-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, B0WpOLUP0Z1TZwq6OMcsjSeQzvSMP4nBX4A0odzEWsag4+yKaqjrnjob1J+qgU9X CXsqIOK0raZMmdyOmmpeCQ== 0000950116-98-001874.txt : 19980918 0000950116-98-001874.hdr.sgml : 19980918 ACCESSION NUMBER: 0000950116-98-001874 CONFORMED SUBMISSION TYPE: SB-2 PUBLIC DOCUMENT COUNT: 17 FILED AS OF DATE: 19980916 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: ROLLING PIN KITCHEN EMPORIUM INC CENTRAL INDEX KEY: 0000930114 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-RETAIL STORES, NEC [5990] IRS NUMBER: 311421571 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: SB-2 SEC ACT: SEC FILE NUMBER: 333-63527 FILM NUMBER: 98710642 BUSINESS ADDRESS: STREET 1: 4264 WINTERS CHAPEL RD STREET 2: BLDG B CITY: ATLANTA STATE: GA ZIP: 30360 BUSINESS PHONE: 7704572600X11 MAIL ADDRESS: STREET 1: 4006 VENTURE COURT CITY: COLUMBUS STATE: OH ZIP: 43228 FORMER COMPANY: FORMER CONFORMED NAME: HOME RETAIL HOLDINGS INC DATE OF NAME CHANGE: 19980824 FORMER COMPANY: FORMER CONFORMED NAME: GAYLORD COMPANIES INC DATE OF NAME CHANGE: 19941019 SB-2 1 As filed with the Securities and Exchange Commission on September 16, 1998 Registration No. 333- ================================================================================ U.S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------- FORM SB-2 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ROLLING PIN KITCHEN EMPORIUM, INC. (Name of Small Business Issuer in Its Charter)
Delaware 5719 31-1421571 (State or other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer Incorporation or Organization) Classification Code Number) Identification No.) 4264 Winters Chapel Road, Building B Glenn Kaas Atlanta, Georgia 30360 President and Chief Executive Officer (Address and Telephone Number of Principal Executive Rolling Pin Kitchen Emporium, Inc. Offices and Principal Place of Business) 4264 Winters Chapel Road, Building B Atlanta, Georgia 30360 (Name, Address and Telephone Number of Agent for Service of Process) Copies to: William E. Sudow, Esq. Jay M. Kaplowitz, Esq. John K. Hughes, Esq. Arthur S. Marcus, Esq. Brown & Wood LLP Gersten, Savage, Kaplowitz & Fredericks, LLP 815 Connecticut Avenue, N.W. 101 East 52nd Street, 9th Floor Washington, D.C. 20006 New York, NY 10022 (202) 973-0600 (212) 752-9700 (202) 223-0485 (212) 980-5192
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.
CALCULATION OF REGISTRATION FEE ================================================================================================================== Proposed Proposed Maximum Number of Maximum Aggregate Amount of Title of Each Class of Securities to be Shares to be Offering Price Offering Price(1) Registration Registered Registered Per Share Fee - ------------------------------------------------------------------------------------------------------------------ Class A Common Stock, $0.01 par value 1,361,650 $ 7.00 $ 9,531,550 $2,812 - ------------------------------------------------------------------------------------------------------------------ Common Stock held by Selling Stockholders 138,350 $ 7.00 $ 968,450 $ 286 - ------------------------------------------------------------------------------------------------------------------ Underwriters' Warrants(2) 150,000 $ 0.01 $ 1,500 $ 0(3) - ------------------------------------------------------------------------------------------------------------------ Class A Common Stock, $0.01 par value(4) 150,000 $11.55 $ 1,732,500 $ 511 - ------------------------------------------------------------------------------------------------------------------ Class A Common Stock, $0.01 par value(5) 225,000 $ 7.00 $ 1,575,000 $ 465 - ------------------------------------------------------------------------------------------------------------------ Total 1,990,412 $13,809,000 $4,074 ==================================================================================================================
(1) Estimated solely for purposes of calculating the registration fee, pursuant to rule 457(a) under the Securities Act. (2) Represents warrants sold to the Representative of the Underwriters. (3) None pursuant to Rule 457(g). (4) Represents shares issuable upon exercise of the warrants to be issued to the Representative of the Underwriters, which warrants have an exercise price of $11.55 per share. See "Description of Securities - Warrants." (5) Represents shares issuable upon the exercise of the Underwriters' option to cover over-allotments, if any. THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE. The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer of sale is not permitted. SUBJECT TO COMPLETION, DATED SEPTEMBER 16, 1998 Prospectus [GRAPHIC} 1,500,000 shares of common stock $5.00 to $7.00 per share Rolling Pin Kitchen Emporium, Inc. This prospectus relates to the offering of up to 1,500,000 shares of Class A common stock, par value $.01 per share, including 138,350 shares held by certain selling stockholders of the company. Shares of the predecessor company, Gaylord Companies, Inc., were traded on the Nasdaq's SmallCap Market and OTC Bulletin Board under the symbol "GJCO." Effective August 12, 1998, the company emerged from bankruptcy and ceased trading on the OTC Bulletin Board. Application will be made to list the common stock on the Nasdaq SmallCap Market under the symbol "RPKE." THIS INVESTMENT INVOLVES A HIGH DEGREE OF RISK. PLEASE REFER TO "RISK FACTORS" BEGINNING ON PAGE 5. NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED THESE SECURITIES, OR DETERMINED IF THIS PROSPECTUS IS TRUTHFUL AND COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------------------------------------------- Underwriting Proceeds to Price to Discounts and Proceeds to Selling Public Commissions(1) Company(2) Stockholders - --------------------------------------------------------------------------------------------------------------------- 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 public will total $____, the underwriting discount will total $____ and the proceeds to the company will total $_____. See "Underwriting." The shares are being offered by the underwriters when, as and if received and accepted by them, subject to prior sale, to withdrawal of the offer without notice, to the approval of counsel and to certain other conditions. ii NUTMEG SECURITIES, LTD. The underwriters' website is located at http://nutmeggrs@aol.com. iii
Table of Contents Page ---- Summary............................................................................................................1 About Our Company...............................................................................................1 Recent Bankruptcy of our Predecessor............................................................................1 The Offering....................................................................................................1 Common Stock....................................................................................................1 Selling Shareholders............................................................................................2 Warrants Held by the Underwriter................................................................................2 Other Warrants..................................................................................................2 Our Predecessor Entity Failed to Make All Required Securities Filings...........................................2 Where You Can Find More Information.............................................................................2 Key Facts.......................................................................................................3 Summary Financial Information...................................................................................4 RISK FACTORS.......................................................................................................5 Recent Bankruptcy of our Predecessor............................................................................5 Seasonal Variations in the Quality Cookware Industry Will Affect Our Revenues...................................5 Need for Additional Capital to Attract New Acquisition Candidates and the Impact on Operating Results...........5 Competition in the Quality Cookware Industry May Affect Our Revenues and Market Position........................6 Risks Associated with Our Cookware Store Franchises.............................................................6 Lack of Written Contracts with Suppliers........................................................................6 Dependence on Existing Leased Locations in Shopping Malls.......................................................6 Ability to Retain and Attract Key Executives....................................................................6 Control by Current Officers and Directors; Relationship of Principal Stockholders...............................7 Dilution in the Value of Your Shares............................................................................7 Certain Anti-Takeover Provisions in Our Charter and Bylaws; Possible Future Issuances of Preferred Stock........7 Our Predecessor Entity Failed to Make All Required Securities Filings...........................................8 Negotiated Public Offering Price of the Common Stock............................................................8 No Liquid Trading Market for Your Common Stock..................................................................8 Potential Effects of Failure to List Common Stock on The Nasdaq SmallCap Market.................................8 Our Stock Price May Fluctuate Which May Affect the Value of Your Shares.........................................8 Shares Eligible For Future Sale.................................................................................8 Risks Associated with Forward-Looking Statements................................................................9 THE COMPANY.......................................................................................................10 USE OF PROCEEDS...................................................................................................11 DIVIDEND POLICY...................................................................................................11 CAPITALIZATION....................................................................................................12 DILUTION..........................................................................................................14 PRICE RANGE OF COMMON STOCK.......................................................................................16 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.............................17 Historical.....................................................................................................17 Overview.......................................................................................................17 Business and Operational Model of the Company..................................................................18 Liquidity and Capital Resources................................................................................20 Seasonality....................................................................................................22 BUSINESS..........................................................................................................23 The Company....................................................................................................23
iv
Page ---- Industry Background............................................................................................23 Strategy.......................................................................................................24 Reorganization of Predecessor..................................................................................26 Acquisition of Aropi...........................................................................................26 Discontinued Operations........................................................................................27 Properties.....................................................................................................27 Trademarks.....................................................................................................27 Employees......................................................................................................27 Legal Proceedings..............................................................................................28 MANAGEMENT........................................................................................................29 Executive Officers, Directors and Key Employees................................................................29 Director Compensation..........................................................................................30 Executive Compensation.........................................................................................30 Summary Compensation Table.....................................................................................31 Stock Option Grants............................................................................................31 1998 Equity Incentive Plan.....................................................................................31 Employment Agreements..........................................................................................34 Indemnification of Officers and Directors......................................................................34 CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS..............................................................35 The Home Retail Acquisition Corp. ("HRAC") Junior Participation; the Merger Agreement..........................35 The Reorganization.............................................................................................35 Other Transactions.............................................................................................36 Control by Certain Directors...................................................................................36 Advisory Agreement.............................................................................................37 PRINCIPAL STOCKHOLDERS............................................................................................38 SELLING STOCKHOLDERS..............................................................................................39 DESCRIPTION OF SECURITIES.........................................................................................43 Common Stock...................................................................................................43 Preferred Stock................................................................................................44 Registration Rights............................................................................................44 Warrants.......................................................................................................44 Transfer Agent and Registrar...................................................................................46 SHARES ELIGIBLE FOR FUTURE SALE...................................................................................47 UNDERWRITING......................................................................................................48 LEGAL MATTERS.....................................................................................................50 EXPERTS...........................................................................................................50 ADDITIONAL INFORMATION............................................................................................50 INDEX TO FINANCIAL STATEMENTS....................................................................................F-1
