases on satisfactory terms and conditions or that
the Reorganized Company will be able to comply with the provisions of the
current leases or renegotiate favorable lease terms as they expire.
G. Seasonality
The Reorganized Company's business is subject to substantial seasonal
variations. Historically, a significant portion of the Reorganized Company's 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. The
Reorganized Company believes that this is the general pattern associated with
similar retail industries. If for any reason the Reorganized Company's sales
were to be substantially below seasonal norms during the October through
December period, the Reorganized Company's 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 the Reorganized Company's results of operations for the year.
The Reorganized Company must also make decisions regarding how much inventory to
buy well in advance of the season in which it will be sold, especially for the
Christmas selling season. Significant deviations in actual from projected demand
for products can have an adverse affect on the Reorganized Company's sales and
profitability.
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H. Dependency Upon Key Executives
The Reorganized Company's success depends upon the contributions of its
senior management. The Reorganized Company believes that its future success will
depend upon its ability to attract, motivate and retain highly-skilled
managerial, technical and marketing personnel. The loss of the services of
certain of the Reorganized Company's executives or technical personnel, or the
inability to hire and retain qualified personnel could have an adverse effect
upon the Reorganized Company's business. Competition for personnel having the
qualifications required by the Reorganized Company is expected and there can be
no assurance that the Reorganized Company will be successful in attracting and
retaining the personnel it requires to successfully develop new and enhanced
services and to continue to grow and operate profitably. The Reorganized Company
has no key man life insurance on the lives of any of its executive officers or
technical personnel. See "Background of Management".
I. Lack of Trading Market; No Market for Class B Common Stock
There is no liquid public trading market for the Debtors' securities
and there is no assurance that a regular public trading market for the
Reorganized Company's securities will be sustained. Since the Class B Common
Stock cannot be transferred there will be no public market for Class B Common
Stock. Holders of Class B Common Stock will not be able to sell their shares of
Class B Common Stock until they are converted into Class A Common Stock. See
"Description of Capital Stock - Common Stock."
J. Delisting of Securities from NASDAQ; Risks of Low-Priced Stocks
Gaylord Company's securities were delisted from the Nasdaq Small
Capitalization market. To re-list, the Company must have $4,000,000 in total
assets, $1,000,000 in total capital and surplus, $200,000 in market value of
public float, a minimum bid price of $1.00 per share, a minimum of 100,000
shares publicly held and a minimum of 300 shareholders. If the Reorganized
Company is unable to list on Nasdaq, trading, if any, in the Company's Class A
Common Stock and New Warrants would continue to be conducted in the
over-the-counter market in the so-called "pink sheets" or the NASD's "Electronic
Bulletin Board." As a consequence, an investor would likely continue to find it
difficult to dispose of, or to obtain quotations as to the price of, the Class A
Common Stock and New Warrants of the Reorganized Company.
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K. Penny Stock Regulation
In the event that the Reorganized Parent is unable to satisfy the
Nasdaq listing requirements, trading would continue to be conducted in the pink
sheets or the NASD's Electronic Bulletin Board. In the absence of the Class A
Common Stock being quoted on Nasdaq, or the Reorganized Company having
$4,000,000 in net tangible assets (and meeting certain other tests), trading in
the securities 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 who 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 Reorganized Parent's securities were subject to the regulations
applicable to penny stocks, the market liquidity for the securities would
continue to be severely affected 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 the Reorganized
Parent's securities will not continue to be subject to these or other
regulations that would adversely affect the market for such securities.
L. Non-Compliance with Securities Laws
Gaylord Company has not made the regular disclosure filings required by
the Exchange Act. Although the Reorganized Company plans to resume compliance
with the Exchange Act after confirmation, the Reorganized Company may be subject
to various sanctions, disabilities and damages as a result of its previous
non-compliance. For instance, holders of restricted securities will not be able
to sell such securities under Rule 144. See "Securities Laws Matters."
M. Volatility of Stock Price; Absence of Dividends
From time to time, there may be significant volatility in the market
price for the Class A Common Stock. Quarterly operating results of the
Reorganized Company, changes in earnings estimated by analysts, if any, changes
in general conditions in the Reorganized Company's industry or the economy or
the financial markets or other developments affecting the Reorganized Company
could cause the market price of the Class A Common Stock to fluctuate
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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. For the foreseeable future, it is
expected that earnings, if any, generated from the Reorganized Company's
operations will be used to finance the growth of its business, and that no
dividends will be paid to holders of any of the capital stock of Reorganized
Parent.
N. Potential Adverse Effect of Redemption of New Warrants
The New Warrants are redeemable by the Reorganized Parent at a price of
$.05 per New Warrant, provided that (i) prior notice of not less than 30 days is
given to the holders of the New Warrants, and (ii) the closing sale price of the
Class A Common Stock as reported on NASDAQ or other reporting agency on each of
the 20 consecutive trading days ending on the tenth day prior to the date on
which the Reorganized Parent gives notice of redemption has been at least
$12.00. The holders of the New Warrants shall have exercise rights until the
close of the business day preceding the date fixed for redemption. Notice of
redemption of the New Warrants could force the holders to exercise the New
Warrants and pay the exercise price at a time when it may be disadvantageous for
them to do so, to sell the New Warrants at the market price when they might
otherwise wish to hold the New Warrants, or to accept the redemption price which
is likely to be substantially less than the market value of the New Warrants at
the time of redemption.
O. Competition
The Reorganized Company faces significant competition from companies
that are similarly specialized and also from companies that are involved in more
generalized retailing. The Reorganized Company also faces competition from other
companies, such as catalogue companies, which have added or may add cookware to
existing or future offerings. Many of the Reorganized Company's existing and
potential competitors are larger and have significantly greater financial,
marketing, technological and other resources than the Reorganized Company. There
can be no assurance as to the degree to which the Reorganized Company will be
able to compete effectively.
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P. Risks Associated with Forward-Looking Statements
This Disclosure Statement contains certain statements that are
"forward-looking statements" within the meaning of Section 27A of the Securities
Act of 1933, as amended (the "Securities Act") and Section 21E of the Exchange
Act. Those statements include, among other things, the discussions of the
Reorganized Company's business strategy and expectations concerning developments
in the retail cookware industry, the Reorganized Company's market position,
future operations, transaction growth, margins and profitability, and liquidity
and capital resources. Holders of Claims and Equity Interests are cautioned that
reliance on any forward-looking statement involves risks and uncertainties, and
that although the Reorganized Company believes 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 below. In light of these and other uncertainties, the
inclusion of a forward-looking statement herein should not be regarded as a
representation by the Reorganized Company that the Reorganized Company's plans
and objectives will be achieved.
Q. Certain Anti-Takeover Provisions; Possible Future Issuances of
Preferred Stock.
The Charter and Bylaws of the Reorganized Parent, and Delaware law
contain certain provisions that may have the effect of inhibiting a
non-negotiated merger or other business combination involving the Reorganized
Company. Such provisions are intended to encourage any person interested in
acquiring the Reorganized Company 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, blank check preferred stock, super
majority voting provisions, and the application of Delaware law provisions on
business combinations. Certain of these provisions may discourage a future
acquisition of the Reorganized Company not approved by the Board of Directors in
which shareholders might receive a premium value for their shares. As a result,
shareholders who might desire to participate in such a transaction may not have
the opportunity to do so. In addition, the Board of Directors has the power to
designate the issuance of up to 1,000,000 shares of 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 the Reorganized
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Company's Class A Common Stock, and the fights and preferences of any such
preferred stock may be superior to those of the Class A Common Stock, thus
adversely affecting the rights of the holders of Class A Common Stock. While the
Reorganized Company has no present intention to issue shares of preferred stock,
any such issuance could be used to discourage, delay or make more difficult a
change in control of the Reorganized Company. See "Description of Capital Stock
- - Preferred Stock."
XV. DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of Reorganized Parent will consist of
20,000,000 shares of Class A Common Stock, par value $0.01 per share, 155,000
shares of Class B Restricted Common Stock, par value $0.01 per share and one
million (1,000,000) shares of Serial Preferred Stock, par value $0.01 per share.
The following summary of certain terms of Reorganized Parent's capital
stock describes material provisions of, but does not purport to be complete and
is subject to and qualified in its entirety by, Reorganized Parent's Restated
and Amended Certificate of Incorporation, Reorganized Parent's Bylaws and the
Delaware General Corporation Law.
A. Common 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 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 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 Class A 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 Class A Common Stock are entitled to share ratably in any assets
remaining after satisfaction of all prior claims upon liquidation of Reorganized
Parent, including prior claims of any outstanding preferred stock.
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 of the
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Class A Common Stock for twenty (20) consecutive trading days as quoted on
Nasdaq or, if such shares are not trading on Nasdaq, 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 Class A Common Stock (the "Trigger
Price") or (ii) of a sale of all or substantially all the assets of Reorganized
Parent, a sale of all the equity interests of Reorganized Parent or a merger or
consolidation of Reorganized Parent with or into another entity in which
Reorganized Parent 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 soon
as practicable after a Trigger Event, Reorganized Parent 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 Reorganized Parent, 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. 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. 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 for conversion. Reorganized Parent
shall at all times reserve a sufficient number of shares of authorized but
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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.
After giving effect to the reorganization of the Debtors under the
Plan, there will be 1,522,033 shares of Class A Common Stock and 154,951 shares
of Class B Common Stock issued and outstanding.
The holders of Class A 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
shareholders 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 Class A Common Stock and
Class B Common Stock have no preemptive or other subscription rights, and shares
of Class A 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 Class A 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 Reorganized
Parent may designate and issue in the future or which is currently outstanding.
See "Preferred Stock."
B. 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 Class A 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 Reorganized Parent.
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C. Registration Rights
Holders of Allowed Claims in Class 6 shall have the right for six
months after the Effective Date to include shares of Class A Common Stock issued
to them pursuant to the Plan in any registered public offering of the
Reorganized Parent and in any underwriting of such offering. See IV.A.4 above.
Registration rights were also issued in connection with the issuance of the
Fremont Warrants. The holders of the Fremont Warrants or the shares of Class A
Common Stock issued on conversion of the Fremont Warrants have the right to
unlimited incidental registrations.
XVI. MERGER
Pursuant to the Merger, which will become effective on the Effective
Date of the Plan (i) the holders of HRAC Common Stock will become entitled to
receive 1,383,684 shares of Class A Common Stock, (ii) the holders of Gaylord
Companies Common Stock will become entitled to receive 85,777 shares of Class B
Common Stock, and (iii) the holders of Gaylord Companies Preferred Stock will
become entitled to receive 69,174 shares of Class B Common Stock.
XVII. EQUITY INCENTIVE PLAN
The 1998 Equity Incentive Plan is designed to advance the Reorganized
Company's interests by enhancing its ability to attract and retain employees and
others in a position to make significant contributions to the success of the
Reorganized Company through ownership of shares of Class A Common Stock. The
1998 Equity Incentive Plan provides for the grant of incentive stock options
("ISOs"), non-statutory stock options ("NQSOs"), stock appreciation fights
("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
Class A Common Stock are reserved for issuance under the 1998 Equity 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 Class A Common
Stock issuable under the 1998 Equity Incentive Plan are subject to adjustment
for stock dividends and similar events. Awards under the 1998 Equity Incentive
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Plan may also include provision for payment of dividend equivalents with respect
to the shares subject to the award.
The 1998 Equity 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 Class A Common Stock is registered
under the Exchange Act, all members of the Option Committee shall be "outside
directors" as defined. All employees of the Reorganized Company and any of its
subsidiaries and other persons or entities (including non-employee directors of
the Reorganized Company and its subsidiaries) who, in the opinion of the Option
Committee, are in a position to make a significant contribution to the success
of the Reorganized Company or its subsidiaries are eligible to participate in
the 1998 Equity Incentive Plan.
No determination has been made (i) as to which individuals may in the
future receive options or rights under the 1998 Equity 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 fights will be granted. The proceeds received by the Reorganized
Company from the sale of stock pursuant to the 1998 Equity Incentive Plan will
be used for the general purposes of the Reorganized Company, or in the case of
the receipt of payment in shares of Class A Common Stock, as the Board of
Directors may determine, including redelivery of the shares received upon
exercise of options.
Approval of the Plan of Reorganization shall constitute approval of the
adoption 1998 Equity Incentive Plan.
XVIII. CONCLUSION
The Debtors believe that acceptance of the Plan by Creditors and
holders of Equity Interests is in the best interests of all parties, and that
Confirmation will provide the best and most prompt recovery for all parties in
interest. Debtors urge all parties to vote in favor of the Plan.
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Dated: June 24, 1998 Gaylord Companies, Inc.
/s/ John D. Critser
-------------------------------------
By: John D. Critser
The Cookstore, Inc.
/s/ John D. Critser
-------------------------------------
By: John D. Critser
The Cookstore Worthington, Inc.
/s/ John D. Critser
-------------------------------------
By: John D. Critser
Respectfully submitted,
SCHOTTENSTEIN, ZOX & DUNN
A Legal Professional Association
/s/ Daniel R. Swetnam
-------------------------------------
Daniel R. Swetnam (0011022)
E. James Hopple (0019298)
Victoria E. Powers (0054589)
Susan K. Cliffel (0046915)
Daniel M. Anderson (0067041)
41 S. High Street, Suite 2600
Columbus, Ohio 43215
(614) 221-3211
Case Attorneys For Debtors
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EXHIBITS
Exhibit A Gaylord Companies, Inc.'s and Cookstore Debtors' Amended Plan of
Reorganization dated June 24, 1998
Exhibit B Form 10-KSB of Gaylord Companies, Inc. for the period ending December
31, 1996
Exhibit C Financial Report of Cookstore Debtors for 1997
Exhibit D Term Sheet, Advisory Agreement and Related Documents
Exhibit E Schedule of Treatment of Executory Contracts and Unexpired Leases
Exhibit F Projected Financial Operations of Reorganized Company
Exhibit G Liquidation Analysis
Exhibit H Merger Agreement
Exhibit I 1998 Equity Incentive Plan
<PAGE>
EXHIBIT A
UNITED STATES BANKRUPTCY COURT
SOUTHERN DISTRICT OF OHIO
EASTERN DIVISION
In re:
GAYLORD COMPANIES, INC. : Case No. 97-60560
Joint Administered With:
GAYLORD BOOK COMPANY, : Case No. 97-60562
GAYLORD'S, INC., : Case No. 97-60561
SAWWORTH BOOK COMPANY, : Case No. 97-60563
GAYLORD ENTERPRISES, INC., : Case No. 97-60564
THE COOKSTORE, INC., and : Case No. 97-60565
THE COOKSTORE WORTHINGTON, INC.; Case No. 97-60566
: Chapter 11
Debtors. : (Judge Caldwell)
AMENDED PLAN OF REORGANIZATION OF
GAYLORD COMPANIES, INC.,
THE COOKSTORE, INC., AND THE COOKSTORE
WORTHINGTON, INC., DATED JUNE 24,1998
Gaylord Companies, Inc. ("Gaylord Companies"), The Cookstore, Inc.
("TCI") and The Cookstore Worthington, Inc. ("TCWI") (Gaylord Companies, TCI and
TCWI sometimes referred to collectively as "Debtors"), Debtors and
Debtors-in-Possession, hereby propose the following Plan of Reorganization
pursuant to 11 U. S. C. [Section] 1101 et seq.
ARTICLE I
DEFINITIONS
A. Defined Terms
When used in this Plan, the following terms shall have the meanings set
forth below, unless the context otherwise requires. Such meanings shall apply
equally to both the singular and plural forms of the defined term. Any
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capitalized term used but not otherwise defined in this Plan shall have the
meaning given to that term in the Bankruptcy Code. Unless otherwise indicated,
capitalized terms used in this Plan shall refer to the terms as defined in this
Article I.
"Administrative Expense" shall mean an actual, necessary cost or
expense of preserving the Debtors' Estates incurred after the Petition Date,
which is entitled to priority in this Case pursuant to sections 503(b) and
507(a)(1) of the Bankruptcy Code, including fees and expenses of Professionals
pursuant to sections 330 and 331 of the Bankruptcy Code and fees, if any, due to
the United States Trustee under 28 U.S.C. [Section] 1930(a)(6).
"Allowed Claim" shall mean any Claim against the Debtors' Estates to
the extent that
(i) proof of the Claim was filed with the Court within the
Claims Bar Date if no objection is interposed to the Claim
within any permissible or extended period of time, but only to
the extent and in the amount set forth in the proof of Claim,
or
(ii) if no proof of the Claim was filed, the Claim is deemed
filed pursuant to section 1111(a) of the Bankruptcy Code (the
Claim is listed in the Schedules filed pursuant to section
521(l) of the Bankruptcy Code and is not listed as disputed,
contingent or unliquidated), but only to the extent and in the
amount set forth in the Schedules, or
(iii) a proof of the Claim was timely filed with the Court
and, if an objection to allowance of the Claim was interposed
within any permissible or extended period of time, the Claim
is or has been allowed by the Plan, Final Order of the Court,
or written agreement or stipulation between Debtors and the
claimant.
"Allowed Secured Claim" shall mean that portion, if any, of an Allowed
Claim subject to offset under section 553 of the Bankruptcy Code or fully
secured by a lien, mortgage, security interest, encumbrance or other charge
against property of the Estate which charge is valid, duly perfected and
enforceable under applicable law, to the extent of the value, determined in
accordance with section 506(a) of the Bankruptcy Code, of the Creditor's
interest in the property.
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"Amelar Note" shall mean that certain demand note in the original
principal amount of $30,000, as it may be amended, payable by HRAC to Amelar
Investments L.L.C. or its designees, which note shall be assumed by the
Reorganized Parent.
"Assumed HRAC Obligations" shall mean the Amelar Note, the Gem
Debenture and the CH Note.
"Assumption Order" shall mean, collectively, any and all orders entered
by the Court authorizing the Debtors' assumption of unexpired leases or
executory contracts or both.
"Available Cash" shall mean, with respect to the Reorganized Company as
determined at the end of each fiscal year based upon the Reorganized Company's
audited financial statements, an amount equal to the sum of (a) the Reorganized
Company's net income after provision for income taxes for such fiscal year (and
excluding intercompany income) plus (b) to the extent that any of the following
previously have been deducted in determining such net income: (i) depreciation,
(ii) amortization of goodwill or other intangibles, (iii) deferred compensation,
(iv) any other non-cash charges to income and (v) the positive or negative
amount, as the case may be, of the difference between consolidated working
capital on the first day of the next fiscal year less projected consolidated
working capital on the last day of the next fiscal year, less (c) the sum of (i)
actual capital expenditures, (ii) any non-cash credits which were added in
determining net income, (iii) any principal, interest or other payments made
with respect to capital leases and indebtedness for borrowed money, including,
without limitation, under the financing arrangements between Fremont and TCI and
TCWI, and (iv) any management or advisory fees paid by the Reorganized Company.
For the avoidance of doubt, it is hereby confirmed that the term "Available
Cash" shall not include any income, losses or other items arising out of the
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conduct of the business of Debtors' Affiliates or the sale of the assets owned
by or stock issued by any of Debtors' Affiliates.
"Available Cash Note" shall mean the unsecured and subordinated
promissory note, as it may be amended, to be issued by Reorganized Parent to
Arter & Hadden (or such other person or entity selected by the Debtors) for the
benefit of the holders of Allowed Unsecured Claims pursuant to Section IV
hereof.
"Avoiding Action" shall mean any action by the Debtors under sections
544, 545, 547, 548 or 550 of the Bankruptcy Code.
"Ballot" shall mean the form distributed to each holder of an impaired
Claim entitled to vote on the Plan on which an acceptance or rejection of the
Plan shall be indicated.
"Bankruptcy Code" shall mean Title 11 of the United States Code as
currently in effect as well as Sections 157, 158, 1334, 1408 through 1412, and
1452 of Title 28 of the United States Code.
"Bankruptcy Rules" shall mean the Federal Rules of Bankruptcy Procedure
as currently in effect.
"Cambridge" shall mean Cambridge Holdings, L.L.C., a limited liability
company organized under the laws of the state of Delaware.
"CH Note" shall mean that certain demand note in the original principal
amount of up to $450,000, as it may be amended, payable by HRAC to Cambridge or
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its designees in connection with certain transaction costs and expenses advanced
by Cambridge to HRAC, which CH Note shall be assumed by the Reorganized Parent.
"Case" shall mean, collectively, Case Numbers 97-60560, 97-60565 and
97-60566, commenced by voluntary petitions for relief under Chapter 11 of the
Bankruptcy Code filed with the Court on November 13, 1997. The term "Case" does
not include Case Numbers 97-60561 through 97-60564.
"Claim" shall have the meaning ascribed to it in section 101(5) of the
Bankruptcy Code.
"Claims Bar Date" shall mean (i) with respect to Claims by entities
other than governmental entities, March 17, 1998 and (ii) with respect to Claims
by governmental entities, May 12, 1998; each of the foregoing being the
applicable bar date by which a proof of Claim was required to have been filed in
the Case as established by Bankruptcy Rule 3003 or by Final Order of the Court.
"Class A Common Stock" shall mean the Class A Common Stock, $0.01 par
value per share, of the Reorganized Parent.
"Class B Common Stock" shall mean the Class B Restricted Common Stock,
$0.01 par value per share, of Reorganized Parent, each share of which shall
automatically convert into one share of Class A Common Stock only after (i) the
Class A Common Stock has traded at in excess of $11.57 per share for a period of
no less than 20 consecutive trading days or (ii) a sale of all or substantially
all the assets of Reorganized Parent, a sale of all the equity interests of
Reorganized Parent or a merger or consolidation of Reorganized Parent with or
into another entity in which Reorganized Parent is not the surviving entity
pursuant to which the holders of Class A Common Stock would receive, on a fully
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diluted basis after giving effect to the conversion of the Class B Common Stock
and any other convertible securities, consideration which exceeds $11.57 per
share, in each case subject to adjustment in the event of any stock splits or
similar events.
"Confirmation" shall mean entry of the Confirmation Order.
"Confirmation Date" shall mean the date on which the Confirmation Order
is entered.
"Confirmation Hearing" shall mean the hearing held by the Court to
consider confirmation of the Plan pursuant to section 1129 of the Bankruptcy
Code, as such hearing may be adjourned or continued from time to time.
"Confirmation Order" shall mean the Final Order entered by the Court
confirming the Plan pursuant to section 1129 of the Bankruptcy Code.
"Cookstore Debtors" shall mean TCI and TCWI.
"Court" shall mean the United States Bankruptcy Court for the Southern
District of Ohio, Eastern Division, or in the event such court ceases to
exercise jurisdiction over the Case, such court or adjunct thereof that
thereafter exercises jurisdiction over the Case, and any court having
jurisdiction to hear appeals from any such court.
"Creditor" shall have the meaning ascribed to it in section 101(10) of
the Bankruptcy Code.
"Debtors" shall mean, collectively, Gaylord Companies, TCI and TCWI in
their corporate capacities and as Debtors and Debtors-in-Possession in the Case.
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"Debtors' Affiliates" shall mean, collectively, all of Debtors'
affiliates, as that term is defined in section 101(2) of the Bankruptcy Code,
including, without limitation, Gaylord Book Company, Gaylord's, Inc., Sawworth
Book Company, and Gaylord Enterprises, Inc., the estates of which are seeking to
reorganize pursuant to that certain Plan of Reorganization of United Magazine
Company with Regard to Bankruptcy Estates of Debtors Gaylord Book Company,
Sawworth Book Company, Gaylord's, Inc. and Gaylord Enterprises, Inc. Dated April
16, 1998 (May 1, 1998 Modification).
"Disclosure Statement" shall mean the Amended Disclosure Statement for
the Amended Plan of Reorganization of Gaylord Companies, Inc., The Cookstore,
Inc. and The Cookstore Worthington, Inc. Dated June 24, 1998, as may be amended
or modified from time to time.
"Disputed Claim" means a Claim against the Estate that is not an
Allowed Claim and either (a) an objection to the Claim has been filed by a party
in interest; or (b) the Claim appears on a schedule of disputed claims filed by
Debtors with the Court on or before the Effective Date.
"Effective Date", unless advanced or accelerated by HRAC in its sole
discretion, shall mean the later of the following dates, as calculated pursuant
to Bankruptcy Rule 9006: (a) a date no later than twenty (20) days following
Confirmation; (b) if an appeal from the Confirmation Order is timely filed, the
first business day on which implementation of the Plan has not been stayed
pending such appeal; and (c) the date on which the conditions specified in
Article VIII have been satisfied.
"Equity Interest" shall mean any equity interest in the Debtors,
including any equity security, as defined in section 101(16) of the Bankruptcy
Code, common stock, preferred stock, warrants, options, puts, calls or shares,
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and the right or power to acquire or exercise rights with respect to the same,
asserted by any person or entity.
"Estate" shall mean, collectively, the estates of each of the Debtors
created pursuant to section 541 of the Bankruptcy Code upon commencement of the
Case.
"Exit Financing Facility" shall mean the post-Effective Date term loan
and working capital revolving credit financing facility for the Reorganized
Company to be provided by Fremont or other lender selected by the Reorganized
Company upon terms and pursuant to agreements in form and substance acceptable
to Fremont (or such other lender), the Debtors and the Reorganized Company.
"Final Decree" means a final decree entered by the Court pursuant to
Bankruptcy Rule 3022.
"Final Order" shall mean an order of a court of appropriate
jurisdiction in the Case as to which (a) any appeal that has been taken has been
finally determined or dismissed, or (b) the time for appeal has expired and a
notice of appeal has not been timely filed.
"Financing Order" shall mean the Final Order Authorizing The Cookstore,
Inc. and The Cookstore Worthington Inc. to Obtain Secured Post-Petition Credit
entered on May 6, 1998.
"Financing Warrants" shall mean the Fremont Warrants and the Individual
Warrants.
"Fremont" shall mean Fremont Financial Corporation, a California
corporation.
"Fremont Allowed Secured Claim" shall mean the amount of Fremont's
Secured Claim pursuant to the Financing Order.
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"Fremont Senior Tranche" shall mean the Fremont Allowed Secured Claim
(excluding the HRAC Junior Tranche and the Individual Junior Tranche).
"Fremont Warrants" shall mean the warrants that expire on June 30, 2003
to purchase Class A Common Stock at a price of $.01 per share to be issued by
the Reorganized Parent to Fremont.
"Gem Debenture" shall mean that certain Debenture by HRAC to the order
of Global Strategic Holdings, Ltd. in the principal amount of up to $300,000
with a maturity date of October 1, 1998.
"General Secured Claim" shall mean any Claim, to the extent reflected
in the Schedules or a proof of claim as a Secured Claim, which is secured by a
lien on collateral to the extent of the value of such collateral, as determined
in accordance with section 506(a) of the Bankruptcy Code, or, in the event that
such Claim is subject to setoff under section 553 of the Bankruptcy Code, to the
extent of such setoff.
"Greenfield" shall mean Greenfield Commercial Credit, L.L.C.
"HRAC" shall mean Home Retail Acquisition Corp., a Delaware
corporation.
"HRAC Advisory Agreement" shall mean the Advisory Agreement, as
amended, between Cambridge and the Debtors under the Term Sheet (which Advisory
Agreement has been assigned by Cambridge to HRAC) pursuant to which HRAC agreed
to act as an advisor to the Debtors and the Debtors agreed to pay to HRAC, among
other things, $30,000 per month for such services.
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"HRAC Junior Tranche" shall mean the junior tranche of the Fremont
Allowed Secured Claim that HRAC purchased from Fremont pursuant to those certain
Subordinated, Last-out Participation Agreements between Fremont and HRAC in an
amount not less than $250,000, as amended, restated, modified and supplemented.
"Individual Junior Participants" shall mean any or all of the persons
(other than HRAC) who are party to one or more of those certain Subordinated,
Last-Out Participation Agreements each dated as of April 28, 1998 with Fremont,
as amended, restated, modified and supplemented.
"Individual Junior Tranche" shall mean the junior tranche of the
Fremont Allowed Secured Claim in the collective amount of $250,000 which were
purchased from Fremont pursuant to those certain Subordinated, Last-Out
Participation Agreements each dated as of April 28, 1998 between each of the
Individual Junior Participants and Fremont, as amended, restated, modified and
supplemented.
"Individual Warrants" shall mean the warrants, expiring June 30, 2003
to purchase Class A Common Stock at a price of $4.00 per share to be issued by
the Reorganized Parent to the Individual Junior Participants.
"Ingram" shall mean Ingram Book Company, a division of Ingram
Industries, Inc.
"IRS" shall mean the Department of the Treasury, Internal Revenue
Service.
"Merger" shall mean the merger of HRAC into Gaylord Companies pursuant
to the Merger Agreement.
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"Merger Agreement" means the Merger Agreement and Plan of
Recapitalization dated June __, 1998, between HRAC and Gaylord Companies.
"New Securities" shall mean, collectively, Class A Common Stock, Class
B Common Stock, New Warrants, Financing Warrants and Available Cash Note.
"New Warrants" shall mean the warrants, expiring October 30, 1998, to
purchase Class A Common Stock at the initial exercise price of $11.57 per share
to be issued to the holders of Allowed Equity interests in Class 9 pursuant to
Article IV hereof The New Warrants shall be redeemable for $.05 per Warrant in
the event the Class A Common Stock has traded at $12.00 per share for a period
of no less than 20 consecutive trading days.
"Other Equity Interests" shall mean all Equity Interests in the Debtors
other than the holders of common stock of Gaylord Companies.
"Petition Date" shall mean November 13, 1997, the date Debtors
commenced the Case.
"Plan" shall mean this Amended Plan of Reorganization of Gaylord
Companies, Inc., The Cookstore, Inc. and The Cookstore Worthington, Inc. dated
June 24, 1998, proposed by Debtors, as may hereafter be amended or modified.
"Priority Claim" shall mean any Claim, other than a Claim for
Administrative Expense, entitled to priority under section 507(a) of the
Bankruptcy Code.
"Priority Tax Claim" shall mean any Claim of a governmental unit of the
kind specified in sections 502(i) and 507(a)(8) of the Bankruptcy Code.
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"Professional" shall mean any and all attorneys, accountants,
appraisers, consultants, or other persons retained by or on behalf of Debtors
pursuant to order of the Court.
"Record Date" means the business day that is five days after the
Confirmation Date.
"Reorganized Company" shall mean, collectively, Reorganized Parent and
the Reorganized Cookstore Companies.
"Reorganized Cookstore Companies" shall mean the Cookstore Debtors as
reorganized under this Plan.
"Reorganized Parent" shall mean the surviving entity Home Retail
Holdings, Inc. (f/k/a Gaylord Companies, Inc.), the successor in interest
following the Merger.
"Schedules" shall mean the schedules filed by Debtors with the Clerk of
the Court pursuant to Bankruptcy Rule 1007, as may be modified or amended from
time to time.
"Substantial Consummation" shall have the meaning ascribed to it in 11
U.S.C. [Section] 1101(2).
"Term Sheet" shall mean that certain Term Sheet entered into by and
between the Debtors and Cambridge dated February 26, 1998, as approved by the
Court pursuant to the Court's Order Granting Debtor's Motion for Authority to
Enter Into and Perform Term Sheet, as amended, entered in the Case on or about
March 6, 1998.
"Term Sheet Transaction" shall mean the transactions described in and
contemplated by the Term Sheet.
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"Unclassified Claims" shall mean Claims described in Article 11 and
Section III(E) of this Plan.
"Unsecured Claim" means any Claim that is neither secured by property
of the Estate nor entitled to priority under section 507 or other applicable
provision of the Bankruptcy Code.
"Unsecured Creditor" shall mean any Creditor that is the holder of an
Unsecured Claim.
A. Undefined Terms
Unless otherwise indicated, terms used in this Plan that are defined in
the Bankruptcy Code and not in this Plan have the meanings ascribed to such
terms in the Bankruptcy Code. The rules of construction contained in this
Bankruptcy Code and Bankruptcy Rules apply to this Plan.
ARTICLE II
TREATMENT OF ADMINISTRATIVE
EXPENSE CLAIMS AND PRIORITY TAX CLAIMS
A. Administrative Expense Claims
1. In General. Except to the extent that any entity entitled to payment
of any Allowed Administrative Expense Claim agrees to a different treatment, and
except as provided in Section II(A)(2) and (3) below, each holder of an Allowed
Administrative Expense Claim shall receive cash in an amount equal to such
Allowed Administrative Expense Claim on the later of the Effective Date and the
date such Administrative Expense Claim becomes an Allowed Administrative Expense
Claim, or as soon thereafter as is practicable; provided, however, that (1)
Allowed Administrative Expense Claims representing liabilities or other
obligations incurred in the ordinary course of business by the Debtors shall be
paid in full (and any such other obligations shall be performed) by the
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Reorganized Company in the ordinary course of business in accordance with the
terms and subject to the conditions of any agreements governing, instruments
evidencing or other documents relating to, such transactions and (2) any Claim
for Administrative Expense held or asserted by an entity against the bankruptcy
estate(s) of the Debtors' Affiliates shall not be impaired hereby, and any such
claim for Administrative Expenses held or asserted against such other estate(s)
shall be reduced by the amount paid to such entity pursuant to the terms of the
Plan.
2. Professional Compensation and Expense Reimbursement Claims. All
entities seeking an award by the Court of compensation for services rendered or
reimbursement of expenses incurred through and including the Confirmation Date
under sections 503(b)(2), 503(b)(3), 503(b)(4) or 503(b)(5) of the Bankruptcy
Code (a) shall file their respective final applications for allowances of
compensation for services rendered and reimbursement of expenses incurred
through the Confirmation Date within 30 days after the Effective Date and (b) if
granted such an award by the Court, shall be paid in full in such amounts as are
allowed by the Court (i) on the later of the Effective Date or the date such
Administrative Expense Claim becomes an Allowed Administrative Expense Claim, or
as soon thereafter as is practicable or (ii) upon such other terms as may be
mutually agreed upon between such holder of an Allowed Administrative Expense
Claim and the Debtors or, on and after the Effective Date, the Reorganized
Company. All professional fees for services rendered in connection with the Case
and the Plan after the Confirmation Date, including, without limitation, those
relating to the occurrence of the Effective Date and the resolution of Disputed
Claims, shall be paid by the Reorganized Company upon receipt of an invoice or
on such other terms as the Reorganized Company may agree to, without the need
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for further Court authorization or entry of a Final Order, absent an objection
by the Reorganized Company. In the event the Reorganized Company objects to such
fees, the matter shall be resolved by the Bankruptcy Court upon motion of such
professional.
3. Payment of Statutory Fees. All fees payable pursuant to section 1930
of title 28 of the United States Code shall be paid on the later of the
Effective Date or such other date as specified in invoices therefor received by
the Debtors or Reorganized Company.
B. Priority Tax Claims
Except to the extent that a holder of an Allowed Priority Tax Claim has
been paid by the Debtors prior to the Effective Date or agrees to a different
treatment, each holder of an Allowed Priority Tax Claim shall receive, at the
sole option of Reorganized Company (a) cash in an amount equal to such Allowed
Priority Tax Claim on the later of the Effective Date and the date such Priority
Tax Claim becomes an Allowed Priority Tax Claim, or as soon thereafter as is
practicable, or (b) equal annual cash payments in an aggregate amount equal to
such Allowed Priority Tax Claim, together with interest at a fixed annual rate
equal to 7%, over a period through the sixth anniversary of the date of
assessment of such Allowed Priority Tax Claim, or upon such other terms
determined by the Court to provide the holder of such Allowed Priority Tax Claim
deferred cash payments having a value, as of the Effective Date, equal to such
Allowed Priority Tax Claim.
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ARTICLE III
CLASSIFICATION OF CLAIMS AND EQUITY INTERESTS
As described in Article V(D) hereof and in the Disclosure Statement,
effective on the Effective Date, HRAC shall be merged into Gaylord Companies.
Gaylord Companies shall be the sole surviving entity of the merger, and shall be
Reorganized Parent hereunder. In addition, TCI and TCWI shall be substantively
consolidated with Gaylord Companies only for, purposes of distributions under
the Plan. Accordingly, allowed Claims against and Equity Interests in any one or
more of the estates of Gaylord Companies, TCI and TCWI are classified in this
Plan as if there were a single Estate, although TCI and TCWI shall maintain
their separate existence.
All Allowed Claims are placed in the classes set forth below, or, where
applicable, are treated as Unclassified Claims as discussed in Articles II and
III(E) of this Plan. Unless expressly provided otherwise, an Allowed Claim that
is properly included in more than one class is in a class to the extent it meets
the description of such class and is in a different class to the extent it meets
the description of such different class.
A. Secured Claims
Class 1: Fremont, as sole owner of the Fremont Senior Tranche.
Class 2: HRAC, as owner of the HRAC Junior Tranche.
Class 3: Individual Junior Participants, as owners of the Individual
Junior Tranche.
Class 4: Holders of all other Allowed Secured Claims whose Claims are
not included in Classes 1, 2 or 3.
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B. Priority Claims
Class 5: the Allowed Claims of Unsecured Creditors entitled to priority
pursuant to sections 507(a)(3) or 507(a)(4) of the Bankruptcy
Code.
C. Unsecured Claims
Class 6: the unsecured Allowed Claim of any Creditor not included in
any other class, including, without limitation, the
"deficiency" portion of any Allowed Secured Claims, but not
including Unclassified Claims treated elsewhere in the Plan.
D. Equity Interests
Class 7: the Equity Interests of holders of common shares of Gaylord
Companies.
Class 8: the Equity Interests of holders of preferred shares of Gaylord
Companies.
Class 9: the Equity Interests of holders of warrants for the purchase
of common shares of Gaylord Companies.
Class 10: all other Equity Interests in the Debtors not included in
Class 7, 8 or 9.
E. Unclassified Claims
Section 1123(a)(1) of the Bankruptcy Code provides that certain Claims,
including Claims for Administrative Expenses for unpaid post-Petition Date goods
and services (Bankruptcy Code section 507(a)(1) Claims) and Claims for Allowed
Unsecured Claims of governmental units (Bankruptcy Code Section 507(a)(8)
Claims), shall not be designated into classes. The Unclassified Claims described
herein are treated in Article II of the Plan.
ARTICLE IV
TREATMENT OF CLAIMS AND EQUITY INTERESTS
Allowed Claims in the following classes shall receive the following
treatment in complete satisfaction of all such Allowed Claims.
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Class 1: Class 1 is unimpaired by the Plan. Consequently, Fremont is
conclusively presumed to have accepted the Plan and is not entitled to vote to
accept or reject the Plan.
On the Effective Date, all outstanding obligations due to Fremont under
the Financing Order shall be either (x) repaid in full in cash or (y) repaid
pursuant to the Exit Financing Facility such that Fremont shall receive from the
Reorganized Company, in complete satisfaction of the Fremont Senior Tranche, the
full amount of the Fremont Senior Tranche either (i) in cash on the Effective
Date, or (ii) as may otherwise be agreed by and between Fremont, HRAC, and the
Debtors or the Reorganized Company. In addition, Fremont shall receive in
connection with the Exit Financing Facility Fremont Warrants exercisable to
purchase 92,595 shares of Class A Common Stock at the exercise price of $.01 per
share. The Debtors acknowledge and agree that the obligation of Fremont to
extend the Exit Financing Facility is subject to the terms of the commitment
letter dated March 26, 1998 to Cambridge and that the terms of the Plan shall
not affect or modify the obligation of Fremont to extend the Exit Financing
Facility.
Class 2: Class 2 is impaired by the Plan. Consequently, HRAC shall be
entitled to vote to accept or reject the Plan.
On the Effective Date, HRAC shall be merged into Gaylord Companies, as
more fully described in Article V below. In consideration for the contribution
of HRAC and the merger of HRAC with Gaylord Companies, and in complete
satisfaction of the HRAC Junior Tranche and any amounts owed to HRAC prior to
the Confirmation Date on account of the HRAC Advisory Agreement, the
shareholders of HRAC shall receive on the Effective Date 1,383,684 shares of
Class A Common Stock of Reorganized Parent which, on the Effective Date giving
effect to the exercise of the New Warrants and before the exercise of any
Financing Warrants, shall be equal to eighty percent (80%) of the issued and
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outstanding shares of Class A Common Stock and Class B Common Stock of
Reorganized Parent. In addition the Reorganized Parent will assume the
liabilities of HRAC under the Assumed HRAC Obligations.
Class 3: Class 3 is unimpaired by the Plan. Consequently, each holder
of an Allowed Claim in Class 3 is conclusively presumed to have accepted the
Plan and is not entitled to vote to accept or reject the Plan.
On the Effective Date, all outstanding obligations due to the
Individual Junior Participants and the security interests granted to the holders
of such Claims shall be restructured as a subordinated loan facility in an
amount equal to the outstanding amount of the Individual Junior Tranche and such
holders otherwise will be rendered unimpaired. In partial consideration for the
restructure of such obligations, each holder of an Allowed Claim in Class 3
shall also receive its pro rata percentage of the Individual Warrants
exercisable for 29,261 shares of Class A Common Stock of the Reorganized Parent
at the exercise price of $4.00 per share.
Class 4: Class 4 is unimpaired by the Plan. Consequently, each holder
of an Allowed General Secured Claim is conclusively presumed to have accepted
the Plan and is not entitled to vote to accept or reject the Plan.
At the sole option of Reorganized Company, (i) an Allowed General
Secured Claim shall be reinstated and rendered unimpaired in accordance with
section 1124(2) of the Bankruptcy Code, (ii) a holder of an Allowed General
Secured Claim shall receive cash in an amount equal to such Allowed General
Secured Claim, including any interest on such Allowed General Secured Claim
required to be paid pursuant to section 506(b) of the Bankruptcy Code, on the
later of the Effective Date and the date such General Secured Claim becomes
Allowed, or as soon thereafter as is practicable, or (iii) a holder of an
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Allowed General Secured Claim shall receive the collateral securing its Allowed
General Secured Claim and any interest on such Allowed General Secured Claim
required to be paid pursuant to section 506(b) of the Bankruptcy Code, in full
and complete satisfaction thereof on the later of the Effective Date and the
date such General Secured Claim becomes Allowed, or as soon thereafter as is
practicable. The legal, equitable and contractual rights of the holders of
Allowed General Secured Claims, if any exist, are not altered by the Plan.
Class 5: Class 5 is unimpaired by the Plan. Consequently, each holder
of an Allowed Claim in Class 5 is conclusively presumed to have accepted the
Plan and is not entitled to vote to accept or reject the Plan.
Each holder of an Allowed Claim in Class 5 shall receive cash in an
amount equal to such Allowed Claim on the later of the Effective Date or the
date such Allowed Claim becomes an Allowed Claim, or as soon thereafter as is
practicable.
Class 6: Class 6 is impaired by the Plan. Consequently, each holder of
an Allowed Claim in Class 6 shall be entitled to vote to accept or reject the
Plan.
On the Effective Date, each holder of an Allowed Claim in Class 6 shall
receive from Reorganized Parent in complete satisfaction of the Allowed Claim,
the following:
(i) An amount equal to its pro rata share, as compared to all
other holders of Allowed Claims in Class 6, of the Available
Cash Note. Pursuant to the Available Cash Note, distributions
shall be made by Reorganized Parent from Available Cash in the
maximum amount of $30,000 per year for five (5) years
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beginning on January 30, 1999 and continuing on each January
30 through January 30, 2003, so long as Reorganized Parent has
Available Cash. To the extent that there is insufficient
Available Cash to pay any installment with respect to the
Available Cash Note, then Reorganized Parent's obligation to
make such installment payment for that year shall be
extinguished.
(ii) Shares of Class A Common Stock in Reorganized Parent in
an amount equal to such holder's pro rata share, as compared
to all other holders of Allowed Claims in Class 6, of eight
percent (8%) of the issued and outstanding Class A Common
Stock and Class B Common Stock of Reorganized Parent on the
Effective Date giving effect to the exercise of the New
Warrants and before the exercise of the Financing Warrants.
Such shares of Class A Common Stock shall not be transferable
until the earlier of six months after the Effective Date or
the closing date of a registered public offering by the
Reorganized Parent. Holders of such shares shall have the
right for six months after the Effective Date to register such
shares for sale in a registered public offering; provided that
if any such holder determines not to include such shares in
such a registered public offering, such holder shall be
obliged to agree to any lock-up requested by any underwriter
of such public offering. If such registered public offering is
underwritten, holders who wish to register such shares must
sell such shares on the basis provided in any underwriting
arrangements and execute any documents reasonably required in
connection with such underwriting arrangements.
Class 7: Class 7 is impaired by the Plan. Consequently, each holder of
an Allowed Equity Interest in Class 7 shall be entitled to vote to accept or
reject the Plan.
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Following the conversion of Other Equity Interests to common shares of
Gaylord Companies as provided for in Class 10 below and after the merger of HRAC
with and into the Gaylord Companies, the common shares of Gaylord Companies
shall be extinguished, and the holders of an Allowed Equity Interest in Class 7
shall receive their pro rata share of the number of shares of Class B Common
Stock equal to eight per cent (8%) of the number of the issued and outstanding
shares of Class A Common Stock and Class B Common Stock of Reorganized Parent as
of the Effective Date giving effect to the exercise of the New Warrants and
before the exercise of the Financing Warrants.
Class 8: Class 8 is impaired by the Plan. Consequently, each holder of
an Allowed Equity Interest in Class 8 shall be entitled to vote to accept or
reject the Plan.
All issued and outstanding shares of preferred stock in Gaylord
Companies as of the Effective Date shall be converted to common stock of Gaylord
Companies. Following the merger of HRAC with the Gaylord Companies, such common
shares of Gaylord Companies shall be extinguished and the holders of Allowed
Equity Interests in Class 8 shall receive their pro rata share of the number of
shares of Class B Common Stock equal to four percent (4%) of the number of the
issued and outstanding shares of Class A Common Stock and Class B Common Stock
of Reorganized Parent as of the Effective Date giving effect to the exercise of
the New Warrants and before the exercise of the Financing Warrants.