v Summary This summary highlights selected information from this document and may not contain all of the information that is important to you. To understand the specific terms of the common stock we are offering, you should carefully read this document. It describes the company, its finances, and products. Federal and state securities laws require that we include in this prospectus all the important information that investors will need to make an investment decision. We have not authorized anyone to provide you with information that is different from what is contained in this prospectus. About Our Company We operate a chain of specialty retail stores for quality cookware and serving equipment, cooking accessories and certain select food products as well as cookbooks and food-related publications. We operate 19 company-owned stores and 21 franchised locations under the trademarks The Cookstore and Rolling Pin Kitchen Emporium, which are located primarily throughout the Midwest and Southeast regions of the United States. Our business is comprised of the cookware business of (i) our predecessor entity, which operates four retail cookware stores in Ohio, and (ii) Aropi, Incorporated, which operates 15 company-owned stores in eight states and 21 franchised stores in nine states. We acquired Aropi, Incorporated in August 1998. See "Business." Recent Bankruptcy of our Predecessor Our predecessor entity, Gaylord Companies, Inc., filed for a chapter 11 reorganization in bankruptcy on November 13, 1997 and emerged from bankruptcy on August 12, 1998. During the reorganization, we sold our bookstore operations, closed two of our cookware stores and brought in the current management. We incurred substantial losses in 1996 and 1997 and while in bankruptcy during 1998. Since emerging from bankruptcy, we have continued to incur losses. We cannot be certain that our future operations will be profitable. We may, in fact, continue to incur losses for the foreseeable future. The Offering We are selling our common stock to raise capital in order to open additional cookware stores, acquire existing cookware chains and for general working capital. Common Stock Holders of common stock are entitled to receive dividends declared by the board of directors. Currently, we do not pay a dividend and we do not expect to pay dividends in the foreseeable future. Each holder of common stock is entitled to one vote per share. The holders of common stock have no preemptive or cumulative voting rights. 1 Selling Shareholders Some of our shareholders are selling their shares of common stock in this offering. These shareholders were creditors of the predecessor entity and received the common stock in connection with reorganization of the company in 1998. These shares represent all of the shares that were acquired by these shareholders in connection with the reorganization. These shares of common stock will have the same rights as described above. Warrants Held by the Underwriter We have issued warrants to purchase 150,000 shares of common stock to the lead underwriter of this offering. The exercise price of the warrants is equal to 165% of the public offering price. The Warrants may be exercised at any time during a four year period that begins one year from the effective date of this prospectus. These warrants include demand and piggyback registration rights as well as anti-dilution provisions that provide adjustments to the exercise price and number of shares subject to the warrants if certain events occur. Other Warrants We also have issued warrants to warrant holders of our predecessor entity as required by the plan of reorganization. In addition, we have issued warrants to our creditors in order to induce them to enter into financing arrangements with us. In the aggregate, we have issued warrants to purchase 503,879 shares of common stock. Our Predecessor Entity Failed to Make All Required Securities Filings Prior to bankruptcy, our predecessor entity failed to make certain regular disclosure filings that such entity was required to make under the Securities Exchange Act of 1934. Although we will resume compliance with the Securities Exchange Act of 1934 once we are subject to this law, we may be subject to various sanctions, disabilities and damages as a result of our previous non-compliance. Where You Can Find More Information We will file annual, quarterly and special reports, proxy statements and other information with the Securities and Exchange Commission. You may read and copy any document we file at the Securities and Exchange Commission's public reference rooms in Washington, DC, New York, New York, and Chicago, Illinois. Please call the Securities and Exchange Commission at 1-800-SEC-0330 for further information on the public reference rooms. Our filings are also available to the public at the Securities and Exchange Commission's web site at http://www.sec.gov. Our principal executive offices are located at 4264 Winters Chapel Road, Building B, Atlanta, Georgia 30360, and our telephone number is (707) 457-2600. 2 Key Facts
Class A Common Shares Offered To The Public including 1,361,650 shares by the Company and 138,350 shares by the Selling Shareholders.......................... 1,500,000 shares Total Shares Outstanding After Offering......................................... 2,883,691 Use Of Proceeds................................................................. Acquisition of cookware store chains; opening new stores; capital investment; refinance debt; working capital; and general corporate purposes. Nasdaq SmallCap Market Symbol................................................... RPKE
- ------------------ (1) Excludes options, warrants, Class B common stock and 180,000 shares of common stock reserved under the 1998 Equity Incentive Plan. 3 Summary Financial Information The following table depicts the summarized statement of operations and balance sheet data of the company and Aropi, Incorporated on a historical, pro forma and as adjusted basis. The information is only a summary and does not provide all of the information contained in the actual financial statements, including the related notes, beginning at page F-1 and the Management's Discussion and Analysis of Financial Condition and Results of Operations. Statement of Operations Data: The Gaylord Companies, Inc.
Six months Year ended December 31, ended June 30, ------------------------------- 1998 1997 1996 ---- ---- ---- Net revenues $ 1,135,645 $ 3,724,157 $ 3,497,940 Cost of Goods Sold 1,447,387 3,508,874 2,899,932 Gross profit (loss) (311,742) 215,283 598,008 Operating expenses 367,490 1,649,601 458,457 Other Income (expenses) (85,887) (191,687) (424,394) Loss from operations (765,119) (2,026,654) (284,843)
Aropi, Incorporated
Six months Year ended December 31, Year ended June 30, ended June 30, ----------------------- -------------------- 1998 1997 1998 1997 ---- ---- ---- ---- Net revenues $ 2,240,561 $ 6,397,922 $ 6,310,362 $ 6,572,905 Cost of Goods Sold 1,065,972 3,231,302 3,134,668 3,407,466 Gross profit (loss) 1,174,589 3,166,620 3,175,694 3,165,439 Operating expenses 1,486,326 3,153,074 3,100,287 3,188,113 Other Income (expenses) (96,571) 5,170 (90,126) 65,968 Income (loss) from operations (408,308) 18,716 (14,719) 43,294
Balance Sheet Data:
June 30, 1998 --------------------------------------------------------------------- Gaylord Gaylord (historical) "Fresh Start" Pro-forma As Adjusted(1) ------------ ------------- ------------- --------------- Working Capital (Deficit) $(1,671,985) $ (66,701) $ (398,259) $ 4,009,554 Total Assets 1,436,237 4,164,095 7,059,245 12,217,058 Total Liabilities 2,786,591 1,181,307 4,076,457 2,076,457 Stockholders' Equity (1,350,354) 2,982,788 2,982,788 9,640,601
- ---------- (1) Adjusted for the sale of the 1,361,650 shares of common stock offered hereby (less underwriting discount and estimated offering expenses) and the application of the net proceeds therefrom. 4 RISK FACTORS The shares of common stock offered by this prospectus are speculative and involve a high degree of risk of loss. In addition to the other information in this prospectus, the following factors should be considered carefully in evaluating an investment in the common stock offered hereby. This prospectus contains forward-looking statements that involve risks and uncertainties. The company's actual results may differ materially from the results discussed in the forward-looking statements. The factors that may cause such a difference include, but are not limited to, those discussed below in "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business." Prior to making an investment, you should carefully read this entire prospectus and consider the following risk and speculative factors. Recent Bankruptcy of Our Predecessor Our predecessor entity, The Gaylord Companies, Inc., filed for a chapter 11 reorganization in bankruptcy on November 13, 1997 and emerged from bankruptcy on August 12, 1998. During the reorganization, we sold our bookstore operations, closed two of our cookware stores and brought in the current management. We incurred substantial losses in 1996 and 1997 and while in bankruptcy during 1998. Since emerging from bankruptcy, we have continued to incur losses. We cannot be certain that our future operations will be profitable. We may, in fact, continue to incur losses for the foreseeable future. Seasonal Variations in the Quality Cookware Industry Will Affect Our Revenues Our business is subject to seasonal variations. Historically, a significant portion of our net sales and net earnings have been realized during the period from October through December, and levels of net sales and net earnings have generally been significantly lower during the period from January through September. This is the general pattern associated with similar retail industries, including those companies in our industry segment. If for any reason our sales were to be substantially below seasonal norms during the October through December period, our annual results could be materially and adversely affected. Unfavorable economic conditions affecting retailers generally during the Christmas selling season in any year could materially and adversely affect our results of operations for the year. We must also make decisions regarding how much inventory to purchase well in advance of the season in which it will be sold, especially for the Christmas season. Significant deviations in actual demand from projected demand for products can have an adverse affect on our sales and profitability. Need for Additional Capital to Attract New Acquisition Candidates and the Impact on Operating Results We plan to acquire retail cookware businesses, such as the recent acquisition of Aropi, Incorporated and other companies complementary to our core business. The success of any such acquisitions will depend on many factors, including our ability to identify suitable acquisition candidates, the purchase price, the availability and terms of financing, and our ability to effectively integrate the acquired businesses into our operations. Although we plan to make acquisitions, we may not complete any future acquisitions. No assurances can be given that we will be able to operate acquired businesses profitably or otherwise successfully implement our expansion strategy. We will also attempt to: (i) hire, train, and integrate qualified employees; (ii) locate and obtain sites for new cookware stores; and (iii) adapt our management information and other operational systems to the extent necessary to grow in a profitable manner. We expect to finance future acquisitions and planned internal growth through borrowings or the issuance of equity securities. We have no commitment for any debt or equity 5 financing, and we may not obtain sufficient credit on favorable terms. If we do not obtain additional financing when required, we may be required to modify, delay, or abandon some or all of our development and expansion plans, which may have a material adverse effect on our business and negatively impact the value of our outstanding securities. Further, if we issue additional equity securities, then it could have a significant dilutive effect on the holders of common stock, including purchasers in the offering. Such acquisitions may result in increased costs, significant goodwill, increases in the amount of depreciation and amortization expense, and could also result in write downs of purchased assets. All of these factors could adversely affect our operating results in future periods. In the event that our plans for expansion are not successful, our business will be materially adversely affected. Competition in the Quality Cookware Industry May Affect Our Revenues and Market Position We face significant competition from companies that are similarly specialized and also from companies that are involved in more generalized retailing. We also face competition from other companies, such as catalogue companies, which have added or may add cookware to existing or future product lines. Many of our existing and potential competitors are larger and have significantly greater financial, marketing, technological, and other resources than we possess. We may not be able to compete effectively. Risks Associated with Our Cookware Store Franchises Our ability to operate our existing stores on a profitable basis is dependent to some degree on the continued success of our franchised cookware stores. If the franchisees could not provide the service required pursuant to their franchise agreements with the company or experience an unfavorable change in public perception, we may be materially adversely effected. Further, a decline in the operations or profitability of the franchise cookware stores could adversely affect our revenues since we derive a portion of our revenues from certain minimum franchise fees and fees based upon a percentage of the revenues of franchise cookware stores. See "Business-Strategy." Lack of Written Contracts with Suppliers We currently purchase products from more than 200 suppliers. We do not have any written contracts with our suppliers. If we cannot maintain our existing relationships with these suppliers on terms similar to those currently available, or if we experience any delay or difficulty in obtaining alternative suppliers on comparable terms, then there could be an adverse affect on our business. Dependence on Existing Leased Locations in Shopping Malls We currently lease all of our properties. We may not be able to comply with the provisions of the current leases or renegotiate favorable lease terms as they expire. Once the current leases expire, if we cannot renew the existing lease, we may not be able to find favorable store sites for expansion or negotiate leases on satisfactory terms and conditions for new sites. Ability to Retain and Attract Key Executives Our success depends upon the contributions of our senior management. We believe that our future success will depend upon our ability to attract, motivate, and retain highly skilled managerial, and 6 marketing personnel. The loss of our key executives or the inability to hire and retain qualified personnel could have an adverse effect upon the company's business. The company intends to carry key man life insurance on its chief executive officer, but no other executive officers or technical personnel will be covered under such a policy. Control by Current Officers and Directors; Relationship of Principal Stockholders Cambridge Holdings, L.L.C., its affiliates, and related persons currently own an aggregate of approximately 40% of the common stock, 22% after this offering, and all but two of our directors are principals of or are affiliated with Cambridge. Global Strategic Holdings, Inc. also owns an aggregate of approximately 40% of the common stock, 22% after this offering. Thomas Tuttle, a director of the company, is the sole investment advisor to Global Strategic Holdings, Ltd. Additionally, we have entered into an advisory agreement with DDG Management Services Corp., that will give it control over certain aspects of our business. David Danovitch, a director of the Company and a member of Cambridge Holdings, L.L.C., is a director of DDG Management Services Corp. As a result, Cambridge will be in a position to exercise significant influence over the company and the election of our directors and otherwise essentially control the outcome of all matters requiring stockholder approval. See "Certain Relationships and Related Party Transactions." Dilution in the Value of Your Shares As a result of the Plan of Reorganization under the fresh start accounting rules, there will be 1,522,041 shares of Class A common stock outstanding, and the net tangible book value per share will increase by $0.50 to $0.17 per share. Subsequent to the acquisition of Aropi, Incorporated there was a $647,240 increase in goodwill, resulting in a dilution of $0.43 in the net tangible book value per share to ($0.26) per share. After giving effect to the sale of the 1,500,000 shares of common stock under this offering at a price of $6.00 per share and the application of the net proceeds therefrom, there will be a total of 3,121,972 shares of common stock outstanding with a net tangible book value of $2.17 per share. This would represent an immediate increase in net tangible book value of $2.43 to existing shareholders and an immediate dilution of $3.83 per share to new investors. See "Description of Securities." Certain Anti-Takeover Provisions in Our Charter and Bylaws; Possible Future Issuances of Preferred Stock Our amended and restated certificate of incorporation and bylaws and Delaware General Corporation Law contain certain provisions that may have the effect of inhibiting a non-negotiated merger or other business combination involving the company. Such provisions are intended to encourage any person interested in acquiring us to negotiate with and obtain the approval of the board of directors in connection with any such transaction. These provisions include a staggered board of directors, undesignated preferred stock, super-majority voting provisions and the application of the Delaware General Corporation Law. Certain of these provisions may discourage a future acquisition of our company that is not approved by the board of directors in which stockholders might receive a premium over the market value for their shares. As a result, stockholders who might desire to participate in such a transaction may not have the opportunity to do so. The board of directors has the power to designate the issuance of up to 1,000,000 shares of undesignated preferred stock. The rights and preferences for any series or class may be set by the board of directors in its sole discretion and without approval of the holders of common stock, and the rights and preferences of any such preferred stock may be superior to those of the common stock, thus adversely affecting the rights of the holders of common stock. The company currently has 310,000 shares of preferred stock outstanding resulting from a private placement which occurred upon emerging from bankruptcy. While we have no present intention to issue any additional shares of preferred stock, any such issuance could be used to discourage, delay, or make more difficult a change 7 in control of the company. In addition, such preferred stock may have other rights, including economic rights, senior to the common stock. As a result, the issuance of additional shares of preferred stock could decrease the market value of the common stock. See "Description of Securities--Preferred Stock." Our Predecessor Entity Failed to Make All Required Securities Filings Prior to bankruptcy, our predecessor entity failed to make certain regular disclosure filings that such entity was required to make under the Securities Exchange Act of 1934. Although we will resume compliance with the Securities Exchange Act of 1934 once we are subject to this law, we may be subject to various sanctions, disabilities and damages as a result of our previous non-compliance. Negotiated Public Offering Price of the Common Stock The public offering price of the common stock has been artificially determined by negotiations between the company and the underwriter. The public offering price bears no relationship to earnings, asset values, book value or any other recognized criteria of value. See "Underwriting." No Liquid Trading Market for Your Common Stock Our common stock currently has no liquid public trading market and we cannot be certain that a regular public trading market for our common stock will develop or, if developed, be sustained. As a result, you may not be able to resell any shares of our common stock that you purchase in the offering. Potential Effects of Failure to List Common Stock on The Nasdaq SmallCap Market In the event that we are unable in the future to satisfy the Nasdaq SmallCap listing requirements, trading would continue to be conducted in the pink sheets or on the OTC Bulletin Board. In the absence of the common stock being quoted on the Nasdaq SmallCap Market, trading of the common stock would be covered by Rule 15g-9 promulgated under the Exchange Act for non-Nasdaq and non-exchange listed securities. Under such rule, broker-dealers that recommend such securities to persons other than established customers and accredited investors must make a special written suitability determination for the purchaser and receive the purchaser's written agreement to a transaction prior to sale. Securities are exempt from this rule if the market price is at least $5.00 per share. If the common stock were subject to the regulations applicable to penny stocks, the market liquidity for the securities would likely be reduced by limiting the ability of broker-dealers to sell the securities and the ability of stockholders to sell their securities in the secondary market. There is no assurance that trading in our common stock will not be subject to these or other regulations that would adversely affect the market for such securities. Our Stock Price May Fluctuate Which May Affect the Value of Your Shares From time to time, there may be significant volatility in the market price for the common stock. Our quarterly operating results, changes in earnings estimated by analysts, if any, changes in the general conditions of the quality cookware industry, the economy or financial markets, or other developments affecting our business could cause the market price of the common stock to fluctuate substantially. In addition, in recent years the stock market has experienced significant price and volume fluctuations. This volatility has had a significant effect on the market prices of securities issued by many companies for reasons unrelated to their operating performance. Shares Eligible For Future Sale Sales of substantial amounts of common stock in the public market following this offering could lower the market price of the common stock. Of the 2,883,691 shares of common stock to be 8 outstanding after this offering (assuming no exercise of outstanding options, warrants, conversion of the Class B common stock or the over-allotment option), 1,500,000 shares will be freely tradeable without restriction. Upon expiration of lock-up agreements entered into by our officers, directors, and shareholders prior to the offering an additional 1,383,691 shares will become eligible for sale 13 months after the closing of this offering, subject to the provisions of Rule 144. See "Shares Eligible for Future Sale." In addition, we intend to file a registration statement on Form S-8 with respect to the common stock issuable upon exercise of options under the 1998 Equity Incentive Plan. The 1998 Equity Incentive Plan authorizes the issuance of options for up to 180,000 shares of common stock. Currently, no options have been issued under the 1998 Equity Incentive Plan. See "Management--1998 Equity Incentive Plan." Upon filing of such registration statement, the holders of such options may, subject to vesting requirements including certain performance targets, exercise and sell their shares immediately without restriction, except affiliates who are subject to certain volume limitations and manner of sale requirements of Rule 144. See "Shares Eligible for Future Sale." Holders of certain warrants to purchase shares are entitled to incidental registration rights with respect to such shares. Upon registration, 451,306 of such shares may be sold in the market without limitation. In addition, pursuant to the plan of reorganization the predecessor of the company has granted warrants to purchase 52,573 shares of common stock, exercisable at a price of $11.57 per share, to the holders of all of the then outstanding warrants of such predecessor. These warrants do not contain registration rights. See "Description of Securities--Registration Rights." Sales of such shares may decrease the market price for the common stock. See "Underwriting." Risks Associated with Forward-Looking Statements This prospectus contains certain statements that are considered "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Exchange Act of 1934. Those statements include, among other things, the discussions of our business strategy and expectations concerning developments in the quality cookware industry, our market position, future operations, ability to grow through making acquisitions, margins and profitability, and liquidity and capital resources. Investors are cautioned that reliance on any forward-looking statement involves risks and uncertainties, and that although we believe that the assumptions on which the forward-looking statements contained herein are reasonable, any of those assumptions could prove to be inaccurate, and as a result, the forward-looking statements based on those assumptions also could be incorrect. The uncertainties in this regard include, but are not limited to, those identified in the risk factors discussed herein. In light of these and other uncertainties, the inclusion of a forward-looking statement herein should not be regarded as a representation by us that our plans and objectives will be achieved. 