Class 9: Class 9 is impaired by the Plan. Consequently, each holder of
an Allowed Equity Interest in Class 9 shall be entitled to vote to accept or
reject the Plan.
All outstanding warrants for the purchase of common shares of Gaylord
Companies shall be deemed cancelled and become null and void (without further
act or action by any party). 52,573 New Warrants at the exercise price, of
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$11.57 shall be distributed pro rata to the holders of Allowed Claims in Class
9. The New Warrants shall not be exercisable or transferable until six months
after the Effective Date.
Class 10: Class 10 is impaired by the Plan. Consequently, each holder
of an Allowed Equity Interest in Class 10 shall be entitled to vote to accept or
reject the Plan.
All Equity Interests in the Debtors not treated in Class 7, 8 or 9
hereof shall be converted, pursuant to the terms of the applicable agreement (be
it a put, or other applicable right, including without limitation, any right to
issue new warrants), to preferred or common shares of Gaylord Companies, as
provided in such agreement or, at the option of the holder of any Class 10
Equity Interest, extinguished. If converted to preferred shares of Gaylord
Companies, the interests of the holder of such shares then shall be subject to
the further conversion provided for holders of Equity Interests in Class 8
hereof. If converted to common shares of Gaylord Companies, the interests of the
holder of such shares then shall be subject to the treatment provided for
holders of Equity Interests in Class 7 hereof.
ARTICLE V
MEANS FOR IMPLEMENTATION OF THE PLAN
A. Distributions Provided for in the Plan
Payments under the Plan shall be funded from any cash or property held,
received or obtained by the Debtors and/or the Reorganized Company, from loans
made or capital contributed by, or arranged through the efforts of, Fremont,
HRAC, the Individual Junior Participants or certain other parties, or from funds
generated by the Reorganized Company's future operations, at the sole option of
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the Reorganized Company. On the Effective Date, the Debtors and/or Reorganized
Company will cause to be available for distribution shares of Class A and Class
B Common Stock of Reorganized Parent.
B. Exit Financing Facility
On or prior to the Effective Date, the Debtors or Reorganized Company,
as the case may be, shall enter into the Exit Financing Facility. On and after
the Effective Date, the Reorganized Company shall be deemed to have assumed,
without any action or execution of any document, all obligations arising under
the Exit Financing Facility. As partial consideration for providing the Exit
Financing Facility, Fremont or such other lender providing the Exit Financing
Facility shall receive Fremont Warrants as provided in Article IV of the Plan.
C. Subordinated Loan Facility
On or prior to the Effective Date, the Debtors or Reorganized Company,
as the case may be, shall enter into a subordinated loan facility with the
Individual Junior Participants or other lenders designated by the Debtors or
Reorganized Company, in the aggregate original principal amount equal to
Individual Junior Tranche. As partial consideration for providing such
subordinated loan facility, the Individual Junior Participants shall receive
Individual Warrants as provided in Article IV of the Plan.
D. Merger of HRAC and Gaylord Companies
Effective on the Effective Date, HRAC shall be merged into Gaylord
Companies. Gaylord Companies shall be the sole surviving entity of the merger,
and shall be Reorganized Parent hereunder pursuant to the terms of the Merger
Agreement.
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E. Issuance of New Securities
1. On the Effective Date, the authorized capital stock of Reorganized Parent
will consist of 20,000,000 shares of Class A Common Stock, par value $0.01 per
share, 154,951 shares of Class B Restricted Common Stock, par value $0.01 per
share and one million (1,000,000) shares of Serial Preferred Stock, par value
$0.01 per share.
2. The issuance of the following securities and notes by Reorganized Parent is
hereby authorized without further act or action under applicable law,
regulation, order or rule except to the extent expressly set forth in this Plan:
(1) 1,522,034 shares of Class A Common Stock;
(2) 175,429 shares of Class A Common Stock to be reserved until
such time as the Class B Common Stock converts to Class A
Common Stock pursuant to the terms of this Plan;
(3) 154,951 shares of Class A Common Stock to be reserved until
such time as the holders of the New Warrants, the Fremont
Warrants and the Individual Warrants exercise such warrants;
(4) 180,000 shares of Class A Common Stock to be reserved in
connection with any employee equity incentive plans as may
be instituted by the Reorganized Company in its discretion;
(5) 154,951, shares of Class B Common Stock;
(6) 52,573 New Warrants;
(7) 92,595 Fremont Warrants;
(8) 29,261 Individual Warrants; and
(9) Available Cash Note;
3. The shares of Class A Common Stock issued pursuant to this Plan
shall be subject to dilution arising from the issuance of shares by Reorganized
Parent of Class A Common Stock as may be authorized or required, from time to
time, by operation or exercise of the New Warrants and Financing Warrants,
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conversion of the Class B Common Stock to Class A Common Stock and such other
issuances of Class A Common Stock by Reorganized Parent as may be directed by
the Board of Directors of Reorganized Parent from time to time in accordance
with Reorganized Parent's bylaws and certificate of incorporation.
4. On the Effective Date, Reorganized Parent shall (i) issue an
aggregate of 1,383,684 shares of Class A Common Stock to the shareholders of
HRAC and 138,350 shares of Class A Common Stock to the holders of Allowed Claims
in Class 6; (ii) issue an aggregate of 85,777 shares of Class B Common Stock to
the holders of Allowed Claims in Class 7 and issue an aggregate of 69,174 shares
of Class B Common Stock to the holders of Allowed Claims in Class 8; (iii) issue
52,573 New Warrants; (iv) issue 121,856 Financing Warrants; (v) reserve for the
issuance of 175,429 shares of Class A Common Stock to effectuate the provisions
of the New Warrants and Financing Warrants; (vi) reserve for the issuance of
154,951 shares of Class A Common Stock upon conversion of the Class B Common
Stock; (vii) reserve for the issuance of 180,000 shares of Class A Common Stock
in connection with any employee equity incentive plans as may be instituted by
the Reorganized Company in its discretion; (viii) issue the Available Cash Note;
and (ix) assume the Assumed HRAC Obligations. All shares of Class A and Class B
Common Stock to be issued pursuant to this Plan shall be, upon issuance, fully
paid and non-assessable and shall be subject to dilution as set forth in Article
IV hereof, and the holders thereof shall have no preemptive or other rights to
subscribe for additional shares.
F. Cancellation and Surrender of Existing, Securities and Agreements
1. On the Effective Date, the promissory notes, share certificates,
bonds and other instruments evidencing any Claim, except to the extent contrary
to and not consistent with the treatment of the Fremont Allowed Secured Claim,
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and the Allowed General Secured Claims, pursuant to Article IV hereof, or Equity
Interest, shall be deemed cancelled without further act or action under any
applicable agreement, law, regulation, order or rule and the obligations of the
Debtors under the agreements, indentures and certificates of designations
governing such Claims and Equity Interests, as the case may be, shall be
discharged.
2. Each holder of a promissory note, share certificate, bond or other
instrument evidencing a Claim, except to the extent contrary to and not
consistent with the treatment of the Fremont Allowed Secured Claim and the
Allowed General Secured Claims pursuant to Article IV hereof, or Equity
Interest, shall surrender such promissory note, share certificate, bond or
instrument to Reorganized Parent, unless such requirement is waived by
Reorganized Parent. No distribution of property hereunder shall be made to or on
behalf of any such holders unless and until such promissory note, share
certificate, bond or instrument is received by Reorganized Parent or the
unavailability of such promissory note, share certificate, bond or instrument is
established to the reasonable satisfaction of Reorganized Parent or such
requirement is waived by Reorganized Parent. The Reorganized Parent may require
any holder that is unable to surrender or cause to be surrendered any such
promissory notes, share certificates, bonds or instruments to deliver an
affidavit of loss and indemnity and/or furnish a bond in form and substance
(including, without limitation, with respect to amount) reasonably satisfactory
to the Reorganized Parent. Any holder that fails within the later of one year
after the Effective Date and the date of Allowance of its Claim or Equity
Interest (i) if possible, to surrender or cause to be surrendered such
promissory note, share certificate, bond or instrument; (ii) if requested, to
execute and deliver an affidavit of loss and indemnity reasonably satisfactory
to the Reorganized Parent and (iii) if requested, to furnish a bond reasonably
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satisfactory to the Reorganized Parent, shall be deemed to have forfeited all
rights, claims and causes of action against the Debtors and Reorganized Parent
and shall not participate in any distribution hereunder. Notwithstanding the
foregoing, the Debtors and Reorganized Parent shall be deemed to waive the
requirements of this Section V(F) as to any holder whose Claim is expressly
Allowed pursuant to the Confirmation Order.
G. Continuation of Bankruptcy Injunction or Stays
All injunctions or stays provided for in the Chapter 11 Cases under
sections 105 or 362 of the Bankruptcy Code, or otherwise, and in existence on
the Confirmation Date, shall remain in full force and effect until the Effective
Date.
H. Reverting of Assets
(a) The property of the Estates shall revert to the Reorganized Company
on the Effective Date.
(b) From and after the Effective Date, the Reorganized Company may
operate the Debtors' business, shall have full authority to incur and pay
post-Petition Date and post-Confirmation Date obligations, and may use, acquire
and dispose of property, free of any restrictions imposed under the Bankruptcy
Code.
(c) As of the Effective Date, all property of the Debtors and
Reorganized Company shall be free and clear of all liens, claims and interests
of holders of Claims and Equity Interests, except as provided in the Plan.
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(d) As of the Effective Date, the Reorganized Company shall have the
right to compromise Claims without further Court order.
I. General Release of Liens
Except as otherwise provided in the Plan, in the treatment of the
Individual Junior Tranche or in the Exit Financing Facility, or in any contract,
instrument, indenture or other agreement or document created in connection with
the Plan or the implementation thereof, on the Effective Date, all mortgages,
deeds of trust, liens or other security interests against property of the
Estates are hereby released, and all the right, title and interest of any holder
of such mortgages, deeds of trust, liens or other security interests will revert
to Reorganized Company or the Debtors as applicable, and the successors and
assigns thereof.
J. Compensation and Benefit Programs
All employment and severance practices and policies, and all
compensation and benefit plans, policies and programs of the Debtors applicable
to their directors, officers or employees, including, without limitation, all
savings plans, retirement plans, health care plans, severance benefit plans,
incentive plans, workers' compensation programs and life, disability and other
insurance plans are treated either as executory contracts under the Plan
pursuant to Article VI hereof or as permitted under applicable non-bankruptcy
law.
K. Retiree Benefits
Payments, if any, due to any person for the purpose of providing or
reimbursing payments for retired employees and their spouses and dependents for
medical, surgical, or hospital care benefits, or benefits in the event of
sickness, accident, disability, or death under any plan, fund or program
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(through the purchase of insurance or otherwise) maintained or established in
whole or in part by the Debtors prior to the Petition Date shall be continued
for the duration of the period the Debtors have obligated themselves to provide
such benefits, subject to any and all fights of the Debtors under applicable
law. Notwithstanding the foregoing, the Debtors intend to reject the
Supplemental Executive Retirement Program of Gaylord Companies on or before the
Confirmation Date.
L. Breaches
In the event any of the Debtors or the Reorganized Company breaches any
of its obligations under this Plan, the Debtors and the Reorganized Company
shall have sixty (60) days from the receipt of written notice of such breach
from the holder of an Allowed Claim to sure such breach.
M. Pre-Payment of Allowed Claims
In the event the Debtors or the Reorganized Company is able to pre-pay
any Allowed Claim, the Debtors and the Reorganized Company shall have the
absolute right, in their sole discretion, to pre-pay all or a portion of any
class of Allowed Claims at any time, so long as each claimant in the class is
paid the same proportional amount. Any prepayment shall be without penalty.
N. Bylaws and Amended Certificates of Incorporation
The respective bylaws and certificates of incorporation of the
Reorganized Company shall be amended and restated as of the Effective Date to
the extent necessary (a) to prohibit the issuance of nonvoting equity securities
as required by section 1123(a)(6) of the Bankruptcy Code, subject to further
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amendment of such certificate of incorporation and bylaws as permitted by
applicable law and (b) to effectuate the provisions of the Plan, in each case
without any further action by the stockholders or directors of the Debtors or
the Reorganized Company.
O. Corporate Action
The following is hereby deemed to be authorized and approved in all
respects, without any requirement or further action by the stockholders or
directors of the Debtors or Reorganized Company, as if such actions had been
taken by unanimous action of the stockholders and directors of the Debtors or
the Reorganized Company, as applicable: (i) the adoption of the Reorganized
Company's bylaws and certificate of incorporation, (ii) the initial selection of
directors and officers of Reorganized Company, (iii) the distribution of cash
and the issuance and distribution of New Securities, (iv) the approval of the
Merger, (v) the ratification of the Merger Agreement and (vi) all other
corporate action to be taken or required by the Debtors or Reorganized Company,
as applicable, to effectuate the Plan and all agreements and transactions
provided for or contemplated by the Plan.
ARTICLE VI
TREATMENT OF EXECUTORY CONTRACTS AND UNEXPIRED LEASES
A. Assumption or Rejection of Executory Contracts and Unexpired Leases
On the Effective Date, all executory contracts and unexpired leases of
the Debtors shall be rejected by the Debtors pursuant to the provisions of
sections 365 and 1123 of the Bankruptcy Code, except: (i) any executory contract
or unexpired lease that is the subject of a separate motion to assume filed
pursuant to section 365 of the Bankruptcy Code by the Debtors before the entry
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of the Confirmation Order, (ii) executory contracts and unexpired leases listed
on Exhibit E to the Disclosure Statement, and (iii) all executory contracts or
unexpired leases assumed under this Plan or by order of the Bankruptcy Court
entered before the Confirmation Date and not subsequently terminated pursuant to
an order of the Bankruptcy Court. The Debtors reserve the right to amend, alter
or modify Exhibit E at any time prior to the Confirmation Hearing. The Debtors
will provide notice of any amendments to Exhibit E to the parties to the
executory contracts or unexpired leases affected thereby.
B. Cure of Defaults
Except as may otherwise be agreed to by the parties, within 60 days
after the Effective Date, the Reorganized Company shall cure any and all
undisputed defaults under any executory contract or unexpired lease assumed
pursuant to the Plan in accordance with section 365(b)(1) of the Bankruptcy
Code. All disputed defaults that are required to be cured shall be cured either
within 30 days of the entry of a Final Order determining the amount, if any, of
the Debtors' or Reorganized Company's liability with respect thereto, or as may
otherwise be agreed to by the parties.
C. Bar Date for Filing Proofs of Claims Relating to Executory Contracts and
Unexpired Leases Rejected Pursuant to the Plan
Claims based on executory contracts or unexpired leases that were
rejected on or prior to the Claims Bar Date that were not filed by that date
shall be disallowed and forever barred. Claims arising out of the rejection of
an executory contract or unexpired lease designated for rejection under the Plan
must be filed with the Court and served upon the Debtors or Reorganized Company
or as otherwise may be provided in the Confirmation Order by no later than 30
days after the notice of entry of an order approving such rejection. Any Claims
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not filed within such time will be forever barred from assertion against the
Debtors, their Estates, the Reorganized Company and their property, and the
holders thereof shall not be entitled to any distribution under this Plan or
otherwise from the Debtors or Reorganized Company. Claims required to be filed
pursuant to a Final Order entered prior to the Confirmation Date shall be
forever barred and disallowed if not filed within the time specified in such
Final Order. Unless otherwise ordered by the Court, all Claims arising from the
rejection of executory contracts and unexpired leases shall be treated as
General Unsecured Claims under the Plan.
ARTICLE VII
SUBSTANTIVE CONSOLIDATION FOR PLAN PURPOSES
A. Substantive Consolidation for Plan Purposes
Except as expressly provided in the Plan, the Debtors and each
Reorganized Company shall continue to maintain their separate corporate
existence for all purposes other than the treatment of Claims under the Plan.
This Plan shall serve as a motion seeking entry of an order substantively
consolidating the Estates of the Debtors. Pursuant thereto, on the Effective
Date, (i) all intercompany Claims by and among the Debtors shall be eliminated;
(ii) all assets and liabilities of the Debtors shall be merged and treated as
though they were merged; (iii) all prepetition guarantees, indemnifications or
similar financial assurances of or assumptions by one Debtor of any obligation
of another Debtor shall be eliminated; (iv) any obligation of any Debtor and all
guarantees or assumptions, indemnifications or similar financial assurances
thereof by one or more of the Debtors shall be deemed to be one obligation of
the consolidated Debtors; provided, however, that where one or more of the
Debtors that is an obligor has been released of its obligations by operation of
applicable law or agreement, each Debtor shall be deemed released; (v) any
Claims filed or to be filed or scheduled respecting any such obligation shall be
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deemed one Claim against the consolidated Debtors; and (vi) each and every Claim
filed in the individual chapter 11 case of any of the Debtors shall be deemed
filed against the consolidated Debtors in the consolidated Case and shall be
deemed a single obligation of all of the Debtors under the Plan. On the
Confirmation Date, but subject to the occurrence of the Effective Date, and in
accordance with the terms of the Plan and the consolidation of the assets and
liabilities of the Debtors, all Claims based upon guarantees of collection,
payment or performance made by the Debtors as to the obligations of another
Debtor or of any other party shall be discharged, released and of no further
force and effect; provided, however, that nothing herein shall affect the
obligations of each of the Debtors under the Plan.
B. Order Granting Substantive Consolidation
Unless an objection to substantive consolidation is made in writing by
any Creditor affected by the Plan as herein provided on or before the date that
is fixed by the Court as the last date on which acceptances to this Plan may be
received, or such other date as may be fixed by the Court, the cases shall be
substantively consolidated by the Court as provided in the Confirmation Order.
In the event any such objections are timely filed, a hearing with respect
thereto shall be scheduled by the Court, which hearing may, but need not,
coincide with the hearing to consider confirmation of the Plan.
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ARTICLE VIII
CONFIRMATION AND EFFECTIVE DATE
A. Conditions Precedent to Effectiveness
The Plan shall not become effective until the following conditions
precedent shall have occurred:
1. The Confirmation Order shall have been entered and shall contain the
following provisions:
(a) except with respect to an entity that is an underwriter as defined
in Bankruptcy Code section 1145(b), section 5 of the Securities Act of 1933 (15
U.S.C. Section 77(d)), or any state or local law requiring registration for the
offer or sale of a security or registration or licensing of an issuer of,
underwriter of, or broker or dealer in securities, does not apply to the
transactions provided for in this Plan; provided, however, that in the event the
Court should refuse to enter a Confirmation Order that is deemed to include such
a finding, the Debtors shall have the option of withdrawing the Plan or
proceeding without the Bankruptcy Code section 1145 qualification, and
(b) acceptance of the Plan has been made in good faith and in
compliance with the applicable provisions of the Bankruptcy Code as contemplated
by section 1125(e) of the Bankruptcy Code.
2. There shall be no stay in effect with respect to the Confirmation
Order;
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3. The Reorganized Company shall have credit available under the Exit
Financing Facility to provide the Reorganized Company with financing sufficient
to meet its cash obligations under the Plan and its business requirements as of
and after the Effective Date;
4. All actions, documents and agreements necessary to implement shall
have been effected or executed and delivered; and
5. Each of the Plan documents and the New Securities shall have been
effected or executed and delivered.
ARTICLE IX
OBJECTIONS TO CLAIMS
The Debtors and the Reorganized Company shall be entitled to file
objections to proofs of claim at any time prior to the closing of the Case.
Notwithstanding any other provision of the Plan specifying a date or time for
payment or distributions, payments and distributions in respect of any Claim
which as of such date is disputed, unliquidated, or contingent shall not be made
until such Claim becomes an Allowed Claim whereupon such payments and
distributions shall be made promptly or as otherwise provided for in the Plan.
In the event that, at the time a payment is to be made to holders of Claims in a
specific class, a Claim that would otherwise be a Claim in that class remains
disputed, unliquidated or contingent, the Reorganized Company shall reserve from
its distribution to said class an amount estimated to be sufficient to pay the
amount of such disputed, unliquidated and contingent Claims. The Reorganized
Company shall distribute the appropriate amount to the holder of such disputed,
unliquidated and contingent Claims at such time, if any, as those Claims become
Allowed Claims.
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ARTICLE X
PROVISIONS REGARDING VOTING
AND DISTRIBUTIONS UNDER THE PLAN
A. Voting of Claims
Each holder of an Allowed Claim in an impaired Class which retains or
receives property under the Plan shall be entitled to vote separately to accept
or reject the Plan and indicate such vote on a duly executed and delivered
Ballot as provided in such order as is entered by the Court establishing certain
procedures with respect to the solicitation and tabulation of votes to accept or
reject the Plan, or any other order or orders of the Court.
B. Nonconsensual Confirmation
If any impaired Class entitled to vote shall not accept the Plan by the
requisite statutory majorities provided in sections 1126(c) or 1126(d) of the
Bankruptcy Code, as applicable, the Debtors and the Reorganized Company reserve
the right (a) to undertake to have the Court confirm the Plan under section
1129(b) of the Bankruptcy Code and (b) to amend the Plan to the extent necessary
to obtain entry of the Confirmation Order.
C. Method of Distributions Under the Plan
1. In General. Subject to Bankruptcy Rule 9010, all distributions under
the Plan shall be made by the Reorganized Company to the holder of each Allowed
Claim at the address of such holder as listed on the Schedules as of the Record
Date, unless the Debtors or Reorganized Company have been notified in writing of
a change of address, including, without limitation, by the filing of a proof of
claim or notice of transfer of claim filed by such holder that provides an
address for such holder different from the address reflected on the Schedules.
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2. Distributions of Cash. Any payment of cash made by the Reorganized
Company pursuant to the Plan shall be made by check drawn on a domestic bank.
3. Timing of Distributions. Any payment or distribution required to be
made under the Plan on a day other than a business day shall be made on the next
succeeding business day.
4. Fractional Cents. Whenever any payment of a fraction of a cent would
otherwise be called for, the actual payment shall reflect a rounding of such
fraction to the nearest whole cent (rounding down in the case of .50 or less and
rounding up in the case of more than .50).
5. Fractional Shares, New Warrants, Financing Warrants. No fractional
shares of Class A Common Stock, Class B Common Stock or fractional New Warrants,
Fremont Warrants, Individual Warrants or cash in lieu thereof shall be
distributed under the Plan. When any distribution on account of an Allowed Claim
pursuant to the Plan would otherwise result in the issuance of a number of
shares of Class A Common Stock, Class B Common Stock, Fremont Warrants,
Individual Warrants or New Warrants that is not a whole number, the actual
distribution of shares of Class A Common Stock, Class B Common Stock, Fremont
Warrants, Individual Warrants or New Warrants shall be rounded up to the nearest
whole number. The total number of shares of Class A Common Stock, Class B Common
Stock, Fremont Warrants, Individual Warrants or New Warrants to be distributed
to a Class of Claims shall be adjusted as necessary to account for the rounding
provided in this Section XC5.
6. Unclaimed Distributions. Any distributions under the Plan that are
unclaimed for a period of one year after distribution thereof shall be revested
in the Reorganized Company and any entitlement of any holder of any Claim or
Equity Interest to such distributions shall be extinguished and forever barred.
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7. Distributions to Equity Interest Holders as of the Record Date. As
of the close of business on the Record Date, the transfer ledgers (for Equity
Interests) shall be closed, and there shall be no further changes in the record
holders of any Equity Interests. Debtors and Reorganized Company shall have no
obligation to recognize any transfer of any Equity Interests occurring after the
Record Date. Debtors and Reorganized Company shall instead be entitled to
recognize and deal for all purposes under the Plan (except as to voting to
accept or reject the Plan) with only those record holders stated on the transfer
ledgers as of the close of business on the Record Date.
ARTICLE XI
PROVISIONS REGARDING RELEASES, INJUNCTIONS AND DISCHARGE
A. Injunction
The Confirmation Order shall provide for, and shall operate as, an
injunction against the commencement or continuation of any action to collect,
recover, or offset from any of the Debtors or the Reorganized Company, or any
property of any of the Debtors or the Reorganized Company, any Claim or Equity
Interest that is treated in this Plan except as otherwise permitted by this Plan
or by Final Order of the Court. The Court shall have jurisdiction to determine
and award damages for any violation of the injunction provided for in this Plan
or the Confirmation Order, including, without limitation, compensatory damages,
professional fees, expenses and costs, and exemplary damages for any willful
violation of the injunction.
39
<PAGE>
B. Discharge of Debtors
Except as otherwise expressly provided in section 1141 of the
Bankruptcy Code or the Plan, the distributions made pursuant to and in
accordance with the applicable terms and conditions of the Plan are in full and
final satisfaction, settlement, release and discharge as against the Debtors of
any debt that arose before the Effective Date and any debt of a kind specified
in section 502(g), 502(h), or 502(i) of the Bankruptcy Code and all Claims and
Equity Interests of any nature, including, without limitation, any interest
accrued thereon from and after the Petition Date, whether or not (i) a proof of
Claim or Equity Interest based on such debt, obligation or equity interest is
filed or deemed filed under section 501 of the Bankruptcy Code, (ii) such Claim
or Equity Interest is Allowed under section 502 of the Bankruptcy Code or (iii)
the holder of such Claim or Equity Interest, has accepted the Plan.
ARTICLE XII
MANDATORY PLAN PROVISIONS;
COMPLIANCE WITH LOCAL BANKRUPTCY RULE
A. Prohibition on Issuance of Nonvoting Equity Securities
The Debtors' charters shall, and is hereby deemed (i) to provide that
nonvoting equity securities in the Debtors may not be issued, and (ii) to
provide, as to the classes of security possessing voting power, for an
appropriate distribution of such power among the classes, including, in the case
of any class of equity securities having a preference over another class with
respect to dividends, adequate provisions for the election of directors
representing such preferred class in the event of default in payment of such
dividends.
40
<PAGE>
B. Post-Confirmation Reports
Pursuant to the terms of Local Bankruptcy Rule 3020-2, six (6) months
after entry of the Confirmation Order, or within such other time as the Court
may direct, the Reorganized Company, or such other party as the Court may
designate, shall file and serve, pursuant to Local Bankruptcy Rules 9013-3 and
3020-2, a report setting forth the actions taken and progress made toward
consummation of the Plan until the Final Decree is entered. Thereafter any
Creditor may request information regarding disbursement under the Plan from
Debtors or the Reorganized Company in writing.
ARTICLE XIII
RETENTION OF JURISDICTION
After Confirmation and until entry of a Final Order under section 350
of the Bankruptcy Code, the Court shall retain and have exclusive jurisdiction
and authority for all purposes as allowed under the Bankruptcy Code and other
applicable law including, without limitation, proceedings that relate to:
(a) to hear and determine any and all objections to the allowance of
any Claims or any controversies as to the classification of any Claims; provided
that only Debtors and the Reorganized Company may file objections to Claims;
(b) to hear and determine any and all applications by Professionals for
compensation and reimbursement of expenses;
41
<PAGE>
(c) to hear and determine any and all pending applications for the
rejection and disaffirmance of executory contracts and unexpired leases, and fix
and allow any Claims resulting therefrom;
(d) to liquidate any Disputed Claims;
(e) to enforce the provisions of the Plan, including the injunction,
exculpation and releases provided for in the Plan;
(f) to hear and determine any and all applications, adversary
proceedings, contested matters and litigated matters;
(g) to enable the Debtors to prosecute any and all proceedings which
have been or may be brought prior to the Effective Date to set aside liens or
encumbrances and to recover any transfers, assets, properties, or damages to
which the Debtors may be entitled under applicable provisions of the Bankruptcy
Code or any federal, state, or local laws;
(h) to correct any defect, cure any omission, or reconcile any
inconsistency in the Plan or in the Confirmation Order as may be necessary to
carry out its purpose and the intent of the Plan;
(i) to determine any Claim or liability to a governmental unit which
may be asserted as a result of the transactions contemplated herein;
(j) to hear and determine matters concerning state, local, and federal
taxes in accordance with sections 364, 505 and 1146 of the Bankruptcy Code; and
42
<PAGE>
(k) to determine such other matters as may be provided for in the
Confirmation Order or as may be authorized under the provisions of the
Bankruptcy Code.
Whether or not a Final Order closing this Case has been entered
pursuant to section 350 of the Bankruptcy Code, following Substantial
Consummation the Court shall retain concurrent jurisdiction only to correct any
defect, cure any omission, or reconcile any inconsistency in this Plan or the
Confirmation Order, as may be necessary to carry out the purposes and intent
thereof. For the avoidance of doubt, following Substantial Consummation of the
Plan the Court shall not retain jurisdiction with respect to the Exit Financing
Facility.
ARTICLE XIV
MISCELLANEOUS
A. Provisions Applicable to All Claims
The payment, distributions and other treatments provided in respect of
each Allowed Claim pursuant to the terms of this Plan shall be in complete
satisfaction, discharge and release of each such Claim or Equity Interest,
unless otherwise specifically provided herein.
B. Reservation of Debtors' Rights
Unless otherwise specifically provided in this Plan, neither the filing
of nor Confirmation of this Plan shall be interpreted or deemed to waive
Debtors' rights under the Bankruptcy Code or other applicable, law to assert any
cause of action or to otherwise seek relief, including pursuant to any Avoiding
Action against any person or entity.
43
<PAGE>
C. Effectuating Documents and Further Transactions
Each of the Debtors or Reorganized Company, as the case may be, is
authorized to execute, deliver, file or record such contracts, instruments,
releases, indentures and other agreements or documents and take such actions as
may be necessary or appropriate to effectuate and further evidence the terms and
conditions of the Plan and any notes or securities issued pursuant to the Plan.
D. Exemption from Transfer Taxes
Pursuant to section 1146(c) of the Bankruptcy Code, the issuance,
transfer or exchange of notes or equity securities under the Plan, the creation
of any mortgage, deed of trust or other security interest, the making or
assignment of any lease or sublease, or the making or delivery of any deed or
other instrument of transfer under, in furtherance of, or in connection with the
Plan, including, without limitation, any merger agreements or agreements of
consolidation, deeds, bills of sale or assignments executed in connection with
any of the transactions contemplated under the Plan shall not be subject to any
stamp, real estate transfer, mortgage recording or other similar tax.
E. Exculpation
None of the Debtors, the Reorganized Debtors, the Creditors' Committee,
Cambridge, HRAC nor any of their respective members, officers, directors,
employees, advisors or agents shall have or incur any liability to any holder of
a Claim or Equity Interest for any act or omission in connection with, related
to, or arising out of, the Cases, the pursuit of confirmation of the Plan, the
consummation of the Plan or the administration of the Plan or the property to be
44
<PAGE>
distributed under the Plan, except for willful misconduct or gross negligence,
and, in all respects, the Debtors, the Reorganized Company, the Creditors'
Committee, Cambridge, HRAC and each of their respective members, officers,
directors, employees, advisors and agents shall be entitled to rely upon the
advice of counsel with respect to their duties and responsibilities under the
Plan.
F. Amendment or Modification of the Plan
Alterations, amendments or modifications of the Plan may be proposed in
writing by the Debtors at any time prior to the Confirmation Date, provided that
the Plan, as altered, amended or modified, satisfies the conditions of sections
1122 and 1123 of the Bankruptcy Code, and the Debtors shall have complied with
section 1125 of the Bankruptcy Code. The Plan may be altered, amended or
modified at any time after the Confirmation Date and before substantial
consummation, provided that the Plan, as altered, amended or modified, satisfies
the requirements of sections 1122 and 1123 of the Bankruptcy Code and the Court,
after notice and a hearing, confirms the Plan, as altered, amended or modified,
under section 1129 of the Bankruptcy Code. A holder of a Claim or Equity
Interest that has accepted the Plan shall be deemed to have accepted the Plan,
as altered, amended or modified, if the proposed alteration, amendment or
modification does not materially and adversely change the treatment of the Claim
or Equity Interest of such holder. The Debtors may, without notice to holders of
Claims or Equity Interests insofar as it does not materially and adversely
affect the interests of any such holders, correct any defect or omission in this
Plan and any exhibit hereto, in the Disclosure Statement and any exhibit thereto
or in any other document in connection with this Plan or the Disclosure
Statement.
45
<PAGE>
G. Severability
In the event that the Bankruptcy Court determines, prior to the
Confirmation Date, that any provision in the Plan is invalid, void or
unenforceable, such provision shall be invalid, void or unenforceable with
respect to the holder or holders of such Claims or Equity Interests as to which
the provision is determined to be invalid, void or unenforceable. The
invalidity, voidness or unenforceability of any such provision shall in no way
limit or affect the enforceability and operative effect of any other provision
hereof.
H. Revocation or Withdrawal of the Plan
The Debtors reserve the right to revoke or withdraw the Plan prior to
the Confirmation Date. If the Debtors revoke or withdraw the Plan prior to the
Confirmation Date, then the Plan shall be deemed null and void. In such event,
nothing contained herein shall constitute or be deemed a waiver or release of
any claims by or against the Debtors or any other party or to prejudice in any
manner the fights of the Debtors or any party in any further proceedings
involving the Debtors.
I. Binding Effect
The provisions of this Plan shall bind the Debtors, the Reorganized
Company, the Creditors, and any successor or assign including a Chapter 7 or
Chapter 11 trustee, and shall bind any person or entity asserting a Claim
against any of the Debtors or the Estate, and any person or entity asserting an
Equity Interest in any of the Debtors, whether or not the Claim or Equity
Interest is impaired Under this Plan, and whether or not such person or entity
has accepted the Plan.
46
<PAGE>
Columbus, Ohio
Dated: June 24, 1998
Gaylord Companies, Inc.
/s/ John D. Critser
----------------------------------
By: John D. Critser
Its: President
The Cookstore, Inc.
/s/ John D. Critser
----------------------------------
By: John D. Critser
Its: President
The Cookstore Worthington, Inc.
/s/ John D. Critser
----------------------------------
By: John D. Critser
Its: President
47
<PAGE>
UNITED STATES BANKRUPTCY COURT
SOUTHERN DISTRICT OF OHIO
EASTERN DIVISION
In re:
GAYLORD COMPANIES, INC. : Case No. 97-60560
Joint Administered With:
GAYLORD BOOK COMPANY, : Case No. 97-60562
GAYLORD'S, INC., : Case No. 97-60561
SAWWORTH BOOK COMPANY, : Case No. 97-60563
GAYLORD ENTERPRISES, INC., : Case No. 97-60564
THE COOKSTORE, INC., and : Case No. 97-60565
THE COOKSTORE WORTHINGTON, INC.; Case No. 97-60566
: Chapter 11
Debtors. : (Judge Caldwell)
NOTICE OF ERRATA IN THE AMENDED DISCLOSURE STATEMENT AND
AMENDED PLAN OF REORGANIZATION OF GAYLORD COMPANIES, INC.,
THE COOKSTORE, INC. AND THE COOKSTORE WORTHINGTON, INC.,
DATED JUNE 24, 1998
TO: All Creditors, Equity Security Holders and Parties In Interest
On June 24, 1998, Gaylord Companies, Inc., The Cookstore, Inc. and The
Cookstore Worthington, Inc, (collectively, the "Debtors") filed an Amended Plan
of Reorganization (the "Amended Plan") and an Amended Disclosure Statement (the
"Amended Disclosure Statement'). Upon further review, the Debtors have
discovered the following errors in the Amended Disclosure Statement and Amended
Plan.
(1) Page 35 of the Amended Disclosure Statement and page 19 of the Amended
Plan, in the discussion of the treatment of Class 7 Equity Interest
Holders, should be amended as follows (new text in bold face, removed
text lined out):
<PAGE>
... the common shares of Gaylord Companies shall be extinguished,
and the holders of an Allowed Equity Interest in Class 7 shall
receive their pro rata share of 85,777 shares of Class B Common
Stock equal to eight percent (8%) of the number of the issued and
outstanding shares of Class A Common Stock and Class B Common
Stock of Reorganized Parent as of the Effective Date giving
effect to the exercise of the New Warrants and before the
exercise of the Financing Warrants.
The documents should state that the holders of Class 7 Equity
Interests will receive their pro rata shares of 85,777 shares of Class
B Common Stock. This is equal to approximately five percent (5%)
rather than eight percent (8%) of the number of issued and outstanding
shares of Class A Common Stock and Class B Common Stock of the
Reorganized Parent after the Effective Date giving effect to the
exercise of the new Warrants and before the exercise of the Financing
Warrants. This is currently reflected at page 47 of the Amended
Disclosure Statement and page 23 of the Amended Plan.
(2) On page 9 of the Amended Plan, the definition of "New Warrants" should
state that the warrants expire October 30, 1999 rather than October
30, 1998.
(3) On page 22 of the Amended Plan, section V.E.2.(2) should read as
follows: 174,429 shares of Class A Common Stock to be reserved until
such time as the holders of the New Warrants, the Fremont Warrants and
the Individual Warrants exercise such warrants.
(4) On page 23 of the Amended Plan section V.E.2.(3) should read as
follows:
154,951 shares of Class A Common Stock to be reserved until such
time as the Class B Common Stock converts to Class A Common Stock
pursuant to the terms of this Plan.
2
<PAGE>
Dated: July 2, 1998
Respectfully submitted,
/s/ Daniel R. Swetnam
-----------------------------------
Daniel R. Swetnam (0011022)
Victoria E. Powers (0054589)
Schottenstein, Zox & Dunn, L.P.A.
41 South High Street, Ste. 2600
Columbus, Ohio 43215
(614) 462-2700
Case Attorneys for the Debtors
CERTIFICATE OF SERVICE
The undersigned hereby certifies that a copy of the foregoing Notice of
Errata in the Amended Disclosure Statement and Amended Plan of Reorganization of
Gaylord Companies, Inc., The Cookstore, Inc. and The Cookstore Worthington,
Inc., Dated June 24, 1998 was served upon Nick V. Cavalieri, Esq., Arter &
Hadden, One Columbus, 10 W. Broad Street, Columbus, Ohio 43215, counsel for the
Official Committee of Unsecured Creditors, and to all creditors, equity security
holders and other parties in interest upon which the Amended Disclosure
Statement and Amended Plan dated June 24, 1998 were served, by depositing the
same with the U. S. Postal Service, regular U. S.
mail, postage pre-paid, this 2nd day of July, 1998.
/s/ Daniel R. Swetnam
-----------------------------------
3
<PAGE>
EXHIBIT B
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from ______________ to ______________ EXHIBIT
B
Commission File Number 1-13518
GAYLORD COMPANIES, INC.
----------------------------------------------
(Name of small business issuer in its charter)
Delaware 31-1421571
- ------------------------------- ---------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
4006 Venture Court, Columbus, Ohio 43228
---------------------------------------------------
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (614) 771-2777
Securities registered pursuant to Section 12(b) of the Exchange Act: ___
Securities registered pursuant to Section 12(g) of the Exchange Act:
Common Stock, $.01 par value
----------------------------
(Title of Class)
Warrants
----------------
(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
YES __X__ NO _____
Check if disclosure of delinquent filers pursuant to Item 405 of Regulation S-B
is not contained in this form, and no disclosure will be contained, to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part M of this Form 10-KSB or any amendment to this
Form 10-KSB. [ ]
Issuer's revenues for its most recent fiscal year $13,304,394.
-1-
<PAGE>
The number of shares of Common Stock held by nonaffiliates of the registrant (as
determined for the purpose of this Form 10-KSB only) as of February 28, 1997 was
1,854,475 with an approximate aggregate market value of $2,405,023 (based upon
the average of the bid and asked prices of such shares as of such date). The
number of shares of the Common Stock of the registrant outstanding as of
February 28, 1997 was 3,785,000.
-2-
<PAGE>
Table of Contents
Page
Item Number and Caption
PART I
Item 1 Business ......................................................... 4
Item 2. Properties ....................................................... 10
Item 3. Legal Proceedings................................................. 11
Item 4. Submission of Matters to a Vote of Security Holders .............. 11
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters ......................................................... 12
Item 6. Management's Discussion and Analysis of Financial Condition
and Results of Operations.......................................... 13
Item 7. Financial Statements and Supplementary Data........................ 16
Item 8. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure............................................ 17
PART III
Item 9. Directors and Executive Officers ................................... 17
Item 10. Executive Compensation.............................................. 18
Item 11. Security Ownership of Certain Beneficial Owners and Management...... 19
Item 12. Certain Relationships and Related Transactions...................... 21
Item 13. Exhibits, Financial Statement Schedule & and Reports on Form 8-K.... 22
-3-
<PAGE>
PART I
Item 1. Business.
Gaylord Companies, Inc. (the "Company") is a specialty retailer of
books in "Little Professor" bookstores (the "Bookstores") and quality cookware
and serving equipment, cooking accessories and certain select food products as
well as cookbooks and food-related publications in specialty retail stores (the
"Cookstores"). Unless the context otherwise indicates, the term "Company"
includes Gaylord Companies, Inc. and its six wholly-owned subsidiaries (the
"Subsidiaries"). The Company owns and operates six Bookstores and six
Cookstores.
The Bookstores are operated pursuant to separate license
agreements ("License Agreements") with Little Professor Book Centers, Inc. (the
"Franchisor"). Five of the six Bookstores are known as Little Professor Book
Company Superstores (the "Superstores"), while the other Bookstore is known as a
bargain Bookstore.
The following table sets forth information relating to each of the Company's
Subsidiaries:
<TABLE>
<CAPTION>
Date of
Subsidiary Incorporation Store Location Store Opening Store Type
---------- ------------- -------------- ------------- ----------
<S> <C> <C> <C> <C>
Gaylord Book Company 1977 Lane Avenue Shopping Center, August 1977 Little Professor Book
Columbus, Ohio Company Store
Lane Avenue Shopping Center, October 1993 Little Professor
Columbus, Ohio Bargain Bookstore
The Cookstore, Inc. . . . 1981 Lane Avenue Shopping Center, October 1981 Cookstore
Columbus, Ohio
Summit Mall, December 1994 Cookstore
Akron, Ohio
Castleton Square Mall
Indianapolis, Indiana December 1996 Cookstore
Florence Mall
Florence, Kentucky December 1996 Cookstore
Sawworth Book Little Professor Book
Company 1984 Worthington Mall, October 1984 Company Bookstore
Worthington, Ohio
Plaza at Sawmill Place, April 1985 Little Professor Book
Columbus, Ohio Company Bookstore
Gaylord's Inc 1989 Forest Fair Mall, April 1989 Little Professor Book
Cincinnati, Ohio Company Bookstore
The Cookstore Worthington Mall, December 1993 Cookstore
Worthington, Inc. 1993 Worthington, Ohio
The Mall at Fairfield Commons, November 1994 Cookstore
Beavercreek, Ohio
Gaylord Enterprises, Inc. 1993 Boardman Plaza, December 1993 Little Professor Book
Boardman, Ohio Company Bookstore
</TABLE>
-4-
<PAGE>
The Company was formed pursuant to the laws of the State of Delaware on
July 19, 1994. The first of the Company's Subsidiaries was formed and commenced
operating a Bookstore in 1977. The executive offices of the Company are located
at 4006 Venture Court, Columbus, Ohio 43228. Its telephone number is (614)
771-2777.
Store Characteristics
The six Bookstores are located in regional malls and shopping
centers in Ohio. The Company operates five Superstores (the "Superstores"). The
Superstores are based upon the Company's "superstore" concept and range from
8,000 to 18,000 square feet in size while offering 60,000 to 80,000 book titles.
The Superstores offer thousands of foreign and domestic magazines, books on
cassette, out-of-town newspapers, travel guides, maps and calendars. The Company
also operates a bargain bookstore (the "Bargain Bookstore") which is
approximately 2,000 square feet in size and offers approximately 10,000 book
titles. The Bargain Bookstore sells deeply discounted publisher overstock,
remaindered and used books. The Company's long-term strategy is to selectively
locate and open additional Bookstores, although the Company does not have any
present plans to do so.
The six Cookstores are each approximately 3,300 square feet in size and
are situated in regional retail malls. Each store offers approximately 5,000
different types of products which includes 30,000 to 50,000 separate items and
includes products from over 200 vendors. The current product lines for the
Cookstores fall into 12 distinct categories including accessories, bakeware,
books, cookware, cutlery, electronics, food, furniture, gadgets, gifts,
tableware and textiles. Management intends to use its existing Cookstores as the
basic store design prototype for most of the Company's anticipated expansion.
The Company is also considering implementing a "superstore" concept for the
Cookstores. These superstore Cookstores would expand each product category
carried in the basic prototype store, particularly the food and tableware
categories. The superstore Cookstores would be in excess of 5,000 square feet in
size.
Store Design and Ambiance
The Company believes that it has created a warm, comfortable atmosphere
in the Bookstores which are Superstores. The Superstores contain furnishings
that include fireplaces, pianos, reading rooms and comfortable chairs, including
special children's sections with child-sized furniture.
In the Cookstores, the Company's strategy is to present the
merchandise in what the Company believes is an upscale and fashionable setting.
The full range of the stores' products are displayed and stocked on the retail
floor. The merchandise is arranged by category for shopping convenience and
every item is tagged with the current retail price. Feature displays are
arranged throughout the store emphasizing seasonal products or particular
themes.
Advertising
The Superstores utilize marketing programs aimed at reading
activities for readers of all ages including visits, readings, workshops and
booksignings by locally and nationally acclaimed writers and book illustrators.
The Superstores place special emphasis on marketing aimed at the sale of
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<PAGE>
children's books including its "Rug Club Storytime" and "Read-n-Grow Kid's Club"
reading programs for children.
Current Cookstore promotions center around seasonal events and holidays
in which certain product lines are traditional favorites. Promotions are planned
around in-store demonstrations and are advertised in local newspapers, press
releases and/or through direct mail and point of sale materials.
Customer Service
The Company emphasizes customer service in both the Bookstores and
Cookstores and, through its salespeople, strives to provide its customers with
an enjoyable shopping experience. The Company adheres to a number of customer
service policies and practices to reinforce customer confidence in the Company.
Expansion
The Company's strategy is to expand its Cookstore locations into
regional malls and strip shopping centers and other select sites throughout the
country, with an emphasis in the Midwest. The Company plans to open additional
Cookstores. The number of additional Cookstores that will be opened will be
dependent upon site opportunities, the ability of the Company to secure
additional financing the cost of opening such stores, the renewal of the
Company's existing credit facilities and cash flow from operations. However,
there can be no assurance that additional Cookstores will be opened. The Company
believes that the primary markets for the basic Cookstore are middle to upper
income shopping destinations. The majority of these locations are in regional
shopping malls located in suburban and urban core revitalization areas. Smaller
specialty malls and select, upper end in-line shopping centers are additional
target locations. The Company believes that due to the industry's highly
fragmented nature, and the relatively few number of stores of its chief national
competitors, Williams Sonoma, Inc., Bed Bath & Beyond, Linens & Things and
Lechter's, Inc., there are hundreds of prime locations available for future
Cookstores although there is no assurance that such locations can be obtained on
terms favorable or acceptable to the Company.
The Company intends to continue expansion close to its current Midwest
base. The Company intends to focus on those locations in which products may be
delivered direct from suppliers by United Parcel Service or truck, eliminating
the costs which would be necessitated by central warehousing and distribution.
Prime considerations for successful new stores are market and site demographics,
competition and the Company's ability to successfully manage the logistics of
store operations.
Competition
The Bookstores
The retail bookselling business is highly competitive. The Company
competes in the bookstore business with Barnes & Noble, Inc., Media Play, a
division of Musicland Stores Corporation, and Borders-Walden Group. In the
Bookstore business, the Company competes with other national chains, which
operate substantially more superstores than the Company. The Company also
-6-
<PAGE>
competes with regional chains, as well as independent single store operators,
local multi-store operators, department stores, variety discounters, drug stores
and warehouse clubs. The Company competes with its competitors on the basis of
price and its presentation of its products. Many of the Company's competitors
have been expanding in both store size and number of outlets, while others have
announced their intentions to pursue such expansion. In addition, certain of the
Company's competitors have substantially greater financial, advertising and
other resources than the Company, which may give them certain competitive
advantages.
The Cookstores
The specialty retail business is highly competitive. The Company's
stores compete against a wide variety of stores, including department and
specialty stores, as well as mail order catalogs. Certain of the Company's
competitors have greater financial, distribution, advertising and marketing
resources than the Company, which may give them certain competitive advantages.
The Company competes on the basis of its selection and quality of merchandise,
and service to its customers. While some cooking product lines are carried in
many stores stocking a broad range of products, few stores specialize totally in
kitchen/cookware as do the Cookstores. The specialized market is highly
fragmented with many local independent stores and small regional chains. The
only national specialized kitchen products stores are Williams-Sonoma, Inc. and
Lechter's, Inc. In addition, the Company competes with other well-known stores,
including Linens & Things and Bed Bath & Beyond. Other local and small regional
competitors vary widely in design, product selection and customer service. The
Company believes that most local competitors are small, highly specialized
operations situated in less desirable retail or non-retail locations. While
these operators may be localized competition for the Cookstores, the Company
believes that most markets do not have significant local operators and few
competitors, with the exception of Williams-Sonoma, Inc. and Lechter's, Inc.,
are located in the mall locations where the Company anticipates opening
Cookstores.
Suppliers and Distribution
The Company purchases approximately 64% of its products for the
Bookstores from Ingram Book Company (the "Consignor") and approximately 10% from
Unimag Distributors. The Bookstores do not purchase more than 5% of their
inventory from any other single supplier. Four of the Subsidiaries are parties
to five separate consignment agreements with the Consignor. Two of such
consignment agreements may be terminated upon 120 days prior written notice by
the Consignor. The balance of the consignment agreements may generally be
terminated by the Consignor upon 270 days prior written notice. Although the
Subsidiaries have not satisfied certain provisions in the consignment
agreements, the Consignor has never declared a default under any of the
consignment agreements, or expressed an intention to do so. Specifically, the
Company has not met the provisions in the consignment agreements with respect to
the required inventory turnover ratios. The inventory turnover provisions under
the consignment agreements require the Company to sell consigned goods at a rate
equal to 2.5 to 3 times the average amount of consigned goods held by the
Company at certain Bookstore locations on an annualized and/or a calendar year
basis. In 1996 the Company failed to meet such requirements in the five
Bookstores subject to the consignment agreements. The inventory turnover ratios
ranged from 41% to 70%, of the required inventory turnover ratios for each of
the Bookstores, respectively. In addition, the Company may have failed to comply
-7-
<PAGE>
with the provisions in the consignment agreement with respect to the amount of
consigned goods on hand in two of the Bookstores. The Company does not
anticipate curing such defaults in the future unless required to do so by the
Consignor. Upon a default by any of the Subsidiaries under any of the
consignment agreements, the Consignor may terminate all of such consignment
agreements. Management believes that the consignment agreements with the
Consignor are advantageous to the Company and that in the event that such
consignment agreements are terminated, there could be a material adverse affect
on the Company. The Cookstores acquire their inventory from approximately 200
suppliers and do not purchase more than 5% of their inventory from any single
supplier. The Company does not have any written supply agreements with these
vendors, who are not obligated to continue to furnish products to the Company.
The Company believes that its decentralized distribution and inventory
control system has significantly enhanced its ability to control costs and to
manage its inventory on a store-by-store basis for both the Bookstores and the
Cookstores. The Company's suppliers ship inventory directly to the stores and
almost all of the inventory is displayed and stocked on the retail floor.
Management believes that this distribution system has resulted in significant
cost savings for the Company. Although the Company may make commitments for
significant warehouse space in the future, management believes that its present
distribution system can continue to be utilized in connection with the Company's
plans for expansion. However, there is no assurance that the Company will not
have to centralize its inventory and lease warehouse space in connection with
the Company's plans for expansion.
Management Information System
The Company's information systems provide management with sales,
inventory and other information and are important to the Company's ability to
achieve cost efficiencies, operate profitably and control shrinkage. The Company
uses retail point-of-sale systems which are polled daily and which generate
sales reports and supporting documentation which are forwarded to the main
office for auditing and input into the Company's automated accounting program.
The point-of-sale system provides daily accounting of sales and gross profit as
well as other control items such as discounts, price overrides and refunds.
Financial statements, including income statements and balance sheets, are
produced monthly for each location. Complete inventories are taken once or twice
a year. Each item in the Bookstores and the Cookstores has its own distinct item
number which is used by the point-of-sales system to record sale and cost
information. Items are also tracked for reorder information and generation of
historical sales reports used to make purchasing and reorder decisions.
License Agreements
Four of the Subsidiaries have entered into five separate License
Agreements with the Franchisor, Little Professor Book Centers, Inc., with
respect to the Bookstores. The License Agreements replaced separate franchise
agreements relating to five of the Bookstores. The Company owns approximately
11% of the outstanding common stock of the Franchisor. The initial term of the
License Agreements expired on December 31, 1996 and may be extended by the
Company until December 31, 2001. The Company and the Franchisor have agreed to
renew the License Agreement on a month-to-month basis. The Company will pay to
the Franchisor a royalty of 1/2 of 1% of monthly sales for all of the
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<PAGE>
Bookstores. If there is a default by any of the Subsidiaries under any one of
the License Agreements, then the Franchisor may terminate all of the License
Agreements.
The Company and the Franchisor have also entered into a separate
agreement (the "Supplementary Agreement") which includes, among other things,
consulting services to be rendered to the Franchisor, rights of first refusal
permitting the Company to open additional franchises, the termination of the
License Agreements and the Franchisor's repurchase of its common stock owned by
the Company. Pursuant to the Supplementary Agreement, the Company or the
Franchisor may terminate the License Agreements and the Supplementary Agreement
upon 12 months notice and the payment of $100,000. The initial term of the
Supplementary Agreement expired on December 31, 1996 and may be extended by the
Franchisor until December 31, 2001. The Company and the Franchisor have agreed
to renew the Supplementary Agreement on a month-to-month basis. In addition,
upon the termination of the Supplementary Agreement, the Franchisor has the
right to purchase its shares of common stock owned by the Company at the
greatest of the cost to the Company, the book value or the fair market value of
such shares. The Franchisor has granted the Company a right of first refusal for
the opening of any Little Professor Bookstore in Ohio, or in Collier County or
Lee County, Florida. The Company has not exercised its right of first refusal in
either Ohio or Florida to date. Management believes that the Company would have
to consider its ability to manage the logistics of store operations in locations
that are distant from its principal executive offices in Columbus, Ohio before
electing to open any Little Professor Bookstores in Florida.
Upon the opening of Little Professor Book Company bookstores by third
parties in excess of 8,000 square feet in size, the Franchisor will pay to the
Company the greater of $10,000 or 15% of the Franchisor's then current initial
franchise fees plus 2/ 10 of 1% of the monthly sales during the initial term of
any such agreements.
Trademarks
The Cookstore, Inc. has been granted a registered trademark for "The
Cookstore" with the United States Patent and Trademark Office. The Company
intends to submit applications to register any new trademarks that it develops
in the future.
Employees
As of December 31, 1996, the Company had 93 full-time employees and 100
part-time employees of which 180 were involved in retail store sales and 13 in
general management and administration. The Company believes its success will
depend upon its ability to identify, hire and retain capable management. As
there is significant competition for qualified personnel, there can be no
assurance that the Company will succeed in recruiting or retaining suitable
staff. In particular, the Company's success is dependent on the continued
availability of both John Gaylord and John D. Critser, either of whose loss or
impairment could have a material adverse affect on the Company. The Company
considers its relations with its employees, none of whom are covered by
collective bargaining agreements, to be generally good.
-9-
<PAGE>
Insurance
The Company presently maintains insurance as required by law,
including workers' compensation coverage, and liability insurance in respect of
hazards on the Company's business premises. The Company carries a general
liability policy which provides for coverage of $1,000,000 per occurrence and
$2,000,000 in the aggregate. The Company carries key man life insurance in the
amount of $1,000,000 on the lives of both John Gaylord and John D. Critser with
the Company as beneficiary.
Seasonality
The Company's business is subject to substantial seasonal
variations. Historically, a significant portion of the Company's 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 February through July.
Item 2. Properties.
The Company currently operates and occupies, pursuant to written
leases, five Superstores, one Bargain Bookstore and six Cookstores. Total rental
expenses for the Company's real estate leases were $1,156,662 and $1,512,178 in
1995 and 1996, respectively.
The five Superstores average approximately 13,156 square feet in size
and have current minimum rents which average approximately $12.60 per square
foot. All of the Bookstore leases have initial terms which expire between
September 1998 and December 2003, and four of the five leases give the Company
an option or options to renew the lease for additional periods ranging from five
to ten years. The Bargain Bookstore operates under a month-to-month lease, is
approximately 2,000 square feet, and pays 10% of its gross receipts as rent. The
Cookstores average approximately 3,475 square feet and have current minimum
rents which average approximately $25.71 per square foot. All of the Cookstore
leases have initial terms which expire between 2004 and 2006 and one of the six
leases gives the Company an option to renew the lease for an additional five
years.
In addition to current minimum rent, the Bookstore and Cookstore leases
generally require the Company to pay additional rent which is calculated as a
percentage of gross sales over an agreed upon figure. For the Bookstore leases,
the percentage ranges from 3% to 10. 5% and the amount of gross sales ranges
from approximately $971,000 to $4,426,000. For the Cookstore leases, the
percentage ranges from 59% to 6% and the gross sales number ranges from
approximately $959,000 to $1,800,000. Generally, except for the Forest Fair Mall
site, the Company has not paid percentage rent in excess of minimum base rent.
In addition, the Company is generally obligated to pay common area maintenance
charges and other charges on each of the Superstores, and Cookstores leases.
All of the Company's leased properties are situated in regional malls,
specialty centers or strip centers located in Ohio. The Company leases 9,620
square feet for a Superstore, 2,000 square feet for a Bargain Bookstore and
3,298 square feet for a Cookstore at the Lane Avenue Shopping Center, Columbus,
Ohio, a 225,000 square foot enclosed specialty center containing approximately
100 stores, including Talbots, Banana Republic and Bombay Company. The Company
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<PAGE>
leases 8,929 square feet for a Superstore and 3,341 square feet for a Cookstore
at the Worthington Mall, Worthington, Ohio, a 175,000 square foot enclosed
specialty center containing approximately 50 stores including Talbots, The Gap,
Ann Taylor and Jos. A. Bank. The Company leases 17,356 square feet for a
Superstore at the Plaza at Sawmill Place, Columbus, Ohio, a 110,000 square foot
strip center containing approximately 25 stores, including Service Merchandise
and Blockbuster Video. The Company leases 18,312 square feet for a Superstore at
the Forest Fair Mall, Cincinnati, Ohio, a 1,400,000 square foot enclosed
regional center containing approximately 100 stores, including Elder Beerman,
Parisian and Biggs. The Company leases 11,565 square feet for a Superstore at
Boardman Plaza, Boardman, Ohio, a 450,000 square foot strip center containing
approximately 100 stores, including Burlington Coat Factory and Radio Shack. The
Company leases 3,598 square feet for a Cookstore at the Mall at Fairfield
Commons, Beavercreek, Ohio, a suburb of Dayton, which is a 1,000,000 square foot
major regional mall with approximately 100 stores, including The Limited, The
Gap and five major department stores. The Company leases 3,227 square feet for a
Cookstore at the Summit Mall in Akron, Ohio, which is an 850,000 square foot
major regional mall with approximately 100 stores, including Kaufman's,
Dillards, The Limited and The Gap. The Company leases 3,790 square feet for a
Cookstore at the Castleton Square Mall in Indianapolis, Indiana which is a
1,000,000 square foot major regional mall with approximately 100 specialty
stores and five major department stores. The Company leases 3,598 square feet
for a Cookstore at the Florence Mall in Florence, Kentucky which is a 1,000,000
square foot major regional mall with approximately 100 specialty stores and four
major department stores.
Item 3. Legal Proceedings.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
On November 6, 1996 the Company held an annual meeting of the
stockholders. At the meeting John Gaylord, George Gaylord, John D. Critser and
Martin C. Licht were re-elected to the board of directors. Of the shares voted,
2,374,094 voted for all of the directors and 4,500 abstained.
In addition, the stockholders ratified Feldman Radin & Co., P.C. as the
Company's independent auditors for the year ended December 31, 1996 and ratified
the amendment of the Company's certificate of incorporation increasing the
number of authorized shares of Common Stock from 10,000,000 to 50,000,000. Of
the shares voted with respect to the ratification of Feldman Radin & Co., P.C.
as the Company's auditors, 2,348,594 voted for ratification, 500 voted against
ratification and 30,000 abstained. Of the shares voted with respect to the
ratification of the amendment of the Company's certificate of incorporation
2,330,464 voted for ratification, 15,000 voted against ratification and 33,600
abstained.
-11-
<PAGE>
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
Market Information
The Common Stock and the Redeemable Warrants are quoted on the NASDAQ
Small Market under the symbols GJCO and GJCOW, respectively, and on the Boston
Stock Exchange under the symbols GJC and GJCW, respectively. The following table
sets forth the range of high and low bid quotations of the Common Stock through
February 28, 1997 as reported by the NASDAQ Small Cap Market. The quotations
reflect inter-dealer prices without retail mark-ups, mark-downs, or commissions
and may not represent actual transactions. Prior to October 31, 1995 there was
no public market for the Common Stock or the Redeemable Warrants.
Common Stock
--------------------------------------
High Low
1995
Fourth Quarter*..........................4 3
1996
First Quarter............................5 1 1/2
Second Quarter......................3 5/16 7/8
Third Quarter............................2 7/8
Fourth Quarter.....................1 17/32 27/32
1997
First Quarter (through February 28, 1997) 1 1/2 1
* Prior to such time there was no public market for the Company's Common Stock.
Holders
As of February 28, 1997 the Company had approximately 37 record holders
of its Common Stock.
Private Placement
In November 1996 in a private placement exempt from the registration
requirements under the Securities Act of 1933, as amended under Section 4(2)
thereof and/or Rule 506 of Regulation D thereunder the Company issued an
aggregate of $300,000 of the Company's promissory notes and 180,000 shares of
the Company's common stock to three accredited investors.
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<PAGE>
Item 6. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Forward-Looking Statements
When used in the Form 10-KSB and in future filings by the Company with
the Securities and Exchange Commission, the words or phrases "will likely
result" and "the Company expects" "will Continue," "is anticipated,"
"estimated," "project," or "outlook" or similar expressions are intended to
identify "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. The Company wishes to caution readers
not to place undue reliance on any such forward-looking statements, each of
which speak only as of the date made. Such statements are subject to certain
risks and uncertainties that could cause actual results to differ materially
from historical earnings and those presently anticipated or projected. The
Company has no obligation to publicly release the result of any revisions which
may be made to any forward-looking statements to reflect anticipated or
unanticipated events or circumstances occurring after the date of such
statements.
Results of Operations
Year Ended December 31, 1995 and 1996
Consolidated Operations
The Company incurred a net loss of $987,810 in fiscal 1996 as compared
to a net loss of $609,927. for fiscal 1995. The increase in the net loss in
fiscal 1996 as compared to fiscal 1995 was primarily due to lower sales, higher
store operating expenses and higher administrative expenses in fiscal 1996 as
compared to fiscal 1995. Additionally, the Company did not record a tax benefit
in fiscal 1996 as compared to a tax benefit of $267,490 for fiscal 1995.
Net sales in fiscal 1996 were $13,304,394, a 3.0% decrease from net
sales of $13,722,144 for fiscal 1995. The decrease was due primarily to the fact
that while total Cookstore sales increased 15.0% and comparable Cookstore sales
increased 5.8%, total Bookstore sales decreased 8.2% for fiscal 1996 as compared
to fiscal 1995. All Bookstores sales are comparable.
Cost of goods sold, including store occupancy and delivery costs, was
$9,886,911 for fiscal 1996 as compared to $10,177,693 for fiscal 1995.
Management believes that such decrease was due primarily to the decreased level
of sales. Gross profit as a percentage of net sales was 25.8% for both fiscal
1995 and fiscal 1996.
Store operating expenses for fiscal 1996 were $2,473,243 compared to
$2,394,236 for fiscal 1995. Management believes that the increase in such
expenses was due primarily to the reclassification of certain payroll expenses
to store level operating expenses for fiscal 1996. Such expenses were classified
as administrative expenses in fiscal 1995. Store operating expenses were 18.6%
of net sales for fiscal 1996 as compared to 17.5% in fiscal 1995. Management
believes that the increase in such expenses as a percentage of net sales is due
primarily to the fact that while store level operating expenses increased in
fiscal 1996 as compared to the prior year. net sales decreased.
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<PAGE>
Administrative expenses for fiscal 1996 were $1,333,846 compared to
$1,206,874 for fiscal 1995. Management believes that the increase in
administrative expenses is due primarily to an increase in various professional
and consulting fees in fiscal 1996 as compared to the prior year.
Depreciation and amortization for fiscal 1996 were $193,810 compared to
$246,991 for fiscal 1995 Management believes that the decrease in depreciation
and amortization is due primarily to the fact that some assets had been
completely depreciated and amortized in fiscal 1996 as compared to the prior
year.
Interest expenses for fiscal 1996 were $327,734 compared to $391,081
for fiscal 1995. Management believes that the decrease in interest expenses is
due primarily to a lower level of bank debt in fiscal 1996 as compared to the
same period in the prior year.
Amortization of discount on notes payable for fiscal 1996 was $10,667
compared to $190,208 for fiscal 1995. Management believes that the decrease in
amortization of discount on notes payable is due primarily to the fact that the
amortization was accelerated upon the repayment of bridge loans in the aggregate
principal of $500,000 after the completion of the Company's initial public
offering during fiscal 1995 compared to fiscal 1996. Amortization of debt issue
costs amounted to $139,319 in fiscal 1996. Such costs were related to the
issuance of $622,500 in convertible notes during fiscal 1996.
Cookstore Operations
Net sales in fiscal 1996 were $3,497,940, a 15.0% increase over net
sales of $3,042,412 during fiscal 1995. Management believes that the increase
was due primarily to the opening of the two newest Cookstores on December 1,
1996 and increases in comparable stores net sales. Comparable store net sales
were up 5.8% in fiscal 1996 as compared to fiscal 1995.
Cost of goods sold, including store occupancy and delivery costs, was
$2,286,565 for fiscal 1996 as compared to $2,103,086 for fiscal 1995. Management
believes that such increase was due primarily to the increased level of sales
and the inclusion of the occupancy costs for the two newest Cookstores opened on
December 1, 1996. Gross profit as a percentage of net sales was 34.6% for fiscal
1996 as compared to 30.9% during fiscal 1995. Management believes that the
primary reasons for the higher gross profit as a percentage of net sales for
fiscal 1996, as compared to fiscal 1995, are lower occupancy costs as a
percentage of net sales due primarily to higher comparable store sales and
seasonality in the two newest Cookstores that were open only a few weeks at the
end of 1996. While the store occupancy cost portion of cost of goods sold is
generally relatively fixed throughout the year, December net sales in the
Cookstores generally are about 29% of total sales for the twelve month period.
Bookstore Operations
Net sales in fiscal 1996 were $9,806,454, an 8.2% decrease from net
sales of $10,679,732 in the prior year. Management believes that the decrease
was due primarily to the fact that Superstore Bookstores in Boardman, Cincinnati
and Columbus (Sawmill Road) posted significant sales decreases as a result of
new competition from stores operated by Barnes & Noble, Inc. and Borders-Walden
-14-
<PAGE>
Group, Inc., in close proximity in fiscal 1996. All Bookstore net sales are
comparable in the period.
Cost of goods sold, including store occupancy and delivery costs, were
$7,580,345 for fiscal 1996 as compared to $8,074,607 for fiscal 1995. Gross
profit as a percentage of net sales was 22.7% for fiscal 1996 as compared to
24.4% for fiscal 1995. Management believes that the decrease in the gross profit
as a percentage of net sales for fiscal 1996 as compared to the same period in
the prior year is due primarily to the fact that while sales decreased,
occupancy costs were higher.
Liquidity and Capital Resources
Through December 31, 1996, the Company has funded its requirements for
working capital and capital expenditures primarily from the net proceeds of its
initial public offering in November 1995 (the "Initial Public Offering"),
through borrowings under its bank credit facilities, and the sale of the
Company's debt and equity securities in private placements. In 1996 the Company
sold $622,500 of convertible notes of which $352,500 had been converted as of
December 31, 1996. As of December 31, 1996, the Company had a revolving line of
credit of $395,000, secured term debt in the aggregate amount of $164,994,
promissory notes in the face amount of $300,000 and subordinated notes in the
aggregate amount of $270,000 ($150,000 of which were repaid in January 1997).
The bank debt bears interest at 2.5% per annum over the prime rate of interest,
the promissory notes bear interest at 8.0% per annum and $60,000 of the
subordinated notes bear interest at 5.0% per annum and another $60,000 of the
subordinated notes bear interest at 17.5% per annum. The line of credit and the
secured term debt mature on May 31, 1997. Under the bank loan agreements, no
additional advances will be made under the line of credit through the maturity
date of May 31, 1997. The failure of the Company to refinance the Company's
existing credit facilities, of which there can be no assurance, would have a
material adverse affect on the Company.
In June 1996 the Company consummated a private placement to 12
investors of an aggregate of $622,500 of its convertible notes at an interest
rate of 5.0%. The principal amount of each convertible note is convertible into
shares of Common Stock at the rate of $1.50 per share. The resale of the shares
of Common Stock issuable upon the conversion of the convertible notes were
registered under the Securities Act of 1933, as amended. As of December 31, 1996
an aggregate principal amount of $352,500 of the convertible notes had been
converted to 235,000 shares of the Company's Common Stock, an aggregate
principal amount of $150,000 has been repaid and of the remaining aggregate
principal amount of $120,000, $60,000 was extended to mature at the demand of
the bearer after June 10, 1997 at a new rate of interest of 17.5% and another
$60,000 matured on March 27, 1997 and is currently in default. The notes are
convertible into shares of Common Stock at the rate of $1.50 per share.
The Company's capital expenditures totaled $26,775 in fiscal 1995 and
$204,551 in fiscal 1996. Capital expenditures were higher in 1996 because the
Company opened two new Cookstores.
On November 7, 1995, the Company consummated the Initial Public
Offering of 750,000 shares of common stock and 1,725,000 warrants at a price to
the public of $3.00 and $0.10, respectively. In addition, certain principal
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<PAGE>
stockholders of the Company purchased 60,000 shares of the Company's Series A
Preferred Stock at a price of $5.00 per share.
On November 11, 1996 the Company consummated a private placement of
promissory notes in the aggregate principal amount of $300,000. The notes bear a
rate of interest of 8.0% and mature on May 11, 1999.
The Company had working capital of $231,457 at December 31, 1996
compared to working capital of $604,191 at December 31, 1995, a decrease of
$372,734. Cash used by operating activities during fiscal 1996 was $671,186. The
major elements comprising this amount consisted of the net loss of $987,810,
offset by non-cash expenses aggregating approximately $260,000. Cash was used
for increases to inventory and prepaid expenses aggregating approximately
$496,000, which was offset by increases to accounts payable of approximately
$552,000. In addition, approximately $205,000 was expended for purchases of
property and equipment, primarily to open two new Cookstores. Financing
activities, including issuances of equity and debt (net of repayments), provided
the Company. with approximately $1,04 1,000 of the Company's cash.
The Company has informal agreements with one of its major suppliers
with respect to the reduction of certain charges. Such reductions aggregate
approximately $283,000 at December 31, 1996, which is reflected as a reduction
in the balance of the payable to this vendor on the Company's books. Such
amounts have not formally been credited by the vendor to the Company's account.
At December 31, 1996, the Company had approximately $398,000 recorded
as deferred tax assets, representing amounts the Company believes are more
likely than not to be recovered through future operations, of which there can be
no assurance. Taxable income would need to aggregate approximately $1,000,000
prior to the expiration of these carry-forwards in the year 2011, for the
Company to realize their full benefit. The Company's evaluation of the
recoverability of deferred tax assets is based on certain assumptions regarding
future operations of which there can be no assurance. Specifically, such
evaluation assumes an annualized profitability on the two new Cookstores opened
in December 1996, the anticipation of opening two additional Cookstores within
three years of December 31, 1996 (and that such stores will experience similar
profitability to the Company's existing Cookstores), and the absence of certain
professional, consulting and finance charges incurred during fiscal 1996 which
the Company believes are non-recurring.
The Company anticipates that it will be necessary for the Company to
refinance its existing credit facilities and raise additional capital during the
next twelve months to increase the number of Cookstores and become profitable.
However, there can be no assurance that this will occur. The failure of the
Company to secure additional financing would have a material adverse affect on
the Company.
Item 7. Financial Statements and Supplementary Data.
See Item 13 of this Form 10-KSB, "Exhibits, Lists, and Reports on Form
8-K."
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<PAGE>
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
PART III
Item 9. Directors and Executive Officers
The following table sets forth certain information concerning the
directors and executive officers of the Company.
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
George Gaylord.......................70 Senior Chairman of the Board and Director
John Gaylord ........................42 Chairman of the Board, Chief Executive Officer,
Treasurer, Chief Financial Officer and Director
John D. Critser .....................42 President, Chief Operating Officer and Director
Janet Gaylord Goodburn...............37 Secretary
Martin C. Licht .....................55 Director
</TABLE>
All directors of the Company hold office until the next annual meeting
of shareholders and until their respective successors are duly elected and
qualify. Officers serve at the discretion of the Board of Directors.
The following is a brief summary of the background of each executive
officer and director of the Company:
George Gaylord has been a director and Senior Chairman of the Company
since its inception in July 1994. Mr. Gaylord opened the Company's first Little
Professor Book Center in 1970 and was Chairman and Chief Executive Officer of
each of the Subsidiaries from their inception through November 1993. Mr. Gaylord
has been a director and Chairman Emeritus of the Subsidiaries since November
1993. Mr. Gaylord is the father of John Gaylord, Janet Gaylord Goodburn, Susan
Gaylord Noble and Judy Gaylord and is the uncle of John D. Critser.
John Gaylord has been Chairman of the Board of Directors, Chief
Executive Officer, Treasurer, Chief Financial Officer and a director of the
Company since its inception in July 1994. Since November 1993, Mr. Gaylord has
served as Chairman of the Board of Directors and Chief Executive Officer of the
Subsidiaries. From August 1977 through November 1993, Mr. Gaylord served as
President or Vice President of each of the Subsidiaries. Mr. Gaylord is the son
of George Gaylord, the brother of Janet Gaylord Goodburn, Susan Gaylord Noble
and Judy Gaylord, and the first cousin of John D. Critser.
John D. Critser has been a director, President and Chief Operating
Officer of the Company since its inception in July 1994. Mr. Critser has been
President and Chief Operating Officer of each of the Subsidiaries since November
1993. Prior to joining the Company in July 1993, Mr. Critser was Vice President
- - Store Operations for Eckerd Vision Group, a division of the Eckerd
-17-
<PAGE>
Corporation. Mr. Critser joined Eckerd Corporation in 1983 as an operations
manager and served as a Vice President of the Eckerd Vision Group since February
1991. He holds a B.S. degree in Administrative Science (1976) and an M.B.A.
degree from the University of South Florida (1981). Mr. Critser is the first
cousin of John Gaylord, Janet Gaylord Goodburn, Susan Gaylord Noble and Judy
Gaylord and the nephew of George Gaylord.
Janet Gaylord Goodburn has been the Secretary of the Company since its
inception in July 1994. Commencing in October 1984 Ms. Goodburn served as a Vice
President of each of the Subsidiaries and she has also served as the Secretary
and/or Treasurer of certain of the Subsidiaries. Ms. Goodburn is the daughter of
George Gaylord and the sister of John Gaylord, Susan Gaylord Noble and Judy
Gaylord and the first cousin of John D. Critser.
Martin C. Licht has been a director of the Company since November 1995.
He has been a practicing attorney since 1967 and has been a partner of the law
firm of Lane & Mittendorf LLP, since January 1997. Mr. Licht is also a director
of two companies traded on the NASDAQ Small Capitalization Market, Natural
Health Trends Corp. which owns and operates three vocational schools and is
engaged in the business of complementary medicine and Cable & Co. Worldwide,
Inc. which imports and markets footwear on a wholesale basis.
Directors' Compensation
Directors of the Company do not receive any fixed compensation for
their services as directors. However, the Board of Directors may authorize the
payment of a fixed sum to non-employee directors for their attendance at regular
and special meetings of the Board as is customary for similar companies.
Directors will be reimbursed for their reasonable out-of-pocket expenses
incurred in connection with their duties to the Company. For the fiscal year
ended December 31, 1996, neither the Company nor the Subsidiaries paid its
directors any cash or other form of compensation for acting in such capacity
except that directors who were also executive officers of the Company and
Subsidiaries received cash compensation for acting in the capacity of executive
officers.
Item 10. Executive Compensation.
The following table provides a summary of cash and non-cash
compensation for each of the last three fiscal years ended December 31, 1994,
1995 and 1996 with respect to the following officers of the Company:
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<PAGE>
<TABLE>
<CAPTION>
Annual Compensation Long-Term Compensation
------------------- ----------------------
Awards Payouts
------ -------
Securities
Restricted Underlying
Name and Principal Other Annual Stock Options LTIP All Other
Positions Year Salary($) Bonus($) Compensation($)(1) Award(s)($) SARs(#) Payouts($) Compensation
--------- ---- --------- -------- ----------------------------- ------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
John Gaylord............ 1996 134,048 -- -- -- -- -- --
Chief Executive Officer 1995 136,259 -- -- -- -- -- --
and Chairman of the 1994 139,832 -- -- -- -- -- --
Board
George Gaylord.......... 1996 145,423 -- -- -- -- -- --
Senior Chairman of the 1995 216,010 -- -- -- -- -- --
Board 1994 234,641 -- -- -- -- -- --
John D. Critser......... 1996 122,532 -- -- -- -- -- --
President and Chief 1995 103,076 -- -- -- -- -- --
Operation Officer(2) 1994 88,443 $40,000(2) -- -- -- -- --
</TABLE>
- ---------------------------
(1) Excludes perquisites and other personal benefits that in the aggregate do
not exceed 10% of each of such individual's total annual salary and bonus.
(2) Mr. Critser received 21,845 shares of Common Stock in 1994 which were
valued at $40,000.
Employment and Consulting Agreements
The Company has entered into employment agreements with George Gaylord,
John Gaylord and John D. Critser, which will expire in April 1998, under which
they each receive annual sums of $150,000 per annum. The agreements provide that
the executive will be eligible to receive short-term incentive bonus
compensation if the Company is profitable, the amount of which, if any, will be
determined by the Board of Directors based on the employee's performance,
contributions to the Company's success and on the Company's ability to pay such
incentive compensation. The employment agreements also provide for termination
based on death, disability, voluntary resignation or material failure in
performance. The employment agreements provide for severance payments upon
termination unless the executive is terminated without cause, in which case the
executive will receive one year's salary as severance. The agreements contain
non-competition provisions that preclude each executive from competing with the
Company for a period of one year from the date of termination of employment.
Stock Options
No options were granted to, held or exercised by, any of the Company's
officers during the fiscal year ended December 31, 1996. The Company has adopted
the 1994 Stock Option Plan under which up to 333,333 options to purchase shares
of Common Stock may be granted to key employees, consultants and members of the
Board of Directors of the Company. The exercise price of the options will be
determined by the Stock Option Committee selected by the Board of Directors, but
the exercise price will not be less than 85% of the fair market value of the
Common Stock on the date of grant.
-19-
<PAGE>
Item 11. Security Ownership of Certain Beneficial Owners and Management.
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information as of February 28,
1997 as to the Common Stock and Series A Preferred Stock ownership of each of
the Company's directors, executive officers, all executive officers and
directors as a group and all persons known by the Company to be the beneficial
owners of more than five percent of the Company's Common Stock.
<TABLE>
<CAPTION>
Ownership of Common
Stock and Series A
Common Stock Common Series A Preferred
Number of Stock Series A Preferred Stock -
Name 2nd Address of Beneficial Owner Shares (1) Percentage Stock - Number Percentage
- ------------------------------------ ------ ---------- -------------- ----------
<S> <C> <C> <C> <C>
George Gaylord.......................... 678,580(2)(4) 17.9% 28,320 47.2%
611 Clarion Court
Columbus, Ohio 43220
John Gaylord............................ 496,036(2)(3) 13.1% 20,720 34.5
8836 Finlarig Drive
Dublin, Ohio 43017
Judy Gaylord............................ 198,344(2) 5.2% 2,945 4.9
8667 Blanca Ct.
Powell, Ohio 43065
Janet Gaylord Goodburn.................. 198,344(2) 5.2% 2,946 4.9
3935 Cedric Lane
Dublin, Ohio 43017
Susan Gaylord Noble..................... 198,344(2) 5.2% 2,945 4.9
2933 Kicking Bird Trace
Dublin, Ohio 43017
John D. Critser......................... 160,877 (2)(4) 4.3% 2,124 3.5
8562 Torwoodlee Ct.
Dublin, Ohio 43017
Martin C. Licht ........................ 0 - - -
Selden Lane
Greenwich, Connecticut 06831
- ---------------------------------------------
All present officers and
Directors as a group
(5 persons)............................. 1,533,837 40.5% 100%
</TABLE>
(1) Unless otherwise noted, all persons named in the table have sole voting and
dispositive power with respect to all shares of Common Stock and Series A
Preferred Stock beneficially owned by them.
(2) Each of these five members of the Gaylord family named, as well as John D.
Critser, disclaims beneficial ownership of the securities owned by the
other individuals named in the above table.
-20-
<PAGE>
(3) Includes 71,345 shares of Common Stock and 2,960 shares of Series A
Preferred Stock owned by John Gaylord's wife, Jennifer Lynn Gaylord.
(4) The foregoing does not reflect an agreement between Mr. Critser and George
Gaylord whereby George Gaylord may purchase from Mr. Critser up to the
following number of shares if Mr. Critser's employment with the Company is
terminated for any reason during any of the 12-month periods ending on July
31st of the years indicated: 78,992 shares (1997) and 39,497 shares (1998).
The purchase price for the shares of Common Stock will be Mr. Critser's
cost.
Item 12. Certain Relationships and Related Transactions.
Pursuant to an agreement dated September 12, 1994 between Gaylord
Family Limited ("GFL) and the Franchisor, the Franchisor has agreed to make
payments to GFL for the development of the superstore concept for two Little
Professor bookstores. GFL is owned by John Gaylord, George Gaylord, Janet
Gaylord Goodburn, Susan Gaylord Noble and Judy Gaylord. The Franchisor has
agreed to pay to GFL 25% of the initial franchise fees and 33% of the royalties
paid to the Franchisor by Little Professor bookstores unaffiliated with the
Company located in Ft. Wayne, Indiana (the "Ft. Wayne Store") and Reston,
Virginia (the "Reston Store"). GFL received $48,621 in 1995 and $21,670 in 1996
pursuant to such agreement. George Gaylord receives all of the payments, net of
expenses, received by GFL from the Franchisor.
John Gaylord and George Gaylord have guaranteed, jointly and severally,
certain loans in the aggregate principal amount of $559,994 due to Bank One
Columbus, N.A. John Gaylord and Jennifer Lynn Gaylord, his wife, and George
Gaylord have mortgaged their respective residences to secure the guarantees.
John Gaylord and Jennifer Lynn Gaylord have guaranteed, jointly and severally,
the lease for the Cookstore located in the Lane Avenue Shopping Center,
Columbus, Ohio. George Gaylord has guaranteed the lease for the Superstore
located in the Lane Avenue Shopping Center, Columbus, Ohio. In, addition, John
Gaylord and George Gaylord have jointly and severally guaranteed certain
promissory notes in the aggregate principal amount of $300,000.
George Gaylord is a founder of the Company and may be deemed a parent
of the Company as a result of his ownership of approximately 17.9% of the Common
Stock, his service as a director, and his relationship to his children who
collectively owned approximately 28.7% of the Common Stock. John Gaylord may be
deemed a parent of the Company as a result of his ownership of approximately
13.1% of the Common Stock, including the 71,345 shares of Common Stock owned by
his wife, Jennifer Lynn Gaylord, his executive position, his service as a
director, and his relationship to his father, George Gaylord, who owns
approximately 17.9% of the Common Stock.
As of December 31, 1996, George Gaylord, John Gaylord, Susan Gaylord
Noble, Janet Gaylord Goodburn and Judy Gaylord owed the Company an aggregate of
$67,112 in connection with advances made to such individuals by the Company and
the Subsidiaries. The debt is evidenced by a term note (the "Note"), dated
February 28, 1995, in the original principal amount of $88,701 executed by such
individuals. Each of the parties are jointly and severally liable for the entire
amount due under the Note. The Note bears interest at 8.5% per annum and is
-21-
<PAGE>
payable in sixty equal monthly installments of principal and interest which
commenced August 1, 1995.
Martin C. Licht, a partner of Lane & Mittendorf LLP, the Company's
counsel, is a director of the Company. The Company paid $240,594 in 1995 and
$185,000 in 1996 to law firms in which Martin C. Licht was a member.
Item 13. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) Index to Financial Statements
1. Financial Statements
<TABLE>
<CAPTION>
Page
<S> <C>
Independent Auditor's Report F-2
Consolidated Balance Sheet - December 31, 1996 F-3
Consolidated Statements of Operations - Years Ended December 31, 1996, and 1995 F-4
Consolidated Statement of Changes in Stockholders' Equity - For the years ended
December 31, 1996 and 1995 F-5
Consolidated Statements of Cash Flow - Years Ended December 31, 1996, and 1995 F-6
Notes to Financial Statements F-7
</TABLE>
2. Financial Statement Schedules
None
3. Exhibits Included Herein
See Exhibit Index on page 25 hereof for the exhibits filed as
part of this Form 10-KSB.
(b) Reports on Form 8-K
There were no reports on Form 8-K filed with the Securities and Exchange
Commission during the quarter ended December 31, 1996.
(c) Exhibit Index
<TABLE>
<CAPTION>
Number Description of Exhibit
- ------ ----------------------
<S> <C>
3.1 -- Certificate of Incorporation of the Company. +
3.2 -- By-Laws of the Company. +
</TABLE>
-22-
<PAGE>
<TABLE>
<CAPTION>
Number Description of Exhibit
- ------ ----------------------
<S> <C>
4.1 -- Form of Warrant Agreement between the Company and Continental Stock Transfer & Trust Company, as
warrant agent. +
4.2 -- 1994 Stock Option Plan, as amended. +
4.3 -- Specimen Certificate of the Company's Warrant. +
4.4 -- Form of Underwriter's Warrants. +
10.1 -- Form of Employment Agreement between the Company and John D. Critser. +
10.2 -- Form of Employment Agreement between the Company and John Gaylord. +
10.3 -- Form of Employment Agreement between the Company and George Gaylord. +
10.4 -- Agreements between the Subsidiaries and Bank One, Columbus, N.A. +
10.5 -- Exchange Agreement, dated as of August 1, 1994, by and among George Gaylord, John Gaylord, Janet
Gaylord Goodburn, Susan Gaylord Noble, Judy Gaylord, Jennifer Lynn Gaylord, John D. Critser and
Gaylord Companies, Inc. +
10.6 -- Lease, dated September 30, 1987, between UAP-Columbus JV326132, as Landlord, and Gaylord Book
Company, as Tenant, as amended, for premises located at 1655 and 1657 West Lane Avenue, Lane Avenue
Shopping Center, Upper Arlington, Ohio.+
10.7 -- Lease, dated December 15, 1988, between Retail Projects of Cincinnati, Inc., as Landlord, and
Little Professor Enterprises, Inc., as Tenant, as subsequently assigned to Gaylord's Inc. and
amended, for premises located at Space 180, Forest Fair Mall, Forest Park, Ohio. +
10.8 -- Lease, dated June 13, 1989, between UAP-Columbus JV326132, as Landlord, and The Cookstore, Inc., as
Tenant, as amended, for premises located at 1677 West Lane Avenue, M-1/4 and M-6, Lane Avenue
Shopping Center, Upper Arlington, Ohio. +
10.9 -- Lease, dated September 24, 1990, between Planned Communities Company, as Landlord, and Little
Professor Enterprises, Inc., as Tenant, for premises located at Worthington Square Shopping Center,
Worthington, Ohio. +
10.10 -- Lease, dated July 16, 1992, between Sawmill Place Plaza Associates, as Landlord, and Little
Professor Enterprises, Inc., as Tenant, as amended, for premises known as Space 122, Plaza at
Sawmill Place, 2700 Sawmill Place Blvd., Columbus, Ohio. +
10.11 -- Lease, dated September 10, 1993, between UAP-Columbus,
JV326132, as Landlord, and Gaylord Book Co., Inc., as Tenant, as
amended, for premises located at 1595 West Lane Avenue, Upper
Arlington, Ohio. +
10.12 -- Lease, dated September 13, 1993, between Aetna Life Insurance
Company, as Landlord, and Gaylord Companies, Inc., as Tenant, for
premises located at Worthington Mall, Worthington, Ohio. +
10.13 -- Lease, dated October 21, 1993, between Greater Boardman Plaza, Inc., as Landlord, and Gaylord
Enterprises, Inc., as Tenant, for premises located at Room No. 101, Greater Boardman Plaza Shopping
Center, 255 Boardman-Canfield Road, Youngstown, Ohio. +
10.14 -- Lease, dated July 15, 1994, between Glimcher Properties Limited Partnership, as Landlord, and
Gaylord Companies, as Tenant, for premises located at the Mall at Fairfield Commons, Store #E181,
Beavercreek, Ohio. +
10.15 -- Lease, dated August 19, 1994, between DeBartolo Capital Partnership, as Landlord, and The Cookstore
Inc., as Tenant, for premises located at Room 240, Summit Mall Shopping Center, 3265 West Market
Street, Akron, Ohio. +
</TABLE>
-23-
<PAGE>
<TABLE>
<CAPTION>
Number Description of Exhibit
- ------ ----------------------
<S> <C>
10.16 -- Sublease, dated August 31, 1994, between J.E. Hanger, Inc., sublessor and The Gaylord Companies,
Inc., sublessee, as a sublease under the master lease dated April 23, 1991 between Teachers
Insurance and Annuity Association, as lessor, and J. E. Hanger, Inc., as lessee, for premises
located at 4006 Venture Court, Columbus, Ohio.+
10.17 -- Consignment Agreement, dated February 25, 1989, between Ingram Industries, Inc., as Consignor, and
Gaylord's, Inc., as Consignee, relating to the store located at 1018 Forest Fair Drive, Cincinnati,
Ohio. +
10.18 -- Consignment Agreement dated May 21, 1991, between Ingram Book Company, as Consignor, and Little
Professor Enterprises, Inc., as Consignee, relating to the store -located at 155 Worthington
Square, Worthington, Ohio. +
10.19 -- Consignment Agreement, dated February 10, 1993, between Ingram Book Company, as Consignor, and
Gaylord Book Company, as Consignee, relating to the store located at 1646 W. Lane Avenue, Columbus,
Ohio. +
10.20 -- Consignment Agreement, dated February 10, 1993, between Ingram Book Company, as Consignor, and
Little Professor Enterprises, Inc., as Consignee, relating to the store located at 6490 Sawmill
Road, Columbus, Ohio. +
10.21 -- Consignment Agreement, dated December 1993, between Ingram Book Company, as Consignor, and Gaylord
Enterprises, Inc., as Consignee, relating to the store located at 101 Boardman-Canfield Road,
Boardman, Ohio. +
10.22 -- License Agreement, dated as of January 1, 1994, between Sawworth Book Company, as License Owner,
and Little Professor Book Centers, Inc., as Franchisor, relating to 55 Worthington Square,
Worthington, Ohio. +
10.23 -- License Agreement, dated as of January 1, 1994, between Sawworth Book Company, as License Owner,
and Little Professor Book Centers, Inc., as Franchisor, relating to 6490 Sawmill Road, Columbus,
Ohio. +
10.24 -- License Agreement, dated as of January 1, 1994, between Gaylord Enterprises, Inc., as License
Owner, and Little Professor Book Centers, Inc., as Franchisor, relating to 101 Boardman-Canfield
Road, Boardman, Ohio. +
10.25 -- License Agreement, dated as of January 1, 1994, between Gaylord's, Inc., as License Owner, and
Little Professor Book Centers, Inc., as Franchisor, relating to 1018 Forest Fair Drive, Cincinnati,
Ohio. +
10.26 -- License Agreement, dated as of January 1, 1994, between Gaylord Book Company, as License Owner, and
Little Professor Book Centers, Inc., as Franchisor, relating to 1657 W. Lane Avenue, Columbus,
Ohio. +
10.27 -- Agreement, dated as of January 1, 1994, between the Company and Little Professor Book Centers, Inc.