9 THE COMPANY Rolling Pin Kitchen Emporium, Inc. (the "Company") operates a chain of specialty retail stores for quality cookware and serving equipment, cooking accessories and certain select food products as well as cookbooks and food-related publications. The Company operates 19 Company-owned stores and 21 franchised locations under the trademarks The Cookstore and Rolling Pin Kitchen Emporium, which are located primarily throughout the Midwest and Southeast regions of the United States. The Company's business is comprised of the cookware business of (i) its predecessor entity, which was organized under the name The Gaylord Companies, Inc. in Delaware on July 19, 1994 (the "Predecessor Entity"), and was reorganized and renamed Home Retail Holdings, Inc. during the bankruptcy reorganization pursuant to Chapter 11 of the United States Bankruptcy Code (the "Bankruptcy Code") that was completed on August 7, 1998 (the "Reorganization") and which operates four retail cookware stores in Ohio, and (ii) Aropi, Incorporated, an Iowa corporation ("Aropi"), which operates 15 Company-owned stores in eight states and 21 franchised stores in nine states. The Company acquired Aropi in August 1998. On September 15, 1998, the Company changed its name from Home Retail Holdings, Inc. to Rolling Pin Kitchen Emporium, Inc. See "Business." The Company's goal is to build a consolidated enterprise with national market reach through the acquisition and integration of independent quality cookware businesses, the opening of new cookware stores in large markets, and developing franchised cookware stores in primarily smaller markets throughout the United States. Although the Company has had general discussions with representatives of certain potential acquisition candidates, it currently does not have any agreement with any other company with regard to any acquisitions. The Company believes that, through the prior experience of its management team and board members, and its referral network of investment and commercial bankers, business leaders, attorneys, accountants and business and financial brokers, it can identify, attract, and acquire attractive acquisition candidates. The Company's stores range in size from approximately 1,600 square feet to 3,300 square feet and operate in regional retail malls. Each store offers a wide range of products, from over 200 vendors in 12 distinct categories including accessories, bakeware, books, cookware, cutlery, electronics, food, furniture, gadgets, gifts, tableware and textiles. The Company intends to use its existing stores as the basic store design prototype for most of its anticipated expansion. The Company has four stores operating under The Cookstore trademark in Ohio and recently acquired Aropi which has 15 Company-owned stores operating under the Rolling Pin Kitchen Emporium trademark in Alabama, Florida, Georgia, Kentucky, Louisiana, South Carolina, Tennessee, and Virginia and 21 franchised stores operating under the Rolling Pin trademark in Arkansas, Florida, Georgia, Illinois, Iowa, Kentucky, North Carolina, South Carolina, and Tennessee. The Company's principal executive offices are located at 4264 Winters Chapel Road, Building B, Atlanta, Georgia 30360. 10 USE OF PROCEEDS If all 1,361,650 shares (the "Shares") of the Company's Class A Common Stock ("Common Stock") offered pursuant to this prospectus (the "Prospectus") are sold (the "Offering"), the Company will receive gross proceeds of approximately $8,169,900 (assuming the public offering price is $6.00, and assuming the over-allotment option is not exercised). The Company will not receive any proceeds from the sale of shares by the selling stockholders of the Company (the "Selling Stockholders"). If the underwriters ("Underwriters") exercise the over-allotment option, the Company will receive an additional $1,575,000. The estimated net proceeds of $6,657,813 were determined after deduction of all commissions, discounts and expenses paid to the Underwriters (estimated to be $1,062,087) and after all expenses of the Offering (estimated to be $450,000). The Company intends, in the following order of priority, to use the net proceeds from this Offering approximately as follows:
Amount Percentage ------ ---------- Expansion of Business Operations Opening of New Stores(1) $ 2,250,000 33.79% Acquisition of Existing Chains 1,000,000 15.03% Expenses Associated with Selling New Franchises 250,000 3.75% Expand Alternative Distribution Channels 600,000 9.01% Total - Expansion of Business Operations $ 4,100,000 61.58% Repayment a portion of Existing Indebtedness(2) 1,500,000 22.54% Working capital and general corporate purposes 1,057,813 15.89% TOTAL $6,657,813 100.00% ========== =======
- ---------------------- (1) Assumes that 18 stores are opened over the next 18 months at an average cost of $125,000 per store (not including costs to stock inventory). (2) The proceeds will be used to refinance a portion of existing indebtedness that bears interest of three percentage points over the Prime Rate as published in the Wall Street Journal and is to be completely repaid out of the proceeds of this Offering. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." DIVIDEND POLICY Holders of the Common Stock are entitled to dividends only, as and if, declared by the Board of Directors, out of funds legally available therefor. The Company has not yet paid any dividends and does not expect to do so in the foreseeable future. The Company intends to use all retained earnings for working capital and to finance the anticipated growth and expansion of its business. 11 CAPITALIZATION The following table sets forth the capitalization of the Company as of June 30, 1998: (i) on an actual basis; (ii) on a Fresh-Start basis ("Fresh Start"); (iii) on a pro forma basis after giving effect to the acquisition of Aropi; and (iv) on an adjusted basis, giving effect to the proceeds and use of proceeds from the sale of the Common Stock the Company offered pursuant to this Prospectus after deducting underwriting discounts and commissions and estimated offering expenses:
June 30, 1998 ------------------------------------------------------------------ Actual Fresh Start Pro Forma As Adjusted ------ ----------- --------- ----------- Long term debt less current portion(1) $ 0 $ 0 $670,502 $670,502 Stockholders' equity: Preferred Stock, 1,500,000 shares authorized 300,000 0 0 0 60,000 issued and outstanding actual; 60,000 shares issued and outstanding pro forma and pro forma as adjusted Class A Common Stock, par value $.01 per 40,950 15,220 15,220 28,837 share, 10,000,000 shares authorized; issued and outstanding 4,095,000 actual shares; 1,522,041 shares issued and outstanding Fresh Start and pro forma; 2,883,691 shares issued and outstanding pro forma as adjusted(2)(3) Class B Common Stock, par value $.01 per 0 1,550 1,550 1,550 share, 154,951 shares issued and outstanding actual pro forma and pro forma as adjusted(3) Additional Paid-in Capital 2,641,834 2,966,018 2,966,018 9,610,214 Accumulated deficit (4,333,142) 0 0 0 Total stockholders equity (1,350,354) 2,982,788 2,982,788 9,640,601 Total capitalization (1,350,354) 2,982,788 3,653,290 10,311,103
- --------------- (1) As of June 30, 1998, the current portion of obligations under long term debt was approximately $726,313. (2) Excludes (i) 92,595 shares of the Common Stock subject to warrants granted to Liberty Bidco Investment Corporation, a Michigan corporation ("Bidco"), exercisable at $0.01 per share (the "Bidco Warrants"), 40,602 shares of Common Stock subject to warrants granted to Bidco, exercisable at 165% of the public offering price (the "New Bidco Warrants"), 40,602 shares of Common Stock subject to warrants granted to Greenfield Commercial Credit, L.L.C. ("Greenfield"), exercisable at 165% of the public offering price (the "Greenfield Warrants"), 52,573 shares of the Common Stock subject to warrants granted to all of the holders of the outstanding warrants of the Predecessor Entity pursuant to the Plan of Reorganization, exercisable at $11.57 per share (the "New Warrants"), 29,261 shares of the Common Stock subject to warrants granted to the holders of all of a certain class of securities of the Predecessor Entity, exercisable at 80% of the public offering 12 price (the "Individual Warrants"), and 98,246 shares of the Common Stock subject to warrants granted to Michael Leonard and William Laux, exercisable at 165% of the public offering price (the "Other Financing Warrants"); (ii) 180,000 shares of the Common Stock reserved for issuance pursuant to the Incentive Plan; (iii) the exercise of the Underwriters' over-allotment option; (iv) 154,551 shares of the Common Stock issuable upon contingent conversion of the outstanding Class B Common Stock; and (v) 150,000 shares of the Common Stock subject to warrants granted to the Underwriters, exercisable at 165% of the public offering price (the "Underwriters' Warrants"). See "Description of Securities." (3) The Class B Common Stock automatically converts into shares of Common Stock upon the occurrence of certain events. See "Description of Securities." 13 DILUTION As of June 30, 1998, there were 4,095,000 shares of Common Stock outstanding, having a negative net tangible book value per share of approximately $(0.33). Net tangible book value per share represents the amount of the Company's total tangible assets less its total liabilities, divided by the number of shares of the Company's Common Stock outstanding. After giving effect to the sale of the 1,361,650 shares of Common Stock under this Offering at a price of $6.00 per share and the application of the net proceeds therefrom (but assuming none of the options, warrants or shares of Class B Common Stock are exercised), there would be a total of 2,883,691 shares of Common Stock outstanding with a net tangible book value of approximately $2.17 per share. This would represent an immediate increase in net tangible book value of $2.43 per share to existing stockholders and an immediate dilution of $3.83 per share to new investors. Dilution is determined by subtracting net tangible book value per share after the Offering from the amount paid by new investors per share of Common Stock. The following table illustrates the per share dilution:
Public offering price per share $6.00 Net tangible book value per share - 06/30/98 actual (0.33) Increase attributable to Fresh Start Reorganization 0.50 Dilution attributable to Aropi acquisition (0.43) ------ Net tangible book value per share before Offering (0.26) Increase attributable to new investors 2.43 ---- Net tangible book value per share after Offering 2.17 ----- Dilution to new investors $3.83 =====
The following table summarizes, on a pro forma basis, as of September 14, 1998, the difference between the existing stockholders and the new investors with respect to the number of shares of Common Stock purchased from the Company, the total consideration paid and the average price per share: Shares Purchased
Total Average Price Number Percent Consideration Per Share ------ ------- ------------- --------- Existing stockholders 1,522,041 52.8% $1,695,500 $1.11 New investors 1,361,650 47.2% 8,169,900 6.00 --------- ------- --------- ---- Total 2,883,691 100.00% $9,865,400 ========= ======= ==========
The foregoing table assumes: (i) no exercise of the Underwriters' over-allotment option; (ii) no exercise of the Underwriters' Warrants to purchase 150,000 shares of Common Stock, exercisable at 165% of the public offering price; (iii) no exercise of the Bidco Warrants to purchase 92,595 shares of Common Stock, exercisable at $0.01 per share, (a) New Bidco Warrants to purchase 40,602 shares of Common Stock, exercisable at 165% of the public offering price, (b) Greenfield Warrants to purchase 40,602 shares of Common Stock, exercisable at 165% of the public offering price, (c) New Warrants to 14 purchase 52,573 shares of Common Stock, exercisable at $11.57 per share, (d) Individual Warrants to purchase 29,261 shares of Common Stock, exercisable at 80% of the public offering price, or (e) Other Financing Warrants to purchase 98,246 shares of Common Stock, exercisable at 165% of the public offering price; (iv) no conversion of the Class B Common Stock; and (v) no exercise of stock options outstanding after June 30, 1998. As of June 30, 1998, there were 180,000 shares of Common Stock reserved for issuance under the Incentive Plan. To the extent that any shares of Common Stock are issued on exercise of any of these warrants or conversion of the Class B Common Stock, or, possibly, options granted after June 30, 1998, there will be further dilution to new investors. See "Description of Securities." 15 PRICE RANGE OF COMMON STOCK Shares of the Predecessor Entity's common stock and redeemable warrants were traded on the Nasdaq's SmallCap Market and OTC Bulletin Board under the trading symbols "GJCO" and "GJCOW," respectively, and on the Boston Stock Exchange under the symbols "GJC" and "GJCW," respectively. No other class of the Predecessor Entity's common stock was publicly traded. The following table sets forth the high and low sales prices for shares of the Predecessor Entity's common stock on the Nasdaq's SmallCap Market and OTC Bulletin Board for the periods indicated: High Low Sale Sale ---- ---- Fiscal year ended December 31, 1996 First quarter $ 5.00 $ 1.50 Second quarter 3.31 0.87 Third quarter 2.00 0.87 Fourth quarter 1.53 0.84 Fiscal year ended December 31, 1997 First quarter $ 1.44 $ 1.00 Second quarter 1.31 0.75 Third quarter 1.22 0.38 Fourth quarter 0.69 0.02 Fiscal year ended December 31, 1998 First quarter $ 0.28 $ 0.09 Second quarter 0.32 0.14 On August 7, 1998, the last sale price for shares of the Predecessor Entity's common stock as reported by the Nasdaq's OTC Bulletin Board was $0.17 per share. Since August 12, 1998, there has been no established public trading market for the Predecessor Entity's common stock because the common stock was exchanged for the Company's Common Stock. There is currently no trading market for the Company's Common Stock. At August 31, 1998, there were approximately 345 holders of record of shares of Common Stock. 