+
10.28 -- Letter Agreement, dated September 12, 1994, from Little Professor Book Centers, Inc. to Gaylord
Family Limited. +
10.29 -- Mutual Release Agreement, dated September 12, 1994, among Little Professor Book Centers, Inc. and
the Company Gaylord's, Inc., Gaylord Family Investments, Inc., Gaylord Book Company, Sawworth Book
Company, Gaylord Enterprises, Inc., Gaylord Family Limited, George Gaylord and John Gaylord. +
10.30 -- Loan Agreement with Bank One. +
21.1 -- List of Subsidiaries. +
27.1 -- Financial Data Schedule.*
</TABLE>
* Filed with this Form 10-KSB
+ Previously Filed with Registration Statement No. 33-90832.
-24-
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Dated: April 14, 1997 GAYLORD COMPANIES, INC.
By: /s/ John D. Critser
------------------------------------
John D. Critser, President, Chief
Operating Officer, Director *
By: /s/ John Gaylord
------------------------------------
John Gaylord, Chairman of the
Board, Chief Executive Officer,
Treasurer, Chief Financial Officer
and Director
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of the
Registrant in the capacities and on the date indicated.
Name Title Date
- ---- ----- ----
/s/ John D. Critser President, Chief Operating Officer, April 14, 1997
- ---------------------- Director
John D. Critser
/s/ John Gaylord Chairman of the Board, Chief April 14, 1997
- ---------------------- Executive Officer, Treasurer, Chief
John Gaylord Financial Officer and Director
/s/ Martin C. Licht Director April 14, 1997
- ----------------------
Martin C. Licht
/s/ George Gaylord Senior Chairman April 14, 1997
- ---------------------- of the Board and
George Gaylord Director
-25-
<PAGE>
GAYLORD COMPANIES, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
Page
----
Independent Auditors' Report F-2
Consolidated Balance Sheet at December 31, 1996 F-3
Consolidated Statement of Operations for the years ended
December 31, 1996 and 1995 F-4
Consolidated Statement of Stockholders' Equity for the years
ended December 31, 1996 and 1995 F-5
Consolidated Statement of Cash Flows for the years ended
December 31, 1996 and 1995 F-6
Notes to Consolidated Financial Statements F-7
F-1
<PAGE>
FELDMAN RADIN & CO., P.C.
CERTIFIED PUBLIC ACCOUNTANTS
MEMBER OF DFK INTERNATIONAL 805 THIRD AVENUE
WITH OFFICES IN PRINCIPAL NEW YORK, N.Y. 10022-7513
CITIES THROUGHOUT THE WORLD (212) 593-3100
TELECOPIER (212) 355-3631
INDEPENDENT AUDITORS' REPORT
To the Shareholders and
Board of Directors
Gaylord Companies, Inc.
We have audited the accompanying consolidated balance sheet of Gaylord
Companies. Inc. and subsidiaries as of December 31, 1996, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
the years ended December 31, 1996 and 1995. 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. as of December 31, 1996, and the results of its operations and
its cash flows for the years ended December 31, 1996 and 1995 in conformity with
generally accepted accounting principles.
FELMAN RADIN & CO., P.C.
Certified Public Accountants
February 28, 1997,
March 27, 1997 as to Note 11
and April 15, 1997 as to Note 5
F-2
<PAGE>
GAYLORD COMPANIES. INC.
BALANCE SHEET
DECEMBER, 31,1996
<TABLE>
<CAPTION>
ASSETS
<S> <C>
CURRENT ASSETS:
Cash $ 815,518
Accounts receivable - trade 80,329
Other receivables 177,217
Inventories 2,210,240
Prepaid expenses and other current assets 210,539
----------
TOTAL CURRENT ASSETS 3,496,843
PROPERTY AND EQUIPMENT 723,576
GOODWILL 120,292
DEFERRED INCOME TAXES 398,196
INVESTMENT 125,000
OTHER ASSETS 26,977
----------
$4,890,884
==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $2,244,918
Sales and other taxes payable 190,474
Line of credit 395,000
Convertible notes 270,000
Current portion of long-term debt 164,994
----------
TOTAL CURRENT LIABILITIES 3,265,386
NOTE PAYABLE, net of discount 214,667
STOCKHOLDERS' EQUITY:
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 S.01 per share; 10,000,000 shares
authorized, 3,635,000 shares issued and outstanding 36,350
Paid-in-capital in excess of par 2,338,938
Accumulated deficit (999,219)
Receivable for stock (168,571)
Unearned stock compensation (96,667)
----------
TOTAL STOCKHOLDERS' EQUITY 1,410,831
----------
$4,890,884
==========
</TABLE>
The notes are an integral part of the consolidated
financial statements.
F-3
<PAGE>
GAYLORD COMPANIES. INC.
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Year ended December 31,
-------------------------------------------
1996 1995
---------- -------
<S> <C> <C>
NET SALES $ 13,304,394 $ 13,722,144
COST OF GOODS SOLD, including store occupancy and
Delivery costs 9,866,911 10,177,693
----------- ----------
GROSS PROFIT 3,437,483 3,544,451
----------- -----------
OPERATING EXPENSES:
Store operating expenses 2,473,243 2,394,236
Administrative 1,333,846 1,206,874
Depreciation and amortization 193,810 246,991
----------- ----------
4,000,899 3,848,101
----------- -----------
OPERATING INCOME (LOSS) (563,416) (303,650)
----------- -----------
OTHER INCOME (EXPENSE):
Interest expense (327,734) (391,081)
Interest income 15,917 4,448
Amortization of discount on notes payable (10,667) (190,208)
Amortization of debt issue costs (139,319) --
Other - net 37,409 3,074
----------- ----------
(424,394) (573,767)
----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES (987,810) (877,417)
INCOME TAX BENEFIT - 267,490
----------- ----------
NET INCOME (LOSS) $ (987,810) $ (609,927)
=========== ===========
EARNINGS (LOSS) PER COMMON SHARE $ (0.33) $ (0.29)
=========== ===========
WEIGHTED AVERAGE COMMON SHARES USED 3,103,957 2,125,000
=========== ===========
</TABLE>
The notes are an integral part of the consolidated
financial statements.
F-4
<PAGE>
GAYLORD COMPANIES, INC.
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Paid-in
Preferred Stock Common Stock Capital In
--------------- ------------ Excess Of
Shares Amount Shares Amount Par Value
------ ------ ------ ------ ---------
<S> <C> <C> <C> <C> <C>
BALANCE - DECEMBER 31, 1994 - $ - 2,000,000 $20,000 $226,024
Sale of preferred stock 60,000 300,000 - - -
Sale of common stock and warrants - - 750,000 7,500 1,374,793
Dividends paid on preferred stock - - - - -
Net loss - - - - -
------ ------- --------- ------ ---------
BALANCE - DECEMBER 31,1995 60,000 300,000 2,750,000 27,500 1,600,817
Sale of stock to consultant - - 300,000 3,000 297,000
Shares issued with note payable - - 180,000 1,800 94,200
Shares issued for services - - 170,000 1,700 112,050
Conversion of notes, net of
associated
Deferred debt issue costs - - 235,000 2,350 234,871
Dividends on preferred stock - - - - -
Amortization of unearned stock
compensation - - - - -
Net loss - - - - -
------ ------- --------- ------ ---------
BALANCE - DECEMBER 31,1996 60,000 $300,000 3,635,000 $36,350 $2,338,938
====== ======== ========= ======= ==========
</TABLE>
<TABLE>
<CAPTION>
Retained
Unearned Stock Receivable Earnings
Compensation for Stock (deficit) Totals
------------ --------- --------- ------
<S> <C> <C> <C> <C>
BALANCE - DECEMBER 31, 1994 $ - $ - $ 639,897 $ 885,921
Sale of preferred stock - - - 300,000
Sale of common stock and warrants - - - 1,382,293
Dividends paid on preferred stock - - (5,379) (5,379)
Net loss - - (609,927) (609,927)
-------- ---------- --------- ---------
BALANCE - DECEMBER 31,1995 - - 24,591 1,952,908
Sale of stock to consultant - (168,571) - 131,429
Shares issued with note payable - - - 96,000
Shares issued for services (110,000) - - 3,750
Conversion of notes, net of
associated
Deferred debt issue costs - - - 237,221
Dividends on preferred stock - - (36,000) (36,000)
Amortization of unearned stock
compensation 13,333 - - 13,333
Net loss - - (987,219) (987,810)
-------- ---------- --------- ---------
BALANCE - DECEMBER 31,1996 $(96,667) $ (168,571) $(999,219) $1,410,831
======== ========== ========= ==========
</TABLE>
The notes are an integral part of the consolidated
financial statements.
F-5
<PAGE>
GAYLORD COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended December 31,
----------------------------
1996 1995
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ (987,810) $ (609,927)
Adjustments to reconcile net income (loss) to net
cash provided (used) by operating activities
Depreciation and amortization: 193,810 246,991
Non cash imputed compensation expense 57,012 --
Gain on disposal of property and equipment (602) --
Amortization of discount on notes payable 10,667 190,208
Change in assets and liabilities:
Decrease (increase) in accounts receivable (38,231) (9,674)
Decrease (increase) in other receivable 16,490 5,844
Decrease (increase) in inventory (399,788) 3,148
Decrease (increase) in prepaid expenses and other assets (96,668) (60,505)
Decrease (increase) in other assets 11,136 8,862
Decrease (increase) in deferred income taxes -- (261,112)
Increase (decrease) in accounts payable 551,627 (253,272)
Increase (decrease) in sales and other taxes payable 11,171 32,560
Increase (decrease) in other current liabilities -- (51,823)
Decrease (increase) in deferred registration costs -- 192,832
----------- -----------
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES (671,186) (565,868)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (204,551) $ (26,755)
Proceeds from sale of property and equipment 3,785 --
----------- -----------
NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES (200,766) (26,775)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of preferred stock -- 300,000
Proceeds from issuance of common stock and warrants, net of expenses 69,721 1,382,293
Dividends paid (36,000) (5,379)
Proceeds from note payable 204,000 --
Proceeds from bank debt 395,000 250,000
Repayments of bank debt (463,770) (688,817)
Proceeds from issuance of convertible notes 622,500 --
(Increase) decrease in restricted cash 250,000 (250,000)
Principal payments of capital lease obligations -- (8,062)
----------- -----------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES 1,041,451 980,035
----------- -----------
NET INCREASE (DECREASE) IN CASH 169,499 387,392
CASH AT BEGINNING OF YEAR 649,019 261,627
----------- -----------
CASH AT END OF YEAR $ 818,518 $ 649,019
=========== ===========
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Cash paid during the year for:
Interest $ 318,612 $ 147,391
=========== ===========
Income taxes -- --
=========== ===========
Non cash financing and investing activity:
Conversion of notes payable to common stock $ 352,500 $ --
=========== ===========
Common stock issued for future services $ 112,500 $ --
=========== ===========
Receivable for common stock $ 168,571 $ --
=========== ===========
</TABLE>
The notes are an integral part of the consolidated
financial statements.
F-6
<PAGE>
GAYLORD COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31,1996
I. 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 books, quality cookware and serving equipment, with
operations in Ohio, Indiana and Kentucky.
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.
(b) Inventories
Inventories are stated at the lower of cost or market. Cost is
determined using the retail method and the FIFO method.
(c) Investments
The Company adopted SFAS No. 115, "Accounting for Certain Investments
in Debt and Equity Securities." This SFAS requires, among other things,
that securities designated as available for sale be revalued at period
end with the unrealized gain or loss, net of tax effect, recorded as an
element of stockholders' equity. The held to maturity classification
includes debt securities that the Corporation has the positive intent
and ability to hold to maturity which are carried at amortized cost.
The available for sale classification includes debt and equity
securities which are carried at fair value. Unrealized gains or losses
on securities available for sale are included as a separate component
of stockholders' equity, net of tax effect.
The Company has an eleven percent interest in the common stock of a
franchisor organization, Little Professor Book Company ("LPBC"), held
for long-term investment purposes, which is stated at cost which
management believes approximates fair market value. An agreement with
the franchisor states that the franchisor may purchase the stock from
the Company at the end of the license agreements with the franchisor at
the higher of cost, book value, or market value.
F-7
<PAGE>
(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) Goodwill
Goodwill, which arose as a result of the purchase of one of the
Company's bookstores in 1977 is being amortized on a straight-line
basis over a period of 40 years. The Company assesses the
recoverability of the goodwill by evaluating whether the amortization
of the goodwill balance over its remaining useful life can be recovered
through projected undiscounted future results of the acquired entity.
The amount of goodwill impairment, if any, is measured based on
projected discounted future results, using a discount rate reflecting
the Company's average cost of capital.
(f) Preopening Costs
Expenses associated with the opening of new stores are deferred and
amortized ratably over a twelve month period beginning on the date of
the store opening.
(g) Net Earnings (Loss) Per Share
Net earnings (loss) per share is computed based on the weighted average
number of common shares outstanding after giving effect to preferred
stock dividends.
(h) 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.
(i) 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.
F-8
<PAGE>
(j) Impairment of Long - Lived Assets
The Company has adopted Statement of Financial Accounting Standards No.
121, "Accounting For The Impairment Of Long-Lived Assets And For
Long-Lived Assets To Be Disposed Of as of January 1, 1996. Such
adoption had no material effect on the financial position of the
Company.
2. OTHER RECEIVABLES
Other receivables consist of the following at December 31, 1996:
Officer's receivable $67,112
Other receivables 110,105
--------
$177,217
========
The officers' receivable is due in monthly installments through July
2000 and bears interest at the rate of 8.5% per annum.
3. INVENTORIES
The Company, as consignee, has entered into consignment agreements
whereby title to the consigned goods remain with the consignor until
sold by the Company. These consignment agreements have an original term
of 2 years with automatic one-year renewals, unless terminated by
either party. The Company is obligated to pay a formula based
consignment fee. Such formula is based on the average amount of
consigned goods held during the period at prime plus 2 percent (10.5%
at December 31, 1996 and 1995) plus a fixed charge. The total
consignment fees for the years ended December 31, 1996 and 1995 were
$261,900 and $254,300, respectively.
The Company may return consigned goods to the consignor up to a defined
level without a fee. Upon the termination of the consignment
agreements, the consignor shall be entitled to the immediate return of
all of the consigned goods.
As the consigned goods remain the property of the consignor until sold,
the consigned goods (cost of approximately $2,871,000 at December 31,
1996) are not reflected as inventory in the accompanying consolidated
financial statements. The maximum amount of consigned goods the Company
may have on hand at any time cannot exceed $4,670,000 (at retail
value). The consigned goods sold under this arrangement were
approximately 64% and 61% of cost of sales in the years ended December
31, 1996 and 1995, respectively.
Currently, the Company is not in compliance with the provisions in the
consignment agreement with respect to the Company's inventory turnover
ratios. Upon a default under the consignment agreements, the consignor
may terminate all of such consignment agreements.
F-9
<PAGE>
4. PROPERTY AND EQUIPMENT
The following is a summary of property and equipment at December 31,
1996:
Depreciable
Life
----
Computers and equipment 5 years 285,072
Leasehold improvements 10 years 550,213
Furniture and fixtures 7 years 1,091,179
----------
1,926,464
1,202,888
----------
$ 723,576
Accumulated depreciation and amortization ==========
5. BANK DEBT
The following is a summary of bank debt at December 31, 1996:
Term loan $ 164,994
Line of credit 395,000
-----------
$ 559,994
===========
In November 1995, the Company entered into a master financing agreement
with its lending bank, which was amended in May 1996. Under the amended
agreement, the rate of interest was set at prime plus 2.5% and all
outstanding principal became due on January 10, 1997.
The Company's accounts receivable, inventory and property and
equipment, are pledged as security under this loan agreement. Also,
certain stockholders have personally guaranteed the debt.
In April 1997, an amendment to this financing agreement was entered
into pursuant to which all principal becomes due by May 31, 1997 and
the interest rate is increased to prime plus 3.5%.
6. BRIDGE FINANCINGS
In August 1994, the Company borrowed $500,000 in a bridge financing. In
accordance with Accounting Principles Board Opinion No. 14, the
proceeds received for the bridge financings were allocated between the
equity and debt securities included in such units based upon their
relative estimated fair values. The difference between the face amount
and the allocated value of the debt was recorded as a discount on the
notes payable totaling $150,000. An additional $57,500 of financing
costs were also recorded as discounts. The remaining unamortized
discount was written off during November 1995 upon the Company's
accelerated repayment of the bridge loans with the proceeds of its
Initial Public Offering.
F-10
<PAGE>
7. COMMITMENTS AND CONTINGENCIES
(i) Leases
The Company has ten noncancelable operating leases, covering its
headquarters and its store locations. Such leases expire variously over
the next ten years, but also provide for renewal options.
Future minimum lease payments under noncancelable operating leases are
as follows:
Operating
Year ending December 31, Leases
------------------------ ---------
1997 $1,162,471
1998 1,220,127
1999 1,022,610
2000 852,037
2001 873,708
Later years, through 2006 2,109,458
Total rental expense for operating leases was $1,512,178 and $1,156,662
in 1996 and 1995, respectively, including contingent rentals of
$141,389 and $166,266 in 1996 and 1995, respectively.
(ii) License Agreements
Four of the subsidiaries entered into five separate license agreements
with LPBC with respect to six bookstores. The initial term of the
license agreements expired on December 31, 1996 and may be extended by
the Company until December 31, 2001. Until such time as a renewal
agreement is drafted, the Company and LPBC are operating under a
month-to-month agreement under the same terms. The Company pays LPBC a
royalty of 1/2 of 1% of monthly sales for all of the bookstores. If
there is a default by any of the Subsidiaries under any one of the
license agreements, then LPBC may terminate all of the license
agreements.
The Company and LPBC also entered into a separate agreement (the
"Supplementary Agreement") which includes, among other things,
consulting services to be rendered to LPBC, rights of first refusal
permitting the Company to open additional franchises, the termination
of the license agreements and LPBC's repurchase of its common stock
owned by the Company. Pursuant to the Supplementary Agreement, the
Company or LPBC may terminate the license agreements and the
Supplementary Agreement upon 12 months notice and the payment of
$100,000. The initial term of the Supplementary Agreement expired on
December 31, 1996 and may be extended by LPBC until December 31, 2001.
In addition, upon the termination of the Supplementary Agreement, LPBC
has the right to repurchase its shares of common stock owned by the
Company at the greater of the cost to the Company, the book value or
the fair market value of such shares. Until such time as a renewal
agreement is drafted, the Company and LPBC are operating under a
month-to-month agreement under the same terms. LPBC has granted the
F-11
<PAGE>
Company a right of first refusal for opening of any Little Professor
Bookstore in Ohio, or in Collier County or Lee County, Florida. Upon
the opening of Little Professor Book Company bookstores by third
parties in excess of 8,000 square feet in size, LPBC will pay to the
Company the greater of $ 10,000 or 15% of its then current initial
franchise fees plus 2/10 of 1% of the monthly sales during the initial
term of any such agreements.
(iii) Employment Agreements
The Company has entered into employment agreements with three of its
executive officers which expire in April 1998. Aggregate annual
salaries under these agreements are $425,000.
(iv) Verbal Agreements
The Company has informal agreements with one of its major suppliers
with respect to the reduction of certain charges. Such reductions
aggregate approximately $283,000 at December 31, 1996, which is
reflected as a reduction in the balance of the payable to this vendor
on the Company's books. Such amounts have not formally been credited by
the vendor to the Company's account.
8. 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:
Years ended December 31,
------------------------
1996 1995
--------- ----------
Tax benefit computed at statutory rate $(346,000) $(297,000)
State and local taxes, net of federal benefit -- (40,000)
Effect of permanent differences 29,000 68,000
Other, net 3,000 1,510
Tax benefit not recognized 314,000 --
--------- ---------
$ -- $(267,490)
========= =========
F-12
<PAGE>
The Company had deferred tax assets total $809,000, representing the
tax effects of net operating loss carryforwards totaling $670,000, 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 $411,000 as a reserve against such
deferred tax assets. The net operating loss carryforwards totaling
approximately $1,676,000, expire in the years 2009 and 2011.
9. STOCKHOLDERS' EQUITY
On August 1, 1994, the Company adopted the 1994 Stock Option Plan under
which up to 333,333 options to purchase shares of common stock may be
granted to key employees, consultants and members of the Board of
Directors. As of December 31, 1996, no options have been issued under
this plan.
In March and May 1995, certain principal shareholders surrendered an
aggregate of 41,667 and 659,735 shares, respectively, of the Company's
common stock and such shares were retired. These transactions were
accounted for as a recapitalization of the Company and were given
retroactive effect in the accompanying consolidated financial
statements for all periods presented.
In October 1995 the Company effected a stock split of one and
two-thirds shares for each issued and outstanding share in the form of
a stock dividend. All common stock data in these financial statements
are retroactively adjusted to reflect this transaction.
The Company can issue a maximum of 1,500,000 shares of preferred stock,
in one or more series, containing such rights, including voting rights,
dividend rates, redemption prices and liquidation preferences, as the
Board of Directors may determine.
In November 1995, the Company sold 60,000 shares of Series A Cumulative
preferred stock to certain shareholders for $5.00 per share. The shares
pay an annual dividend of $0.60 per share and contain a liquidation
preference of $5.00 per share.
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. 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.
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.
10. 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
F-13
<PAGE>
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
$2.13 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
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
$2.52 per share at December 31, 1996.
11. 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.
12. 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 $85,333 at December 3 1, 1996.
13. RETIREMENT PLAN
In August 1996, the Company adopted a Supplemental Executive Retirement
Plan to provide unfunded, deferred compensation benefits to a select
group of management employees, with eligibility determined at the
discretion of the Compensation Committee of the Board of Directors.
Benefits are payable upon each participant attaining retirement age
(whether or not he actually retires), and are based on a formula which
provides for a maximum annual retirement benefit not to exceed 75% of
the participant's final average earnings prior to reaching retirement
F-14
<PAGE>
age, less any amounts earned from the Company as a result of the
participant's continued employment.
The Company's policy is to record the present value of the projected
post-retirement benefit over the remaining service period.
14. SEGMENT INFORMATION
Summary information for the Company's two industry segments is as
follows:
<TABLE>
<CAPTION>
Bookstore Cookstore Total
--------- --------- -----
<S> <C> <C> <C>
For the year ended December 31, 1996:
Net sales $ 9,806,454 $ 3,497,940 $ 13,304,394
Cost of Goods Sold, including store
occupancy and delivery costs 7,580,345 2,286,565 9,866,910
------------ ------------ ------------
Gross Profit 2,226,109 1,211,375 3,437,484
Store Operating Expenses 1,859,876 613,367 2,473,243
------------ ------------ ------------
Store Level Income 366,233 598,008 964,241
Depreciation and Amortization 125,477 68,334 193,811
Administrative 1,093,708 390,123 1,483,831
------------ ------------ ------------
Operating income (loss) $ (852,952) $ 139,551 (713,401)
============ ============ ============
Other expenses 274,409
------------
Income (loss) before taxes $ (987,810)
============
Identifiable assets $ 2,803,849 $ 1,859,984 $ 4,663,833
============ ============
Corporate assets 227,051
------------
Total assets $ 4,890,884
============
Other information:
Capital acquisitions $ 2,410 $ 178,419
============ ============
</TABLE>
F-15
<PAGE>
<TABLE>
<CAPTION>
Bookstore Cookstore Total
--------- --------- -----
<S> <C> <C> <C>
For the year ended December 31, 1995:
Net sales $ 10,679,732 $ 3,042,412 $ 13,722,144
Cost of Goods Sold, including store
occupancy and delivery costs 8,074,607 2,103,086 10,177,693
------------ ------------ ------------
Gross Profit 2,605,125 939,326 3,544,451
Store Operating Expenses 1,803,698 590,538 2,394,236
------------ ------------ ------------
Store Level Income 801,427 348,788 1,150,215
Depreciation and Amortization 156,128 90,863 246,991
Administrative 939,292 267,582 1,206,874
------------ ------------ ------------
Operating income (loss) $ (293,993) $ (9,657) (303,650)
============ ============ ============
Other expenses 573,767
------------
Income (loss) before taxes $ (877,417)
------------
Identifiable assets $ 2,385,618 $ 1,620,389 $ 4,006,007
============ ============
Corporate assets 459,126
------------
Total assets $ 4,465,133
============
Other information:
Capital acquisitions $ 14,518 $ 12,257
============ ============
</TABLE>
F-16
<PAGE>
EXHIBIT C
Gaylord Companies Inc., Cookstore Operations
Consolidated Statement of Operations
1997
Sales $ 3,724,157
Cost of Sales 2,018,684
-----------
Gross Profit 1,705,473
Variable Expenses 737,201
Fixed Expenses 876,964
-----------
Total Expenses 1,614,165
Contribution Margin 91,307
Other Income (Expenses):
Corporate Charges (1,013,656)
Cash Discounts Taken 1,283
Interest Expenses (105,976)
Other Income (Expenses) (3,116)
Depreciation & Amortization (95,640)
-----------
Total Other Income (Expenses) (1,217,125)
Net Income Before Taxes (1,125,818)
Taxes on Income 37,180
Net Income $(1,162,999)
<PAGE>
EXHIBIT D
TERM SHEET
This Term Sheet sets forth the material terms of the Plan or Plans of
Reorganization to be submitted by Gaylord Companies, Inc. ("Gaylord Companies"),
The Cookstore, Inc. ("TCI"), and The Cookstore Worthington, Inc. ("TCWI")
(Gaylord Companies, TCI and TCWI are collectively referred to as the "Debtors"),
as well as certain key operational issues between the date hereof and the
Effective Date (as described in Section 3.1 below).
1. Introduction. Gaylord Companies is a Delaware corporation with six
wholly-owned subsidiaries (the "Subsidiaries"). Two of the Subsidiaries (TCI and
TCWI) own and operate six retail stores known as Cookstores (the "Cookstores"),
while four Subsidiaries own and operate six retail bookstores (collectively
referred to herein as the "Bookstores"). On November 13, 1997, Gaylord Companies
and each of the six Subsidiaries filed petitions under Chapter 11 of the
Bankruptcy Code with the United States Bankruptcy Court in the Southern District
of Ohio (Consolidated Case No. 97-60560).
This Term Sheet confirms (i) the essential terms and conditions of the
agreement to consummate the transactions described herein, (ii) the parties'
mutual intent to continue to negotiate in good faith regarding the non-essential
terms of the agreement, and (iii) the obligations of the parties to enter into
and deliver definitive agreements consistent with such terms and to perform such
agreements. The Term, Sheet shall be signed by Cambridge Holdings, L.L.C.
("Cambridge") and the Debtors with the understanding that the Debtors do not
have the authority to execute this Term Sheet unless and until the Bankruptcy
Court grants the Debtors authority to do so. Therefore, none of the obligations
and agreements of Cambridge hereunder shall be enforceable against Cambridge
until such authorization is received by the Debtors. Immediately after the Term
Sheet is signed by the parties hereto, the Debtors will file a motion with the
Bankruptcy Court seeking authority to execute and perform the terms hereof, and
will promptly prepare and submit an appropriate Plan or Plans of Reorganization
to fully implement the terms hereof. The Debtors agree to take all reasonable
measures necessary or appropriate to obtain approval of the foregoing motion and
Plan or Plans of Reorganization.
2. Assets and Liabilities of the Debtors. The following is a brief
summary of the assets and liabilities of the Debtors.
2.1. Assets. TCI and TCWI own and operate the six Cookstores.
TCI and TCWI estimate that they will have, as of February 28, 1998, inventory
(either on hand or the subject of prepaid orders) with an estimated value (at
cost) of $1,075,000. TCI and TCWI also estimate that they will have, as of
February 28, 1998, cash on hand of approximately $80,000. TCI and TCWI are
parties to certain leases and executory contracts, as described in the schedules
filed with the Bankruptcy Court. Gaylord Companies, TCI or TCWI owns the trade
name "Cookstore." Other assets, which are described in TCI's and TCWI's
schedules filed with the Bankruptcy Court, are of nominal value.
Gaylord Companies is a publicly traded entity. Gaylord Companies is a
party to a lease of the Cookstores' point of sale equipment. Gaylord Companies
is also party to a real property lease for the corporate offices. The remaining
assets of Gaylord Companies are described in its schedules filed with the
Bankruptcy Court and are of nominal value.
2
<PAGE>
2.2 Liabilities. The liabilities of the Debtors as of the
Petition Date (as estimated by the Debtors) are as follows:
A. Greenfield Commercial Credit, L.L.C. $1,271,662.40
(Principal and interest as of petition
date; several post-petition payments have
been made to Greenfield)
B. Administrative Expenses 200,000.00
(Note: Debtors have prepaid most of these
expenses; all administrative expenses are
post-petition)
C. Priority Claims Pursuant to 80,000.00
11 U.S.C. ss. 507(a)(8) (taxes)
D. Arrearages on Leases 190,000.00
E. General Unsecured Claims 1,200,000.00
(It is estimated that TCI and
TCWI have claims of
approximately $650,000 and
Gaylord Companies has claims of
approximately $550,000)
3. Terms of the Plan(s) of Reorganization. The Plan or Plans of
Reorganization for the Debtors will contain the following terms:
3.1 Greenfield Debt. Greenfield will be paid the allowed
secured amount of its claim either (i) in cash at the Effective Date (the term
"Effective Date" will be fixed in the Plan as no later than 20 days after entry
of the order confirming the Plan or Plans of Reorganization), (ii) by deferred
payments with interest at a market rate, or (iii) on such terms as may be agreed
to by Greenfield, Cambridge and the Debtors. It is estimated by Debtors-that
Greenfield's secured claim will be valued at approximately $900,000.
Notwithstanding the foregoing, unless otherwise agreed by Cambridge, in
Cambridge's discretion, the maximum cash payment to be made to Greenfield shall
not exceed the lesser of (x) $910,000 and (y) the value of the collateral
securing Greenfield's claim on the confirmation date as determined by the
Bankruptcy Court. If Greenfield's allowed secured claim exceeds the amount
payable in cash as set forth in the preceding sentence, then the balance of the
allowed secured claim will be paid either (i) by deferred payments with interest
at a market rate, (ii) by cash payments from one or more members of the Gaylord
family, or (iii) on such other terms as may be agreed to by Greenfield,
Cambridge and the Debtors. Greenfield's lien upon the Debtors' collateral will
be released upon the effectiveness of the Plan or Plans of Reorganization or if
other collateral is substituted such that Greenfield retains the indubitable
3
<PAGE>
equivalent of its present collateral, as determined by the Bankruptcy Court. The
balance of Greenfield's claim will be treated as a general unsecured claim.
3.2 Administrative Claims. Debtors have paid a significant
portion of the administrative claims. All remaining amounts will be paid as
agreed to by the Debtors and the holders of such claims, subject to the approval
of Cambridge.
3.3 Priority Claims. The Debtors' priority claims will be paid
over a period of six years, with interest.
3.4 Leases and Executory Contracts. Cambridge will negotiate
with the lessors of the Debtors' real property leases, point of sale lease and
any other leases or executory contracts. Cambridge reserves the right to request
that the Debtors reject any lease, leases or executory contracts. The damage
claims for rejection of leases or executory contracts will be treated as general
unsecured claims.
3.5 General Unsecured. Claims. Allowed unsecured claims will
be paid the sum of $150,000 over a period of five years, to be divided pro rata.
This amount will be evidenced by one or more unsecured and subordinated
promissory notes of the reorganized entities and will be paid in five equal
installments of $30,000 on January 30 of each year commencing January 30, 1999,
subject to a free cash flow test to be reasonably required by Cambridge and the
Senior Lender (as defined in Section 6.5 below), and such other restrictions as
the Senior Lender shall reasonably require.
3.6 Shareholder Interests. In exchange for the new value it
will provide, Cambridge and/or its designees will receive preferred convertible
shares (with a current pay, performance related coupon and other terms
consistent with the performance objective of Cambridge) of Gaylord Companies
equal to 80% of the capital stock of the Gaylord Companies, on a fully diluted
basis (subject to the final sentence of this paragraph), and sufficient to
control Gaylord Companies. The existing preferred stock of Gaylord Companies may
be converted to common stock. Thereafter, all existing shareholder interests
shall receive common shares equal to an aggregate of 20% of the capital stock of
Gaylord Companies on a fully diluted basis (subject to the final sentence of
this paragraph). A portion of the 20% interest in Gaylord Companies may be
allocated and distributed to unsecured creditors, all on such terms as may be
agreed upon by the Debtors, the Creditors Committee and Cambridge. The precise
form and terms of the capital structure will be developed as part of the Plan or
Plans of Reorganization in a manner to be agreed upon by Cambridge and the
Debtors. At the option of Cambridge, TCI and TCWI may be dissolved, merged or
otherwise restructured so that Gaylord Companies is the only remaining entity.
The foregoing is subject to dilution pursuant to terms requested by the Senior
Lender providing funding for the transactions, terms requested by new management
of the reorganized Debtors, and terms requested by new or additional equity
(which may be either preferred or common), provided that the total dilution will
be pro rated between Cambridge and the other shareholders.
3.7 The Bookstores. Cambridge has no interest in the
Bookstores. The Bookstores will be sold, liquidated or reorganized under their
own Plan or Plans of Reorganization, and will not be a part of the reorganized
Debtors. The expected purchase price with respect to the Bookstores is
$200,000-250,000, all
4
<PAGE>
of which will be paid to Greenfield in reduction of its secured claim. Gaylord
Companies will keep Cambridge advised regarding material developments in
connection with the sale of the Bookstores.
4. Procedure. Immediately after execution of this Term Sheet by each of
the parties, the Debtors will file a motion seeking authority to execute and
perform this Term Sheet, approve the break-up fee described in Section 7 below,
implement the Advisory Agreement under Section 5(a) hereof, and to implement the
other terms of this Term Sheet. If approved, the Debtors will then promptly
prepare and file an appropriate Plan or Plans of Reorganization to complete the
terms described herein. The Debtors agree that as long as Cambridge is
supporting and endorsing the Plan or Plans of Reorganization, the Debtors will
prosecute the Plan or Plans of Reorganization, and will not support any
competing Plan or Plans for the Debtors.
5. Election to Proceed: Interim Management.
(a) Within five (5) days of the date that the Bankruptcy Court approves
this Term Sheet, the Debtors agree to enter into an advisory agreement (the
"Advisory Agreement") with Cambridge whereby Cambridge will render advice to the
Debtors regarding the operation of the Cookstore business. The terms of such
Advisory Agreement shall be in form and substance reasonably satisfactory to
Cambridge and the Debtors (including, without limitation, an advisory fee of
$30,000 per month payable pursuant to a promissory note which shall be payable
only on or after the Effective Date, an agreement by the Debtors to provide all
reasonable information and access to Cambridge with respect to the Cookstores
business and an agreement by the Debtors to indemnify and hold Cambridge and
each of the employees, partners, agents and affiliates of Cambridge harmless
with respect to (x) the advisory services rendered to the Cookstores business,
other than with respect to the gross negligence or willful misconduct of
Cambridge and (y) the undertaking by Cambridge to provide funds pursuant to
Section 8 hereof (other than the failure of Cambridge or its designee to make
available the aggregate of $25,000 pursuant to the terms of-Section 8 hereof
(provided that the liability under this clause (y) shall be limited to the
amount of $25,000 less any amounts made available under Section 8)). Further,
the Creditors Committee must agree that it will not file suit against Cambridge
as a result of any action taken pursuant to the Advisory Agreement except as set
forth in the preceding sentence.
(b) On or before March 31, 1998, Cambridge will have satisfied or waived
the condition set forth in Section 6.2 and will make reasonable efforts to have
a commitment letter from a lender to provide the financing required by Section
6.5 below. In the event that (x) Cambridge is unable to conclude arrangements
acceptable to it as described in Section 6.2 below or (y) Cambridge is unable to
obtain a commitment letter satisfactory to Cambridge from a lender as described
in the immediately preceding sentence, each on or before March 31, 1998, then
Cambridge may, at its option, terminate all of its obligations hereunder and/or
in connection herewith (including, without limitation, Section 5(a) herein). The
Debtors hereby agree (i) to hold Cambridge harmless in the event that Cambridge
elects to terminate its obligations pursuant to the immediately proceeding
sentence and (ii) advise Cambridge, prior to March 31, 1998, at Cambridge's
request, as to whether the terms of a particular commitment letter are
satisfactory to the Debtors.
5
<PAGE>
6. Conditions. Cambridge's obligation to proceed under a Plan
or Plans of Reorganization is conditioned upon the following:
6.1 Unless waived by Cambridge, entry of a final order within
sixty (60) days of the date the Bankruptcy Court approves this Term Sheet, from
which no appeal has been taken and the date for filing an appeal has passed,
confirming the Plan or Plans of Reorganization, the foregoing to reflect the
terms and conditions hereof, to terminate all liens and other claims with
respect to the Debtors except as stated in such Plan, to provide that all leases
and executory contracts have been rejected (except for leases and executory
contracts that are designated as accepted pursuant to a schedule to the Plan and
which shall be restructured pursuant to the arrangements described in Section
6.2 below) and to be otherwise in form and substance satisfactory to Cambridge.
6.2 Cambridge shall have concluded arrangements acceptable to
it with the lessors and parties to other executory contracts with respect to
prepetition arrearage and with respect to future arrangements.
6.3 Cambridge shall have completed all due diligence on or
before the date of the final hearing to consider confirmation of the Plan or
Plans of Reorganization, and the results thereof shall be satisfactory to
Cambridge.
6.4 Execution by either John Gaylord or John Critser of a
validity guaranty in favor of the Senior Lender providing financing for the
transaction, in form and substance reasonably acceptable to both parties.
6.5 Senior debt financing by a lender (the "Senior Lender")
satisfactory to Cambridge shall be made available to Cambridge to enable
Cambridge to close the transactions contemplated by this Term Sheet, the terms
of which shall be satisfactory in form and substance to Cambridge.
6.6 Payment by the Gaylord Companies of the due diligence fees
and expenses of the Senior Lender, pursuant to the time frame required by such
Senior Lender.
6.7 Gaylord Companies shall have delivered to Cambridge on or
before March 5, 1998 projections on a weekly basis and on a cumulative basis
with respect to the Cookstores and the Cookstores-related business of Gaylord
Companies through June 30, 1998 (the "Budget") and (i) the form and substance of
such projections shall be satisfactory to Cambridge and (ii) the Cookstores and
the Cookstores-related business of Gaylord Companies shall achieve the
performance reflected in such projections on a weekly basis and on a cumulative
basis, as determined by Cambridge. Debtors shall furnish Cambridge (x) on a
weekly basis with financial statements prepared by the chief financial officer
of Debtors, which shall include a comparison of the Debtor's performance with
the projections submitted to Cambridge on both a weekly and cumulative basis and
management's written explanation of any variances, whether positive or negative
and (y) daily "spot" reports prepared by the Debtors' chief financial officers
regarding sales, inventory levels and any material events arising in the
business of the Debtors. Without limiting in any manner the other conditions and
provisions hereof, it is expressly confirmed and acknowledged that Cambridge may
6
<PAGE>
at its option, terminate all of its obligations under this Term Sheet in the
event that this condition is not met at any time on a weekly or cumulative
basis.
6.8 (a) The Debtors shall comply with all of their obligations
under this Term Sheet and (b) all information and data furnished to Cambridge by
or on behalf of any of the Debtors (including the information in Sections 1 and
2 and Section 6.7 hereof) shall at all times be true and correct in all material
respects.
6.9 Each Debtor and any senior officer, shareholder or
affiliate thereof shall cooperate in all material respects with Cambridge with
respect to the transactions contemplated by this Term Sheet.
6.10 The bankruptcy proceeding of any of the Debtors shall not
be dismissed, converted into a Chapter 7 proceeding or an examiner or trustee
appointed in such bankruptcy proceeding, and no Debtor (or any senior officer,
shareholder or affiliate thereof) or the Creditors Committee shall seek
Bankruptcy Court authorization for any of the foregoing.
6.11 The Debtors shall have promptly notified all known
creditors and other parties of interest with respect to the Plan, such notice to
include advertising in a newspaper of record in Ohio.
6.12 The Debtors shall continue at all times to have the
exclusive right to prepare a Plan of Reorganization and the Debtors shall not
have submitted any other Plan to the Bankruptcy Court (except with the prior
written consent of Cambridge).
6.13 The execution and delivery of all other documents and
agreements reasonably required by Cambridge as part of the effectiveness of the
transaction.
If Cambridge learns that one or more of the above conditions has not
been or will not be satisfied, then Cambridge may, at its option, provide
written notice of termination of its obligations hereunder to the Debtors and
the Creditors Committee. The Debtors will have a grace period of ten days from
the date of giving of such notice within which to cure or satisfy conditions
6.4, 6.8(a), 6.9 and 6.10 to the extent that the failure of such condition was
not the result of the volitional act of any Debtor, Senior Officer of Debtor,
Shareholder of Debtor or affiliate of Debtor. If the condition has no grace
period or remains unsatisfied after any applicable grace period, then Cambridge
may elect to immediately terminate this Term Sheet and all parties will be
released of any obligation hereunder, except for the payment of the break-up fee
in Section 7 below.
7. Break-up Fee. All parties recognize that the Debtors may receive
competing bids prior to closing and that the transactions contemplated hereby
may not be consummated. In the event that the transactions contemplated hereby
are not closed and (i) a competing bid or proposal for any or all of the Debtors
is submitted and concluded; (ii) the Debtors fail to prosecute the Plan of
Reorganization described herein; (iii) the Debtors seek authority to sell some
or all of the assets of any of the Debtors pursuant to Section 363 of the
Bankruptcy Code or any similar provision of applicable law; (iv) Section 6.4 is
not satisfied; or (v) prior to the date of the final hearing to consider
confirmation of the Plan or Plans of Reorganization, Cambridge or the Senior
Lender discover that the Debtors or any Senior Officer, Shareholder or director
7
<PAGE>
of Debtors has made a misrepresentation of a fact or condition, or has failed to
disclose a fact, which is material to the Debtors' business or the prospects for
reorganization, then Debtors shall upon demand of Cambridge pay Cambridge a
break-up fee in the amount of $40,000 plus out of pocket expenses (including
reasonable attorneys' fees, which fees shall be subject to Court approval with
respect to reasonableness).
8. Good Faith Fund. (a) No later than three days after the Bankruptcy
Court approves execution of this Term Sheet, Cambridge will establish and fund a
separate account, under its own name, exclusive ownership and control, and shall
deposit therein not less than $250,000 to evidence its ability to proceed with
this transaction. Cambridge will provide evidence of the existence and amount of
this fund to the Debtors and the Creditors Committee. (b) Cambridge acknowledges
that the Budget will reflect an aggregate cash shortfall for the period ending
May 2, 1998. On and after the execution of the Advisory Agreement, and so long
as the Debtors are in compliance therewith, Cambridge agrees that up to $25,000
of the Good Faith Fund described in clause (a) above will be made available to
the Cookstores in order to fund such cash shortfall pursuant to the schedule set
forth on the Budget, provided that (i) each request shall be made by the chief
financial officer of the Companies and shall contain a detailed explanation of
the need for and usage of the funds; (ii) the obligation of Cambridge to provide
the foregoing funds shall terminate without notice upon the termination of
Cambridge's other obligations hereunder; (iii) Cambridge shall have no
obligation to provide the foregoing funds in the event that any of the
conditions set forth in Section 6 shall not or will not be satisfied, regardless
of whether or not Cambridge elects to terminate its obligations as a result
thereof, (iv) such funds shall be used only for the purchase of Cookstore
inventory; and (v) such funds shall be advanced as a loan to the Debtors, for
which the Debtors shall be jointly and severally liable, and which shall benefit
from a final and non-appealable order of the Bankruptcy Court (which order shall
be in form and substance satisfactory to Cambridge, including, without
limitation, a superpriority administrative expense priority and a first priority
security interest in the proceeds of such loan (including any property purchased
with such loan and the proceeds thereof) and repayment provisions reasonably
satisfactory to Cambridge).
9. Due Diligence. Each of the parties agrees that Cambridge, acting
through its own management personnel, its counsel, its accountants and other
representatives designated by it, shall have full opportunity to examine the
Debtors' offices, properties, and books and records, and to meet and discuss the
business, operations, history and prospects with the Debtors' officers,
employees, attorneys, accountants, agents, suppliers and customers, and to
otherwise perform such diligence as it deems necessary or proper.
10. Miscellaneous.
10.1 Notice. In the event notice must be provided under this
Term Sheet, written notice shall be sent by both telecopy and regular mail as
follows:
If to Debtor:
John Gaylord
Gaylord Companies, Inc.
4006 Venture Court
Columbus, Ohio 43228
(614) 771-2777 (telephone)
(614) 771-8826 (telecopy)
8
<PAGE>
with a copy to:
Daniel R. Swetnam, Esq.
Schottenstein, Zox & Dunn
Huntington Center, Suite 2600
41 South High Street
Columbus, Ohio 43215-6106
(614) 462-2225 (telephone)
(614) 464-1135 (telecopy)
If to Cambridge:
David Danovitch
Cambridge Partners, L.L.C.
535 Madison Avenue, 19th Floor
New York, NY 10022-4212
(212) 508-6500 (telephone)
(212) 508-6501 (telecopy)
with a copy to:
Leonard Lee Podair, Esq.
Hahn & Hessen LLP
Empire State Building
350 Fifth Avenue
New York, NY 10118-0075
(212)-946-0243 (telephone)
(212)-594-7167 (telecopy)
If to the Creditors Committee:
Nick V. Cavalieri, Esq.
Arter & Hadden
One Columbus - 10 W. Broad Street
Columbus, OH 43215-3422
(614) 221-3155 (telephone)
(614) 221-0479 (telecopy)
Notices sent pursuant to this Section 10.1 shall be deemed received by
the recipients thereof upon telecopy transmission, with answer back received.
10.2 Governing Law. Except to the extent required by
applicable bankruptcy law, the terms of this letter shall be governed by the
laws of the State of New York.
9
<PAGE>
10.3 Assignability. The rights and obligations under this Term
Sheet shall not be assignable or delegable except (i) with the prior written
consent of the other parties hereto, and (ii) Cambridge may assign its rights
hereunder to an affiliate of Cambridge.
10.4 Time to Complete. At the option of Cambridge, this Term
Sheet shall terminate in the event that it is not approved by a final and
non-appealable order by the Bankruptcy Court by March 6, 1998.
ACKNOWLEDGED AND AGREED:
GAYLORD COMPANIES, INC.
THE COOKSTORE, INC. and
THE COOKSTORE WORTHINGTON, INC.
Debtors in Possession
By: /s/ John Gaylord
- ---------------------------------------------
Title: Chairman and Chief Executive Officer
Date: February 26, 1998
CAMBRIDGE HOLDINGS, L.L.C.
By: _______________________________
Its: _______________________________
Date: February ___, 1998
10
<PAGE>
ACKNOWLEDGED AND AGREED:
GAYLORD COMPANIES, INC.
THE COOKSTORE, INC. and
THE COOKSTORE WORTHINGTON, INC.
Debtors in Possession
By: _____________________________
Title: _____________________________
Date: February __, 1998
CAMBRIDGE HOLDINGS, L.L.C.
By: _____________________________
Its: _____________________________
11
<PAGE>
ADVISORY AGREEMENT
AGREEMENT made as of the 17th day of March, 1998, by and between
Cambridge Holdings, L.L.C., a Delaware limited liability company ("Cambridge
Holdings") and Gaylord Companies, Inc. ("Gaylord Company"), The Cookstore, Inc.
("Cookstore") and The Cookstore Worthington, Inc. ("Cookstore Worthington"), as
debtors in possession (collectively, the "Company").
Background: The parties have entered into a Term Sheet, dated
as of February 26, 1998, concerning certain transactions, including without
limitation the conditional undertaking by Cambridge Holdings to provide funds
pursuant to Section 8 of the Term Sheet (the "Transactions") relating to
reorganization of Cookstore, Cookstore Worthington and the Cookstore-related
business of Gaylord Company (collectively, the "Cookstore Business") in a
Chapter 11 proceeding. Certain defined terms, not otherwise defined herein, have
the same meaning as set forth in the Term Sheet.
As set forth in Section 5 of the Term Sheet, the Creditors
Committee has entered into an agreement providing that it will not file suit
against Cambridge Holdings as a result of any action taken pursuant to the Term
Sheet or this Agreement, other than the failure of Cambridge Holdings or its
designee to provide funds pursuant to, and in accordance with the terms of,
Section 8 of the Term Sheet.
IT IS AGREED:
1. The Company agrees to and does hereby retain Cambridge Holdings, and
Cambridge Holdings agrees to and does hereby accept retainer as an advisor by
the Company in a part-time capacity in connection with the operations of the
Cookstore Business of the Company. In compensation for the advisory services to
be provided by Cambridge Holdings, the Company will pay Cambridge Holdings at
the rate of $30,000 per month pursuant to the provisions of the Term Sheet and
payable by delivery of a promissory note in the form attached hereto as Schedule
A. Such compensation shall not be subject to proration. It is understood and
agreed that Cambridge Holdings may act as an advisor or consultant to other
companies and that each of Cambridge Holdings' officers, directors and
affiliates may act as a director, officer, employee or agent of other companies
and may continue to hold such directorships or other positions and shall be
permitted to devote such time thereto as may reasonably be necessary to
discharge the ordinary duties attendant upon any such directorships or
positions.
2. This Agreement shall become effective as of a date (the
"Commencement Date") that is five (5) days after the date that the Bankruptcy
Court approves the Term Sheet and shall continue until the earlier of the
Effective Date or the first anniversary of the Commencement Date. In addition,
Cambridge Holdings may immediately terminate its obligations under this
Agreement if Cambridge Holdings terminates its obligations pursuant to the terms
of Section 5(b) or Section 6 of the Term Sheet or if a Plan or Plans of
Reorganization as contemplated by the Term Sheet are not filed or confirmed as
contemplated under the Term Sheet. The Company may terminate this Agreement only
upon the termination of the Term Sheet.
12
<PAGE>
3. (a) The Company shall upon reasonable notice give Cambridge Holdings
and its counsel, financial advisors, auditors and other authorized
representatives full access to the offices, properties, books and records of the
Company, including, but not limited to, all employee benefit plans, and will
instruct the Company's employees, counsel and financial advisors to cooperate
with Cambridge Holdings and each such representative in its investigation of the
Company; provided that no investigation pursuant to this Section shall affect
any representation or warranty given by the Company to Cambridge Holdings
hereunder.
(b) Cambridge Holdings agrees that, during the term of
Cambridge Holdings' retention by the Company and thereafter, it shall preserve
in confidence all Confidential Information (as hereinafter defined) acquired or
developed by Cambridge Holdings or disclosed to Cambridge Holdings as a direct
or indirect consequence of or through Cambridge Holdings' retention by the
Company and/or its affiliates. Cambridge Holdings will not, without the prior
written authorization of the Company, disseminate, publish, disclose or
otherwise make available any such Confidential Information or any portion
thereof to any other person, except to Cambridge Holdings' advisors, counsel,
accountants and agents in connection with providing the services hereunder, make
use of such information for Cambridge Holdings' personal benefit or for the
benefit of any person other than the Company and/or its affiliates or assist
others in doing so or except pursuant to subpoena or government request;
provided that Cambridge Holdings shall give 10 days notice to the Company prior
to complying with such subpoena or request.
(c) "Confidential Information" shall mean all information of
any kind or nature pertaining to the Company or its affiliates which is not
available to the public, including, but not limited to, information relating to
the Company's or its affiliates' agreements, the Company's or its affiliates'
proprietary rights, research, developments, inventions, know-how, trade secrets,
patents, patent applications, documents of any kind and manuals, technical
advances, research results, commercial arrangements, manufacture, engineering,
products, processes, accounting, sales, strategies, tax returns, financial
statements, marketing, customers or customer lists, and any information of a
like nature furnished to or obtained by Cambridge Holdings from the Company
and/or its affiliates relating to activities of third parties have transmitted
to the Company or its affiliates under any agreement or arrangement to hold the
same secret or confidential.
(d) All documents, records, notebooks and similar repositories
containing Confidential Information, including copies thereof, in Cambridge
Holdings' possession or control, whether prepared by Cambridge Holdings or
others, shall be promptly destroyed or, at the Company's option and expense
returned to the Company upon the request of the Company after the last day of
Cambridge Holdings' retention by the Company and/or its affiliates. If at any
time after the termination of this Agreement, Cambridge Holdings has any
Confidential Information in its possession or control, it shall immediately
return to the Company all such Confidential Information, including all copies
and portions thereof.
4. Cambridge Holdings and the Company acknowledge that Cambridge
Holdings is an independent contractor. Cambridge Holdings shall not hold itself
out as, nor shall it take any action from which others might infer that it is a
partner, agent or joint venturer of the Company. Cambridge Holdings shall not
take any action which binds, or purports to bind, the Company.
13
<PAGE>
5. The Company agrees to indemnify Cambridge Holdings in accordance
with the indemnification provisions (the "Indemnification Provisions") attached
to this Agreement, which Indemnification Provisions are incorporated herein and
made a part hereof by reference. The Indemnification Provisions shall survive
the termination of this Agreement.
6. This Agreement contains the entire agreement between the parties
with respect to the subject matter hereof. It may not be changed except by
agreement in writing signed by the party against whom enforcement or any waiver,
change, discharge, or modification is sought. Waiver of or failure to exercise
any rights provided by this Agreement in any respect shall not be deemed a
waiver of any further or future rights.
7. This Agreement shall be interpreted according to, and governed by,
the laws of the State of New York.
8. This Agreement shall be binding upon the parties and their
successors and
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement on the day and year first above written.
CAMBRIDGE HOLDINGS, L.L.C.
By: _________________________
GAYLORD COMPANIES, INC., THE
COOKSTORE, INC. AND THE COOKSTORE
WORTHINGTON, INC., as debtors in possession
By: __________________________
14
<PAGE>
INDEMNIFICATION PROVISIONS
The Company (as such term is defined in the Agreement (as such
term is defined below)) agrees to indemnify and hold harmless Cambridge Holdings
against any and all losses, claims, damages obligations, penalties, judgments,
awards, liabilities, costs, expenses and disbursements (and all actions, suits,
proceedings and investigations in respect thereof and any and all legal or other
costs, expenses and disbursements in giving testimony or furnishing documents in
response to a subpoena or otherwise), including without limitation, prompt
advancement of the costs, expenses and disbursements, as and when incurred, of
investigating, preparing or defending any such action, proceeding or
investigation (whether or not in connection with litigation to which Cambridge
Holdings is a party), directly or indirectly, caused by, relating to, based
upon, arising out of or in connection with (a) Cambridge Holdings' acting for
the Company under the Advisory Agreement dated March 17, 1998 between Cambridge
Holdings and the Company, as it may be amended from time to time (the
"Agreement"), including, without limitation, any act or omission by Cambridge
Holdings in connection with its acceptance of or the performance of its
obligations under the Agreement; provided, however, such indemnity agreement
shall not apply to any portion of any such loss, claim, damage, obligation,
penalty, judgment, award, liability, cost, expense or disbursement to the extent
it is found by the final and unappealable order of a court of competent
jurisdiction to have resulted from the gross negligence or willful misconduct of
Cambridge Holdings; or (b) any Transactions (as such term is defined in the
Agreement) (other than the failure of Cambridge Holdings or its designee to
provide funds pursuant to Section 8 of the Term Sheet; provided, however, the
liability of Cambridge Holdings under this clause (b) shall be limited to the
amount of $25,000 less any amounts made available under Section 8 of the Term
Sheet). The Company also agrees that Cambridge Holdings shall not have any
liability (whether direct or indirect, in contract or tort or otherwise) to the
Company or to any person (including, without limitation, Company stockholders)
claiming through the Company for or in connection with the engagement of
Cambridge Holdings, except to the extent that any such liability results from
Cambridge Holdings' gross negligence or willful misconduct.
These Indemnification Provisions shall be in addition to any
liability which the Company may otherwise have to Cambridge Holdings or the
persons indemnified below in this sentence and shall extend to the following:
Cambridge Holdings and Cambridge Holdings' affiliated entities, directors,
officers, employees, counsel, and agents and controlling persons, and their
respective affiliated entities, directors, officers, employees, counsel, agents
and controlling persons (within the meaning of the federal securities laws). All
references to Cambridge Holdings in these Indemnification Provisions shall be
understood to include any and all of the foregoing.
If any action, suit, proceeding or investigation is commenced,
as to which Cambridge Holdings proposes to demand indemnification, it shall
notify the Company with reasonable promptness; provided, however, that any
failure by Cambridge Holdings to notify the Company shall not relieve the
Company from its obligations hereunder to the extent the Company has actual
knowledge of such action, suit, proceeding or investigation. Cambridge Holdings
shall use the Company's counsel in any action, suit, proceeding or investigation
that is commenced, as to which Cambridge Holdings proposes to demand
indemnification, provided, however, that if Cambridge Holdings or the Company's
counsel determines that a conflict of interest or potential conflict of interest
15
<PAGE>
exists between such counsel's representation of the Company and Cambridge
Holdings, then such counsel shall inform Cambridge Holdings that it shall not
represent Cambridge and Cambridge Holdings shall have the right to retain
counsel of its own choice, which counsel shall be reasonably acceptable to the
Company, and the Company shall pay the fees, expenses and disbursement of such
counsel; and such counsel shall to the extent consistent with its professional
responsibilities cooperate with the Company and any counsel designated by the
Company. The Company shall be liable for any settlement of any claim against
Cambridge Holdings made with the Company's written consent, which consent shall
not be unreasonably withheld. The Company shall not, without the prior written
consent of Cambridge Holdings, settle or compromise any claim, or permit a
default or consent to the entry of any judgment in respect thereof, unless such
settlement, compromise or consent includes, as an unconditional term thereof,
the giving by the claimant to Cambridge Holdings of an unconditional release
from all liability in respect of such claim.
In order to provide for just and equitable contribution, if a
claim for indemnification pursuant to these Indemnification Provisions is made
but it is found in a final judgment by a court of competent jurisdiction (not
subject to further appeal) that such indemnification may not be enforced in such
case, even though the express provisions hereof provide for indemnification in
such case, then the Company shall contribute to the losses, claims, damages,
obligations penalties, judgments, awards, liabilities, costs, expenses and
disbursements to which the indemnified persons may be subject in accordance with
relative benefits received by the Company and also the relative fault of the
Company, in connection with the statements, acts or omissions which resulted in
such losses, claims, damages, obligations, penalties, judgments, awards,
liabilities, costs, expenses and disbursements and the relevant equitable
considerations shall also be considered. No person found liable for a fraudulent
misrepresentation shall be entitled to contribution from any person who is not
also found liable for such fraudulent misrepresentation.
Neither termination nor completion of the engagement of
Cambridge Holdings referred to above shall affect these Indemnification
Provisions which shall then remain operative and in full force and effect.
16
<PAGE>
Schedule A
PROMISSORY NOTE
$30,000 [DATE]
New York, New York
FOR VALUED RECEIVED, GAYLORD COMPANIES, INC. ("Gaylord"), THE
COOKSTORE, INC. ("Cookstore") and THE COOKSTORE WORTHINGTON, INC. ("Cookstore
Worthington," and jointly and severally with Gaylord and Cookstore, the
"Debtor"), debtors and debtors-in-possession, jointly and severally promise to
pay to the order of CAMBRIDGE HOLDINGS, L.L.C. ("Cambridge"), and its successors
and assigns, at 535 Madison Avenue, New York, New York, 10022-4212, on the
Maturity Date (as hereinafter defined), the sum of THIRTY THOUSAND DOLLARS AND
NO CENTS ($30,000.00), with interest on the unpaid amount hereof at the rate of
_____ percent (__%) per annum. Interest on this Note (and, to the extent
permitted by applicable law, interest on accrued interest) shall accrue and be
payable in full on the Maturity Date.
This Note is one of a series of notes issued or to be issued under the
Advisory Agreement dated as of March ___, 1998 between the Debtor and Cambridge.
The holder of this Note (i) shall have all of the rights as a holder
under applicable law, including the: (i) Uniform Commercial Code as in effect in
the State of New York; and (ii) may at any time exchange this Note for preferred
shares of Gaylord in an aggregate value equal to the principal, interest and
other amounts due under this Note at the time of exchange.
As used herein, the term "Maturity Date" shall mean such date as
Cambridge shall demand payment of this Note (provided that such date shall be on
or after the effective date of the plan or plans of reorganization of any Debtor
implementing the terms of the Term Sheet entered into between the Debtor and
Cambridge on or about February 26, 1998 (the "Effective Date")). Debtor shall
have no liability to the holder of this Note if no Effective Date occurs.
The Debtor agrees to reimburse Cambridge for its reasonable costs and
expenses in any successful action to enforce this Note. The Debtor represents
and warrants that the execution, delivery and performance of this Note have been
authorized by all necessary corporate and bankruptcy court action.
17
<PAGE>
This Note shall be governed by the laws of the State of New York,
without regard to the conflicts of law principles thereof.
GAYLORD COMPANIES, INC.,
THE COOKSTORE, INC. and
THE COOKSTORE WORTHINGTON,
INC., debtors and debtors-in-possession
By: ______________________________
Title:
18
<PAGE>
EXHIBIT E
Treatment of Executory Contracts and Unexpired Leases
The following executory contracts and unexpired leases will be assumed by
Debtors:
1. Lane Avenue Shopping Center, 1677 West Lane Avenue Columbus, OH (Landlord:
UAP-Columbus, JV326132);
2. Summit Mall, 3265 West Market Street, Akron, OH (Landlord: DeBartolo
Capital Partnership);
3. Worthington Mall. 100 Worthington Mall, Worthington, OH (Landlord: Aetna
Life Insurance Co.);
4. The Mall at Fairfield Commons, 2727 Fairfield Commons Road Beavercreek OH
45431 (Landlord: Glimcher Properties Corporation);
5. Lease with M&I First National Leasing with respect to certain computers;
and
6. Agreement with respect to electronic security devices with Sensormatic,
Electronics Corp.
<PAGE>
EXHIBIT F
<TABLE>
<CAPTION>
Income Statement (Estimated)
Jul-98 Aug-98 Sep-98 Oct-98 Nov-98 Dec-98 1998(1)
REVENUE
<S> <C> <C> <C> <C> <C> <C> <C>
NET SALES $ 148,043 $ 146,266 $ 145,928 $ 177,017 $ 377,382 $ 955,932 $1,950,567
% Growth -1.2% -0.2% 21.3% 113.2% 153.3%
COST OF SALES 79,943 78,984 78,801 95,589 200,012 497,085 1,030,413
% Growth
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL 68,100 67,282 67,127 81,428 177,369 458,847 920,153
Gross Margin % 47.17%
- -----------------------------------------------------------------------------------------------------------------------------------
EXPENSE
SALES, GENERAL & ADMINISTRATIVE(2) 154,956 105,478 106,549 118,751 116,871 128,925 731,531
% of Sales
% of Growth
- -----------------------------------------------------------------------------------------------------------------------------------
EBITDA/OP, INC (81,381) (32,694) (33,867) (31,158) 67,026 337,052 224,977
% of Sales
% of Growth
- -----------------------------------------------------------------------------------------------------------------------------------
DEPRECIATION & AMORTIZATION 5,476 5,502 5,555 6,165 6,527 7,130 36,355
- -----------------------------------------------------------------------------------------------------------------------------------
EBIT (86,857) (38,196) (39,423) (37,323) 60,499 329,922 188,622
% of Sales
% of Growth
- -----------------------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE 5,292 5,292 5,292 5,292 5,292 5,292 31,752
TOTAL EXPENSE 160,248 110,770 111,842 124,043 122,163 134,217 763,283
% of Sales
INCOME (LOSS) BEFORE
EXTRAORDINARY ITEMS (92,149) (43,488) (44,715) (42,615) 55,207 324,630 156,870
RESTRUCTURING CHARGES -- -- -- -- -- -- --
PROVISION (BENEFIT) FOR TAXES -- -- -- -- -- 62,748 62,748
==========================================================================================
NET INCOME (LOSS) $ (92,149) $ (43,488) $ (44,715) $ (42,615) $ 55,207 $ 261,882 $ 94,122
==========================================================================================
NET INCOME AVAILABLE FOR SUB DEBT TRADE $ -- $ -- $ -- $ -- $ -- $ --
==========================================================================================
INCOME TO BE RETAINED % of Sales $ (92,149) $ (43,488) $ (44,715) $ (42,615) $ 55,207 $ 261,882 $ 94,122
==========================================================================================
</TABLE>
(1) 1/2 Year
(2) July SG & A expense includes $50,000 audit and filing expenses
<PAGE>
<TABLE>
<CAPTION>
Effective Date Jul-98 Aug-98 Sep-98
---------------------------------------------------------------
<S> <C> <C> <C> <C>
ASSETS
Current Assets
Cash and Cash Equivalents $ 30,000 $ 57,284 $ 60,359 $ 62,235
Trade receivable -- -- -- --
Inventories 921,000 893,370 866,569 840,572
Transaction Expense -- -- -- --
Other Current -- -- -- --
Total Current Assets ---------------- -------------- ------------- -------------
951,000 950,654 926,928 902,806
Fixed/Other Assets
FF&E 290,000 292,738 295,489 298,240
Accumulated Depreciation -- 5,476 10,977 16,533
Net FF&E ---------------- -------------- ------------- -------------
290,000 287,262 284,511 281,707
Other Non Current (Deferred Charges) -- -- -- --
Goodwill 115,141 114,901 114,661 114,421
Total Non-current Assets ---------------- -------------- ------------- -------------
405,141 402,163 399,172 396,128
Total Assets $1,356,141 $1,352,818 $1,326,100 $1,298,934
LIABILITIES & OWNERS' EQUITY
Current Liabilities
Bank Debt $ -- $ -- $ --
Trade Payables -- 79,943 87,937 96,731
Accruals (taxes + interest) -- 8,883 17,659 26,414
Total Current Liabilities ---------------- -------------- ------------- -------------
-- 88,826 105,596 123,145
Non-current Liabilities
Long-term Debt - Fremont 668,470 668,470 668,470 668,470
Long-term Debt - Sec -- -- -- --
Long Term Debt 500,000 500,000 500,000 500,000
Liability to Unsecured Creditors and former SH 187,671 187,671 187,671 187,671
Total Non-current Liabilities ---------------- -------------- ------------- -------------
1,356,141 1,356,141 1,356,141 1,356,141
Total Liabilities 1,356,141 1,444,966 1,461,737 1,479,286
Owners' Equity
Preferred Stock -- -- -- --
Additional Paid-in Capital -- -- -- --
Common Stock & Retained Earnings -- (92,149) (135,637) (180,352)
Less: Treasury Stock -- -- -- --
Total Owners' Equity ---------------- -------------- ------------- -------------
-- (92,149) (135,637) (180,352)
Total Liabilities and Owners' Equity $1,356,141 $1,352,818 $1,326,100 $1,298,934
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Oct-98 Nov-98 1998
-------------------------------------------
<S> <C> <C> <C>
ASSETS
Current Assets
Cash and Cash Equivalents $ 86,532 $ 199,170 $ 535,118
Trade receivable -- -- --
Inventories 806,949 798,879 806,868
Transaction Expense -- -- --
Other Current -- -- --
Total Current Assets ------------- ------------- ------------
893,481 998,049 1,341,986
Fixed/Other Assets
FF&E 301,322 304,586 308,151
Accumulated Depreciation 22,698 29,225 36,355
Net FF&E ------------- ------------- ------------
278,624 275,360 271,796
Other Non Current (Deferred Charges) -- -- --
Goodwill 114,181 113,941 113,702
Total Non-current Assets ------------- ------------- ------------
392,805 389,302 385,497
Total Assets $1,286,286 $1,387,351 $1,727,483
LIABILITIES & OWNERS' EQUITY
Current Liabilities
Bank Debt $ -- $ -- $ --
Trade Payables 116,077 139,293 160,187
Accruals (taxes + interest) 37,035 59,678 117,034
Total Current Liabilities ------------- ------------- ------------
153,112 198,971 277,221
Non-current Liabilities
Long-term Debt - Fremont 668,470 668,470 668,470
Long-term Debt - Sec -- -- --
Long Term Debt 500,000 500,000 500,000
Liability to Unsecured Creditors and former SH 187,671 187,671 187,671
Total Non-current Liabilities ------------- ------------- ------------
1,356,141 1,356,141 1,356,141
Total Liabilities 1,509,253 1,555,112 1,633,361
Owners' Equity
Preferred Stock -- -- --
Additional Paid-in Capital -- -- --
Common Stock & Retained Earnings (222,967) (167,760) 94,122
Less: Treasury Stock -- -- --
Total Owners' Equity ------------- ------------- ------------
(222,967) (167,760) 94,122
Total Liabilities and Owners' Equity $1,286,286 $1,387,351 $1,727,483
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CASH FLOWS (Estimated)
Jul-98 Aug-98 Sep-98 Oct-98 Nov-98 Dec-98
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
CASH FLOW FROM OPERATIONS
Net Income $(92,149) $(43,488) $(44,715) $(42,615) $55,207 $261,882
Depreciation 5,476 5,502 5,555 6,165 6,527 7,130
Goodwill Amortz. 240 240 240 240 240 240
Transaction Expense Amortz. -- -- -- -- -- --
Change Current Assets/Liabilities 116,456 43,571 43,546 63,590 53,928 70,261
Preferred Dividends -- -- -- -- -- --
Total Cash Flow From Operations -------------------------------------------------------------------------------
30,022 5,825 4,627 27,380 115,901 339,513
Transaction Expenses -- -- -- -- -- --
Post-Retirement Benefits -- -- -- -- -- --
Restructuring -- -- -- -- -- --
Adjusted Cash From Operations -------------------------------------------------------------------------------
30,022 5,825 4,627 27,380 115,901 339,513
CASH FLOW FROM FINANCING
Retirement of Debt -- -- -- -- -- --
Proceeds from Long-term Debt -- -- -- -- -- --
Redeem Preferred/Treasury Stock -- -- -- -- -- --
Additional Paid-in Capital -- -- -- -- -- --
Repayment of LTD -- -- -- -- -- --
Total Cash Flow from Financing -- -- -- -- -- --
CAPEX AND OTHER NET USES OF CASH
Capital Expenditures (2,738) (2,751) (2,751) (3,083) (3,264) (3,565)
Change in Long-Term Assets/Liabilities -- -- -- -- -- --
Acquisitions -- -- -- -- -- --
Insurance Proceeds -- -- -- -- -- --
Total Capex and Other Net Uses of Cash -------------------------------------------------------------------------------
(2,738) (2,751) (2,751) (3,083) (3,264) (3,565)
Adjusted Cash from Operations 30,022 5,825 4,627 27,380 115,901 339,513
Net Financing -- -- -- -- -- --
Capex & Other Net Uses (2,738) (2,751) (2,751) (3,083) (3,264) (3,565)
Total Cash Flow Before Dividend Payout -------------------------------------------------------------------------------
27,284 3,074 1,876 24,297 112,638 335,948
Common Dividends -- -- -- -- -- --
- -------------------------------------------------------------------------------------------------------------------------------
Cash - beginning of Year 30,000 57,284 60,359 62,235 86,532 119,170
Increase (Decrease) in Cash 27,284 3,074 1,876 24,297 112,638 335,948
Cash - end of Period $57,284 $60,359 $62,235 $86,532 $199,170 $535,118
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
EXHIBIT G
The Cookstore/Gaylord Companies
Illustration of Net Recovery Analysis
($ in 000's)
<TABLE>
<CAPTION>
Assumption: Cost Total $ % of Retail % of Cost % of Sales
- ---------- ---- ------- ----------- --------- ----------
<S> <C> <C> <C> <C> <C>
Inventory available for sale $1,080
Projected Inventory at Retail $2,218
Sales of original inventory 1,419 64.00% 131.42% 100.00%
Operating Expenses
Store payroll 98 4.43% 9.10% 6.92%
Incentives/bonuses 10 0.44% 0.91% 0.69%
Employee benefit and taxes 17 0.78% 1.60% 1.22%
----- ----- ------ ------
Subtotal - Payroll 125 5.65% 11.61% 8.84%
Advertising 66 3.00% 6.15% 4.68%
Store signs 6 0.27% 0.56% 0.42%
----- ----- ------ ------
Subtotal - Advertising 72 3.27% 6.71% 5.10%
Independent inventory service 5 0.22% 0.46% 0.35%
Credit card fees 15 0.69% 1.41% 1.07%
Miscellaneous store operating costs 11 0.49% 1.01% 0.77%
Consolidation costs 8 0.36% 0.74% 0.56%
----- ----- ------ ------
Subtotal - Other operating costs 39 1.76% 3.62% 2.75%
Store occupancy & utilities 197 8.88% 18.23% 13.87%
On-site management 44 1.99% 4.09% 3.11%
Incentives/bonuses 10 0.47% 0.97% 0.73%
----- ----- ------ ------
Subtotal - On-site management 55 2.46% 5.06% 3.85%
Total Operating Expenses 488 22.03% 45.23% 34.42%
Liquidation costs & fees 35 1.60% 3.29% 2.50%
----- ----- ------ ------
Net Recovery $895 40.37% 82.91% 63.08%
==== ===== ===== =====
</TABLE>
<PAGE>
Exhibit H to Disclosure
Statement
MERGER AGREEMENT AND PLAN OF RECAPITALIZATION, dated June __, 1998, among HOME
RETAIL ACQUISITION CORP., a Delaware corporation ("HRAC"), and GAYLORD
COMPANIES, INC., Debtor-in-Possession, a Delaware corporation ("Gaylord").
Gaylord is a debtor-in-possession in a Chapter 11 Bankruptcy proceeding
and HRAC is preparing a Plan of Reorganization (the "Bankruptcy Plan") in order
to enable Gaylord to emerge from bankruptcy.
The respective Boards of Directors of HRAC and Gaylord deem it
advisable and in the best interests of such corporations and their respective
stockholders that simultaneously at the Effective Time, as hereafter defined:
(a) HRAC be merged with and into Gaylord with Gaylord as the surviving entity in
a transaction intended to qualify as a tax-free statutory merger under Section
368(a)(1)(A) of the Tax Code and (b) Gaylord restructure its equity ownership in
a transaction intended to qualify as a tax-free recapitalization under Section
368(a)(1)(E) or Section 1036 of the Tax Code, on the terms and conditions set
forth in this Agreement.
Accordingly, the parties agree as follows:
Definitions. As used in this Agreement and in any amendments thereto,
the following terms shall have the following meanings:
(a) "Closing" shall refer to the closing under this Agreement as
described in Section 6.
(b) "Effective Time" shall mean the date and time when the Merger
becomes effective pursuant to the General Corporation Law of the State of
Delaware ("GCL").
(c) "Merger" shall refer to the merger of HRAC into and with Gaylord as
provided in Section 1.
(d) "Gaylord Common Stock" shall refer to the Common Stock, $0.01 par
value per share, of Gaylord outstanding prior to the Effective Time.
(e) "HRAC Common Stock" shall refer to the Common Stock, $0.01 par
value per share, of HRAC.
(f) "HRH Class A Common Stock" shall refer to the Class A Common Stock,
$0.01 par value per share, of the Surviving Corporation.
(g) "HRH Class B Common Stock" shall refer to the Class B Restricted
Common Stock; $0.01 par value per share, of the Surviving Corporation.
(h) "Recapitalization" shall refer to the restructuring of the equity
interests of the shareholders of Gaylord simultaneous with the Merger as
described in Section 4 hereof.
<PAGE>
(i) "Series A Preferred Stock" shall refer to the Series A Cumulative
Preferred Stock, $0.01 par value per share, of Gaylord.
(j) "Surviving Corporation" shall have the meaning set forth in Section
3(a) below.
(k) "Tax Code" shall refer to the Internal Revenue Code of 1986, as
amended.
1. The Merger. At the Effective Time, HRAC shall be merged into and
with Gaylord upon the terms set forth in this Agreement in a transaction
intended to qualify as a reorganization described in Section 368(a)(1)(A) of the
Internal Revenue Code.
2. Certificate of Merger. After satisfaction or waiver of all
conditions established herein to the obligations of the parties, Gaylord shall
file with the Secretary of State of the State of Delaware a duly executed
Certificate of Merger in the form of Annex I (the "Certificate of Merger"). The
parties shall use their best efforts to cause such conditions to be fulfilled as
soon as possible.
3. Effect of Merger. The effect of the Merger shall be as provided in
this Agreement, the Certificate of Merger and the GCL. At the Effective Time:
(a) Gaylord shall be the surviving corporation after giving
effect to the Merger (in such capacity, the "Surviving Corporation");
(b) the certificate of incorporation of the Surviving
Corporation shall be as set forth on Exhibit A to Annex I hereto,
giving effect to the restatement and amendment thereof as set forth on
such Exhibit A;
(c) the Bylaws of the Surviving Corporation shall be as set
forth on Annex II hereto, giving effect to the restatement and
amendment thereof as set forth on such Annex II;
(d) the initial directors of the Surviving Corporation shall
be those persons who immediately prior to the Effective Time were
serving as the directors of Gaylord to hold office in accordance with
the Certificate of Incorporation and Bylaws of the Surviving
Corporation until their successors are duly elected or appointed;
(e) the initial officers of the Surviving Corporation shall be
those persons who immediately prior to the Effective Time were serving
as the officers of Gaylord until their successors are duly elected or
appointed,
(f) the corporate existence, franchises and rights of Gaylord,
with its purposes, powers and objects, shall continue unaffected and
unimpaired by the Merger, and the Surviving Corporation shall succeed
to and be fully vested insofar as permitted by law and not otherwise
expressly provided herein, with the corporate existence, identity and
all rights, franchises, assets, liabilities and obligations of HRAC,
all as set forth in and subject to Section 259 of the GCL;
2
<PAGE>
(g) the name of the Surviving Corporation shall be changed to
"Home Retail Holdings, Inc."; and
(h) the separate existence and corporate organization of HRAC
shall cease.
4. Treatment of Shares. At the Effective Time, by virtue of
the simultaneous Merger and Recapitalization and without any action on the part
of any stockholder of HRAC, Gaylord or their stockholders:
(a) each issued share of HRAC Common Stock outstanding
immediately prior to the Effective Time shall be converted by operation
of law under the Merger into the right to receive 13.83684 shares of
HRH Class A Common Stock;
(b) each issued share of Gaylord Common Stock outstanding
immediately prior to the Effective Time shall be converted pursuant to
the Recapitalization into .0226026 share of HRH Class B Common Stock,
(c) each issued share of Series A Preferred Stock outstanding
immediately prior to the Effective Time shall be converted pursuant to
the Recapitalization into the right to receive 1.1529 shares of HRH
Class B Common Stock, and
(d) no fractional shares of HRH Class A Common Stock or HRH
Class B Common Stock will be issued as a result of the Merger, either
at the Closing or at the time of issuance of certificates in the names
of the holders of HRAC Common Stock, Gaylord Common Stock and Series A
Preferred Stock. In lieu of the issuance of fractional shares, each
holder of HRAC Common Stock, Gaylord Common Stock or Series A Preferred
Stock who otherwise would be entitled to receive a fractional share of
HRH Class A or Class B Common Stock shall receive one share of HRH
Class A or Class B Common Stock, as the case may be;
provided that in no case shall more than an aggregate of 154,951 shares of Class
B Common Stock be issued to holders of Gaylord Common Stock and Series A
Preferred Stock.
5. Further Assurances. If at any time after the Effective Time,
the Surviving Corporation shall consider or be advised that any further
assignments or assurances in law or any other things are necessary or desirable
to vest, perfect or confirm, of record or otherwise, in the Surviving
Corporation the title to any property or right of HRAC acquired or to be
acquired by reason of or as a result of the Merger, the officers of Gaylord in
office immediately prior to the Effective Time shall in the name and on behalf
of Gaylord have and may exercise power and authority to execute and deliver all
such proper deeds, assignments and assurances in law and do all things necessary
and proper to vest, perfect or confirm title to such property or rights in the
Surviving Corporation and otherwise to carry out the purposes of this Agreement,
and the proper officers and directors of the Surviving Corporation are hereby
additionally authorized in the name of HRAC or otherwise to take any and all
such action.
3
<PAGE>
6. Closing and Exchange of Stock Certificates.
(a) The Closing (provided that the Effective Time shall
already have arrived) will take place at 10:00 A.M. New York time on
the date of the Effective Time, or at such other time as the parties to
this Agreement, acting through their Boards of Directors or the
Executive Committees thereof, may mutually agree. The place of Closing
will be at the offices of Hahn & Hessen LLP, 350 Fifth Avenue, New
York, New York or at such other place as may be mutually agreed upon by
the parties.
(b) As soon as practicable after the Effective Time, each
holder of shares of HRAC Common, Stock Gaylord Common Stock or Series A
Preferred Stock outstanding immediately prior to the Effective Time
shall surrender the certificate or certificates representing such
shares to Surviving Corporation and shall receive in exchange therefor
a certificate or certificates representing the number of whole shares
of HRH Class A Common Stock or HRH Class B Common Stock which such
holder shall be entitled to receive as provided in Section 4. The
certificate or certificates so surrendered shall be duly endorsed as
Surviving Corporation may require. Subject to the following provisions
of this Section 6(b), after the Effective Time each certificate which
represented outstanding shares of HRAC Common Stock, Gaylord Common
Stock or Series A Preferred Stock prior to the Effective Time shall be
deemed for all corporate purposes to evidence the ownership of the
shares of HRH Class A Common Stock or HRH Class B Common Stock, as the
case may be, provided in Section 4. No dividend or other distribution
payable with respect to the HRH Class A Common Stock or HRH Class B
Common Stock shall be paid to any holder of any certificate
representing shares of HRAC Common Stock, Gaylord Common Stock or
Series A Preferred Stock issued and outstanding immediately prior to
the Effective Time until such holder surrenders such certificate for
exchange as provided in this Section 6(b).
(c) All shares of HRH Class A Common Stock or HRH Class B
Common Stock for and into which shares of HRAC Common Stock, Gaylord
Common Stock or Series A Preferred Stock shall have been exchanged and
converted pursuant to this Agreement shall be deemed to have been
issued in full satisfaction of all rights pertaining to such exchanged
and converted shares. Except for such rights and except as provided in
Section 6(b), the holder of certificate(s) representing shares of HRAC
Common Stock, Gaylord Common Stock or Series A Preferred Stock issued
and outstanding immediately prior to the Effective Time shall have no
rights with respect to such shares other than to surrender such
certificate or certificates pursuant to Section 6(b).
7. Representations, Warranties and Covenants of Gaylord.
Gaylord represents, warrants and agrees as follows:
(a) Gaylord is a corporation duly incorporated, validly
existing and in good standing under the laws of the State of Delaware
with corporate power and authority to carry on the business in which it
is engaged, to own, lease, and operate its properties, to execute and
deliver this Agreement and to perform its obligations under this
Agreement;
4
<PAGE>
(b) The authorized capital stock of Gaylord consists of
10,000,000 shares of Gaylord Common Stock, $.01 par value per share, of
which 3,795,000 shares are issued and outstanding on the date of this
Agreement, and 1,500,000 shares of cumulative preferred stock, $.01 par
value per share, of which 60,000 shares of Series A Preferred Stock are
issued and outstanding on the date of this Agreement. Gaylord does not
hold any shares of its authorized capital stock in its treasury. All of
the issued and outstanding shares of such capital stock are duly and
validly issued and outstanding and are fully paid and nonassessable.
(c) Except with the prior written approval of HRAC and as set
forth in the Bankruptcy Plan, between the date of this Agreement and
the Effective Time, there will be no change in the Certificate of
Incorporation or By-Laws or in the authorized or issued capital stock
of Gaylord.
(d) Except with the prior written approval of HRAC and as set
forth in the Bankruptcy Plan, between the date of this Agreement and
the Effective Time, Gaylord will not (i) issue any additional capital
stock or other security, (ii) declare, set aside or pay any dividend or
make any other distribution in respect to its capital, (iii) directly
or indirectly redeem, purchase or otherwise acquire any shares of its
capital stock, or (iv) issue to any person options, warrants or other
rights to acquire any securities of Gaylord.
(e) From the date of this Agreement up to and including the
Effective Time, except with the prior written approval of HRAC as set
forth in the Bankruptcy Plan, the business of Gaylord will be conducted
in the usual, regular and ordinary manner, and Gaylord will not make
any material change in its methods of management, distribution,
marketing, accounting or operations.
8. Representations, Warranties and Covenants of Gaylord and
HRAC. Each of Gaylord and HRAC will use its respective best efforts to cause all
of the conditions set forth in Sections 7 through 11 that are within its control
to be satisfied as soon as practicable after the date hereof.
9. Representations, Warranties and Covenants of HRAC.
(a) HRAC is a corporation duly organized, validly existing and
in good standing under the laws of the State of Delaware with power and
authority to carry on its business, to own its properties, and to
execute and deliver this Agreement and perform its obligations
hereunder.
(b) Between the date of this Agreement and the Effective Time,
there will be no change in the Certificate of Incorporation or By-Laws
or in the authorized or issued capital stock of HRAC.
(c) Except as otherwise provided herein, between the date of
this Agreement and the Effective Time, HRAC will not (i) issue any
additional capital stock or other security, (ii) declare, set aside or
pay any dividend or make any other distribution in respect to its
capital, (iii) directly or indirectly redeem, purchase or otherwise
5
<PAGE>
acquire any shares of its capital stock, or (iv) issue to any person
options, warrants or other rights to acquire any securities of HRAC.
(d) The authorized capital stock of HRAC consists of 1,000,000
shares of HRAC Common Stock, $0.01 par value per share, of which
100,000 shares are issued and outstanding on the date of this
Agreement, and 100,000 shares of serial preferred stock, $0.01 par
value per share, of which no shares are issued and outstanding on the
date of the Agreement. HRAC does not hold any shares of its authorized
capital stock in its treasury. All of the issued and outstanding shares
of such capital stock are duly and validly issued and outstanding and
are fully paid and nonassessable.
10. Conditions Precedent to the Obligation of HRAC. The
obligations of HRAC under this Agreement and the Certificate of Merger are
subject to the fulfillment prior to or on the Effective Time of the following
conditions:
(a) this Agreement and the Merger shall have been approved by
the affirmative vote of the holders of all of the shares of HRAC Common
Stock entitled to vote thereon; and
(b) the Bankruptcy Plan shall have been confirmed and declared
effective.
11. Conditions Precedent to Obligations of Gaylord. The
obligations of Gaylord under this Agreement are subject to the fulfillment prior
to or on the Effective Time of the following condition:
(a) The Bankruptcy Plan shall have been confirmed and declared
effective.
12. Modification and Termination. To the fullest extent
permitted under the GCL, HRAC and Gaylord, by mutual consent of their respective
Boards of Directors, may amend, modify and supplement this Agreement in such
manner as may be agreed upon by them in writing at any time before the Closing.
HRAC and Gaylord may at any time, by mutual consent of their Boards of
Directors, terminate this Agreement.
13. Miscellaneous.
(a) Parties in Interest. This Agreement shall only bind and
inure to the benefit of the parties and their respective successors and
assigns.
(b) Entire Agreement. This Agreement contain the entire
understanding of the parties with respect to the subject matter hereof
and supersedes all prior agreements and understandings between the
parties with respect to such subject matter.
(c) Counterparts. This Agreement may be executed in any number
of counterparts, and each such counterpart shall be deemed to be an
original instrument, but all such counterparts together shall
constitute only one agreement.
6
<PAGE>
(d) Headings. The section headings contained in this Agreement
are for reference purposes only and shall not affect in any way the
meaning or interpretation of this Agreement.
(e) Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of Delaware, without
giving effect to principles of conflicts of law.
IN WITNESS WHEREOF, the Board of Directors of each of the parties
hereto first having duly adopted and approved the same, this Merger Agreement
and Plan of Reorganization has been executed and delivered on the date first
above written.
HOME RETAIL ACQUISITION CORP.
Attest: By: ______________________________________
Name:
_______________________ Title:
Name:
Title:
GAYLORD COMPANIES, INC., debtor-in-possession
Attest: By: ______________________________________
Name:
_______________________ Title:
Name:
Title:
7
<PAGE>
ANNEX I
TO MERGER AGREEMENT
AND PLAN OF RECAPITALIZATION
CERTIFICATE OF MERGER
OF
HOME RETAIL ACQUISITION CORP.
WITH AND INTO
GAYLORD COMPANIES, INC.
The undersigned corporation, organized and existing under the General
Corporation Law of the State of Delaware (the "General Corporation Law"), DOES
HEREBY CERTIFY:
FIRST: The name and state of incorporation of each of the constituent
corporations in the merger are as follows:
Name State of Incorporation
---- ----------------------
HOME RETAIL ACQUISITION CORP. Delaware
GAYLORD COMPANIES, INC. Delaware
SECOND: A Merger Agreement and Plan of Recapitalization dated June ___,
1998 (the "Merger Agreement") has been approved, adopted, certified, executed,
and acknowledged by each constituent corporation in accordance with Section 251
or 303 of the General Corporation Law of the State of Delaware.
THIRD: The name of the surviving corporation shall be HOME RETAIL
HOLDINGS, INC.
FOURTH: Such amendments or changes to the certificate of incorporation
of the surviving corporation as are desired to be effected by the merger are set
forth on Exhibit A attached hereto and incorporated herein by reference, which
sets forth such certificate of incorporation, as so amended and restated, in its
entirety.
FIFTH: The executed Merger Agreement is on file at the principal place
of business of the surviving corporation at _____________, ____________.
SIXTH: A copy of the Merger Agreement will be furnished by the
surviving corporation, on request and without cost, to any stockholder of any
constituent corporation.
<PAGE>
IN WITNESS WHEREOF, this Certificate of Merger has been executed and
acknowledged this __ day of June, 1998.
GAYLORD COMPANIES, INC., debtor-in-possession
By: ______________________________________
Name:
Title:
Acknowledged:
___________________________
Name:
Title:
2
<PAGE>
Exhibit A to Annex I
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 ______________, ________.