16 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis should be read in conjunction with the Financial Statements and related Notes contained elsewhere in this Prospectus. This Prospectus contains forward-looking statements that involve risks and uncertainties. The Company's actual results may differ significantly from the results discussed in the forward-looking statements. Factors that might cause such a difference include, but are not limited to, those discussed in "Risk Factors." Historical The Company is the successor entity to the Predecessor Entity, which filed for bankruptcy in November 1997 and operated under bankruptcy protection during the first half of 1998. The Predecessor Entity began as a family business operating a chain of bookstores and eventually cookware stores as well. The various operations were consolidated in a corporate entity under the name Gaylord Companies, Inc. in July 1994. In October 1995, the Predecessor Entity effected a public offering of its common stock. Although the Predecessor Entity had expected to raise approximately $4 million to $5 million in that Offering to finance the expansion of its operations, net proceeds to the Predecessor Entity totaled approximately $2 million. Management believes that the failure to secure an appropriate level of capital, along with competitive pressures from larger competitors and increased operating expenses resulted in the bankruptcy. Overview Notwithstanding the difficulties encountered by the Predecessor Entity, management believes that the quality cookware industry has substantial growth potential and that the cookware store business is an attractive business model that is capable of generating consistent levels of sales and profitability. Management believes that the tendency of more families to prepare an increased number of meals at home means greater demand for a variety of cooking equipment, tools and related merchandise. The potential market for the type of products found in the Company's stores consists of nearly every home in the country. According to estimates by National Housewares Manufacturers Association, annual retail sales of housewares are approximately $54 billion annually. The higher-end segment (which the Company defines as its primary target market) including kitchen gadgets, tools, and accessories captures in excess of $1.8 billion in annual sales. Management believes that this industry niche is an attractive opportunity for several reasons: o This market currently provides for higher gross profit margins and higher average ticket sales than the broader-based housewares market, which includes many more highly competitive, lower-end products. 17 o There are presently a limited number of companies of significant size that have targeted this market in the manner and with the approach to the market as the Company anticipates doing. o There is a growing segment of the population that has a keen interest in cooking. The Company's stores intend to cater to as the high-end segment of the industry. Business and Operational Model of the Company The Company's business plan is based on the belief that retail success today is a function of the traditional location, price, and promotion approaches of traditional merchandising combined with a disciplined operational and logistical infrastructure. The Company recognizes that same-store sales growth is essential to the success of any retail enterprise and the Company will continue to build a marketing organization that is responsive to retail trends in general and to local retail demand in particular. The Company's ability to tailor the store offerings to meet the demands of as local market is essential to the continued success of the stores. Traditional merchandising techniques are complemented by a constant use of creative marketing efforts that focus on making the consumer's visit to the store as much an entertainment experience as a shopping task. The Company's commitment to operational focus means that its success is dependent in large part on its ability to manage information systems, inventory levels, distribution logistics, controlling shrinkage of inventory, purchasing efficiencies and effective customer service at the store level. In order to achieve its goal, the Company will focus on operating efficiencies and synergies by combining administrative functions. The Company will manage cost through a expense control system that requires analysis of the cost benefits of each expenditure and through analysis of the decision process for selecting new sites. Results of Operations - The Company The Company operates a chain of specialty retail stores for quality cookware and serving equipment. The Company's revenue is derived primarily from the sale of cookware and serving equipment. Six Months Ended June 30, 1998 Compared To Six Months Ended June 30, 1997 - The Company Net Revenues. For the six months ended June 30, net revenues decreased $330,000, or 23%, from $1.47 million in 1997 to $1.14 million in 1998, primarily due to the Company's operating under bankruptcy protection and the resultant inability to keep its stores fully stocked with inventory and to engage in promotional activities. Operating Expenses. For the six months ended June 30, operating expenses increased approximately $34,000, or 10%, from $333,000 in 1997 to $367,000 in 1998. As a percentage of net revenues, operating expenses increased 18 from 23% in 1997 to 32% in 1998, primarily due to a combination of reduced sales and increased costs associated with operating in bankruptcy. General and Administrative Expenses. For the six months ended June 30, general and administrative expenses decreased $111,000, or 39%, from $284,000 in 1997 to $173,000 in 1998. As a percentage of net revenues, general and administrative expenses decreased from 19% in 1997 to 15% in 1998. This decrease as a percentage of net revenues was due to among other things reductions in overhead brought about by the need to conserve cash while in bankruptcy. Results For 1997 Compared To 1996 - The Company Net Revenues. Net revenues increased $200,000, or 6%, from $3.5 million in 1996 to $3.7 million in 1997, primarily due to the opening of two new Cookstores on December 1, 1996. Operating Expenses. Operating expenses increased approximately $1.2 million, or 262%, from $458,000 in 1996 to $1.65 million in 1997. As a percentage of net revenues, operating expenses increased from 13.1% in 1996 to 44.2% in 1997, primarily due to increased costs associated with the newest Cookstores (which were opened on December 1, 1996) and the increased costs of borrowing associated with a refinancing of its debt. General and Administrative Expenses. General and administrative expenses increased $683,000, or 175%, from $390,000 in 1996 to $1.07 million in 1997. As a percentage of net revenues, general and administrative expenses increased from 11.1% in 1996 to 28.8% in 1997. This increase as a percentage of net revenues was primarily due to an increase in professional, consulting and financing fees. Liquidity and Capital Resources - The Company The Company used $290,872 in net cash from operating activities in 1997. In the six months ended June 30, 1998, $940,871 of cash was used by operating activities. Net cash used in investing activities was approximately $34,915 in 1997 and $0 in the six months ended June 30, 1998. Net cash provided by financing activities was $577,772 in 1997, including the incurrence of (i) $395,000 in long-term debt which was used to repay bank debt, and (ii) $300,986 in short-term debt which was used for the repayment of notes payable. In the six months ended June 30, 1998, net cash provided by financing activities was $83,049. At June 30, 1998, the Company had a working capital deficit of $1.67 million, with all debt being classified as current. Results Of Operations - Aropi Aropi operates a chain of specialty retail stores for quality cookware and serving equipment. Aropi's revenue is derived primarily from the sale of cookware and serving equipment. Aropi's fiscal year ended on June 30. Results for 1998 Compared To 1997 - Aropi Net Revenues. Net revenues decreased $262,543, or 4%, from $6.57 million in 1997 to $6.31 million in 1998, primarily due to the remodeling of a mall which resulted in reduced traffic, new competition entering two of the markets, and a new mall opening in close proximity to one of the Company's existing stores. Operating Expenses. Operating expenses decreased approximately $87,826, or 2.75%, from $3.19 million in 1997 to $3.10 million in 1998. As a percentage of net revenues, operating expenses increased from 48.50% to 49.13%, primarily due to an increase in annual rental payments and increases occuring in the ordinary course of business. 19 General and Administrative Expenses. General and administrative expenses decreased $85,445, or 5.31%, from $1.61 million in 1997 to $1.52 million in 1998. As a percentage of net revenues, general and administrative expenses decreased from 24.46% in 1997 to 24.13% in 1998. This decrease as a percentage of net revenues was due to an increase in expenses for the ordinary course of business. Results For 1997 Compared To 1996 - Aropi Net Revenues. Net revenues decreased $260,019, or 3.81%, from $6.83 million in 1996 to $6.57 million in 1997, primarily due to a closing of one store. Operating Expenses. Operating expenses decreased approximately $44,081, or 1.36%, from $3.23 million in 1996 to $3.19 million in 1997. As a percentage of net revenues, operating expenses increased from 47.30% in 1996 to 48.50% in 1997, primarily due to lower sales and the fact that overhead in the store which had closed decreased at a slower rate than sales. General and Administrative Expenses. General and administrative expenses decreased $74,224, or 4.41%, from $1.68 million in 1996 to $1.61 million in 1997. As a percentage of net revenues, general and administrative expenses decreased from 24.62% in 1996 to 24.46% in 1997. This decrease as a percentage of net revenues was due to lower sales and the fact that overhead in the store which had closed decreased at a slower rate than sales. Liquidity and Capital Resources - Aropi Aropi provided $438,499 in net cash from operating activities in 1997. For the year ended June 30, 1998, $186,218 of cash was provided by operating activities. Net cash used in investing activities was approximately $14,417 in 1997 and $16,659 in 1998, principally for the purchase of fixed assets. Net cash used by financing activities was $434,976 in 1997, incurrence of $15,353 in long-term debt which was used for working capital purposes. For the year June 30, 1998, net cash used in financing activities was $176,703. At June 30, 1998, Aropi had a working capital surplus of $958,754 million, and had $846,815 million of long-term debt outstanding. Liquidity and Capital Resources When the Company emerged from Bankruptcy on August 7, 1998, it had a working capital deficit of $(66,701). At June 30, 1998, the Company had a working capital of $(1,671,985). The increase of $1,605,284 is primarily attributable to the elimination of liabilities subject to compromise as a result of the Plan of Reorganization. Bidco Loan Agreement In August 1998, the Company entered into a Business Loan Agreement With Covenants (the "Loan Agreement") with Bidco, that provided exit financing in the amount of $1,300,000 pursuant to the terms of the Plan of Reorganization. The Loan Agreement was amended on August 20, 1998 by the First Amendment to the Loan Agreement among Bidco, the Company, its subsidiaries and Aropi (the "First Amendment") that provided for an additional $700,000 in financing used to fund the Aropi acquisition as well as for working capital. Borrowings under the Loan Agreement were used to repay the outstanding balance owed by the Company under the Loan and Security Agreement, dated April 23, 1998, between the Company and Fremont Financial Corporation, a California corporation ("Fremont"), as well as for working capital needs and general corporate purposes. The Loan Agreement and First Amendment include restrictions 20 on, among other things, additional debt, capital expenditures, investments, dividends and other distributions, mergers and acquisitions, and contains covenants requiring the Company to meet a specified minimum current assets to current liabilities ratio, and a minimum net worth test. As of the date hereof, the Company is in compliance with all such financial covenants. The Loan Agreement and First Amendment established a first continuing security interest in the current assets of the Company and Aropi, including, among other items, instruments, furniture, accounts receivable and inventory. In addition, the First Amendment provided Bidco with a security interest in the stock of Aropi. Pursuant to the Loan Agreement, the Company executed a Promissory Note that bears interest at the rate of three percentage points over the Prime Rate as published in the Wall Street Journal on the first of every month. The Promissory Note was amended pursuant to the First Amendment to reflect the current amount of the loan which was $2,000,000. Pursuant to the Loan Agreement, the Company issued the Bidco Warrants to purchase 92,595 shares of Common Stock, exercisable at a price of $0.01 per share. Pursuant to the First Amendment, the Company executed the New Bidco Warrants for the right to purchase 40,602 shares of Common Stock, exercisable at 165% of the public offering price, which are subject to a put option by Bidco. Each of the Bidco Warrants and the New Bidco Warrants contain registration rights for the shares received by the Bidco pursuant to such warrants. Under the terms of the Loan Agreement, the Company is required to pay a prepayment penalty of 20% on any amount prepaid unless the entire balance is prepaid from the proceeds of the Offering or a private placement by the Company. The amended Promissory Note is required to be paid in full with the proceeds from this Offering. See "Description of Securities - Warrants." As of August 31, 1998, there was an outstanding balance of $2.0 million. The Loan Agreement and the First Amendment expires on January 31, 1999. Greenfield Loan Agreement In August 1998, the Company entered into a Loan and Security Agreement (the "Loan and Security Agreement") with Greenfield, that provided acquisition financing in the amount of $2 million, of which $500,000 is pursuant to a non-revolving bulge loan facility ("Bulge Loan") and $1.5 million is pursuant to a revolving credit loan facility ("Term Facility"). Borrowings under the Loan and Security Agreement were used to finance the acquisition