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-five thousand (21,155,000), 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-five thousand (155,000) 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
<PAGE>
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 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 share 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)
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its outstanding shares of Class A Common Stock into a smaller number of
shares, the Conversion Rate 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
due 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 Delaware may, on the application in a summary
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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 [Section] 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 [Section] 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 hold in 1999, another class
shall be originally elected for a term expiring at the annual meeting of
stockholders to be hold 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.
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
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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 stockholders except as the provisions of
paragraph (2) of subsection (b) ofss.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.
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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.
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.
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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 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.
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 day of ___________,1998.
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HOME RETAIL HOLDINGS, INC.
ATTEST: By: ______________________________________
_______________________________
Secretary
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Annex II
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
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Corporation shall send to the registered owner thereof any written notice
prescribed by the General Corporation Law.
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 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 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 due is adopted by the Board of Directors, and which
due date not be more than ten days after 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
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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 officer 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 then 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 dissect 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 off 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 an
the date and a the time fixed by the directors.
* PLACE. Annual meetings and special meetings shall be hold 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 a Corporation in the State of
Delaware.
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* 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 then 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 bought 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
during 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
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stockholders entitled to examine the stock ledge, 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 to the beat 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 flux found by him or them. Except as otherwise required by
subsection (e) of Section 231 of the General Corporation Law, the provisions of
this 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 by proxy at the meeting and entitled to vote on
the election of directors. Any other action shall be authorized by a majority of
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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 MEETING. 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
to 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 to 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 corporate
action without a meeting by less than unanimous written consent shall be given
to those stockholders who have riot 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 constituting the whole board shall be at least three. Subject to
the foregoing limitation and except for the first Board of Director, 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 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
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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 pawn 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 a 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 lease 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 meeting 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 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
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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
shall 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 it 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 then 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 required 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 director, 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 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
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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 OFFICES.
(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 to 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:
(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 contact or
transaction by the affirmative votes of a majority of the
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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 stockholder; 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.
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 then the Chairman or
Vice-Chairman of the Board, if any, need be 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 my 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.
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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 of incorporation and the
provisions of the General Corporation Law, the power to amend, alter, or repeal
then 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 Section 2 and 3 may be exercised only by the stockholders acting by at least
75% vote of the outstanding voting shares.
<PAGE>
EXHIBIT I
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 Rule16b-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 nay 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, pledged assigned, or otherwise alienated or hypothecated
<PAGE>
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 be delivered pursuant to the Award, the Participant will instead
<PAGE>
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
Committee may determine), and shall thereupon terminate. In no event, however,
<PAGE>
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 the Committee, 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 Restricted Stock will be so
<PAGE>
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 substantially 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 stockholder, 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 beunder no obligation to deliver Stock prusuant 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 satisfactory 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 consistent with continued qualification of the option
<PAGE>
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>
ROLLING PIN KITCHEN EMPORIUM, INC.
AND
NUTMEG SECURITIES, LTD.
REPRESENTATIVE'S
WARRANT AGREEMENT
REPRESENTATIVE'S WARRANT AGREEMENT dated as of ____________,
1998 by and between ROLLING PIN KITCHEN EMPORIUM, INC., (the "Company") and
NUTMEG SECURITIES, LTD. ("Representative" or "Nutmeg") individually
("Representative").
W I T N E S S E T H:
-------------------
WHEREAS, the Company proposes to issue to the Representative 150,000
warrants (each a "Representative's Warrant") each to purchase a share of the
Company's common stock, par value $.01 per share (the "Common Stock").
WHEREAS, the Representative has agreed, pursuant to the underwriting
agreement (the "Underwriting Agreement") dated _________, 1998, by and between
the Representative and the Company, to act as the Representative in connection
with the Company's proposed public offering (the "Public Offering") of 1,500,000
shares of Common Stock (the "Offering Securities"); and
WHEREAS, the Representative's Stock Warrants to be issued pursuant to
this Agreement will be issued on Firm Closing Date (as such term is defined in
the Underwriting Agreement) by the Company to the Representative in
consideration for, and as part of, the Representative's compensation in
connection with the Representative's acting as the Representative pursuant to
the Underwriting Agreement;
NOW, THEREFORE, in consideration of the premises, the payment by the
Representative to the Company of Ten Dollars ($10.00), the agreements herein set
forth and other good and valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, the parties hereto agree as follows:
1. Grant. The Holder (as defined in Section 3 below) is hereby granted
the right to purchase, at any time from ____________, 1999 until 5:00 p.m., New
York time, __________, 2003, up to 150,000 shares of Common Stock, at an initial
purchase price (subject to adjustment as provided in Section 8 hereof) of $____
per share of Common Stock (165% of the per share public offering price), subject
to the terms and conditions of this Agreement. The securities issuable upon
exercise of the Representative's Warrant are sometimes referred to herein as the
"Representative's Securities."
<PAGE>
2. Warrant Certificates. The warrant certificate (the "Representative's
Warrant Certificate") to be delivered pursuant to this Agreement shall be in the
form set forth in Exhibit A attached hereto and made a part hereof, with such
appropriate insertions, omissions, substitutions, and other variations as
required or permitted by this Agreement.
3. Exercise of Representative's Warrant.
(a) The Representative's Warrant is exercisable during the term set
forth in Section 1 hereof payable by certified or cashier's check or money order
in lawful money of the United States. Upon surrender of Representative's Warrant
Certificate with the annexed Form of Election to Purchase duly executed,
together with payment of the Purchase Price (as hereinafter defined) for the
Representative's Securities (and such other amounts, if any, arising pursuant to
Section 4 hereof) at the Company's principal office currently located at 4264
Winters Chapel Road, Building B, Atlanta, Georgia 30360, the registered holder
of a Representative's Warrant Certificate ("Holder" or "Holders") shall be
entitled to receive a certificate or certificates for the Representative's
Securities so purchased. The purchase rights represented by each
Representative's Warrant Certificate are exercisable at the option of the Holder
or Holders thereof, in whole or in part as to Representative's Securities. The
Representative's Warrant may be exercised to purchase all or any part of the
Representative's Securities represented thereby. In the case of the purchase of
less than all the Representative's Securities purchasable on the exercise of the
Representative's Warrant represented by a Representative's Warrant Certificate,
the Company shall cancel the Representative's Warrant Certificate represented
thereby upon the surrender thereof and shall execute and deliver a new
Representative's Warrant Certificate of like tenor for the balance of the
Representative's Securities purchasable thereunder.
(b) In lieu of the payment of cash upon exercise of the
Representative's Warrant as provided in Section 3(a), the Holder may exercise
the Representative's Warrant by surrendering the Representative's Warrant
Certificate at the principal office of the Company, accompanied by a notice
stating (i) the Holder's intent to effect such exercise by an exchange, (ii)
Common Stock to be issued upon the exchange, (iii) whether Representative's
Warrants are to be surrendered in connection with the exchange, and (iv) the
date on which the Holder requests that such exchange is to occur. The Purchase
Price for the Representative's Securities to be acquired in the exchange shall
be paid by the surrender as indicated in the notice, of Representative's
Warrants, having a "Value", as defined below, equal to the Purchase Price.
"Value" as to each Representative's Warrant shall mean the difference between
the "Market Price", as hereinafter defined, of a share of Common Stock and the
then Purchase Price for a share of Common Stock.
By way of example of the application of the formula, assume that the
Market Price of the Common Stock is $8.00, the Purchase Price of the
Representative's Warrant is $6.00. On such assumptions, the Value of a
Representative's Warrant is $2.00 ($8.00-$6.00) and therefore for each three
Representative's Warrants surrendered, the Holder could acquire one share of
Common Stock in the exchange. Notwithstanding the example, the Holder shall not
be limited to exchanging Representative's Warrants for Common Stock.
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The Warrant Exchange shall take place on the date specified in the
notice or if the date the notice is received by the Company is later than the
date specified in the notice, on the date the notice is received by the Company.
4. Issuance of Certificates. Upon the exercise of the
Representative's Warrant and payment of the Purchase Price therefor, the
issuance of certificates representing the Representative's Securities or other
securities, properties or rights underlying such Representative's Warrant, shall
be made forthwith (and in any event within five (5) business days thereafter)
without further charge to the Holder thereof, and such certificates shall
(subject to the provisions of Sections 5 and 7 hereof) be issued in the name of,
or in such names as may be directed by, the Holder thereof; provided, however,
that the Company shall not be required to pay any tax which may be payable in
respect of any transfer involved in the issuance and delivery of any such
certificates in a name other than that of the Holder, and the Company shall not
be required to issue or deliver such certificates unless or until the person or
persons requesting the issuance thereof shall have paid to the Company the
amount of such tax or shall have established to the satisfaction of the Company
that such tax has been paid. The Representative's Warrant Certificates and the
certificates representing the Representative's Securities or other securities,
property or rights (if such property or rights are represented by certificates)
shall be executed on behalf of the Company by the manual or facsimile signature
of the then present Chairman or Vice Chairman of the Board of Directors or
President or Vice President of the Company, attested to by the manual or
facsimile signature of the then present Secretary or Assistant Secretary or
Treasurer or Assistant Treasurer of the Company. The Representative's Warrant
Certificates shall be dated the date of issuance thereof by the Company upon
initial issuance, transfer or exchange.
5. Restriction On Transfer of Representative's Warrant. The Holder
of a Representative's Warrant Certificate (and its Permitted Transferee, as
defined below), by its acceptance thereof, covenants and agrees that the
Representative's Warrant may be sold, transferred, assigned, hypothecated or
otherwise disposed of, in whole or in part, until ____________, 1999 (one year
following the effective date of the Public Offering), only to officers and
partners of the Representatives, or any Public Offering selling group member and
their respective officers and partners, ("Permitted Transferees"). Thereafter
the Representative's Warrant may be transferred, assigned, hypothecated or
otherwise disposed of in compliance with applicable law.
6. Purchase Price.
(a) Initial and Adjusted Purchase Price. Except as otherwise
provided in Section 8 hereof, the initial purchase price of the Representative's
Securities shall be $______ per share of Common Stock (165% of the per share
public offering price). The adjusted purchase price shall be the price which
shall result from time to time from any and all adjustments of the initial
purchase price in accordance with the provisions of Section 8 hereof.
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(b) Purchase Price. The term "Purchase Price" herein shall mean the
initial purchase price or the adjusted purchase price, depending upon the
context.
7. Registration Rights.
(a) Registration Under the Securities Act of 1933 as amended
("Act"). The Representative's Warrant may have not been registered under the
Act. The Representative's Warrant Certificates may bear the following legend:
"The securities represented by this certificate have not been
registered under the Securities Act of 1933 (the "Act"), and may not be offered
for sale or sold except pursuant to (i) an effective registration statement
under the Act, or (ii) an opinion of counsel, if such opinion and counsel shall
be reasonably satisfactory to counsel to the issuer, that an exemption from
registration under the Act is available".
(b) Demand Registration. (1) At any time commencing on the first
anniversary of and expiring on the fifth anniversary of the effective date of
the Company's Registration Statement relating to the Public Offering (the
"Effective Date"), the Holders of a Majority (as hereinafter defined) in
interest of the Representative's Warrant, or the Majority in interest of the
Representative's Securities (assuming the exercise of all of the
Representative's Warrant) shall have the right, exercisable by written notice to
the Company, to have the Company prepare and file with the U.S. Securities and
Exchange Commission (the "Commission"), on one (1) occasion, a registration
statement on Form SB-2, S-1 or other appropriate form, and such other documents,
including a prospectus, as may be necessary in the opinion of both counsel for
the Company and counsel for the Holders, in order to comply with the provisions
of the Act, so as to permit a public offering and sale, of the Representative's
Securities by such Holders and any other Holders of the Representative's Warrant
and/or the Representative's Securities who notify the Company within fifteen
(15) business days after receipt of the notice described in Section 7(b)(2). The
Holders of the Representative's Warrant may demand registration prior to
exercising the Representative's Warrant, and may pay such exercise price from
the proceeds of such public offering.
(2) The Company covenants and agrees to give written notice of any
registration request under this Section 7(b) by any Holders to all other
registered Holders of the Representative's Warrant and the Representative's
Securities within ten (10) calendar days from the date of the receipt of any
such registration request.
(3) For purposes of this Agreement, the term "Majority" in reference to
the Holders of the Representative's Warrant or Representative's Securities,
shall mean in excess of fifty percent (50%) of the then outstanding
Representative's Warrant or Representative's Securities that (i) are not held by
the Company, an affiliate, officer, creditor, employee or agent thereof or any
of their respective affiliates, members of their family, persons acting as
nominees or in conjunction therewith, or (ii) have not been resold to the public
pursuant to a registration statement filed with the Commission under the Act.
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(c) Piggyback Registration. (1) If, at any time within the period
commencing on the first anniversary and expiring on the sixth anniversary of the
Effective Date, the Company should file a registration statement with the
Commission under the Act (other than in connection with a merger or other
business combination transaction or pursuant to Form S-8), it will give written
notice at least twenty (20) calendar days prior to the filing of each such
registration statement to the Representative and to all other Holders of the
Representative's Warrant and/or the Representative's Securities of its intention
to do so. If a Representative or other Holders of the Representative's Warrant
and/or the Representative's Securities notify the Company within fifteen (15)
calendar days after receipt of any such notice of its or their desire to include
any Representative's Securities in such proposed registration statement, the
Company shall afford the Representative and such Holders of the Representative's
Warrant and/or Representative's Securities the opportunity to have any such
Representative's Securities registered under such registration statement.
Notwithstanding the provisions of this Section 7(c)(1) and the provisions of
Section 7(d), the Company shall have the right at any time after it shall have
given written notice pursuant to this Section 7(c)(1) (irrespective of whether a
written request for inclusion of any such securities shall have been made) to
elect not to file any such proposed registration statement, or to withdraw the
same after the filing but prior to the effective date thereof.
(2) If the managing underwriter of an offering to which the
above piggyback rights apply, in good faith and for valid business reasons,
objects to such rights, such objection shall preclude such inclusion.
(d) Covenants of the Company With Respect to Registration. In
connection with any registrations under Sections 7(b) and 7(c) hereof, the
Company covenants and agrees as follows:
(1) The Company shall use its best efforts to file a
registration statement within thirty (30) calendar days of receipt of any demand
therefor pursuant to Section 7(b); provided, however, that the Company shall not
be required to produce audited or unaudited financial statements for any period
prior to the date such financial statements are required to be filed in a report
on Form 10-K or Form 10-Q, as the case may be. The Company shall use its best
efforts to have any registration statement declared effective at the earliest
possible time, and shall furnish each Holder desiring to sell Representative's
Securities such number of prospectuses as shall reasonably be requested.
(2) The Company shall pay all costs (excluding fees and expenses
of Holders' counsel and any underwriting discounts or selling fees, expenses or
commissions), fees and expenses in connection with any registration statement
filed pursuant to Sections 7(b) and 7(c) hereof including, without limitation,
the Company's legal and accounting fees, printing expenses, blue sky fees and
expenses.
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(3) The Company will use its best efforts to qualify or register
the Representative's Securities included in a registration statement for
offering and sale under the securities or blue sky laws of such states as
reasonably are requested by the Holders, provided that the Company shall not be
obligated to execute or file any general consent to service of process or to
qualify as a foreign corporation to do business under the laws of any such
jurisdiction.
(4) The Company shall indemnify the Holders of the
Representative's Securities to be sold pursuant to any registration statement
and each person, if any, who controls such Holders within the meaning of Section
15 of the Act or Section 20(a) of the Securities Exchange Act of 1934 (the
"Exchange Act"), against all loss, claim, damage, expense or liability
(including all expenses reasonably incurred in investigating, preparing or
defending against any claim whatsoever) to which any of them may become subject
under the Act, the Exchange Act or otherwise, arising from such registration
statement, but only to the same extent and with the same effect as the
provisions pursuant to which the Company has agreed to indemnify the
Representative contained in Section 8 of the Underwriting Agreement.
(5) The Holders of the Representative's Securities to be sold
pursuant to a registration statement, and their successors and assigns, shall
indemnify the Company, its officers and directors and each person, if any, who
controls the Company within the meaning of Section 15 of the Act or Section
20(a) of the Exchange Act, against all loss, claim, damage or expense or
liability to which they may become subject under the Act, the Exchange Act or
otherwise, arising from information furnished by or on behalf of such Holders,
or their successors or assigns, for specific inclusion in such registration
statement to the same extent and with the same effect as the provisions
contained in Section 8 of the Underwriting Agreement pursuant to which the
Representative has agreed to indemnify the Company.
(6) Nothing contained in this Agreement shall be construed as
requiring the Holders to exercise their Representative's Warrant prior to the
initial filing of any registration statement or the effectiveness thereof,
provided that such Holders have made arrangements reasonably satisfactory to the
Company to pay the exercise price from the proceeds of such offering.
(7) The Company shall furnish to each Representative for the
offering, if any, such documents as such Representative may reasonably require.
(8) The Company shall as soon as practicable after the effective
date of the registration statement, and in any event within 15 months
thereafter, make "generally available to its security holders" (within the
meaning of Rule 158 under the Act) an earnings statement (which need not be
audited) complying with Section 11(a) of the Act and covering a period of at
least 12 consecutive months beginning after the effective date of the
registration statement.
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(9) The Company shall deliver promptly to each Holder
participating in the offering requesting the correspondence described below and
any managing Representative copies of all correspondence between the Commission
and the Company, its counsel or auditors with respect to the registration
statement and permit each Holder and Representative to do such investigation,
upon reasonable advance notice, with respect to information contained in or
omitted from the registration statement as it deems reasonably necessary to
comply with applicable securities laws or rules of the National Association of
Securities Dealers, Inc. ("NASD"). Such investigation shall include access to
books, records and properties and opportunities to discuss the business of the
Company with its officers and independent auditors, all to such reasonable
extent and at such reasonable times and as often as any such Holder shall
reasonably request.
(10) The Company shall enter into an underwriting agreement with
the managing underwriter selected for such underwriting by Holders holding a
Majority of the Representative's Securities requested to be included in such
underwriting, provided, however that such managing underwriter shall be
reasonably acceptable to the Company, except that in connection with an offering
for which the Holders have piggyback rights, the Company shall have the sole
right to select the managing underwriter or underwriters. Such underwriting
agreement shall be satisfactory in form and substance to the Company, a Majority
of such Holders (in respect of a registration under Section 7(b) only) and such
managing underwriter, and shall contain such representations, warranties and
covenants by the Company and such other terms as are customarily contained in
agreements of that type. The Holders shall be parties to any underwriting
agreement relating to an underwritten sale of their Representative's Securities.
Such Holders shall not be required to make any representations or warranties to
or agreements with the Company or the underwriters except as they may relate to
such Holders and their intended methods of distribution.
8. Adjustments to Purchase Price and Number of Securities.
(a) Computation of Adjusted Purchase Price. Except as hereinafter
provided, in case the Company shall at any time after the date hereof issue or
sell any shares of Common Stock (other than the issuances referred to in Section
8(g) hereof), including shares held in the Company's treasury, for a
consideration per share less than the "Market Price" (as defined in Section
8(a)(6) hereof) per share of Common Stock on the date immediately prior to the
issuance or sale of such shares, or without consideration, then forthwith upon
any such issuance or sale, the Purchase Price of the Common Stock shall (until
another such issuance or sale) be reduced to the price (calculated to the
nearest full cent) determined by dividing (1) the product of (a) the Purchase
Price in effect immediately before such issuance or sale and (b) the sum of (i)
the total number of shares of Common Stock outstanding immediately prior to such
issuance or sale, and (ii) the number of shares determined by dividing (A) the
aggregate consideration, if any, received by the Company upon such sale or
issuance, by (B) the Market Price, and by (2) the total number of shares of
Common Stock outstanding immediately after such issuance or sale provided,
however, that in no event shall the Purchase Price be adjusted pursuant to this
computation to an amount in excess of the Purchase Price in effect immediately
prior to such computation, except
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in the case of a combination of outstanding shares of Common Stock, as provided
by Section 8(c) hereof.
For the purposes of this Section 8, the term "Purchase Price" shall
mean the Purchase Price of the Common Stock forming a part of the
Representative's Securities set forth in Section 6 hereof, as adjusted from time
to time pursuant to the provisions of this Section 8.
For the purposes of any computation to be made in accordance with
this Section 8(a), the following provisions shall be applicable:
(1) In case of the issuance or sale of shares of Common Stock (or of
other securities deemed hereunder to involve the issuance or sale of shares of
Common Stock) for a consideration part or all of which shall be cash, the amount
of the cash consideration therefor shall be deemed to be the amount of cash
received by the Company for such shares (or, if shares of Common Stock are
offered by the Company for subscription, the subscription price, or, if such
securities shall be sold to Representatives or dealers for public offering
without a subscription offering, the initial public offering price) before
deducting therefrom any compensation paid or discount allowed in the sale,
underwriting or purchase thereof by Representatives or dealers or others
performing similar services, or any expenses incurred in connection therewith.
(2) In case of the issuance or sale (otherwise than as a dividend or
other distribution on any stock of the Company, and otherwise than on the
exercise of options, rights or warrants or the conversion or exchange of
convertible or exchangeable securities) of shares of Common Stock (or of other
securities deemed hereunder to involve the issuance or sale of shares of Common
Stock) for a consideration part or all of which shall be other than cash, the
amount of the consideration therefor other than cash shall be deemed to be the
value of such consideration as determined in good faith by the Board of
Directors of the Company.
(3) Shares of Common Stock issuable by way of dividend or other
distribution on any stock of the Company shall be deemed to have been issued
immediately after the opening of business on the day following the record date
for the determination of stockholders entitled to receive such dividend or other
distribution and shall be deemed to have been issued without consideration.
(4) The reclassification of securities of the Company other than shares
of Common Stock into securities including shares of Common Stock shall be deemed
to involve the issuance of such shares of Common Stock for a consideration other
than cash immediately prior to the close of business on the date fixed for the
determination of security holders entitled to receive such shares, and the value
of the consideration allocable to such shares of Common Stock shall be
determined as provided in Section 8(a)(2).
(5) The number of shares of Common Stock at any one time outstanding
shall include
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<PAGE>
the aggregate number of shares of Common Stock issued or issuable (subject to
readjustment upon the actual issuance thereof) upon the exercise of options,
rights or warrants and upon the conversion or exchange of convertible or
exchangeable securities.
(6) As used herein in the phrase "Market Price" at any date shall be
deemed to be the last reported sale price, or, in the case no such reported sale
takes place on such day, the average of the last reported sales prices for the
last three (3) trading days, in either case as officially reported by the
principal securities exchange on which the Common Stock is listed or admitted to
trading, or, if the Common Stock is not listed or admitted to trading on any
national securities exchange, the average closing bid price as furnished by the
NASD through the NASD Automated Quotation System ("NASDAQ") or similar
organization if NASDAQ is no longer reporting such information, or if the Common
Stock is 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.
(b) Options, Rights, Warrant and Convertible and Exchangeable
Securities. Except in the case of the Company issuing rights to subscribe for
shares of Common Stock distributed to all the stockholders of the Company and
Holders of Representative's Warrant pursuant to Section 8(i) hereof, if the
Company shall at any time after the date hereof issue options, rights or
warrants to purchase shares of Common Stock, or issue any securities convertible
into or exchangeable for shares of Common Stock (other than the issuances
referred to in Section 8(g) hereof), (i) for a consideration per share less than
the Market Price (including the issuance thereof without consideration such as
by way of dividend or other distribution), or (ii) without consideration, the
Purchase Price in effect immediately prior to the issuance of such options,
rights or warrants, or such convertible or exchangeable securities, as the case
may be, shall be reduced to a price determined by making a computation in
accordance with the provisions of Section 8(a) hereof, provided that:
(1) The aggregate maximum number of shares of Common Stock
issuable or that may become issuable under such options, rights or warrants
(assuming exercise in full even if not then currently exercisable or currently
exercisable in full) shall be deemed to be issued and outstanding at the time
such options, rights or warrants were issued, and for a consideration equal to
the minimum purchase price per share provided for in such options, rights or
warrants at the time of issuance, plus the consideration (determined in the same
manner as consideration received on the issue or sale of shares in accordance
with the terms of the Representative's Warrant), if any, received by the Company
for such options, rights or warrants; provided, however, that upon the
expiration or other termination of such options, rights or warrants, if any
thereof shall not have been exercised, the number of shares of Common Stock
deemed to be issued and outstanding pursuant to this Section 8(b)(1) (and for
the purposes of Section 8(a)(5) hereof) shall be reduced by such number of
shares as to which options, warrants and/or rights shall have expired or
terminated unexercised, and such number of shares shall no longer be deemed to
be issued and outstanding, and the Purchase Price then in effect shall forthwith
be readjusted and thereafter be the price which it would have been had
adjustment been
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<PAGE>
made on the basis of the issuance only of shares actually issued or issuable
upon the exercise of those options, rights or warrants as to which the exercise
rights shall not be expired or terminated unexercised.
(2) The aggregate maximum number of shares of Common Stock
issuable upon conversion or exchange of any convertible or exchangeable
securities (assuming conversion or exchange in full even if not then currently
convertible or exchangeable in full) shall be deemed to be issued and
outstanding at the time of issuance of such securities, and for a consideration
equal to the consideration (determined in the same manner as consideration
received on the issue or sale of shares of Common Stock in accordance with the
terms of the Representative's Warrant) received by the Company for such
securities, plus the minimum consideration, if any, receivable by the Company
upon the conversion or exchange thereof; provided, however, that upon the
expiration or other termination of the right to convert or exchange such
convertible or exchangeable securities (whether by reason or redemption or
otherwise), the number of shares deemed to be issued and outstanding pursuant to
this Section 8(b)(2) (and for the purpose of Section 8(a)(5) hereof) shall be
reduced by such number of shares as to which the conversion or exchange rights
shall have expired or terminated unexercised, and such number of shares shall no
longer be deemed to be issued and outstanding and the Purchase Price then in
effect shall forthwith be readjusted and thereafter be the price which it would
have been had adjustment been made on the basis of the issuance only of the
shares actually issued or issuable upon the conversion or exchange of those
convertible or exchangeable securities as to which the conversion or exchange
rights shall not have expired or terminated unexercised.
(3) If any change shall occur in the price per share provided
for in any of the options, rights or warrants referred to in Section 8(b)(1), or
in the price per share at which the securities referred to in Section 8(b)(2)
are convertible or exchangeable, and if a change in the Purchase Price has not
occurred by reason of the event giving rise to the change in the price per share
of such other options, rights, warrants, or convertible or exchangeable
securities, such options, rights or warrants or conversion or exchange rights,
as the case may be, to the extent not theretofore exercised, the shall be deemed
to have expired or terminated on the date when such price change became
effective in respect of shares not theretofore issued pursuant to the exercise
or conversion or exchange thereof, and the Company shall be deemed to have
issued upon such date new options, rights or warrants or convertible or
exchangeable securities at the new price in respect of the number of shares
issuable upon the exercise of such options, rights or warrants or the conversion
or exchange of such convertible or exchangeable securities.
(c) Subdivision and Combination. In case the Company shall at any
time issue any shares of Common Stock in connection with a stock dividend in
shares of Common Stock or subdivide or combine the outstanding shares of Common
Stock, the Purchase Price shall forthwith be proportionately decreased in the
case of a stock dividend or a subdivision or increased in the case of
combination.
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(d) Adjustment in Number of Securities. Upon each adjustment of the
Purchase Price pursuant to the provisions of this Section 8, the number of
Representative's Securities issuable upon the exercise of the Representative's
Warrant shall be adjusted to the nearest whole share by multiplying a number
equal to the Purchase Price in effect immediately prior to such adjustment by
the number of Representative's Securities issuable upon exercise of the
Representative's Warrant immediately prior to such adjustment and dividing the
product so obtained by the adjusted Purchase Price.
(e) Definition of Common Stock. For the purpose of this Agreement,
the term "Common Stock" shall mean the class of stock designated as Common Stock
in the Certificate of Incorporation, of the Company as it may be amended as of
the date hereof.
(f) Reclassification, Merger or Consolidation. The Company will not
merge, reorganize or take any other action which would terminate the
Representative's Warrant without first making adequate provision for the
Representative's Warrant. In case of any reclassification or change of the
outstanding shares of Common Stock issuable upon exercise of the outstanding
warrants (other than a change in par value to no par value, or from nor par
value to par value, or as a result of a subdivision or combination), or in case
of any consolidation of the Company with, or merger of the Company with, or
merger of the Company into, another corporation (other than a consolidation or
merger in which the Company is the continuing corporation and which does not
result in any reclassification or change of the outstanding Common Stock except
a change as a result of a subdivision or combination of such shares or a change
in par value, as aforesaid), or in the case of a sale or conveyance to another
corporation or other entity of the property of the Company as an entirety or
substantially as an entirety, the Holders of each Representative's Warrant then
outstanding or to be outstanding shall have the right thereafter (until the
expiration of such Representative's Warrant) to purchase, upon exercise of such
Representative's Warrant, the kind and number of shares of stock and other
securities and property receivable upon such reclassification, change,
consolidation, merger, sale or conveyance as if the Holders were the owner of
the shares of Common Stock underlying the Representative's Warrant immediately
prior to any such events at a price equal to the product of (x) the number of
shares issuable upon exercise of the Representative's Warrant and (y) the
Purchase Price in effect immediately prior to the record date for such
reclassification, change, consolidation, merger, sale or conveyance, as if such
Holders had exercised the Representative's Warrant. In the event of a
consolidation, merger, sale or conveyance of property, the corporation formed by
such consolidation or merger, or acquiring such property, shall execute and
deliver to the Holders a supplemental Representative's warrant agreement to such
effect. Such supplemental Representative's warrant agreement shall provide for
adjustments which shall be identical to the adjustment provided for in this
Section 8. The provisions of this Section 8(f) shall similarly apply to
successive consolidations or mergers.
(g) No Adjustment of Purchase Price in Certain Cases. No adjustment
of the Purchase Price shall be made:
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(1) Upon the issuance or sale of (i) the Representative's
Warrant or the securities underlying the Representative's Warrant, (ii) the
securities sold pursuant to the Public Offering (including those sold upon
exercise of the Representative's over-allotment option), or (iii) the shares
issuable pursuant to the options, warrants, rights, stock purchase agreements or
convertible or exchangeable securities outstanding or in effect on the date
hereof as described in the prospectus relating to the Public Offering.
(2) If the amount of said adjustments shall aggregate less than
two ($.02) cents for one (1) share of Common Stock; provided, however, that in
such case any adjustment that would otherwise be required then to be made shall
be carried forward and shall be made at the time of and together with the next
subsequent adjustment which, together with any adjustment so carried forward,
shall aggregate at least two ($.02) cents for one (1) share of Common Stock. In
addition, Registered Holders shall not be entitled to cash dividends paid by the
Company prior to the exercise of any warrant or warrants held by them.
9. Exchange and Replacement of Warrant Certificates. Each
Representative's Warrant Certificate is exchangeable without expense, upon the
surrender thereof by the registered Holders at the principal executive office of
the Company, for a new Representative's Warrant Certificate of like tenor and
date representing in the aggregate the right to purchase the same number of
Representative's Securities in such denominations as shall be designated by the
Holders thereof at the time of such surrender.
10. Loss, Theft etc. of Certificates Upon receipt by the Company of
evidence reasonably satisfactory to it of the loss, theft, destruction or
mutilation of any Representative's Warrant Certificate, and, in case of loss,
theft or destruction, of indemnity or security reasonably satisfactory to it,
and reimbursement to the Company of all reasonable expenses incidental thereto,
and upon surrender and cancellation of the Representative's Warrant
Certificates, if mutilated, the Company will make and deliver a new
Representative's Warrant Certificate of like tenor, in lieu thereof.
11. Elimination of Fractional Interests. The Company shall not be
required to issue certificates representing fractions of shares of Common Stock
upon the exercise of the Representative's Warrant, nor shall it be required to
issue scrip or pay cash in lieu of fractional interests; provided, however, that
if a Holder exercises all Representative's Warrant held of record by such Holder
the fractional interests shall be eliminated by rounding any fraction to the
nearest whole number of shares of Common Stock or other securities, properties
or rights.
12. Reservation and Listing of Securities. The Company shall at all
times reserve and keep available out of its authorized shares of Common Stock,
solely for the purpose of issuance upon the exercise of the Representative's
Warrant, such number of shares of Common Stock or other securities and
properties or rights as shall be issuable upon the exercise thereof. The Company
covenants and agrees that, upon exercise of Representative's Warrant and payment
of the Purchase Price therefor, all the shares of Common Stock issuable upon
such exercise shall
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<PAGE>
be duly and validly issued, fully paid, non-assessable and not subject to the
preemptive rights of any stockholder. As long as the Representative's Warrant
shall be outstanding, the Company shall use its best efforts to cause the Common
Stock to be listed (subject to official notice of issuance) on all securities
exchanges on which the Common Stock issued to the public in connection herewith
may then be listed or quoted.
13. Notices to Representative's Warrant Holders. Nothing contained in
this Agreement shall be construed as conferring upon the Holders the right to
vote or to consent or to receive notice as a stockholder in respect of any
meetings of stockholders for the election of directors or any other matter, or
as having any rights whatsoever as a stockholder of the Company. If, however, at
any time prior to the expiration of the Representative's Warrant and their
exercise, any of the following events shall occur:
(a) the Company shall take a record of the holders of its shares of
Common Stock for the purpose of entitling them to receive a dividend or
distribution payable otherwise than in cash, or a cash dividend or distribution
payable otherwise than out of current or retained earnings, as indicated by the
accounting treatment of such dividend or distribution on the books of the
Company; or
(b) the Company shall offer to all the holders of its Common Stock
any additional shares of capital stock of the Company or securities convertible
into or exchangeable for shares of capital stock of the Company, or any option,
right or warrant to subscribe therefor; or
(c) a dissolution, liquidation or winding up of the Company (other
than in connection with a consolidation or merger) or a sale of all or
substantially all of its property, assets and business as an entirety shall be
proposed; then, in any one or more of said events, the Company shall give
written notice of such event at least fifteen (15) calendar days prior to the
date fixed as a record date or the date of closing the transfer books for the
determination of the stockholders entitled to such dividend, distribution,
convertible or exchangeable securities or subscription rights, or entitled to
vote on such proposed dissolution, liquidation, winding up or sale. Such notice
shall specify such record date or the date of closing the transfer books, as the
case may be. Failure to give such notice or any defect therein shall not affect
the validity of any action taken in connection with the declaration or payment
of any such dividend, or the issuance of any convertible or exchangeable
securities, or subscription rights, options or warrants, or any proposed
dissolution, liquidation, winding up or sale.
14. Notices. All notices, requests, consents and other communications
hereunder shall be in writing and shall be deemed to have been duly made when
delivered, or five days after being mailed by registered or certified mail,
return receipt requested: If to the registered Holders of the Representative's
Warrant, to the address of such Holders as shown on the books of the Company; or
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<PAGE>
(b) If to the Company to 4264 Winters Chapel Road, Building B,
Atlanta, Georgia 30360 or to such other address as the Company may designate by
notice to the Holders, with a courtesy copy to William E. Sudow, Esq., Brown &
Wood LLP, 815 Connecticut Avenue, N.W., Washington, D.C. 20006.
15. Supplements and Amendments. The Company and the Representative may
from time to time supplement or amend this Agreement without the approval of any
Holders of Representative's Warrant Certificates (other than the Representative)
in order to cure any ambiguity, to correct or supplement any provision contained
herein which may be defective or inconsistent with any provisions herein, or to
make any other provision in regard to matters or questions arising hereunder
which the Company and the Representative may deem necessary or desirable and
which the Company and the Representative deem shall not adversely affect the
interests of the Holders of Representative's Warrant Certificates.
16. Successors. All the covenants and provisions of this Agreement
shall be binding upon and inure to the benefit of the Company, the
Representative, the Holders and their respective successors and assigns
hereunder.
17. Termination. This Agreement shall terminate at the close of
business on _____________, 2003. Notwithstanding the foregoing, the
indemnification provisions of Section 7 shall survive such termination until the
close of business on the expiration of any applicable statue of limitations.
18. Governing Law; Submission to Jurisdiction. This Agreement and each
Representative's Warrant Certificate issued hereunder shall be deemed to be a
contract made under the laws of the State of New York and for all purposes shall
be construed in accordance with the laws of said state without giving effect to
the rules of said state governing the conflicts of laws.
19. Entire Agreement; Modification. This Agreement (including the
Underwriting Agreement, to the extent portions thereof are referred to herein)
contains the entire understanding between the parties hereto with respect to the
subject matter hereof and thereof. This Agreement may not be modified or amended
except by a writing duly signed by the Company and the Holders of a Majority in
Interest of the Representative's Securities (for this purpose, treating all then
outstanding Representative's Warrants as if they had been exercised).
20. Severability. If any provision of this Agreement shall be held to
be invalid or unenforceable, such invalidity or unenforceability shall not
affect any other provision of this Agreement.
21. Captions. The caption headings of the Sections of this Agreement
are for convenience of reference only and are not intended, nor should they be
construed as, a part of this Agreement and shall be given no substantive effect.
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22. Benefits of this Agreement. Nothing in this Agreement shall be
construed to give to any person or corporation other than the Company and the
Representative and any other registered Holders of the Representative's Warrant
Certificates or Representative's Securities any legal or equitable right, remedy
or claim under this Agreement; and this Agreement shall be for the sole and
exclusive benefit of the Company and the Representative and any other Holders of
the Representative's Warrant Certificates or Representative's Securities.
23. Counterparts. This Agreement may be executed in any number of
counterparts and each of such counterparts shall for all purposes be deemed to
be an original, and such counterparts shall together constitute but one and the
same instrument.
24. Binding Effect. This Agreement shall be binding upon and inure to
the benefit of the Company, the Representative and their respective successors
and assigns and the Holders from time to time of the Representative's Warrant
Certificates or any of them.
[Signature on following page]
15
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed, as of the day and year first above written.
ROLLING PIN KITCHEN EMPORIUM, INC.
By:__________________________________________
Glenn Kaas, President
NUTMEG SECURITIES, LTD., for itself and as
Representative of the Several Underwriters listed On
Schedule A
By:__________________________________________
Name: Daniel T. Guilfoile
Title: Director Investment Banking
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Schedule A
to
Representative's Warrant Agreement
Between
Rolling Pin Kitchen Emporium, Inc.
and
Nutmeg Securities, Ltd.
Representative
Nutmeg Securities, Ltd.
Underwriters:
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ROLLING PIN KITCHEN EMPORIUM, INC.
---------------------------------
\
WARRANT CERTIFICATE
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933 (THE "ACT"), AND MAY NOT BE OFFERED FOR SALE OR SOLD
EXCEPT PURSUANT TO (i) AN EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT, OR
(ii) AN OPINION OF COUNSEL, IF SUCH OPINION AND COUNSEL SHALL BE REASONABLY
SATISFACTORY TO COUNSEL TO THE ISSUER, THAT AN EXEMPTION FROM REGISTRATION UNDER
THE ACT IS AVAILABLE.
THE TRANSFER OR EXCHANGE OF THE WARRANTS REPRESENTED BY THIS CERTIFICATE IS
RESTRICTED IN ACCORDANCE WITH THE WARRANT AGREEMENT REFERRED TO HEREIN.
EXERCISABLE COMMENCING _________, 1999 THROUGH
5:00 P.M., NEW YORK TIME ON ___________, 2003
Warrant covering 150,000 shares of
Common Stock
No. UW-1
This Warrant Certificate certifies that Nutmeg Securities, Ltd. or
registered assigns, is the registered holder of this Warrant to purchase
initially, at any time from ___________, 1999, until 5:00 p.m., New York time on
__________, 2003 (the "Expiration Date"), up to 150,000 shares of Common Stock,
$.01 par value (the "Common Stock") of Rolling Pin Kitchen Emporium, Inc.
("Company") exercisable to purchase one share of Common Stock at a purchase
price of $________ per share (165% of the per share public offering price) (the
"Purchase Price"), upon the surrender of this Warrant Certificate and payment of
the applicable Purchase Price at an office or agency of the Company, but subject
to the conditions set forth herein and in the Representative's Warrant
Agreement, dated as of _______, 1998, by and between the Company and Nutmeg
Securities, Ltd. (the "Warrant Agreement"). Payment of the Purchase Price shall
be made by certified or cashier's check or money order payable to the order of
the Company.
No Warrant may be exercised after 5:00 p.m., New York time, on the
Expiration Date, at which time all Warrant evidenced hereby, unless exercised
prior thereto, shall thereafter be void.
The Warrant evidenced by this Warrant Certificate is part of a duly
authorized issue of Warrants issued pursuant to the Warrant Agreement between
the Company and the
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<PAGE>
Representative, which Warrant Agreement is hereby incorporated by reference in
and made a part of this instrument and is hereby referred to for a description
of the rights, limitation of rights, obligations, duties and immunities
thereunder of the Company and the holders (the words "holders" or "holder"
meaning the registered holders or registered holder) of the Warrant.
The Warrant Agreement provides that upon the occurrence of certain
events the Purchase Price and the type and/or number of the Company's securities
issuable upon the exercise of this Warrant, may, subject to certain conditions,
be adjusted. In such event, the Company will, at the request of the holder,
issue a new Warrant Certificate evidencing the adjustment in the Purchase Price
and the number and/or type of securities issuable upon the exercise of the
Warrant; provided, however, that the failure of the Company to issue such new
Warrant Certificates shall not in any way change, alter, or otherwise impair,
the rights of the holder as set forth in the Warrant Agreement.
Upon due presentment for registration of transfer of this Warrant
Certificate at an office or agency of the Company, a new Warrant Certificate or
Warrant Certificates of like tenor and evidencing in the aggregate a like number
of Warrant shall be issued to the transferee(s) in exchange as provided herein,
without any charge except for any tax or other governmental charge imposed in
connection with such transfer.
Upon the exercise of less than all of the Warrants evidenced by this
Certificate, the Company shall forthwith issue to the holder hereof a new
Warrant Certificate representing such number of unexercised Warrants.
The Company may deem and treat the registered holder(s) hereof as the
absolute owner(s) of this Warrant Certificate (notwithstanding any notation of
ownership or other writing hereon made by anyone), for the purpose of any
exercise hereof, and of any distribution to the holder(s) hereof, and for all
other purposes, and the Company shall not be affected by any notice to the
contrary.
All terms used in this Warrant Certificate which are defined in the
Warrant Agreement shall have the meanings assigned to them in the Warrant
Agreement.
IN WITNESS WHEREOF, the undersigned has executed this certificate this
____day of ________________, 1998.
ROLLING PIN KITCHEN EMPORIUM, INC.
By:______________________________________
Glenn Kaas
President
ATTEST:
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By:__________________________________
Name: Greg Dukoff
Title: Secretary
FORM OF ASSIGNMENT
(To be executed by the registered holder if such holder
desires to transfer the Warrant Certificate.)
FOR VALUE RECEIVED___________________________
hereby sells, assigns and transfers unto _____________________
(Please print name and address of transferee)
this Warrant Certificate, together with all right, title and interest therein,
and does hereby irrevocably constitute and appoint _____________________
Attorney, to transfer the within Warrant Certificate on the books of Rolling Pin
Kitchen Emporium, Inc., with full power of substitution.
Dated:_______________
Signature_____________________
(Signature must conform in all respects to
the name of holder as specified on the face of the Warrant Certificate.)
[Signature guarantee] ________________________________
(Insert Social Security or Other
Identifying Number of Holders)
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<PAGE>
FORM OF ELECTION TO PURCHASE
The undersigned hereby irrevocably elects to exercise the right, represented by
this Warrant Certificate, to purchase ______ shares of Common Stock Warrant and
herewith tenders in payment for such securities a certified or cashier's check
or money order payable to the order of Rolling Pin Kitchen Emporium, Inc in the
amount of $______, all in accordance with the terms hereof. The undersigned
requests that certificates for such securities be registered in the name of
___________________________ whose address is _____________________ and that such
certificates be delivered to _____________________________________ whose address
is____________________________________________________________________.
Dated:_______________
Signature_______________________
(Signature must conform in all respects to the name of holder as specified on
the face of the Warrant Certificate.)
___________________________
(Insert Social Security or Other
Identifying Number of Holders)
[Signature guarantee]
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<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 4006 Venture Court, Columbus, Ohio 43228 hereby certifies
that, for value received, Liberty BIDCO Investment Corporation, a Michigan
corporation, 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 12,
1998 and before 5:00 P.M., New York City time, on June 30, 2003 (the "Expiration
Date") 92,595 fully paid and non-assessable shares of Common Stock of the
Company, at the price per share of $.01. 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 92,595 shares of Common Stock of the Company (representing
approximately 5% 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 12, 1998, the date as
of which the Warrant was first issued.
(d) The term "Other Securities" refers to any stock (other
than Common Stock) and other securities of the Company or any other person
(corporate or otherwise) which the holder of the Warrant at any time shall be
entitled to receive, or shall have received, upon the exercise of the Warrant,
in lieu of or in addition to Common Stock, or which at any time shall be
issuable or shall have been issued in exchange for or in replacement of Common
Stock or Other Securities pursuant to Section 6 or otherwise.
<PAGE>
(e) The term "Purchase Price" shall be $0.01 per share of
Common Stock subject to adjustment under Section 7.
(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 on the Original Issue Date and ending on August 12, 2001.
(i) The term "Securities Act" means the Securities Act of 1933
as the same shall be in effect at the time.
(j) The term "Plan" shall mean the Amended Plan of
Reorganization of the Company, The Cookstore, Inc. and The Cookstore
Worthington, Inc. dated June 24, 1998, as modified.
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
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<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 and all shares of Class A Common Stock,
if any, that are held by holders of Allowed Claims in Class 6 (as such terms
defined in the Plan) and that are required to be included in such registration
statement pursuant to the Plan; second, Requested Shares; and last, securities
held by other persons that have the right to require that their securities be
included in the registration, in each case, 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. 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:
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<PAGE>
(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.
(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.
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<PAGE>
(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.
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
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<PAGE>
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 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
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<PAGE>
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 and any applicable state securities laws, 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 and any applicable state securities laws,
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;
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.
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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 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.
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<PAGE>
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 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.
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<PAGE>
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. Adjustment of Exercise Price and Number of Shares of
Common Stock Purchasable or Number of Warrants. Prior to the Expiration Date,
the Purchase Price, the number of shares of Common Stock purchasable upon the
exercise of each Warrant and the number of Warrants outstanding are subject to
adjustment from time to time upon the occurrence of any of the events enumerated
in this Section 7. Upon each adjustment of the number of shares of Common Stock
purchasable pursuant hereto, the Purchase Price shall be adjusted by multiplying
the Purchase Price in existence immediately prior to such adjustment by a
fraction, the numerator of which is the total maximum number of Shares of Common
Stock issuable upon exercise of a Warrant prior to such adjustment and the
denominator of which is the total maximum number of Shares of Common Stock
issuable upon exercise of this Warrant after such adjustment, provided that in
no event shall the Purchase Price be less than $.01 per share.
If and whenever after the date hereof the Company shall in any
manner (i) issue or sell any shares of any class of its Common Stock, (ii) grant
any warrants, options or rights to purchase shares of Common Stock ("Options"),
or (iii) issue or sell Convertible Securities, whether or not the rights to
exchange or convert thereunder are immediately exercisable (any of the matters
referred to in clauses (i), (ii) and (iii) being an "Event"), then the holder of
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<PAGE>
this Warrant shall thereafter be entitled to purchase at the Purchase Price
resulting from any such adjustment the number of Shares of Common Stock obtained
by (a) dividing (i) the number of shares purchasable pursuant hereto immediately
prior to such Event (with respect to each class of Common Stock) by (ii) the sum
of the total number of shares of Common Stock and Class B Common Stock
outstanding immediately prior to such Event plus the total maximum number of
shares of Common Stock issuable upon the exercise of any Options or upon the
conversion or exchange of all Convertible Securities, in each case outstanding
immediately prior to such Event, and (b) multiplying the result by the sum of
the total number of shares of Common Stock and Class B Common Stock outstanding
immediately after such Event plus the total maximum number of shares of Common
Stock issuable upon the exercise of any Options or upon the conversion or
exchange of all Convertible Securities, in each case outstanding immediately
after such Event.
7.2. Exceptions. The provisions of Sections 7.1 do not apply
to (i) the exercise of any Warrant, (ii) the exercise of any Option with respect
to which an adjustment shall have been made at the time of the issuance of such
Option pursuant to Section 7.1, (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 7.1, (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;
(vii) the issuance of shares of Common Stock, Convertible Securities or Options
in connection with mergers or acquisitions that, in the aggregate, does not
reduce the shares of Common Stock purchased and purchasable pursuant to these
Warrants (collectively, "Warrant Shares") to less than 2.6% of the Company's
Common Stock and Class B Common Stock on a fully diluted basis; (viii) the
issuance of shares of Common Stock, Convertible Securities or Options at any
time that the aggregate market value of the Warrant Shares prior to such
issuance (determined by multiplying the average Market Price of the Common Stock
for the 10 business days preceding such issuance by the number of Warrant
Shares) is at least $4,000,000, provided that such issuance does not reduce such
aggregate market value after such issuance (determined by multiplying the
average Market Price of the Common Stock for the 10 business days after such
issuance by the number of Warrant Shares assuming no anti-dilution as a result
of the issuance) to less than $3,500,000; and (ix) any public offering of Common
Stock that results in at least $4,000,000 in net proceeds to the Company.
7.3. Readjustment. If all of the Common Stock or Convertible
Securities deliverable upon exercise of such Options or upon conversion or
exchange of such Convertible Securities has not been issued on or prior to the
date such Options or the conversion rights under such Convertible Securities, as
the case may be, expire, then the number of shares of Common Stock purchased
upon the exercise of this Warrant shall promptly be readjusted to the number
which would then be in effect had the adjustment upon the issuance of such
securities been made on the basis of the actual number of shares of Common Stock
issued upon such exercise, conversion or exchange of such securities. If the
number of shares for which any Option is exercisable or the rate at which any
Convertible Securities are convertible into or exchangeable for Common Stock
shall change (other than under or by reason of provisions designed to protect
11
<PAGE>
against dilution), the number of shares purchasable upon the exercise of the
Warrant in effect at the time of such event shall promptly be readjusted to the
number of shares which would have been so purchasable at such time had such
Options or Convertible Securities initially been exercisable or convertible into
such changed number of shares.
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.
12
<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.
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:
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<PAGE>
(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 12, 1998
HOME RETAIL HOLDINGS, INC.
By: /s/ GLENN KAAS
---------------------------------------
President
14
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[Corporate Seal]
Attest:
/s/ GREG DUKOFF
- --------------------------------
Secretary
LIBERTY BIDCO INVESTMENT CORPORATION
By:
---------------------------------------
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 __________________________.
(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.
<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>
Void after August 31, 2003
This Warrant and any shares acquired upon the exercise
of this Warrant have not been registered under the
Securities Act of 1933. This Warrant and such shares may not be sold or
transferred in the absence of such registration or an exemption therefrom under
said Act and no transfer of this Warrant or such shares shall be valid or
effective unless and until such conditions shall have been complied with.
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, JRP Consulting Corp.
("JRP") 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 August 31, 2003 (the
"Expiration Date") 23,737 fully paid and non-assessable shares of Common Stock
of the Company, at the price per share of the Purchase Price. The number and
character of such shares of Common Stock and the Purchase Price as hereinafter
defined are subject to adjustment as provided herein.
This Warrant is one of the Common Stock Purchase Warrants (the
"Warrants") originally issued as of the Original Issue Date (as defined below)
and evidencing the right to purchase an aggregate of 23,737 shares of Common
Stock of the Company (representing approximately 1.25% of the Company's Common
Stock and Class B Common Stock, which constitute all of the outstanding stock of
the Company, on a fully diluted basis immediately prior to 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.
<PAGE>
(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.
(e) The term "Purchase Price" shall be 165% of
the initial price to the public pursuant to which the Company first sells $1
million or more of Common Stock (taking into account gross proceeds, not net
proceeds), as set forth on the cover page of the prospectus contained in the
registration statement pertaining to such offering, as such price may be
adjusted pursuant to the terms hereof.
(f) The terms "registered" and "registration"
refer to a registration effected by filing a registration statement in
compliance with the Securities Act, to permit the disposition of Common Stock
(or Other Securities) issued or issuable upon the exercise of Warrants, and any
post-effective amendments and supplements filed or required to be filed to
permit any such disposition.
(g) The term "Registrable Securities" shall
mean the shares of Common Stock or Other Securities issuable upon exercise of
the Warrants, excluding Common Stock or other Securities that (a) have been
registered under the Securities Act pursuant to an effective registration
statement filed thereunder and disposed of in accordance with such registration
statement or (b) are eligible for sale under Rule 144(k) under the Securities
Act, or have been sold pursuant to Rule 144 under the Securities Act.
(h) The term "Registration Period" shall mean
the period commencing concurrently with the closing of the Company's first
public offering of $1 million or more of securities registered under the
Securities Act that takes place after the Original Issue Date and ending on the
earlier of the second anniversary thereof and the Expiration Date.
(i) The term "Securities Act" means the
Securities Act of 1933 as the same shall be in effect at the time.
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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, unless prohibited by the Underwriter, include the
Requested Shares in the registration statement, and, if the proposed sale is to
be underwritten, to cause the underwriters of securities to be sold by the
Company in such registration statement to purchase such Requested Shares. In the
event that any registration pursuant to this Section 1.1 shall be an
underwritten offering of securities of the Company, any request by such holders
pursuant to this Section 1.1 to register the Requested Shares, may, but need
not, specify that such shares are to be included in the underwriting on the same
terms and conditions as the securities, if any, otherwise being sold through
underwriters under such registration. In the event of an underwritten offering
of securities of the Company, such notice shall also specify as to whether such
holder of Registrable Securities desires that any of such Requested Shares to be
included in any such registration statement be subject to any over-allotment
option granted the underwriters of such offering. No holder shall be required to
have its Requested Shares be part of any underwritten offering and/or subject to
any over-allotment option granted any underwriter by the Company.
Notwithstanding the foregoing, if the managing underwriter or underwriters shall
inform the Company of its opinion, at least 15 days prior to the date that the
registration statement becomes effective, that part or all of the Requested
Shares be excluded from the registration statement on the ground that the
inclusion of such Requested Shares will adversely affect the orderly sales and
distribution of the Common Stock being sold, the Company shall include all
securities to be sold by holders, including the Company, which have the right to
require that their securities be included in the registration on a pro rata
basis. If the underwriters agree to purchase any of the Requested Shares
beneficially owned by any holder who has agreed that such Requested Shares shall
be sold pursuant to the underwritten offering or pursuant to the exercise of any
over-allotment option as described above, such holders will enter into a
reasonably customary underwriting agreement with the underwriters and will sell
such Requested Shares to the underwriters unless, and except to the extent that,
upon written notice to the Company and the managing underwriter or underwriters
at least two days prior to the effective date of the registration statement, any
such holder withdraws any portion of such Requested Shares. If the underwriters
elect to purchase less than all the Requested Shares beneficially owned by
holders who have agreed that such Requested Shares shall be sold pursuant to the
underwritten offering or pursuant to the exercise of any over-allotment option,
the underwriters shall purchase such Requested Shares on a pro rata basis among
the Requested Shares that were included in the timely requests from holders of
Registrable Securities under this subsection and the Requested Shares requested
to be included in the registration statement by other stockholders holding
registration rights and who have requested that such shares be sold pursuant to
the underwritten offering or pursuant to the exercise of an over-allotment
option. Notwithstanding the foregoing, the Company may withdraw any registration
statement referred to in this Section 1 without any liability to the holders of
Registrable Securities.
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1.2. Market Standoff. Each holder of Registrable
Securities agrees that if the managing underwriter or underwriters of the
offering contemplated by Section 1.1 so request, such holder shall not effect
any public sale or distribution of any Registrable Securities being registered
thereunder or of any securities convertible into or exchangeable or exercisable
for such Registrable Securities being registered thereunder for a period equal
to the lesser of (x) the period management of the Company has agreed to lockup
and (y) 90 days after the effective date of the registration statement filed in
connection with the public offering.
1.3. Obligations of the Company. When required under
Section 1.1 effect the registration of any Registrable Securities, the Company
shall, as expeditiously as is reasonably possible:
(a) Prepare and file with the SEC a
registration statement with respect to such Registrable Securities and such
amendments and supplements to such registration statement and the prospectus
used in connection therewith as may be necessary to exercise the Company's best
efforts to cause such registration statement to become effective at the earliest
practicable date and to remain effective for a period of 90 days or until the
holders and any underwriter purchasing such Registrable Securities have sold or
otherwise disposed of the Registrable Securities registered in such registration
statement, whichever is earlier.
(b) Furnish to each holder selling Registrable
Securities such number of copies of conformed copies of such registration
statement and of each such amendment and supplement thereto (with all exhibits)
and such number of copies of the prospectus, including a preliminary prospectus,
in conformity with the requirements of the Securities Act, and such other
documents as such holder may reasonably request in order to facilitate the
disposition of Registrable Securities to be sold by such holder pursuant to such
registration statement.
(c) Exercise the Company's best efforts to
register and qualify the Registrable Securities covered by such registration
statement under other securities laws or State Securities Laws of such states or
jurisdictions where a self-executing exemption is not available and as any
seller of such Registrable Securities shall reasonably request; provided,
however, that the Company shall not be required in connection therewith or as a
condition thereto to qualify to do business or to file a general consent to
service of process in any such states or jurisdictions.
(d) Cause all securities covered by such
registration statement to be registered with or approved by such other federal
or state governmental agencies or authorities as may be necessary in the opinion
of counsel to the Company and counsel to the seller or sellers of securities to
enable the seller or sellers thereof to consummate the disposition of such
securities.
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(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, make timely filing of all reports pursuant to the
Securities Exchange Act of 1934, as amended ("Exchange Act") at such time as the
Company's securities are registered under the Exchange Act, and make available
to its securities holders, as soon as reasonably practicable, an earnings
statement covering the period of at least twelve months, but not more than
eighteen months, beginning with the first full calendar month after the
effective date of such registration statement, which earnings statement shall
satisfy the provisions of Section 11(a) of the Securities Act and Rule 158
promulgated thereunder, and promptly furnish to each such seller of securities a
copy of such earnings statement.
(g) Use its best efforts to list all
securities covered by such registration statement on any national securities
exchange on which securities of the same class and, if applicable, series,
covered by such registration statement are then listed or on the Nasdaq Stock
Market ("Nasdaq") if the securities are reported on Nasdaq.
1.4. Information to be Furnished. It shall be a
condition precedent to the obligation of the Company to take any action pursuant
to this Section 1 that the holders of Registrable Securities promptly furnish to
the Company such information regarding them, the securities of the Company held
by them and the intended method of disposition of such securities as the Company
shall reasonably request and as shall be required in connection with the
Company's obligations under this Section 1.
1.5. Underwritten Offerings.
(a) Incidental Underwritten Offerings. If the
Company proposes to register any of its securities under the Securities Act as
contemplated by Section 1.1 and such securities are to be distributed by or
through one or more underwriters, the Company will, if requested by any holder
of Registrable Securities, use its best efforts to arrange for such underwriters
to include all the securities to be offered and sold by such requesting holder
among the securities of the Company to be distributed by such underwriters. The
holders of Registrable Securities to be distributed by such underwriters shall
be parties to the underwriting agreement between the Company and such
underwriters and may, at their option, require that any or all of the
representations and warranties by, and the other agreements on the part of, the
Company to and for the benefit of such underwriters shall also be made to and
for the benefit of such holders of Registrable Securities and that any or all of
the conditions precedent to the obligations of such underwriters under such
underwriting agreement be conditions precedent to the obligations of such
holders of Registrable Securities. Any such requesting holder of Registrable
Securities shall not be required to make any representations or warranties to or
agreements with the Company other than representations, warranties or agreements
regarding such holder, such holder's securities and such holder's intended
method of distribution or any other representations required by applicable law.
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1.6. Notice. In connection with the preparation and
filing of each registration statement under the Securities Act pursuant to this
Agreement, the Company shall promptly notify the holders of Registrable
Securities included in the Registration Statement and their respective counsel
of any stop order issued or threatened by the SEC and take all reasonable
actions required to prevent the entry of such stop order or to remove it if
entered.
1.7. Registration Expenses. All expenses incurred by
the Company and the holders of Registrable Securities in complying with this
Section 1, including, without limitation, all registration, NASD and filing
fees, duplication and printing expenses, travel expenses, fees and disbursements
of counsel for the Company or its independent public accountants, reasonable
fees and disbursements of counsel for holders of securities included in a
Company registration statement and the expense of any special audits incident to
or required by any such registration shall be paid by the Company, except that
each holder of Registrable Securities shall pay underwriting discounts and
commissions attributable to such holder's shares, and transfer taxes on shares
held by such holder.
1.8. Indemnification. In the event any of the Common
Stock of a holder of Registrable Securities is included in a registration
statement pursuant to this Section 1:
(a) To the extent permitted by law, the
Company will indemnify and hold harmless each holder of Registrable Securities
(and its officers, directors, employees, partners and affiliates) selling
Registrable Securities, any underwriter (as defined in the Securities Act) with
respect to the Registrable Securities, and each person, if any, who controls
such holder or underwriter within the meaning of the Securities Act, against any
losses, claims, damages or liabilities, to which they may become subject under
the Securities Act or otherwise, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based upon any
untrue or allegedly untrue statement of any material fact contained in such
registration statement, including any preliminary prospectus or final prospectus
contained therein or any amendments or supplements thereto, or arise out of or
are based upon the omission or alleged omission to state therein a material fact
required to be stated therein or allegedly necessary to make the statements
therein not misleading; and will reimburse each such holder of Registrable
Securities (and its officers, directors, employees, partners and affiliates),
underwriter or controlling person for any legal or other expenses reasonably
incurred by them in connection with investigating or defending any such loss,
claim, damage, liability or action; provided, however, that the indemnity
agreement contained in this Section 1.8(a) shall not apply to amounts paid in
settlement of any such loss, claim, damage, liability or action if such
settlement is effected without the written consent of the Company, which shall
not be unreasonably withheld, nor shall the Company be liable under this Section
1.8(a) to such a holder, underwriter or controlling person for any such loss,
claim, damage, liability or action to the extent that it arises out of, or is
based upon, an untrue statement or allegedly untrue statement or omission or
alleged omission made in connection with such registration statement,
preliminary prospectus, final prospectus, or amendments or supplements thereto,
in reliance upon and in conformity with information furnished in writing
expressly for use in connection with such registration by such holder, the
Company will reimburse each such holder for any legal or other expenses
reasonably incurred by each such holder in connection with investigating or
defending any such loss, claim, damage, liability or action.
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(b) To the extent permitted by law, each
holder selling Registrable Securities pursuant to this Section 1 will indemnify
and hold harmless the Company, each of its directors, officers and employees,
each person, if any, who controls the Company within the meaning of the
Securities Act, and any underwriter for the Company (within the meaning of the
Securities Act) against any losses, claims, damages or liabilities to which the
Company or any such person or underwriter may become subject, under the
Securities Act or otherwise, insofar as such losses, claims, damages or
liabilities (or actions in respect thereto) arise out of, or are based upon, any
untrue or allegedly untrue statement of any material fact contained in such
registration statement, including any preliminary prospectus or final prospectus
contained therein or any amendments or supplements thereto, or arise out of or
are based upon the omission or alleged omission to state therein a material fact
required to be stated therein or allegedly necessary to make the statements
therein not misleading, in each case to the extent that such untrue statement or
allegedly untrue statement or omission or alleged omission was made in such
registration statement, preliminary prospectus, or amendments or supplements
thereto in reliance upon and in conformity with information furnished in writing
by such holder expressly for use in connection with such registration; provided,
however, that the indemnity agreement contained in this Section 1.8(b) shall not
apply to amounts paid in settlement of any such loss, claim, damage, liability
or action if such settlement is effected without the written consent of such
holder, which shall not be unreasonably withheld; and each such holder will
reimburse the Company or any such person or underwriter for any legal or other
expenses reasonably incurred by the Company or any such person or underwriter in
connection with investigating or defending any such loss, claim, damage,
liability or action.
(c) Promptly after receipt by an indemnified
party under this Section 1.8 of notice of the commencement of any action, such
indemnified party will, if a claim in respect thereof is to be made against any
indemnifying party under this Section 1.8, notify the indemnifying party in
writing of the commencement thereof and generally summarize such action. The
indemnifying party shall have the right to participate in and to assume the
defense thereof with counsel mutually satisfactory to the parties; provided that
each indemnified party shall have the right to employ its own counsel in any
such case, but the fees and expense of such counsel shall be at the expense of
such indemnified party unless the employment of such counsel shall have been
authorized in writing by the indemnifying party in connection with the defense
of such action or the indemnifying party shall not have employed counsel to have
charge of the defense of such action or such indemnified party or the
indemnified parties shall have reasonably concluded that there may be defenses
available to it or them that are different from or additional to those available
to the indemnifying party (in which case the indemnifying party shall not have
the right to direct the defense of such action on behalf of the indemnified
party or parties) in any of which events the fees and expenses of such counsel
shall be borne by the indemnifying parties. The failure of any indemnified party
to give notice as provided herein shall not relieve the indemnifying party of
its obligations under this Section 1.8, except to the extent that the
indemnifying party is actually and materially prejudiced by such failure to give
notice.
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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
paragraph, Market Price shall be calculated as the average of the Market Prices
for each of the ten (10) trading days preceding the date which the form of
election attached hereto is deemed to have been sent to the Company ("Notice
Date").
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3.4. Definition of Market Price. As used herein, the
phrase "Market Price" at any date shall be deemed to be (i) if the principal
trading market for such securities is an exchange, the last reported sale price,
as officially reported on any consolidated tape, (ii) if the principal market
for such securities is the over-the-counter market, the closing bid price on
such date as reported by Nasdaq or, if there is no closing bid price reported on
Nasdaq or if the security is not quoted on Nasdaq, then the high bid price as
set forth in the National Quotation Bureau sheet listing such securities for
such day. Notwithstanding the foregoing, if there is no reported closing price
or high bid price, as the case may be, on the date next preceding the event
requiring an adjustment hereunder, then the Market Price shall be determined as
of the latest date prior to such day for which such closing price or high bid
price is available, or if the securities are not quoted on Nasdaq, as determined
in good faith by resolution of the Board of Directors of the Company, based on
the best information available to it.
3.5. Company to Reaffirm Obligations. The Company will,
at the time of any exercise of this Warrant, upon the request of the holder
hereof, acknowledge in writing its continuing obligation to afford to such
holder any rights (including, without limitation, any right to registration of
the shares of Common Stock or Other Securities issued upon such exercise) to
which such holder shall continue to be entitled after such exercise in
accordance with the provisions of this Warrant, provided that if the holder of
this Warrant shall fail to make any such request, such failure shall not affect
the continuing obligation of the Company to afford such holder any such rights.
3.6 Redemption. The Warrant and the Common Stock issued
upon the exercise of the Warrant shall be subject to a put option by JRP (the
"Put Option"). JRP, in its sole discretion, shall have the right and option to
have the Warrant redeemed by the Company at the greater of: (i) $100,000.00 or
(ii) the difference between the Purchase Price and the then current Fair Market
Value (the "Warrant Put Price"); and JRP, 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) $100,000.00 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 JRP 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 JRP of written notice to the
Company of JRP's exercise of the Put Option (the "Put Notice"), the Company
shall pay to JRP the Put Price in cash.
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JRP's Put option shall not be exercisable (except as
described below) until the earlier of: (x) thirteen (13) months following a
registration of the Common Stock by filing a registration statement in
compliance with the Securities Act; or (y) January 31, 2000; provided, however,
that JRP agrees to provide the Company notice six months prior to the exercise
of the Put Option, which notice shall be non-binding on JRP.
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
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(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.
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.
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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 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.
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7.3. Rights and Options. Except as provided in Section
7.4, in case the Company shall grant any rights or options to subscribe for,
purchase or otherwise acquire Common Stock after the Original Issue Date, there
shall be determined the price per share for which Common Stock is issuable upon
the exercise of such rights or options, such determination to be made by
dividing (a) the total amount, if any, received or receivable by the Company as
consideration for the granting of such rights or options, plus the minimum
aggregate amount of additional consideration payable to the Company upon the
exercise of such rights or options, by (b) the maximum number of shares of
Common Stock of the Company issuable upon the exercise of such rights or
options.
If the price per share so determined shall be
less than the applicable Purchase Price, then the granting of such rights or
options shall be deemed to be an issue or sale for cash (as of the date of the
granting of such rights or options) of such maximum number of shares of Common
Stock at the price per share so determined, provided that, if such rights or
options shall by their terms provide for an increase or increases, with the
passage of time, in the amount of additional consideration payable to the
Company upon the exercise thereof, the adjusted purchase price per share shall,
forthwith upon any such increase becoming effective, be readjusted to reflect
the same, and provided, further, that upon the expiration of such rights or
options, if any thereof shall not have been exercised, the adjusted Purchase
Price shall forthwith be readjusted and thereafter be the price which it would
have been had an adjustment been made on the basis that the only shares of
Common Stock so issued or sold were those issued or sold upon the exercise of
such rights or options and that they were issued or sold for the consideration
actually received by the Company upon such exercise, plus the consideration, if
any, actually received by the Company for the granting of all such rights or
options, whether or not exercised.
7.4. Exceptions. The provisions of Sections 7.1, 7.2
and 7.3 do not apply to (i) the exercise of any Warrant,(ii) the exercise of any
right or option with respect to which an adjustment shall have been made at the
time of the issuance of such right or option pursuant to Section 7.3, (iii)
conversion or exchange of any Convertible Security with respect to which an
adjustment shall have been made at the time of the issuance of such Convertible
Security pursuant to Section 7.2, (iv) any transaction with respect to which an
adjustment shall have been made pursuant to Sections 5 or 6, and (v) the
issuance or sale of any Common Stock pursuant to the exercise or conversion of
any option, right or Convertible Security that was issued on or prior to the
Original Issue Date.
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.
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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.
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.
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12. Listing on Securities Exchanges; Registration. If the
Company at any time shall list any Common Stock on any national securities
exchange, or interdealer quotation system, and shall register such Common Stock
under the Securities Exchange Act of 1934 (as then in effect, or any similar
statute then in effect), the Company will, at its expense, simultaneously list
on such exchange, upon official notice of issuance upon the exercise of the
Warrant, and maintain such listing of all shares of Common Stock from time to
time issuable upon the exercise of the Warrant; and the Company will so list on
any national securities exchange, will so register and will maintain such
listing of, any Other Securities if and at the time that any securities of like
class or similar type shall be listed on such national securities exchange by
the Company.
13. Exchange of Warrants. Subject to the provisions of Section 2
hereof, upon surrender for exchange of the Warrant, properly endorsed, to the
Company, the Company at its own expense will issue and deliver to or upon the
order of the holder thereof a new Warrant or Warrants of like tenor, in the name
of such holder or as such holder (upon payment by such holder of any applicable
transfer taxes) may direct, calling in the aggregate on the face or faces
thereof for the number of shares of Common Stock called for on the face or faces
of the Warrant or Warrants so surrendered.
14. Replacement of Warrant. Upon receipt of evidence reasonably
satisfactory to the Company of the loss, theft, destruction or mutilation of the
Warrant and, in the case of any such loss, theft or destruction, upon delivery
of an indemnity agreement reasonably satisfactory in form and amount to the
Company or, in the case of any such mutilation, upon surrender and cancellation
of the Warrant, the Company at its expense will execute and deliver, in lieu
thereof, a new Warrant of like tenor.
15. Warrant Agent. The Company may, by written notice to each
holder of a Warrant, appoint an agent having an office in New York, New York,
for the purpose of issuing Common Stock (or Other Securities) upon the exercise
of the Warrants pursuant to Section 3, exchanging Warrants pursuant to Section
13, and replacing Warrants pursuant to Section 14, or any of the foregoing, and
thereafter any such issuance, exchange or replacement, as the case may be, shall
be made at such office by such agent.
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
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(c) until this Warrant is transferred on the
books of the Company, the Company may treat the registered holder hereof as the
absolute owner hereof for all purposes, notwithstanding any notice to the
contrary.
17. Notices, etc. All notices and other communications from the
Company to the holder of this Warrant shall be mailed by first class registered
or certified mail, postage prepaid, at such address as may have been furnished
to the Company in writing by such holder, or, until an address is so furnished,
to and at the address of the last holder of this Warrant who has so furnished an
address to the Company.
18. Miscellaneous. This Warrant and any term hereof may be
changed, waived, discharged or terminated only by an instrument in writing
signed by the party against which enforcement of such change, waiver, discharge
or termination is sought. This Warrant is being delivered in the State of New
York and shall be construed and enforced in accordance with and governed by the
laws of such State. The headings in this Warrant are for purposes of reference
only, and shall not limit or otherwise affect any of the terms hereof.
19. Assignability. Subject to the transfer conditions referred
to in the legend endorsed hereon, this Warrant is fully assignable at any time
upon surrender of this Warrant with a properly executed Assignment (in the form
of Schedule II hereto) at the principal office of the Company.
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<PAGE>
Dated: August ___, 1998
HOME RETAIL HOLDINGS, INC.
By: /s/ Gerald M. Czarnecki
----------------------------
Chairman of the Board
[Corporate Seal]
Attest:
/s/Greg Dukoff
Secretary
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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.
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<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>
Void after August 31, 2003
This Warrant and any shares acquired upon the exercise
of this Warrant have not been registered under the Securities Act of 1933. This
Warrant and such shares may not be sold or transferred in the absence of such
registration or an exemption therefrom under said Act and no transfer of this
Warrant or such shares shall be valid or effective unless and until such
conditions shall have been complied with.
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, JRP Consulting Corp.
("JRP") 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 August 31, 2003 (the
"Expiration Date") 25,386 fully paid and non-assessable shares of Common Stock
of the Company, at the price per share of the Purchase Price. The number and
character of such shares of Common Stock and the Purchase Price as hereinafter
defined are subject to adjustment as provided herein.
This Warrant is one of the Common Stock Purchase Warrants (the
"Warrants") originally issued as of the Original Issue Date (as defined below)
and evidencing the right to purchase an aggregate of 25,386 shares of Common
Stock of the Company (representing approximately 1.25% of the Company's Common
Stock and Class B Common Stock, which constitute all of the outstanding stock of
the Company, 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.
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(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.
(e) The term "Purchase Price" shall be 165% of
the initial price to the public pursuant to which the Company first sells $1
million or more of Common Stock (taking into account gross proceeds, not net
proceeds), as set forth on the cover page of the prospectus contained in the
registration statement pertaining to such offering, as such price may be
adjusted pursuant to the terms hereof.
(f) The terms "registered" and "registration"
refer to a registration effected by filing a registration statement in
compliance with the Securities Act, to permit the disposition of Common Stock
(or Other Securities) issued or issuable upon the exercise of Warrants, and any
post-effective amendments and supplements filed or required to be filed to
permit any such disposition.
(g) The term "Registrable Securities" shall
mean the shares of Common Stock or Other Securities issuable upon exercise of
the Warrants, excluding Common Stock or other Securities that (a) have been
registered under the Securities Act pursuant to an effective registration
statement filed thereunder and disposed of in accordance with such registration
statement or (b) are eligible for sale under Rule 144(k) under the Securities
Act, or have been sold pursuant to Rule 144 under the Securities Act.
(h) The term "Registration Period" shall mean
the period commencing currently with the closing of the Company's first public
offering of $1 million or more of securities registered under the Securities Act
that takes place after the Original Issue Date and ending on the earlier of the
second anniversary thereof and the Expiration Date.
(i) The term "Securities Act" means the
Securities Act of 1933 as the same shall be in effect at the time.
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<PAGE>
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, unless prohibited by the Underwriter, include the
Requested Shares in the registration statement, and, if the proposed sale is to
be underwritten, to cause the underwriters of securities to be sold by the
Company in such registration statement to purchase such Requested Shares. In the
event that any registration pursuant to this Section 1.1 shall be an
underwritten offering of securities of the Company, any request by such holders
pursuant to this Section 1.1 to register the Requested Shares, may, but need
not, specify that such shares are to be included in the underwriting on the same
terms and conditions as the securities, if any, otherwise being sold through
underwriters under such registration. In the event of an underwritten offering
of securities of the Company, such notice shall also specify as to whether such
holder of Registrable Securities desires that any of such Requested Shares to be
included in any such registration statement be subject to any over-allotment
option granted the underwriters of such offering. No holder shall be required to
have its Requested Shares be part of any underwritten offering and/or subject to
any over-allotment option granted any underwriter by the Company.
Notwithstanding the foregoing, if the managing underwriter or underwriters shall
inform the Company of its opinion, at least 15 days prior to the date that the
registration statement becomes effective, that part or all of the Requested
Shares be excluded from the registration statement on the ground that the
inclusion of such Requested Shares will adversely affect the orderly sales and
distribution of the Common Stock being sold, the Company shall include all
securities to be sold by holders, including the Company, which have the right to
require that their securities be included in the registration on a pro rata
basis. If the underwriters agree to purchase any of the Requested Shares
beneficially owned by any holder who has agreed that such Requested Shares shall
be sold pursuant to the underwritten offering or pursuant to the exercise of any
over-allotment option as described above, such holders will enter into a
reasonably customary underwriting agreement with the underwriters and will sell
such Requested Shares to the underwriters unless, and except to the extent that,
upon written notice to the Company and the managing underwriter or underwriters
at least two days prior to the effective date of the registration statement, any
such holder withdraws any portion of such Requested Shares. If the underwriters
elect to purchase less than all the Requested Shares beneficially owned by
holders who have agreed that such Requested Shares shall be sold pursuant to the
underwritten offering or pursuant to the exercise of any over-allotment option,
the underwriters shall purchase such Requested Shares on a pro rata basis among
the Requested Shares that were included in the timely requests from holders of
Registrable Securities under this subsection and the Requested Shares requested
to be included in the registration statement by other stockholders holding
registration rights and who have requested that such shares be sold pursuant to
the underwritten offering or pursuant to the exercise of an over-allotment
option. Notwithstanding the foregoing, the Company may withdraw any registration
statement referred to in this Section 1 without any liability to the holders of
Registrable Securities.
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<PAGE>
1.2. Market Standoff. Each holder of Registrable
Securities agrees that if the managing underwriter or underwriters of the
offering contemplated by Section 1.1 so request, such holder shall not effect
any public sale or distribution of any Registrable Securities being registered
thereunder or of any securities convertible into or exchangeable or exercisable
for such Registrable Securities being registered thereunder for a period equal
to the lesser of (x) the period management of the Company has agreed to lockup
and (y) 90 days after the effective date of the registration statement filed in
connection with the public offering.
1.3. Obligations of the Company. When required under
Section 1.1 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; provided,
however, that the Company shall not be required in connection therewith or as a
condition thereto to qualify to do business or to file a general consent to
service of process in any such states or jurisdictions.
(d) Cause all securities covered by such
registration statement to be registered with or approved by such other federal
or state governmental agencies or authorities as may be necessary in the opinion
of counsel to the Company and counsel to the seller or sellers of securities to
enable the seller or sellers thereof to consummate the disposition of such
securities.
(e) Notify each seller of securities covered
by such registration statement at any time when a prospectus relating thereto is
required to be delivered under the Securities Act, upon discovery that, or upon
the happening of any event as a result of which, the prospectus included in such
registration statement, as then in effect, includes an untrue statement of a
material fact or omits to state any material fact required to be stated therein
or necessary to make the statements therein not misleading, in the light of the
circumstances under which they were made, and at the request of any such seller
promptly prepare and furnish to it a reasonable number of copies of a supplement
to or an amendment of such prospectus as may be necessary so that, as thereafter
delivered to the purchasers of such securities, such prospectus shall not
include an untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statement therein not
misleading in the light of the circumstances under which they were made.
4
<PAGE>
(f) Comply with all applicable rules and
regulations of the SEC, make timely filing of all reports pursuant to the
Securities Exchange Act of 1934, as amended ("Exchange Act") at such time as the
Company's securities are registered under the Exchange Act, and make available
to its securities holders, as soon as reasonably practicable, an earnings
statement covering the period of at least twelve months, but not more than
eighteen months, beginning with the first full calendar month after the
effective date of such registration statement, which earnings statement shall
satisfy the provisions of Section 11(a) of the Securities Act and Rule 158
promulgated thereunder, and promptly furnish to each such seller of securities a
copy of such earnings statement.
(g) Use its best efforts to list all
securities covered by such registration statement on any national securities
exchange on which securities of the same class and, if applicable, series,
covered by such registration statement are then listed or on the Nasdaq Stock
Market ("Nasdaq") if the securities are reported on Nasdaq.
1.4. Information to be Furnished. It shall be a
condition precedent to the obligation of the Company to take any action pursuant
to this Section 1 that the holders of Registrable Securities promptly furnish to
the Company such information regarding them, the securities of the Company held
by them and the intended method of disposition of such securities as the Company
shall reasonably request and as shall be required in connection with the
Company's obligations under this Section 1.
1.5. Underwritten Offerings.
(a) Incidental Underwritten Offerings. If the
Company proposes to register any of its securities under the Securities Act as
contemplated by Section 1.1 and such securities are to be distributed by or
through one or more underwriters, the Company will, if requested by any holder
of Registrable Securities, use its best efforts to arrange for such underwriters
to include all the securities to be offered and sold by such requesting holder
among the securities of the Company to be distributed by such underwriters. The
holders of Registrable Securities to be distributed by such underwriters shall
be parties to the underwriting agreement between the Company and such
underwriters and may, at their option, require that any or all of the
representations and warranties by, and the other agreements on the part of, the
Company to and for the benefit of such underwriters shall also be made to and
for the benefit of such holders of Registrable Securities and that any or all of
the conditions precedent to the obligations of such underwriters under such
underwriting agreement be conditions precedent to the obligations of such
holders of Registrable Securities. Any such requesting holder of Registrable
Securities shall not be required to make any representations or warranties to or
agreements with the Company other than representations, warranties or agreements
regarding such holder, such holder's securities and such holder's intended
method of distribution or any other representations required by applicable law.
5
<PAGE>
1.6. Notice. In connection with the preparation and
filing of each registration statement under the Securities Act pursuant to this
Agreement, the Company shall promptly notify the holders of Registrable
Securities included in the Registration Statement and their respective counsel
of any stop order issued or threatened by the SEC and take all reasonable
actions required to prevent the entry of such stop order or to remove it if
entered.
1.7. Registration Expenses. All expenses incurred by
the Company and the holders of Registrable Securities in complying with this
Section 1, including, without limitation, all registration, NASD and filing
fees, duplication and printing expenses, travel expenses, fees and disbursements
of counsel for the Company or its independent public accountants, reasonable
fees and disbursements of counsel for holders of securities included in a
Company registration statement and the expense of any special audits incident to
or required by any such registration shall be paid by the Company, except that
each holder of Registrable Securities shall pay underwriting discounts and
commissions attributable to such holder's shares, and transfer taxes on shares
held by such holder.
1.8. Indemnification. In the event any of the Common
Stock of a holder of Registrable Securities is included in a registration
statement pursuant to this Section 1:
6
<PAGE>
(a) To the extent permitted by law, the
Company will indemnify and hold harmless each holder of Registrable Securities
(and its officers, directors, employees, partners and affiliates) selling
Registrable Securities, any underwriter (as defined in the Securities Act) with
respect to the Registrable Securities, and each person, if any, who controls
such holder or underwriter within the meaning of the Securities Act, against any
losses, claims, damages or liabilities, to which they may become subject under
the Securities Act or otherwise, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based upon any
untrue or allegedly untrue statement of any material fact contained in such
registration statement, including any preliminary prospectus or final prospectus
contained therein or any amendments or supplements thereto, or arise out of or
are based upon the omission or alleged omission to state therein a material fact
required to be stated therein or allegedly necessary to make the statements
therein not misleading; and will reimburse each such holder of Registrable
Securities (and its officers, directors, employees, partners and affiliates),
underwriter or controlling person for any legal or other expenses reasonably
incurred by them in connection with investigating or defending any such loss,
claim, damage, liability or action; provided, however, that the indemnity
agreement contained in this Section 1.8(a) shall not apply to amounts paid in
settlement of any such loss, claim, damage, liability or action if such
settlement is effected without the written consent of the Company, which shall
not be unreasonably withheld, nor shall the Company be liable under this Section
1.8(a) to such a holder, underwriter or controlling person for any such loss,
claim, damage, liability or action to the extent that it arises out of, or is
based upon, an untrue statement or allegedly untrue statement or omission or
alleged omission made in connection with such registration statement,
preliminary prospectus, final prospectus, or amendments or supplements thereto,
in reliance upon and in conformity with information furnished in writing
expressly for use in connection with such registration by such holder, the
Company will reimburse each such holder for any legal or other expenses
reasonably incurred by each such holder in connection with investigating or
defending any such loss, claim, damage, liability or action.
(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.
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(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.
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.
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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
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.
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3.6 Redemption. The Warrant and the Common Stock issued
upon the exercise of the Warrant shall be subject to a put option by JRP (the
"Put Option"). JRP, in its sole discretion, shall have the right and option to
have the Warrant redeemed by the Company at the greater of: (i) $100,000.00 or
(ii) the difference between the Purchase Price and the then current Fair Market
Value (the "Warrant Put Price"); and JRP, 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) $100,000.00 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 JRP 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 JRP of written notice to the
Company of JRP's exercise of the Put Option (the "Put Notice"), the Company
shall pay to JRP the Put Price in cash.
JRP's Put option shall not be exercisable (except as
described below) until the earlier of: (x) thirteen (13) months following a
registration of the Common Stock by filing a registration statement in
compliance with the Securities Act; or (y) January 31, 2000; provided, however,
that JRP agrees to provide the Company notice six months prior to the exercise
of the Put Option, which notice shall be non-binding on JRP.
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
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(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.
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.
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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 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.
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7.3. Rights and Options. Except as provided in Section
7.4, in case the Company shall grant any rights or options to subscribe for,
purchase or otherwise acquire Common Stock after the Original Issue Date, there
shall be determined the price per share for which Common Stock is issuable upon
the exercise of such rights or options, such determination to be made by
dividing (a) the total amount, if any, received or receivable by the Company as
consideration for the granting of such rights or options, plus the minimum
aggregate amount of additional consideration payable to the Company upon the
exercise of such rights or options, by (b) the maximum number of shares of
Common Stock of the Company issuable upon the exercise of such rights or
options.
If the price per share so determined shall be
less than the applicable Purchase Price, then the granting of such rights or
options shall be deemed to be an issue or sale for cash (as of the date of the
granting of such rights or options) of such maximum number of shares of Common
Stock at the price per share so determined, provided that, if such rights or
options shall by their terms provide for an increase or increases, with the
passage of time, in the amount of additional consideration payable to the
Company upon the exercise thereof, the adjusted purchase price per share shall,
forthwith upon any such increase becoming effective, be readjusted to reflect
the same, and provided, further, that upon the expiration of such rights or
options, if any thereof shall not have been exercised, the adjusted Purchase
Price shall forthwith be readjusted and thereafter be the price which it would
have been had an adjustment been made on the basis that the only shares of
Common Stock so issued or sold were those issued or sold upon the exercise of
such rights or options and that they were issued or sold for the consideration
actually received by the Company upon such exercise, plus the consideration, if
any, actually received by the Company for the granting of all such rights or
options, whether or not exercised.
7.4. Exceptions. The provisions of Sections 7.1, 7.2
and 7.3 do not apply to (i) the exercise of any Warrant,(ii) the exercise of any
right or option with respect to which an adjustment shall have been made at the
time of the issuance of such right or option pursuant to Section 7.3, (iii)
conversion or exchange of any Convertible Security with respect to which an
adjustment shall have been made at the time of the issuance of such Convertible
Security pursuant to Section 7.2, (iv) any transaction with respect to which an
adjustment shall have been made pursuant to Sections 5 or 6, and (v) the
issuance or sale of any Common Stock pursuant to the exercise or conversion of
any option, right or Convertible Security that was issued on or prior to the
Original Issue Date.
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.
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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.
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.
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12. Listing on Securities Exchanges; Registration. If the
Company at any time shall list any Common Stock on any national securities
exchange, or interdealer quotation system, and shall register such Common Stock
under the Securities Exchange Act of 1934 (as then in effect, or any similar
statute then in effect), the Company will, at its expense, simultaneously list
on such exchange, upon official notice of issuance upon the exercise of the
Warrant, and maintain such listing of all shares of Common Stock from time to
time issuable upon the exercise of the Warrant; and the Company will so list on
any national securities exchange, will so register and will maintain such
listing of, any Other Securities if and at the time that any securities of like
class or similar type shall be listed on such national securities exchange by
the Company.
13. Exchange of Warrants. Subject to the provisions of Section 2
hereof, upon surrender for exchange of the Warrant, properly endorsed, to the
Company, the Company at its own expense will issue and deliver to or upon the
order of the holder thereof a new Warrant or Warrants of like tenor, in the name
of such holder or as such holder (upon payment by such holder of any applicable
transfer taxes) may direct, calling in the aggregate on the face or faces
thereof for the number of shares of Common Stock called for on the face or faces
of the Warrant or Warrants so surrendered.
14. Replacement of Warrant. Upon receipt of evidence reasonably
satisfactory to the Company of the loss, theft, destruction or mutilation of the
Warrant and, in the case of any such loss, theft or destruction, upon delivery
of an indemnity agreement reasonably satisfactory in form and amount to the
Company or, in the case of any such mutilation, upon surrender and cancellation
of the Warrant, the Company at its expense will execute and deliver, in lieu
thereof, a new Warrant of like tenor.
15. Warrant Agent. The Company may, by written notice to each
holder of a Warrant, appoint an agent having an office in New York, New York,
for the purpose of issuing Common Stock (or Other Securities) upon the exercise
of the Warrants pursuant to Section 3, exchanging Warrants pursuant to Section
13, and replacing Warrants pursuant to Section 14, or any of the foregoing, and
thereafter any such issuance, exchange or replacement, as the case may be, shall
be made at such office by such agent.
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
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(c) until this Warrant is transferred on the
books of the Company, the Company may treat the registered holder hereof as the
absolute owner hereof for all purposes, notwithstanding any notice to the
contrary.
17. Notices, etc. All notices and other communications from the
Company to the holder of this Warrant shall be mailed by first class registered
or certified mail, postage prepaid, at such address as may have been furnished
to the Company in writing by such holder, or, until an address is so furnished,
to and at the address of the last holder of this Warrant who has so furnished an
address to the Company.
18. Miscellaneous. This Warrant and any term hereof may be
changed, waived, discharged or terminated only by an instrument in writing
signed by the party against which enforcement of such change, waiver, discharge
or termination is sought. This Warrant is being delivered in the State of New
York and shall be construed and enforced in accordance with and governed by the
laws of such State. The headings in this Warrant are for purposes of reference
only, and shall not limit or otherwise affect any of the terms hereof.
19. Assignability. Subject to the transfer conditions referred
to in the legend endorsed hereon, this Warrant is fully assignable at any time
upon surrender of this Warrant with a properly executed Assignment (in the form
of Schedule II hereto) at the principal office of the Company.