of Aropi, to repay certain outstanding indebtedness and for working capital purposes. The Loan and Security Agreement includes restrictions on, among other things, additional debt, dividends and other distributions, and mergers and acquisitions. As of the date hereof, the Company is in compliance with all such financial covenants. The Loan and Security Agreement granted Greenfield a continuing priority after Bidco perfected security interest in the certain collateral of the Company and its subsidiaries, including, among other items, accounts receivable, general intangibles, inventory, instruments, furniture, and other property. Pursuant to the Loan and Security Agreement, the Company executed a Revolving Credit Note that bears interest at the rate of interest which is equal to three percentage points above the Prime Rate as published in the Wall Street Journal and a Bulge Loan Note that bears interest at a fixed per annum rate of interest equal to 15%. The interest on each note is computed upon the basis of a year of 360 days for the actual number of days elapsed in a month. Pursuant to the Loan and Security Agreement, the Company also executed the Greenfield Warrants granting Greenfield the right to purchase 40,602 shares of Common Stock, exercisable at a price per share equal to 165% of the public offering price. The Greenfield Warrants 21 contain registration rights for the shares received by the Greenfield pursuant to such warrants. See "Description of Securities - Warrants." As of August 31, 1998, there was an outstanding balance of $260,000 under the Bulge Loan and a balance approximately of $1.5 million under the Term Facility. The outstanding balance is to be repaid in full from the proceeds of this Offering or, in any event, no later than January 29, 1999. Seasonality Historically, a significant portion of our net sales and net earnings have been realized during the period from October through December, and levels of net sales and net earnings have generally been significantly lower during the period from January through September. This is the general pattern associated with similar retail industries. If for any reason our sales were to be substantially below seasonal norms during the October through December period, our annual results could be materially and adversely affected. The Company expects to use a portion of the net proceeds of this Offering for its acquisition and expansion program, and for working capital and general corporate purposes. A portion of the proceeds may also be used for acquisitions of complementary businesses; however, at this time the Company has no definitive acquisition targets. The Company expects the proceeds from this Offering will satisfy its operational and acquisition needs for the next 18-24 months. See "Use of Proceeds." 22 BUSINESS The Company The Company operates a chain of specialty retail stores for quality cookware and serving equipment, cooking accessories and certain select food products as well as cookbooks and food-related publications. It operates 19 Company-owned stores and 21 franchised locations under the trademarks The Cookstore and Rolling Pin Kitchen Emporium, which are primarily throughout the Midwest and Southeast regions of the United States. The Company's goal is to build a consolidated enterprise with national market reach through the acquisition and integration of independent quality cookware businesses, the opening of new cookware stores in large markets, and developing franchised cookware stores in primarily smaller markets throughout the United States. Although the Company has had general discussions with representatives of certain potential acquisition candidates, the Company currently has no agreement with any other company with regard to any acquisitions. The Company believes that, through the prior experience of its management team and board members, and its referral network of investment and commercial bankers, business leaders, attorneys, accountants and business and financial brokers, it can identify, attract, and acquire attractive acquisition candidates. The Company's cookware stores range in size from approximately 1,600 square feet to 3,300 square feet and operate in regional retail malls. Each store offers a wide range of products, from over 200 vendors in 12 distinct categories including accessories, bakeware, books, cookware, cutlery, electronics, food, furniture, gadgets, gifts, tableware and textiles. The Company intends to use its existing stores as the basic store design prototype for most of its anticipated expansion. The Company has four stores operating under The Cookstore trademark in Ohio and recently acquired Aropi that has 15 Company-owned stores operating under the Rolling Pin Kitchen Emporium trademark in Alabama, Florida, Georgia, Kentucky, Louisiana, South Carolina, Tennessee, and Virginia and 21 franchised stores operating under the Rolling Pin trademark in Arkansas, Florida, Georgia, Illinois, Iowa, Kentucky, North Carolina, South Carolina, and Tennessee. Industry Background The Company believes numerous factors exist which create a favorable environment for a consolidation within the quality cookware industry. As businesses have become nationwide in scope, the need and demand for a nationwide vendor supplying uniformly high-quality products and services have increased. Similarly, as brand consciousness among end users has increased in certain industries, national brands have realized significant advantages in the marketplace, such as the ability to differentiate their products and services, allowing premium pricing and enhanced customer loyalty. Larger businesses formed through mergers or acquisitions continue to achieve competitive advantages by creating operating synergies through, among other things, the elimination of redundant corporate functions and the use of information technology to decrease cost and increase revenue. Furthermore, manufacturers have developed an increased interest in dealing with large distributors, which has enabled manufacturers to generate efficiency gains due to streamlined production, distribution, and marketing operations. 23 The Company's standard store format (between 1,600 - 3,000 square feet) works especially well in regional malls and strip shopping centers and other select sites that can be classified as middle to upper income shopping destinations. The Company's target areas for acquisition and expansion include regional shopping malls located in suburban and urban core revitalization areas, smaller specialty malls, and select, upper end in-line shopping centers. The Company believes that due to the industry's highly fragmented nature, and the relatively small number of companies, such as Williams-Sonoma, Inc., Bed Bath & Beyond Inc. and Linens 'N Things, Inc. there are hundreds of prime locations available for future store openings or acquisitions. Strategy The Company's goal is to become the leading national retailer of quality cooking and serving equipment. In addition to opening new locations and sales of franchises, the Company intends to acquire established local or regional cookware operations and combine and integrate them into the existing organization. In order to achieve its goal, the Company will focus on: (i) identifying acquisition candidates that meet the Company's consolidation criteria; (ii) opening new locations; (iii) selling new franchises to augment the store brand in smaller markets; and (iv) achieving operating efficiencies and synergies by combining administrative functions, eliminating redundant facilities, implementing system and technology improvements in acquired entities and purchasing products in large volumes for both Company-owned and franchise stores. Identify and Pursue Strategic Consolidation Opportunities. The Company plans to acquire companies with established sales presences and/or local brand names. The Company believes that the smaller-store, high-end quality cookware industry is highly fragmented and often characterized by family-owned smaller-store owner/operators who desire liquidity and may be unable to gain the scale necessary to access the capital markets effectively or to expand beyond a local or regional base. The Company plans to acquire such operations with a combination of cash from the proceeds of this Offering and Common Stock. Currently, the Company has no plans or acquisition targets identified. See "Use of Proceeds." The Company plans to pursue acquisition opportunities in markets of at least 250,000 population with fragmented competition that will benefit from economies of scale. Within such markets, the Company intends to focus on the acquisition of stores or chains having some or all of the following characteristics: (i) stable cash flows and recurring revenue streams from long-term operations or market presence; (ii) the ability to improve sales, operations, and profitability through superior management techniques, access to larger financial resources, and improved purchasing terms; (iii) long-term growth prospects for products offered given the market demographics; (iv) a strong "franchise" or presence in the communities served by the acquisition candidate; (v) an ability to retain, promote, and motivate management teams; (vi) favorable demographic trends within the local regions serviced; and (vii) an under-penetrated market for products provided by the acquisition candidate. Open new locations. The Company plans to open new stores in its current Midwest and Southeast market areas. The Company will select locations for new stores based on market and site demographics, the nature of local competition, and the logistics of shipping and store operations. The approximate cost to open a new store (not including the value of the inventory) is $125,000. The Company's strategy is to present the merchandise in an upscale and fashionable setting. The full range of the stores' products are displayed and stocked on the retail floor. The merchandise is 24 arranged by category for shopping convenience. Feature displays are arranged throughout the store emphasizing seasonal products or particular themes. Selling new franchises. The Company believes that franchising offers the opportunity to deploy the cookware store model, and hence the Company's "brand," with no significant capital requirements. This franchise expansion will allow brand expansion into markets that the Company would not be likely to enter. The Company believes that in smaller markets, the local franchisee is better positioned to commit the effort it takes to make a smaller store successful. The Company will continue to use business brokers as a primary vehicle for franchise development, but, the Company will also augment its in-house commitment to finding new markets and prospects. The Company expects to see the franchise community grow at about the same pace as the internally developed stores. Rolling Pin Kitchen Emporium franchises are available in all states, except for California, Hawaii, Indiana, Maryland, Minnesota, North Dakota, Rhode Island, South Dakota, Washington, New York, Texas, and Wisconsin. The Company does not know when or if it will ever make available franchises in these states. Alternative Channels - The Internet and Catalogs. The Company plans to expand its existing catalog operation. The catalog will be expanded and used in carefully selected direct mailing campaigns so as to develop a customer base that complements the Company's existing market locations and develops brand recognition in markets the Company does not currently have retail cookware stores. The Company has an existing web site which generates a modest volume of transactions. This electronic commerce vehicle will be expanded to capture that segment of the growing market that is comfortable with, or prefers, purchasing products on the internet. The Company will use a variety of marketing strategies designed to increase brand recognition and awareness of the web site. This effort is an important component of the brand identity strategy. Operating efficiencies. The Company believes that it can achieve greater operating efficiencies as it expands and acquires cookware chains, new stores, and franchised locations. Such operating efficiencies include: o Combining Administrative Functions. The Company plans to institute a Company-wide management information system and to combine administrative functions, such as financial reporting and finance, insurance, employee benefits, and legal support, at the corporate level. o Implementing System and Technology Improvements. The Company believes it will be able to increase the operating margin of existing stores and acquired companies by using computerized inventory management and order processing systems, computerized quotation and job costing systems and computerized logistics and distribution systems. The Company believes the implementation of such systems may significantly increase the speed and accuracy of order processing at acquired companies, while increasing inventory turns and providing measurement and analysis tools that facilitate efficient operation. o Using Volume Purchasing. The Company believes that if it is successful in expanding its operations and acquiring more stores, then the Company can achieve operating efficiencies through volume purchasing and may benefit from favorable prices and rebates accruing as the result of high volume purchases. The Company plans to negotiate improved arrangements with wholesalers and manufacturers to reduce inventory levels of certain acquired companies, thereby allowing more efficient operations by decreasing inventory holding costs and increasing operating margins. The Company believes that if it increases the size and scale of its consolidated enterprises then it will be able to negotiate improved terms and performance of delivery vehicles, long distance voice and data services, overnight delivery services, real estate services, banking and financial services, and insurance. 