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Dated: August ___, 1998
HOME RETAIL HOLDINGS, INC.
By: /s/Gerald M. Czarnecki
Chairman of the Board
[Corporate Seal]
Attest:
/s/ Greg E. Dukoff _______
Secretary
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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.
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SCHEDULE II
FORM OF ASSIGNMENT
(To be signed only upon transfer of Warrant)
For value received, the undersigned hereby sells, assigns and
transfers unto ______________ the right represented by the within Warrant to
purchase _____________shares of Common Stock of 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)
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Void after August 31, 2003
This Warrant and any shares acquired upon the exercise
of this Warrant have not been registered under the Securities Act of 1933. This
Warrant and such shares may not be sold or transferred in the absence of such
registration or an exemption therefrom under said Act and no transfer of this
Warrant or such shares shall be valid or effective unless and until such
conditions shall have been complied with.
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, Laux, Holmes & Company
("LHC") 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 August 31, 2003 (the
"Expiration Date") 23,737 fully paid and non-assessable shares of Common Stock
of the Company, at the price per share of the Purchase Price. The number and
character of such shares of Common Stock and the Purchase Price as hereinafter
defined are subject to adjustment as provided herein.
This Warrant is one of the Common Stock Purchase Warrants (the
"Warrants") originally issued as of the Original Issue Date (as defined below)
and evidencing the right to purchase an aggregate of 23,737 shares of Common
Stock of the Company (representing approximately 1.25% of the Company's Common
Stock and Class B Common Stock, which constitute all of the outstanding stock of
the Company, on a fully diluted basis immediately prior to 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.
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(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.
(e) The term "Purchase Price" shall be 165% of
the initial price to the public pursuant to which the Company first sells $1
million or more of Common Stock (taking into account gross proceeds, not net
proceeds), as set forth on the cover page of the prospectus contained in the
registration statement pertaining to such offering, as such price may be
adjusted pursuant to the terms hereof.
(f) The terms "registered" and "registration"
refer to a registration effected by filing a registration statement in
compliance with the Securities Act, to permit the disposition of Common Stock
(or Other Securities) issued or issuable upon the exercise of Warrants, and any
post-effective amendments and supplements filed or required to be filed to
permit any such disposition.
(g) The term "Registrable Securities" shall
mean the shares of Common Stock or Other Securities issuable upon exercise of
the Warrants, excluding Common Stock or other Securities that (a) have been
registered under the Securities Act pursuant to an effective registration
statement filed thereunder and disposed of in accordance with such registration
statement or (b) are eligible for sale under Rule 144(k) under the Securities
Act, or have been sold pursuant to Rule 144 under the Securities Act.
(h) The term "Registration Period" shall mean
the period commencing concurrently with the closing of the Company's first
public offering of $1 million or more of securities registered under the
Securities Act that takes place after the Original Issue Date and ending on the
earlier of the second anniversary thereof and the Expiration Date.
(i) The term "Securities Act" means the
Securities Act of 1933 as the same
shall be in effect at the time.
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<PAGE>
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, unless prohibited by the Underwriter, include the
Requested Shares in the registration statement, and, if the proposed sale is to
be underwritten, to cause the underwriters of securities to be sold by the
Company in such registration statement to purchase such Requested Shares. In the
event that any registration pursuant to this Section 1.1 shall be an
underwritten offering of securities of the Company, any request by such holders
pursuant to this Section 1.1 to register the Requested Shares, may, but need
not, specify that such shares are to be included in the underwriting on the same
terms and conditions as the securities, if any, otherwise being sold through
underwriters under such registration. In the event of an underwritten offering
of securities of the Company, such notice shall also specify as to whether such
holder of Registrable Securities desires that any of such Requested Shares to be
included in any such registration statement be subject to any over-allotment
option granted the underwriters of such offering. No holder shall be required to
have its Requested Shares be part of any underwritten offering and/or subject to
any over-allotment option granted any underwriter by the Company.
Notwithstanding the foregoing, if the managing underwriter or underwriters shall
inform the Company of its opinion, at least 15 days prior to the date that the
registration statement becomes effective, that part or all of the Requested
Shares be excluded from the registration statement on the ground that the
inclusion of such Requested Shares will adversely affect the orderly sales and
distribution of the Common Stock being sold, the Company shall include all
securities to be sold by holders, including the Company, which have the right to
require that their securities be included in the registration on a pro rata
basis. If the underwriters agree to purchase any of the Requested Shares
beneficially owned by any holder who has agreed that such Requested Shares shall
be sold pursuant to the underwritten offering or pursuant to the exercise of any
over-allotment option as described above, such holders will enter into a
reasonably customary underwriting agreement with the underwriters and will sell
such Requested Shares to the underwriters unless, and except to the extent that,
upon written notice to the Company and the managing underwriter or underwriters
at least two days prior to the effective date of the registration statement, any
such holder withdraws any portion of such Requested Shares. If the underwriters
elect to purchase less than all the Requested Shares beneficially owned by
holders who have agreed that such Requested Shares shall be sold pursuant to the
underwritten offering or pursuant to the exercise of any over-allotment option,
the underwriters shall purchase such Requested Shares on a pro rata basis among
the Requested Shares that were included in the timely requests from holders of
Registrable Securities under this subsection and the Requested Shares requested
to be included in the registration statement by other stockholders holding
registration rights and who have requested that such shares be sold pursuant to
the underwritten offering or pursuant to the exercise of an over-allotment
option. Notwithstanding the foregoing, the Company may withdraw any registration
statement referred to in this Section 1 without any liability to the holders of
Registrable Securities.
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<PAGE>
1.2. Market Standoff. Each holder of Registrable
Securities agrees that if the managing underwriter or underwriters of the
offering contemplated by Section 1.1 so request, such holder shall not effect
any public sale or distribution of any Registrable Securities being registered
thereunder or of any securities convertible into or exchangeable or exercisable
for such Registrable Securities being registered thereunder for a period equal
to the lesser of (x) the period management of the Company has agreed to lockup
and (y) 90 days after the effective date of the registration statement filed in
connection with the public offering.
1.3. Obligations of the Company. When required under
Section 1.1 effect the registration of any Registrable Securities, the Company
shall, as expeditiously as is reasonably possible:
(a) Prepare and file with the SEC a
registration statement with respect to such Registrable Securities and such
amendments and supplements to such registration statement and the prospectus
used in connection therewith as may be necessary to exercise the Company's best
efforts to cause such registration statement to become effective at the earliest
practicable date and to remain effective for a period of 90 days or until the
holders and any underwriter purchasing such Registrable Securities have sold or
otherwise disposed of the Registrable Securities registered in such registration
statement, whichever is earlier.
(b) Furnish to each holder selling Registrable
Securities such number of
copies of conformed copies of such registration statement and of each such
amendment and supplement thereto (with all exhibits) and such number of copies
of the prospectus, including a preliminary prospectus, in conformity with the
requirements of the Securities Act, and such other documents as such holder may
reasonably request in order to facilitate the disposition of Registrable
Securities to be sold by such holder pursuant to such registration statement.
(c) Exercise the Company's best efforts to
register and qualify the
Registrable Securities covered by such registration statement under other
securities laws or State Securities Laws of such states or jurisdictions where a
self-executing exemption is not available and as any seller of such Registrable
Securities shall reasonably request; provided, however, that the Company shall
not be required in connection therewith or as a condition thereto to qualify to
do business or to file a general consent to service of process in any such
states or jurisdictions.
(d) Cause all securities covered by such
registration statement to be registered with or approved by such other federal
or state governmental agencies or authorities as may be necessary in the opinion
of counsel to the Company and counsel to the seller or sellers of securities to
enable the seller or sellers thereof to consummate the disposition of such
securities.
(e) Notify each seller of securities covered
by such registration statement at any time when a prospectus relating thereto is
required to be delivered under the Securities Act, upon discovery that, or upon
the happening of any event as a result of which, the prospectus included in such
registration statement, as then in effect, includes an untrue statement of a
material fact or omits to state any material fact required to be stated therein
or necessary to make the statements therein not misleading, in the light of the
circumstances under which they were made, and at the request of any such seller
promptly prepare and furnish to it a reasonable number of copies of a supplement
to or an amendment of such prospectus as may be necessary so that, as thereafter
delivered to the purchasers of such securities, such prospectus shall not
include an untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statement therein not
misleading in the light of the circumstances under which they were made.
4
<PAGE>
(f) Comply with all applicable rules and
regulations of the SEC, make timely filing of all reports pursuant to the
Securities Exchange Act of 1934, as amended ("Exchange Act") at such time as the
Company's securities are registered under the Exchange Act, and make available
to its securities holders, as soon as reasonably practicable, an earnings
statement covering the period of at least twelve months, but not more than
eighteen months, beginning with the first full calendar month after the
effective date of such registration statement, which earnings statement shall
satisfy the provisions of Section 11(a) of the Securities Act and Rule 158
promulgated thereunder, and promptly furnish to each such seller of securities a
copy of such earnings statement.
(g) Use its best efforts to list all
securities covered by such registration statement on any national securities
exchange on which securities of the same class and, if applicable, series,
covered by such registration statement are then listed or on the Nasdaq Stock
Market ("Nasdaq") if the securities are reported on Nasdaq.
1.4. Information to be Furnished. It shall be a
condition precedent to the obligation of the Company to take any action pursuant
to this Section 1 that the holders of Registrable Securities promptly furnish to
the Company such information regarding them, the securities of the Company held
by them and the intended method of disposition of such securities as the Company
shall reasonably request and as shall be required in connection with the
Company's obligations under this Section 1.
1.5. Underwritten Offerings.
(a) Incidental Underwritten Offerings. If the
Company proposes to register any of its securities under the Securities Act as
contemplated by Section 1.1 and such securities are to be distributed by or
through one or more underwriters, the Company will, if requested by any holder
of Registrable Securities, use its best efforts to arrange for such underwriters
to include all the securities to be offered and sold by such requesting holder
among the securities of the Company to be distributed by such underwriters. The
holders of Registrable Securities to be distributed by such underwriters shall
be parties to the underwriting agreement between the Company and such
underwriters and may, at their option, require that any or all of the
representations and warranties by, and the other agreements on the part of, the
Company to and for the benefit of such underwriters shall also be made to and
for the benefit of such holders of Registrable Securities and that any or all of
the conditions precedent to the obligations of such underwriters under such
underwriting agreement be conditions precedent to the obligations of such
holders of Registrable Securities. Any such requesting holder of Registrable
Securities shall not be required to make any representations or warranties to or
agreements with the Company other than representations, warranties or agreements
regarding such holder, such holder's securities and such holder's intended
method of distribution or any other representations required by applicable law.
5
<PAGE>
1.6. Notice. In connection with the preparation and
filing of each registration statement under the Securities Act pursuant to this
Agreement, the Company shall promptly notify the holders of Registrable
Securities included in the Registration Statement and their respective counsel
of any stop order issued or threatened by the SEC and take all reasonable
actions required to prevent the entry of such stop order or to remove it if
entered.
1.7. Registration Expenses. All expenses incurred by
the Company and the holders of Registrable Securities in complying with this
Section 1, including, without limitation, all registration, NASD and filing
fees, duplication and printing expenses, travel expenses, fees and disbursements
of counsel for the Company or its independent public accountants, reasonable
fees and disbursements of counsel for holders of securities included in a
Company registration statement and the expense of any special audits incident to
or required by any such registration shall be paid by the Company, except that
each holder of Registrable Securities shall pay underwriting discounts and
commissions attributable to such holder's shares, and transfer taxes on shares
held by such holder.
1.8. Indemnification. In the event any of the Common
Stock of a holder of Registrable Securities is included in a registration
statement pursuant to this Section 1:
(a) To the extent permitted by law, the Company will indemnify and hold harmless
each holder of Registrable Securities (and its officers, directors, employees,
partners and affiliates) selling Registrable Securities, any underwriter (as
defined in the Securities Act) with respect to the Registrable Securities, and
each person, if any, who controls such holder or underwriter within the meaning
of the Securities Act, against any losses, claims, damages or liabilities, to
which they may become subject under the Securities Act or otherwise, insofar as
such losses, claims, damages or liabilities (or actions in respect thereof)
arise out of or are based upon any untrue or allegedly untrue statement of any
material fact contained in such registration statement, including any
preliminary prospectus or final prospectus contained therein or any amendments
or supplements thereto, or arise out of or are based upon the omission or
alleged omission to state therein a material fact required to be stated therein
or allegedly necessary to make the statements therein not misleading; and will
reimburse each such holder of Registrable Securities (and its officers,
directors, employees, partners and affiliates), underwriter or controlling
person for any legal or other expenses reasonably incurred by them in connection
with investigating or defending any such loss, claim, damage, liability or
action; provided, however, that the indemnity agreement contained in this
Section 1.8(a) shall not apply to amounts paid in settlement of any such loss,
claim, damage, liability or action if such settlement is effected without the
written consent of the Company, which shall not be unreasonably withheld, nor
shall the Company be liable under this Section 1.8(a) to such a holder,
underwriter or controlling person for any such loss, claim, damage, liability or
action to the extent that it arises out of, or is based upon, an untrue
statement or allegedly untrue statement or omission or alleged omission made in
connection with such registration statement, preliminary prospectus, final
prospectus, or amendments or supplements thereto, in reliance upon and in
conformity with information furnished in writing expressly for use in connection
with such registration by such holder, the Company will reimburse each such
holder for any legal or other expenses reasonably incurred by each such holder
in connection with investigating or defending any such loss, claim, damage,
liability or action.
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(b) To the extent permitted by law, each
holder selling Registrable Securities pursuant to this Section 1 will indemnify
and hold harmless the Company, each of its directors, officers and employees,
each person, if any, who controls the Company within the meaning of the
Securities Act, and any underwriter for the Company (within the meaning of the
Securities Act) against any losses, claims, damages or liabilities to which the
Company or any such person or underwriter may become subject, under the
Securities Act or otherwise, insofar as such losses, claims, damages or
liabilities (or actions in respect thereto) arise out of, or are based upon, any
untrue or allegedly untrue statement of any material fact contained in such
registration statement, including any preliminary prospectus or final prospectus
contained therein or any amendments or supplements thereto, or arise out of or
are based upon the omission or alleged omission to state therein a material fact
required to be stated therein or allegedly necessary to make the statements
therein not misleading, in each case to the extent that such untrue statement or
allegedly untrue statement or omission or alleged omission was made in such
registration statement, preliminary prospectus, or amendments or supplements
thereto in reliance upon and in conformity with information furnished in writing
by such holder expressly for use in connection with such registration; provided,
however, that the indemnity agreement contained in this Section 1.8(b) shall not
apply to amounts paid in settlement of any such loss, claim, damage, liability
or action if such settlement is effected without the written consent of such
holder, which shall not be unreasonably withheld; and each such holder will
reimburse the Company or any such person or underwriter for any legal or other
expenses reasonably incurred by the Company or any such person or underwriter in
connection with investigating or defending any such loss, claim, damage,
liability or action.
(c) Promptly after receipt by an indemnified
party under this Section 1.8 of notice of the commencement of any action, such
indemnified party will, if a claim in respect thereof is to be made against any
indemnifying party under this Section 1.8, notify the indemnifying party in
writing of the commencement thereof and generally summarize such action. The
indemnifying party shall have the right to participate in and to assume the
defense thereof with counsel mutually satisfactory to the parties; provided that
each indemnified party shall have the right to employ its own counsel in any
such case, but the fees and expense of such counsel shall be at the expense of
such indemnified party unless the employment of such counsel shall have been
authorized in writing by the indemnifying party in connection with the defense
of such action or the indemnifying party shall not have employed counsel to have
charge of the defense of such action or such indemnified party or the
indemnified parties shall have reasonably concluded that there may be defenses
available to it or them that are different from or additional to those available
to the indemnifying party (in which case the indemnifying party shall not have
the right to direct the defense of such action on behalf of the indemnified
party or parties) in any of which events the fees and expenses of such counsel
shall be borne by the indemnifying parties. The failure of any indemnified party
to give notice as provided herein shall not relieve the indemnifying party of
its obligations under this Section 1.8, except to the extent that the
indemnifying party is actually and materially prejudiced by such failure to give
notice.
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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
paragraph, Market Price shall be calculated as the average of the Market Prices
for each of the ten (10) trading days preceding the date which the form of
election attached hereto is deemed to have been sent to the Company ("Notice
Date").
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3.4. Definition of Market Price. As used herein, the
phrase "Market Price" at any date shall be deemed to be (i) if the principal
trading market for such securities is an exchange, the last reported sale price,
as officially reported on any consolidated tape, (ii) if the principal market
for such securities is the over-the-counter market, the closing bid price on
such date as reported by Nasdaq or, if there is no closing bid price reported on
Nasdaq or if the security is not quoted on Nasdaq, then the high bid price as
set forth in the National Quotation Bureau sheet listing such securities for
such day. Notwithstanding the foregoing, if there is no reported closing price
or high bid price, as the case may be, on the date next preceding the event
requiring an adjustment hereunder, then the Market Price shall be determined as
of the latest date prior to such day for which such closing price or high bid
price is available, or if the securities are not quoted on Nasdaq, as determined
in good faith by resolution of the Board of Directors of the Company, based on
the best information available to it.
3.5. Company to Reaffirm Obligations. The Company will,
at the time of any exercise of this Warrant, upon the request of the holder
hereof, acknowledge in writing its continuing obligation to afford to such
holder any rights (including, without limitation, any right to registration of
the shares of Common Stock or Other Securities issued upon such exercise) to
which such holder shall continue to be entitled after such exercise in
accordance with the provisions of this Warrant, provided that if the holder of
this Warrant shall fail to make any such request, such failure shall not affect
the continuing obligation of the Company to afford such holder any such rights.
3.6 Redemption. The Warrant and the Common Stock issued
upon the exercise of the Warrant shall be subject to a put option by LHC (the
"Put Option"). LHC, in its sole discretion, shall have the right and option to
have the Warrant redeemed by the Company at the greater of: (i) $100,000.00 or
(ii) the difference between the Purchase Price and the then current Fair Market
Value (the "Warrant Put Price"); and LHC, 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) $100,000.00 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 LHC 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 LHC of written notice to the
Company of LHC's exercise of the Put Option (the "Put Notice"), the Company
shall pay to LHC the Put Price in cash.
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LHC's Put option shall not be exercisable (except as
described below) until the earlier of: (x) thirteen (13) months following a
registration of the Common Stock by filing a registration statement in
compliance with the Securities Act; or (y) January 31, 2000; provided, however,
that LHC agrees to provide the Company notice six months prior to the exercise
of the Put Option, which notice shall be non-binding on LHC.
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
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(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.
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.
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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 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.
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7.3. Rights and Options. Except as provided in Section
7.4, in case the Company shall grant any rights or options to subscribe for,
purchase or otherwise acquire Common Stock after the Original Issue Date, there
shall be determined the price per share for which Common Stock is issuable upon
the exercise of such rights or options, such determination to be made by
dividing (a) the total amount, if any, received or receivable by the Company as
consideration for the granting of such rights or options, plus the minimum
aggregate amount of additional consideration payable to the Company upon the
exercise of such rights or options, by (b) the maximum number of shares of
Common Stock of the Company issuable upon the exercise of such rights or
options.
If the price per share so determined shall be
less than the applicable Purchase Price, then the granting of such rights or
options shall be deemed to be an issue or sale for cash (as of the date of the
granting of such rights or options) of such maximum number of shares of Common
Stock at the price per share so determined, provided that, if such rights or
options shall by their terms provide for an increase or increases, with the
passage of time, in the amount of additional consideration payable to the
Company upon the exercise thereof, the adjusted purchase price per share shall,
forthwith upon any such increase becoming effective, be readjusted to reflect
the same, and provided, further, that upon the expiration of such rights or
options, if any thereof shall not have been exercised, the adjusted Purchase
Price shall forthwith be readjusted and thereafter be the price which it would
have been had an adjustment been made on the basis that the only shares of
Common Stock so issued or sold were those issued or sold upon the exercise of
such rights or options and that they were issued or sold for the consideration
actually received by the Company upon such exercise, plus the consideration, if
any, actually received by the Company for the granting of all such rights or
options, whether or not exercised.
7.4. Exceptions. The provisions of Sections 7.1, 7.2
and 7.3 do not apply to (i) the exercise of any Warrant,(ii) the exercise of any
right or option with respect to which an adjustment shall have been made at the
time of the issuance of such right or option pursuant to Section 7.3, (iii)
conversion or exchange of any Convertible Security with respect to which an
adjustment shall have been made at the time of the issuance of such Convertible
Security pursuant to Section 7.2, (iv) any transaction with respect to which an
adjustment shall have been made pursuant to Sections 5 or 6, and (v) the
issuance or sale of any Common Stock pursuant to the exercise or conversion of
any option, right or Convertible Security that was issued on or prior to the
Original Issue Date.
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.
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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.
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.
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12. Listing on Securities Exchanges; Registration. If the
Company at any time shall list any Common Stock on any national securities
exchange, or interdealer quotation system, and shall register such Common Stock
under the Securities Exchange Act of 1934 (as then in effect, or any similar
statute then in effect), the Company will, at its expense, simultaneously list
on such exchange, upon official notice of issuance upon the exercise of the
Warrant, and maintain such listing of all shares of Common Stock from time to
time issuable upon the exercise of the Warrant; and the Company will so list on
any national securities exchange, will so register and will maintain such
listing of, any Other Securities if and at the time that any securities of like
class or similar type shall be listed on such national securities exchange by
the Company.
13. Exchange of Warrants. Subject to the provisions of Section 2
hereof, upon surrender for exchange of the Warrant, properly endorsed, to the
Company, the Company at its own expense will issue and deliver to or upon the
order of the holder thereof a new Warrant or Warrants of like tenor, in the name
of such holder or as such holder (upon payment by such holder of any applicable
transfer taxes) may direct, calling in the aggregate on the face or faces
thereof for the number of shares of Common Stock called for on the face or faces
of the Warrant or Warrants so surrendered.
14. Replacement of Warrant. Upon receipt of evidence reasonably
satisfactory to the Company of the loss, theft, destruction or mutilation of the
Warrant and, in the case of any such loss, theft or destruction, upon delivery
of an indemnity agreement reasonably satisfactory in form and amount to the
Company or, in the case of any such mutilation, upon surrender and cancellation
of the Warrant, the Company at its expense will execute and deliver, in lieu
thereof, a new Warrant of like tenor.
15. Warrant Agent. The Company may, by written notice to each
holder of a Warrant, appoint an agent having an office in New York, New York,
for the purpose of issuing Common Stock (or Other Securities) upon the exercise
of the Warrants pursuant to Section 3, exchanging Warrants pursuant to Section
13, and replacing Warrants pursuant to Section 14, or any of the foregoing, and
thereafter any such issuance, exchange or replacement, as the case may be, shall
be made at such office by such agent.
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;
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(b) subject to the foregoing, any person in
possession of this Warrant properly endorsed is authorized to represent himself
as absolute owner hereof and is empowered to transfer absolute title hereto by
endorsement and delivery hereof to a bona fide purchaser hereof for value; each
prior taker or owner waives and renounces all of his equities or rights in this
Warrant in favor of each such bona fide purchaser and each such bona fide
purchaser shall acquire absolute title hereto and to all rights represented
hereby; and
(c) until this Warrant is transferred on the
books of the Company, the Company may treat the registered holder hereof as the
absolute owner hereof for all purposes, notwithstanding any notice to the
contrary.
17. Notices, etc. All notices and other communications from the
Company to the holder of this Warrant shall be mailed by first class registered
or certified mail, postage prepaid, at such address as may have been furnished
to the Company in writing by such holder, or, until an address is so furnished,
to and at the address of the last holder of this Warrant who has so furnished an
address to the Company.
18. Miscellaneous. This Warrant and any term hereof may be
changed, waived, discharged or terminated only by an instrument in writing
signed by the party against which enforcement of such change, waiver, discharge
or termination is sought. This Warrant is being delivered in the State of New
York and shall be construed and enforced in accordance with and governed by the
laws of such State. The headings in this Warrant are for purposes of reference
only, and shall not limit or otherwise affect any of the terms hereof.
19. Assignability. Subject to the transfer conditions referred
to in the legend endorsed hereon, this Warrant is fully assignable at any time
upon surrender of this Warrant with a properly executed Assignment (in the form
of Schedule II hereto) at the principal office of the Company.
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Dated: August ___, 1998
HOME RETAIL HOLDINGS, INC.
By: /s/ Gerald M. Czarnecki
----------------------------
[Corporate Seal]
Attest:
/s/ Greg E. Dukoff
- ---------------------------
Secretary
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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.
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SCHEDULE II
FORM OF ASSIGNMENT
(To be signed only upon transfer of Warrant)
For value received, the undersigned hereby sells, assigns and
transfers unto ______________ the right represented by the within Warrant to
purchase _____________shares of Common Stock of 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)
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EXHIBIT 4.11
Void after August 31, 2003
This Warrant and any shares acquired upon the exercise of this
Warrant have not been registered under the Securities Act of 1933. This Warrant
and such shares may not be sold or transferred in the absence of such
registration or an exemption therefrom under said Act and no transfer of this
Warrant or such shares shall be valid or effective unless and until such
conditions shall have been complied with.
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, Laux, Holmes
& Company ("LHC") 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 August 31, 2003 (the
"Expiration Date") 25,386 fully paid and non-assessable shares of Common Stock
of the Company, at the price per share of the Purchase Price. The number and
character of such shares of Common Stock and the Purchase Price as hereinafter
defined are subject to adjustment as provided herein.
This Warrant is one of the Common Stock Purchase Warrants (the
"Warrants") originally issued as of the Original Issue Date (as defined below)
and evidencing the right to purchase an aggregate of 25,386 shares of Common
Stock of the Company (representing approximately 1.25% of the Company's Common
Stock and Class B Common Stock, which constitute all of the outstanding stock of
the Company, 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.
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(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.
(e) The term "Purchase Price" shall be 165% of the initial
price to the public pursuant to which the Company first sells $1 million or more
of Common Stock (taking into account gross proceeds, not net proceeds), as set
forth on the cover page of the prospectus contained in the registration
statement pertaining to such offering, as such price may be adjusted pursuant to
the terms hereof.
(f) The terms "registered" and "registration" refer to a
registration effected by filing a registration statement in compliance with the
Securities Act, to permit the disposition of Common Stock (or Other Securities)
issued or issuable upon the exercise of Warrants, and any post-effective
amendments and supplements filed or required to be filed to permit any such
disposition.
(g) The term "Registrable Securities" shall mean the shares of
Common Stock or Other Securities issuable upon exercise of the Warrants,
excluding Common Stock or other Securities that (a) have been registered under
the Securities Act pursuant to an effective registration statement filed
thereunder and disposed of in accordance with such registration statement or (b)
are eligible for sale under Rule 144(k) under the Securities Act, or have been
sold pursuant to Rule 144 under the Securities Act.
(h) The term "Registration Period" shall mean the period
commencing concurrently with the closing of the Company's first public offering
of $1 million or more of securities registered under the Securities Act that
takes place after the Original Issue Date and ending on the earlier of the
second anniversary thereof and the Expiration Date.
(i) The term "Securities Act" means the Securities Act of 1933
as the same shall be in effect at the time.
1. Registration Rights.
1.1. Incidental Registration. During the Registration
Period, each holder of Registrable Securities will have a right to have its
Registrable Securities included in registration statements filed by the Company
on general registration forms under the Securities Act, except as otherwise
provided herein. The Company will notify each such holder in writing (the
"Company Notice") promptly after making the decision to file a registration
statement under the Securities Act with respect to the proposed sale of the
Company's equity securities (except with respect to registration statements
filed on Forms S-4 or S-8 or such others in similar form then in effect under
the Securities Act), specifying in the Company Notice the form of registration
statement, the number of shares of securities the Company proposes to register,
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<PAGE>
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, unless prohibited by the Underwriter, include the
Requested Shares in the registration statement, and, if the proposed sale is to
be underwritten, to cause the underwriters of securities to be sold by the
Company in such registration statement to purchase such Requested Shares. In the
event that any registration pursuant to this Section 1.1 shall be an
underwritten offering of securities of the Company, any request by such holders
pursuant to this Section 1.1 to register the Requested Shares, may, but need
not, specify that such shares are to be included in the underwriting on the same
terms and conditions as the securities, if any, otherwise being sold through
underwriters under such registration. In the event of an underwritten offering
of securities of the Company, such notice shall also specify as to whether such
holder of Registrable Securities desires that any of such Requested Shares to be
included in any such registration statement be subject to any over-allotment
option granted the underwriters of such offering. No holder shall be required to
have its Requested Shares be part of any underwritten offering and/or subject to
any over-allotment option granted any underwriter by the Company.
Notwithstanding the foregoing, if the managing underwriter or underwriters shall
inform the Company of its opinion, at least 15 days prior to the date that the
registration statement becomes effective, that part or all of the Requested
Shares be excluded from the registration statement on the ground that the
inclusion of such Requested Shares will adversely affect the orderly sales and
distribution of the Common Stock being sold, the Company shall include all
securities to be sold by holders, including the Company, which have the right to
require that their securities be included in the registration on a pro rata
basis. If the underwriters agree to purchase any of the Requested Shares
beneficially owned by any holder who has agreed that such Requested Shares shall
be sold pursuant to the underwritten offering or pursuant to the exercise of any
over-allotment option as described above, such holders will enter into a
reasonably customary underwriting agreement with the underwriters and will sell
such Requested Shares to the underwriters unless, and except to the extent that,
upon written notice to the Company and the managing underwriter or underwriters
at least two days prior to the effective date of the registration statement, any
such holder withdraws any portion of such Requested Shares. If the underwriters
elect to purchase less than all the Requested Shares beneficially owned by
holders who have agreed that such Requested Shares shall be sold pursuant to the
underwritten offering or pursuant to the exercise of any over-allotment option,
the underwriters shall purchase such Requested Shares on a pro rata basis among
the Requested Shares that were included in the timely requests from holders of
Registrable Securities under this subsection and the Requested Shares requested
to be included in the registration statement by other stockholders holding
registration rights and who have requested that such shares be sold pursuant to
the underwritten offering or pursuant to the exercise of an over-allotment
option. Notwithstanding the foregoing, the Company may withdraw any registration
statement referred to in this Section 1 without any liability to the holders of
Registrable Securities.
1.2. Market Standoff. Each holder of Registrable Securities
agrees that if the managing underwriter or underwriters of the offering
contemplated by Section 1.1 so request, such holder shall not effect any public
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<PAGE>
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 effect the registration of any Registrable Securities, the
Company shall, as expeditiously as is reasonably possible:
(a) Prepare and file with the SEC a registration
statement with respect to such Registrable Securities and such amendments and
supplements to such registration statement and the prospectus used in connection
therewith as may be necessary to exercise the Company's best efforts to cause
such registration statement to become effective at the earliest practicable date
and to remain effective for a period of 90 days or until the holders and any
underwriter purchasing such Registrable Securities have sold or otherwise
disposed of the Registrable Securities registered in such registration
statement, whichever is earlier.
(b) Furnish to each holder selling Registrable
Securities such number of copies of conformed copies of such registration
statement and of each such amendment and supplement thereto (with all exhibits)
and such number of copies of the prospectus, including a preliminary prospectus,
in conformity with the requirements of the Securities Act, and such other
documents as such holder may reasonably request in order to facilitate the
disposition of Registrable Securities to be sold by such holder pursuant to such
registration statement.
(c) Exercise the Company's best efforts to register
and qualify the Registrable Securities covered by such registration statement
under other securities laws or State Securities Laws of such states or
jurisdictions where a self-executing exemption is not available and as any
seller of such Registrable Securities shall reasonably request provided,
however, that the Company shall not be required in connection therewith or as a
condition thereto to qualify to do business or to file a general consent to
service of process in any such states or jurisdictions.
(d) Cause all securities covered by such registration
statement to be registered with or approved by such other federal or state
governmental agencies or authorities as may be necessary in the opinion of
counsel to the Company and counsel to the seller or sellers of securities to
enable the seller or sellers thereof to consummate the disposition of such
securities.
(e) Notify each seller of securities covered by such
registration statement at any time when a prospectus relating thereto is
required to be delivered under the Securities Act, upon discovery that, or upon
the happening of any event as a result of which, the prospectus included in such
registration statement, as then in effect, includes an untrue statement of a
material fact or omits to state any material fact required to be stated therein
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<PAGE>
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, make timely filing of all reports pursuant to the Securities
Exchange Act of 1934, as amended ("Exchange Act") at such time as the Company's
securities are registered under the Exchange Act, and make available to its
securities holders, as soon as reasonably practicable, an earnings statement
covering the period of at least twelve months, but not more than eighteen
months, beginning with the first full calendar month after the effective date of
such registration statement, which earnings statement shall satisfy the
provisions of Section 11(a) of the Securities Act and Rule 158 promulgated
thereunder, and promptly furnish to each such seller of securities a copy of
such earnings statement.
(g) Use its best efforts to list all securities
covered by such registration statement on any national securities exchange on
which securities of the same class and, if applicable, series, covered by such
registration statement are then listed or on the Nasdaq Stock Market ("Nasdaq")
if the securities are reported on Nasdaq.
1.4. Information to be Furnished. It shall be a condition
precedent to the obligation of the Company to take any action pursuant to this
Section 1 that the holders of Registrable Securities promptly furnish to the
Company such information regarding them, the securities of the Company held by
them and the intended method of disposition of such securities as the Company
shall reasonably request and as shall be required in connection with the
Company's obligations under this Section 1.
1.5. Underwritten Offerings.
(a) Incidental Underwritten Offerings. If the Company
proposes to register any of its securities under the Securities Act as
contemplated by Section 1.1 and such securities are to be distributed by or
through one or more underwriters, the Company will, if requested by any holder
of Registrable Securities, use its best efforts to arrange for such underwriters
to include all the securities to be offered and sold by such requesting holder
among the securities of the Company to be distributed by such underwriters. The
holders of Registrable Securities to be distributed by such underwriters shall
be parties to the underwriting agreement between the Company and such
underwriters and may, at their option, require that any or all of the
representations and warranties by, and the other agreements on the part of, the
Company to and for the benefit of such underwriters shall also be made to and
for the benefit of such holders of Registrable Securities and that any or all of
the conditions precedent to the obligations of such underwriters under such
underwriting agreement be conditions precedent to the obligations of such
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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
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
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based upon, an untrue statement or allegedly untrue statement or omission or
alleged omission made in connection with such registration statement,
preliminary prospectus, final prospectus, or amendments or supplements thereto,
in reliance upon and in conformity with information furnished in writing
expressly for use in connection with such registration by such holder, the
Company will reimburse each such holder for any legal or other expenses
reasonably incurred by each such holder in connection with investigating or
defending any such loss, claim, damage, liability or action.
(b) To the extent permitted by law, each holder
selling Registrable Securities pursuant to this Section 1 will indemnify and
hold harmless the Company, each of its directors, officers and employees, each
person, if any, who controls the Company within the meaning of the Securities
Act, and any underwriter for the Company (within the meaning of the Securities
Act) against any losses, claims, damages or liabilities to which the Company or
any such person or underwriter may become subject, under the Securities Act or
otherwise, insofar as such losses, claims, damages or liabilities (or actions in
respect thereto) arise out of, or are based upon, any untrue or allegedly untrue
statement of any material fact contained in such registration statement,
including any preliminary prospectus or final prospectus contained therein or
any amendments or supplements thereto, or arise out of or are based upon the
omission or alleged omission to state therein a material fact required to be
stated therein or allegedly necessary to make the statements therein not
misleading, in each case to the extent that such untrue statement or allegedly
untrue statement or omission or alleged omission was made in such registration
statement, preliminary prospectus, or amendments or supplements thereto in
reliance upon and in conformity with information furnished in writing by such
holder expressly for use in connection with such registration; provided,
however, that the indemnity agreement contained in this Section 1.8(b) shall not
apply to amounts paid in settlement of any such loss, claim, damage, liability
or action if such settlement is effected without the written consent of such
holder, which shall not be unreasonably withheld; and each such holder will
reimburse the Company or any such person or underwriter for any legal or other
expenses reasonably incurred by the Company or any such person or underwriter in
connection with investigating or defending any such loss, claim, damage,
liability or action.
(c) Promptly after receipt by an indemnified party under
this Section 1.8 of notice of the commencement of any action, such indemnified
party will, if a claim in respect thereof is to be made against any indemnifying
party under this Section 1.8, notify the indemnifying party in writing of the
commencement thereof and generally summarize such action. The indemnifying party
shall have the right to participate in and to assume the defense thereof with
counsel mutually satisfactory to the parties; provided that each indemnified
party shall have the right to employ its own counsel in any such case, but the
fees and expense of such counsel shall be at the expense of such indemnified
party unless the employment of such counsel shall have been authorized in
writing by the indemnifying party in connection with the defense of such action
or the indemnifying party shall not have employed counsel to have charge of the
defense of such action or such indemnified party or the indemnified parties
shall have reasonably concluded that there may be defenses available to it or
them that are different from or additional to those available to the
indemnifying party (in which case the indemnifying party shall not have the
right to direct the defense of such action on behalf of the indemnified party or
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parties) in any of which events the fees and expenses of such counsel shall be
borne by the indemnifying parties. The failure of any indemnified party to give
notice as provided herein shall not relieve the indemnifying party of its
obligations under this Section 1.8, except to the extent that the indemnifying
party is actually and materially prejudiced by such failure to give notice.
2. Sale or Exercise Without Registration. If, at the time of
any exercise, transfer or surrender for exchange of a Warrant or Common Stock
(or Other Securities) previously issued upon the exercise of Warrants, such
Warrant or Common Stock (or Other Securities) shall not be registered under the
Securities Act, the Company may require, as a condition of allowing such
exercise, transfer or exchange, that the holder or transferee of such Warrant or
Common Stock (or Other Securities), as the case may be, furnish to the Company a
satisfactory opinion of counsel to the effect that such exercise, transfer or
exchange may be made without registration under the Securities Act, provided
that nothing contained in this Section 2 shall relieve the Company from
complying with any request for registration pursuant to Section 1 hereof.
3. Exercise of Warrant; Partial Exercise; Cashless Exercise.
3.1. Exercise in Full. Subject to the provisions hereof,
this Warrant may be exercised in full 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
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aggregate Exercise Price for the shares to be purchased shall be determined by
multiplying the number of shares to be purchased by the Purchase Price, and then
dividing the product thereof by an amount equal to the Market Price (as defined
below). Upon any such partial exercise, the Company, at its expense will
forthwith issue and deliver to or upon the order of the holder hereof a new
Warrant of like tenor, in the name of such holder or as such holder may
designate (upon payment by such holder of any applicable transfer taxes),
calling in the aggregate on the face thereof for the number of shares of Common
Stock equal (without giving effect to any adjustment therein) to (A) the number
of shares called for on the face of this Warrant minus (B) the sum of (i) the
number of shares so surrendered by the holder pursuant to this Section plus (ii)
the number of shares issued in the exchange. Solely for the purposes of this
paragraph, Market Price shall be calculated as the average of the Market Prices
for each of the ten (10) trading days preceding the date which the form of
election attached hereto is deemed to have been sent to the Company ("Notice
Date").
3.4. Definition of Market Price. As used herein, the phrase
"Market Price" at any date shall be deemed to be (i) if the principal trading
market for such securities is an exchange, the last reported sale price, as
officially reported on any consolidated tape, (ii) if the principal market for
such securities is the over-the-counter market, the closing bid price on such
date as reported by Nasdaq or, if there is no closing bid price reported on
Nasdaq or if the security is not quoted on Nasdaq, then the high bid price as
set forth in the National Quotation Bureau sheet listing such securities for
such day. Notwithstanding the foregoing, if there is no reported closing price
or high bid price, as the case may be, on the date next preceding the event
requiring an adjustment hereunder, then the Market Price shall be determined as
of the latest date prior to such day for which such closing price or high bid
price is available, or if the securities are not quoted on Nasdaq, as determined
in good faith by resolution of the Board of Directors of the Company, based on
the best information available to it.
3.5. Company to Reaffirm Obligations. The Company will, at
the time of any exercise of this Warrant, upon the request of the holder hereof,
acknowledge in writing its continuing obligation to afford to such holder any
rights (including, without limitation, any right to registration of the shares
of Common Stock or Other Securities issued upon such exercise) to which such
holder shall continue to be entitled after such exercise in accordance with the
provisions of this Warrant, provided that if the holder of this Warrant shall
fail to make any such request, such failure shall not affect the continuing
obligation of the Company to afford such holder any such rights.
3.6 Redemption. The Warrant and the Common Stock issued upon
the exercise of the Warrant shall be subject to a put option by LHC (the "Put
Option"). LHC, in its sole discretion, shall have the right and option to have
the Warrant redeemed by the Company at the greater of: (i) $100,000.00 or (ii)
the difference between the Purchase Price and the then current Fair Market Value
(the "Warrant Put Price"); and LHC, 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) $100,000.00 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 LHC has partially exercised this Warrant such that it is a Holder
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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 LHC of written notice to the
Company of LHC's exercise of the Put Option (the "Put Notice"), the Company
shall pay to LHC the Put Price in cash.
LHC's Put Option shall not be exercisable (except as described
below) until the earlier of: (x) thirteen (13) months following a registration
of the Common Stock by filing a registration statement in compliance with the
Securities Act; or (y) January 31, 2000; provided, however, that LHC agrees to
provide the Company notice six months prior to the exercise of the Put Option,
which notice shall be non-binding on LHC.
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,
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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.
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.
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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 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.
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7.3. Rights and Options. Except as provided in Section 7.4,
in case the Company shall grant any rights or options to subscribe for, purchase
or otherwise acquire Common Stock after the Original Issue Date, there shall be
determined the price per share for which Common Stock is issuable upon the
exercise of such rights or options, such determination to be made by dividing
(a) the total amount, if any, received or receivable by the Company as
consideration for the granting of such rights or options, plus the minimum
aggregate amount of additional consideration payable to the Company upon the
exercise of such rights or options, by (b) the maximum number of shares of
Common Stock of the Company issuable upon the exercise of such rights or
options.
If the price per share so determined shall be less
than the applicable Purchase Price, then the granting of such rights or options
shall be deemed to be an issue or sale for cash (as of the date of the granting
of such rights or options) of such maximum number of shares of Common Stock at
the price per share so determined, provided that, if such rights or options
shall by their terms provide for an increase or increases, with the passage of
time, in the amount of additional consideration payable to the Company upon the
exercise thereof, the adjusted purchase price per share shall, forthwith upon
any such increase becoming effective, be readjusted to reflect the same, and
provided, further, that upon the expiration of such rights or options, if any
thereof shall not have been exercised, the adjusted Purchase Price shall
forthwith be readjusted and thereafter be the price which it would have been had
an adjustment been made on the basis that the only shares of Common Stock so
issued or sold were those issued or sold upon the exercise of such rights or
options and that they were issued or sold for the consideration actually
received by the Company upon such exercise, plus the consideration, if any,
actually received by the Company for the granting of all such rights or options,
whether or not exercised.
7.4. Exceptions. The provisions of Sections 7.1, 7.2 and
7.3 do not apply to (i) the exercise of any Warrant,(ii) the exercise of any
right or option with respect to which an adjustment shall have been made at the
time of the issuance of such right or option pursuant to Section 7.3, (iii)
conversion or exchange of any Convertible Security with respect to which an
adjustment shall have been made at the time of the issuance of such Convertible
Security pursuant to Section 7.2, (iv) any transaction with respect to which an
adjustment shall have been made pursuant to Sections 5 or 6, and (v) the
issuance or sale of any Common Stock pursuant to the exercise or conversion of
any option, right or Convertible Security that was issued on or prior to the
Original Issue Date.
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
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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.
11. Reservation of Stock, etc., Issuable on Exercise of
Warrants. The Company will at all times reserve and keep available, solely for
issuance and delivery upon the exercise of the Warrant, all shares of Common
Stock (or Other Securities) from time to time issuable upon the exercise of the
Warrant.
12. Listing on Securities Exchanges; Registration. If the
Company at any time shall list any Common Stock on any national securities
exchange, or interdealer quotation system, and shall register such Common Stock
under the Securities Exchange Act of 1934 (as then in effect, or any similar
statute then in effect), the Company will, at its expense, simultaneously list
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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;
(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
15
<PAGE>
(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: /s/ Gerald M. Czarnecki
-----------------------------
Chairman of the Board
[Corporate Seal]
Attest:
/s/ Greg E. Dukoff
- --------------------
Secretary
16
<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.
17
<PAGE>
SCHEDULE II
FORM OF ASSIGNMENT
(To be signed only upon transfer of Warrant)
For value received, the undersigned hereby sells, assigns and
transfers unto ______________ the right represented by the within Warrant to
purchase _____________shares of Common Stock of 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)
18
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the use in this Registration Statement on Form SB-2,
Amendment Number 1, of our report dated August 12, 1998, relating to the
consolidated financial statements of Gaylord Companies, Inc. for the years ended
December 31, 1997 and 1996, and of our report dated October 30, 1998 related to
the consolidated balance sheet of Rolling Pin Kitchen Emporium, Inc. as of
August 12, 1998, and the reference to our firm under the caption "Experts" in
this Registration Statement.
/s/ FELDMAN SHERB EHRLICH & CO., P.C.
--------------------------------------
FELDMAN SHERB EHRLICH & CO., P.C.
Certified Public Accountants
New York, New York
November 2, 1998
<PAGE>
INDEPENDENT AUDITORS CONSENT
We hereby consent to the use in Amendment No. 1 of the Rolling Pin Kitchen
Emporium, Inc. Registration Statement (Registration Statement) dated November 4,
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
November 4, 1998
<TABLE> <S> <C>
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<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> AUG-12-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
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0
256,000
<COMMON> 16,770
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