25 As a part of the management agreements signed between the Company and DDG Management Services Corp. and Deltennium Consulting, Inc., these entities have agreed to assume oversight responsibility for the development and execution of the corporate strategy defined in this Prospectus. In addition to his normal duties as Chairman of the Board of the Company, Mr. Czarnecki is the person primarily responsible for overseeing and coordinating the key functions of strategy formulation, mergers and acquisitions, general expansion efforts and financial markets support. Mr. Czarnecki has also agreed to coordinate the activities of the DDG Management Services Corp. and Deltennium Consulting organizations in the furtherance of their responsibilities under the management agreements as they relate to the Company's operations. See "Certain Relationships and Related Party Transactions." Reorganization of Predecessor The Company is the successor entity to the Predecessor Entity, which filed for bankruptcy in November 1997 and operated under bankruptcy protection during the first half of 1998. The Predecessor Entity began as a family business operating a chain of bookstores and eventually cookware stores as well. The various operations were consolidated in a corporate entity under the name Gaylord Companies, Inc. in July 1994. In October 1995, the Predecessor Entity effected a public offering of its common stock. Although the Predecessor Entity had expected to raise approximately $4 million to $5 million in that offering to finance the expansion of its operations, net proceeds to the Predecessor Entity totaled approximately $2 million. Management believes that the failure to secure an appropriate level of capital, along with competitive pressures from larger competitors and increased operating expenses resulted in the bankruptcy. The Company formerly operated under the name The Gaylord Companies, Inc., which was reorganized in a Chapter 11 bankruptcy which was completed on August 7, 1998 (the "Effective Date"). In the Reorganization, the Company sold its bookstore operations, closed two cookware stores, and brought in its current management and was renamed Home Retail Holdings, Inc. On September 15, 1998, the Company changed its name from Home Retail Holdings, Inc. to Rolling Pin Kitchen Emporium, Inc. Acquisition of Aropi In August 1998, the Company acquired Aropi for $1.3 million in cash and two notes for $250,000 each convertible into Common Stock and $1.3 million applied to certain indebtedness. Under the purchase agreement, the Company agreed to secure one of the $250,000 convertible promissory notes pursuant to a letter of credit in the amount of $250,000. The letter of credit was not delivered. Pursuant to a letter agreement between the Company and Mr. Kaas, the Company agreed that instead of providing the letter of credit, Mr. Kaas will receive an aggregate of $100,000 payable over a 12 month period. The entire amount remaining under the letter agreement will be accelerated and become due and payable upon the consummation of the Offering. The Company has also agreed to make a good faith effort to deliver to Mr. Kaas a letter of credit in the amount of $150,000 to secure a convertible promissory note in the amount of $250,000. Aropi owned and operated 15 cookware stores in eight states and 21 franchised stores in nine states. See "Certain Relationships and Related Party Transactions." Aropi was founded in 1978 as Rolling Pin Kitchen Emporium, a sole proprietorship, by members of Mr. Kaas' family. In 1981, Rolling Pin Kitchen Emporium incorporated in the State of Iowa under the name "Aropi, Incorporated." Aropi's stores offer on average 4,000 stock-keeping-units ("SKUs"), which are marketed to consumers with a keen interest in cooking and feature categories that include cookware, cutlery, bakeware, books, food, and associated accessories and gadgets. Aropi distinguishes itself from competition by broader and deeper product offerings and a product mix that it believes is continuously revised and revitalized. Aropi's stores, doing business under the name Rolling Pin Kitchen Emporium, occupy primary locations in mid- and upper-scale malls enjoying the status as a destination center as well as sales to convenience and impulse buyers throughout the year, particularly during the fourth quarter in correlation with the holiday season. Mr. Kaas is the President, Chief Executive Officer and a director of the Company and, following the Offering, he will own approximately 2% of the Common Stock with options to acquire an additional 5,000 shares of Common Stock received in connection with the acquisition of Aropi. 26 Discontinued Operations In the Reorganization, the Company sold six bookstores and closed two cookware stores which were unprofitable and could not be restructured through the reorganization process to become cost effective. Properties The Company leases all of its cookware stores. The Company-owned cookware stores are located in the following markets: Riverchase Galleria, Birmingham, Alabama Aventura Mall, Aventura, Florida Gulf View Square, Port Richey, Florida Cumberland Mall, Atlanta, Georgia Northlake Mall, Atlanta, Georgia Phipps Plaza, Atlanta, Georgia Gwinnett Place Mall, Duluth, Georgia Town Center at Cobb, Kennesaw, Georgia Fayette Mall, Lexington, Kentucky The Mall at Cortana, Baton Rouge, Louisiana Lakeside Shopping Center, Metairie, Louisiana Lane Avenue Shopping Center, Columbus, Ohio Summit Mall Shopping Center, Akron, Ohio Worthington Mall, Worthington, Ohio The Mall at Fairfield Commons, Beavercreek, Ohio Haywood Mall, Greenville, South Carolina 2100 Hamilton Place Blvd., Chattanooga, Tennessee Cool Springs Galleria, Franklin, Tennessee Regency Square Mall, Richmond, Virginia The Company's corporate headquarters is located at 4264 Winters Chapel Road, Building B Atlanta, Georgia 30360. The Company leases tend to be in locations that are considered mid- to upper-end shopping malls and would also be characterized as both destination and convenience driven. A majority of the Company's leases have a term of ten years. The Company believes that its current facilities are adequate for the foreseeable future and that alternate facilities are readily available. Trademarks The Company has been granted registered trademarks for each of "The Cookstore" and "Rolling Pin Kitchen Emporium" with the United States Patent and Trademark Office. Employees As of August 1998, the Company had approximately 188 part-time employees and approximately 34 full-time employees, of whom 34 were in managerial positions and 188 were in sales positions. The Company believes that the success of its business will depend, in part, on its ability to attract and retain qualified personnel. The Company's employees are not covered by a collective bargaining agreement, and the Company considers its relations with its employees to be good. 27 Legal Proceedings The Company is involved in various legal actions arising in the ordinary course of business. The Company believes that none of these actions will have a material adverse effect on its business, financial condition or results of operations. The Predecessor Entity emerged from bankruptcy on August 7, 1998. 28 MANAGEMENT Executive Officers, Directors and Key Employees The following table sets forth information concerning the executive officers and directors of the Company:
NAME AGE POSITION SINCE - ---- --- -------- ----- Glenn Kaas 40 President, Chief Executive Officer and 1998 Director Gerald Czarnecki(1) 58 Chairman of the Board of Directors 1998 Greg Dukoff 34 Secretary, Interim Chief Financial Officer 1998 and Director John Critser 43 Vice President, Operations 1998 David Danovitch(2) 36 Director 1998 Donald Jackson(1) 47 Director 1998 George Lucaci(2) 47 Director 1998 Thomas Tuttle (2) 31 Director 1998
- ----------------- (1) Member of Compensation Committee. (2) Member of Audit Committee. Glenn Kaas has been the President and Chief Executive Officer of the Company since August 1998. He has also been a director of the Company since August 1998. From September 1989 to August 1998, Mr. Kaas was the President, Chief Executive Officer and a director of Aropi. From 1985 to 1989, Mr. Kaas was the Vice President of Aropi. From 1982 to 1985, he was the sole owner of two franchised Rolling Pin stores. Mr. Kaas received a Bachelor of Science and Pharmacology from the University of Illinois Medical School in 1980. Gerald Czarnecki has been Chairman of the Board of Directors of the Company since August 1998. Since December 1995, Mr. Czarnecki has been the Chairman and Chief Executive Officer of the Deltennium Group, Inc., a private investment and management company. From September 1994 to November 1995, Mr. Czarnecki was President and Chief Operating Officer of UNC Incorporated, an aviation manufacturing and services company. From April 1993 to May 1994, he was Senior Vice President of International Business Machines Corporation. From 1988 to April 1993, Mr. Czarnecki was part of an investor group, with specific responsibility for overseeing the affairs of HonFed Savings Bank, a bank located in Hawaii. Greg Dukoff has been the Secretary of the Company since 1998. Since May 1998, he has also been the Administrator of the Predecessor Entity, The Cookstore, Inc., and The Cookstore Worthington, Inc. Since March 1998, he has been a Principal of CH Equity Partners, L.P., a private equity partnership. From 1996 to 1997, Mr. Dukoff was Vice President and Head of Managed Funds with ABN AMRO Bank N.V., an investment bank. From 1994 to 1996, Mr. Dukoff was a First Vice President and Director of Managed Funds with Prudential Securities Incorporated, an investment bank. Mr. Dukoff was an officer of Home Retail Acquisition Corp. from its inception until it was merged into the Predecessor Entity. John Critser has been the Vice President of Operations of the Company since September 1998. Between July 1994 and August 1998, Mr. Critser was a director, President and Chief Operating Officer of the Gaylord Companies, Inc. and was President and Chief Operating Officer of each of the Gaylord 29 subsidiaries since November 1993. Prior to joining Gaylord in July 1993, Mr. Critser held various positions including Vice President of Store Operations with Eckerd Vision Group, a division of the Eckerd Corporation. David Danovitch has been a director of the Company since May 1998 and interim Chief Financial Officer since August 1998. Since October 1997, Mr. Danovitch has been a Managing Director of Cambridge Holdings, L.L.C., an investment firm. From 1994 to 1997, he was a principal of Snowden Capital, Inc., a New York City-based investment banking and direct investment firm. From 1993 to 1994, he served as the chief of staff to the Senior Vice President at International Business Machines Corporation. Between 1990 and 1993, Mr. Danovitch was an attorney with the law firm of Jones, Day, Reavis & Pogue. Donald Jackson has been a director of the Company since August 1998. Mr. Jackson is the Chief Operating Officer of Cambridge Holdings, L.L.C., an investment firm. From February 1995 to June 1997, he was a founder and the President of RiverBank Securities, a small broker-dealer firm. From September 1991 to February 1995, Mr. Jackson was Vice President and Investment Manager for DelCal Enterprises, Inc., a money management firm. From 1990 to 1991, he was Vice President of Institutional Sales, with Nomura Securities International, Inc. George Lucaci has been a director of the Company since August 1998. Mr. Lucaci has been Vice Chairman and Chief Executive Officer of Cambridge Holdings, L.L.C., an investment firm, since June 1995. From October 1992 to June 1995, he was the Managing Director of Normandy Asset Management, a private international investor group. Thomas Tuttle has been a director of the Company since August 1998. Since 1995, he has been the President of GEM Investment Advisors, Inc., an investment advisory firm. Prior to 1995, Mr. Tuttle held various positions with Morgan Stanley & Co., an investment banking firm, and McKinsey & Co., a management consulting firm. Following the Offering, the Company intends to retain a Chief Financial Officer with public company experience. The Company is actively seeking to fill such position. Director Compensation Upon consummation of the Offering, directors who are not employees of the Company will receive $1,000 per year for services rendered as a director and $500 for attending each meeting of the Board of Directors or one of its Committees. Directors who provide active, continuous support for the Company's goals and objectives in addition to serving as directors will also be compensated with stock options. In addition, directors may be reimbursed for certain expenses incurred in connection with attendance at any meeting of the Board of Directors or Committees. Other than reimbursement of expenses, directors who are employees of the Company receive no additional compensation for service as a director. Officers are elected by the Board of Directors and serve until their successors are appointed by the Board of Directors. Executive Compensation The following table sets forth total compensation for the Chief Executive Officer of the Company for each of the last three fiscal years. 30 SUMMARY COMPENSATION TABLE
- ------------------------------------------------------------------------------------------------------------------------ Annual Compensation Long-Term Compensation - ------------------------------------------------------------------------------------------------------------------------ Awards Name and Other Securities All Other Principal Annual Underlying Compensation Position Year Salary($) Bonus($) Compensation Options (#) ($) - ------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------ Glenn Kaas, 1997 68,000(1) --- --- --- --- President and Chief Executive Officer - ------------------------------------------------------------------------------------------------------------------------ 1996 69,000(1) --- --- --- --- - ------------------------------------------------------------------------------------------------------------------------ 1995 --- --- --- --- --- - ------------------------------------------------------------------------------------------------------------------------
- --------------- (1) Reflects compensation paid by Aropi. Stock Option Grants The following table sets forth information concerning the grant of stock options made during 1998 to the Chief Executive Officer:
Name Number of Percent of Total Securities Options Granted to Underlying Options Employees in Name Granted Fiscal Year Price Per Share Expiration Date - ---- ------- ----------- --------------- --------------- Glenn Kaas(1) 5,000 100% $6.00 August 20, 2000
- --------------- (1) The options were granted as part of the purchase price for the acquisition of Aropi. The option is exercisable immediately. 1998 Equity Incentive Plan The Company adopted the Incentive Plan on July 10, 1998, in connection with the Reorganization. The Incentive Plan is designed to advance the interests of the Company by enhancing its ability to attract and retain employees and others in a position to make significant contributions to the success of the Company through ownership of Common Stock. The Incentive Plan provides for the grant of incentive stock options ("ISOs"), non-qualified stock options ("NQSOs"), stock appreciation rights ("SARs"), restricted stock, unrestricted stock, deferred stock grants, and performance awards, loans to participants in connection with awards, supplemental grants and combinations of the above. A total of 180,000 shares of Common Stock are reserved for issuance under the Incentive Plan. The maximum number of shares as to which options or SARs may be granted to any participant in any one calendar year is 80,000. The shares of Common Stock issuable under the Incentive Plan are subject to adjustment for 31 stock dividends and similar events. Awards under the Incentive Plan may also include provision for payment of dividend equivalents with respect to the shares subject to the award. The Incentive Plan is administered by the Option Committee of the Board of Directors (the "Option Committee"). The Option Committee shall consist of at least two directors. If the Common Stock is registered under the Exchange Act, all members of the Option Committee shall be "outside directors" as defined. Each employee of the Company or any of its subsidiaries and other persons or entities (including non-employee directors of the Company or any of its subsidiaries) who, in the opinion of the Option Committee, are in a position to make a significant contribution to the success of the Company or any of its subsidiaries are eligible to participate in the Incentive Plan. No determination has been made (i) as to which individuals may in the future receive options or rights under the Incentive Plan, (ii) as to the number of shares to be covered by any such options or rights granted to any single individual, or (iii) as to the number of individuals to whom such options or rights will be granted. The proceeds received by the Company from the sale of stock pursuant to the Incentive Plan will be used for its general purposes, or in the case of the receipt of payment in shares of Common Stock, as the Board of Directors may determine, including redelivery of the shares received upon exercise of options. Stock Options. The exercise price of an ISO granted under the Incentive Plan may not be less than 100% (110% in the case of an ISO granted to a 10% stockholder) of the fair market value of the Common Stock at the time of grant. The term of each option may be set by the Option Committee but cannot exceed ten years from the date of grant (five years from the date of grant in the case of an ISO granted to a 10% shareholder), and each option will be exercisable at such time or times as the Option Committee specifies. Stock Appreciation Rights. SARs may be granted in tandem with, or independently of, stock options. Each SAR entitles the participant, in general, to receive upon exercise the excess of the fair market value of the shares in cash or Common Stock at the date of exercise over the fair market value of the shares on the date the SAR was granted. The Option Committee may grant SARs which provide that following a change in control of the Company, as determined by the Option Committee, the holder of such right will be entitled to receive an amount measured by specified values or averages of values prior to the change in control. If an SAR is granted in tandem with an option, the SAR will be exercisable only to the extent the option is exercisable. To the extent the option or the SAR is exercised, the accompanying option or SAR, as the case may be, will cease to be exercisable. An SAR granted in tandem with an ISO may be exercised only when the market price of Common Stock subject to the option exceeds the exercise price of such option. SARs not granted in tandem shall be exercisable at such time, and on such conditions, as the Option Committee may specify. Restricted Stock. The Incentive Plan provides for awards of nontransferable shares of restricted Common Stock subject to forfeiture. Awards may provide for acquisition of restricted and unrestricted Common Stock for a purchase price specified by the Option Committee, but in no event less than par value. Restricted Common Stock is subject to repurchase at the original purchase price, or to forfeiture if no cash was paid by the participant, if the participant ceases to be an employee of the Company before the restrictions lapse. Restricted securities shall become freely transferable upon the passage of any applicable period of time and satisfaction of any conditions to vesting. The Option Committee, in its sole discretion, may waive all or part of the restrictions and conditions at any time. The Incentive Plan also provides for deferred grants entitling the recipient to receive shares of Common Stock in the future at such times, and on such conditions, as the Option Committee may specify. Performance awards entitling the recipient to receive cash or Common Stock following the 32 attainment of performance goals determined by the Option Committee may also be granted. Performance conditions and provisions for deferred stock may also be attached to other awards under the Incentive Plan. A loan may be made under the Incentive Plan either in connection with the purchase of Common Stock under an award or with the payment of any federal, state and local tax with respect to income recognized as a result of an award. The Option Committee will determine the terms of any loan, including the interest rate (which may be zero). No loan may have a term exceeding ten years in duration. In connection with any award, the Option Committee may also provide for and grant a cash award to offset federal, state and local income taxes or to make a participant whole for certain taxes. Except as otherwise provided by the Option Committee, if a participant dies, options and SARs held by such participant immediately prior to death, to the extent then exercisable, may be exercised by the participant's executor, administrator or transferee for a period of one year following such death (or for the remainder of their original term, if less). Except as otherwise determined by the Option Committee, options and SARs not exercisable at a participant's death terminate at death. Outstanding awards of restricted Common Stock must be transferred to the Company upon a participant's death and, similarly, deferred Common Stock grants, performance awards and supplemental awards to which a participant was not irrevocably entitled prior to death will be forfeited, except as otherwise determined by the Option Committee. In the case of termination of a participant's association with the Company for reasons other than death, the following will apply: (i) options and SARs remain exercisable, to the extent they were exercisable immediately prior to termination, for three months (or for the remainder of their original term, if less); (ii) shares of restricted Common Stock must be resold to the Company; and (iii) other awards to which the participant was not irrevocably entitled prior to termination will be forfeited, unless otherwise determined by the Option Committee. If any such association is terminated due to the participant's discharge for cause which, in the opinion of the Option Committee, casts such discredit on the participant as to justify immediate termination of any award under the Incentive Plan, such participant's options and SARs may be terminated immediately. In the event of a consolidation or merger in which the Company is not the surviving corporation or which results in the acquisition of substantially all of the Company's outstanding Common Stock by a single person or entity or by a group of persons and/or entities acting in concert or in the event of the sale or transfer of substantially all of the Company's assets, the Option Committee may determine that (i) each outstanding option and SAR will become immediately exercisable unless otherwise provided at the time of grant, (ii) each outstanding share of restricted Common Stock will immediately become free of all restrictions and conditions, (iii) all conditions on deferred grants, performance awards and supplemental grants which relate only to the passage of time and continued employment will be removed, and (iv) all loans under the Incentive Plan will be forgiven. The Option Committee may also arrange to have the surviving or acquiring corporation or affiliate assume any award held by a participant or grant a replacement award. If the optionee is terminated after a change in control without cause, or in the case of certain officers designated from time to time by the Option Committee resigns under certain circumstances, within two years following the change in control, all unvested options will immediately become fully vested, all options will be exercisable for the shorter of four years or their original duration, and all other awards will immediately become fully vested. If the Option Committee makes no such determination, outstanding awards to the extent not fully vested will be forfeited. 33 Employment Agreements Mr. Kaas, the Chief Executive Officer of the Company, has entered into an employment agreement with the Company providing for an annual base salary of $105,000 for the first 12 month period, $115,500 for the second 12 month period, and $127,050 for the third 12 month period. This agreement has a term of three years and contains a covenant not to compete (the "Covenant") with the Company for a period of one year immediately following termination of employment. Under this Covenant, Mr. Kaas is prohibited from, directly or indirectly: (i) engaging in, being employed by, or participating in the operation or management of any business which competes with the Company; (ii) being a stockholder of any corporation or partner of any partnership, or as an owner, investor, principal or agent, or in any other manner, engage in any business which competes within ten miles of any Company cookware store open as of the termination of the employment agreement; or (iii) soliciting, inducing, influencing or attempting to influence or causing any business, firm or corporation which directly competes with the Company to solicit, induce, influence or attempt to influence, the employment of a key employee of the Company. Indemnification of Officers and Directors The Company, to the fullest extent permitted by the provisions of ss. 145 of the General Corporation Law of the State of Delaware, indemnifies, and advances expenses to, any and all persons who is or was a party or is threatened to be made a party to any threatened, pending or completed action, suit, proceeding or claim, whether civil, criminal, administrative or investigative, by reason of the fact that such person is or was or has agreed to be a director or officer of the Company or while a director or officer is or was serving at the request of the Company as a director, officer, partner, trustee, employee or agent of any corporation, partnership, joint venture, trust or other enterprise, including service with respect to employee benefit plans, from and against any and all of the expenses, liabilities, or other matters referred to in or covered by said section (including without limitation attorneys fees and expenses). The indemnification provided by the Company is not exclusive of any other rights to which those indemnified may be entitled under any bylaw, agreement, vote of stockholders or disinterested directors or otherwise, both as to action in their official capacity and as to action in another capacity while holding such office, and shall continue as to a person who has ceased to be a director, officer, employee, or agent and shall inure to the benefit of the heirs, executors, and administrators of such a person. Any person seeking indemnification by the Company is deemed to have met the standard of conduct required for such indemnification unless the contrary shall be established by a court of competent jurisdiction. If the Delaware General Corporation Law is amended to authorize action further eliminating or limiting the personal liability of directors, then the liability of our directors will be eliminated or limited to the fullest extent permitted by such statutes, as so amended. Any amendment, repeal or modification of such provision shall be prospective only and shall not adversely affect any right or protection of any of our directors existing at the time of such amendment, repeal or modification. Additionally, it is the position of the Commission that indemnification of directors and officers for liabilities arising under the Securities Act is against public policy and unenforceable pursuant to Section 14 of the Securities Act. 34 CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS The Company believes that the transactions set forth below were made on terms no less favorable to it than could have been obtained from unaffiliated third parties. All future transactions, including loans, between the Company and its officers, directors, principal stockholders and their affiliates will be approved by a majority of the Board of Directors, including a majority of the independent and disinterested outside directors, and will continue to be on terms no less favorable to the Company than could be obtained from unaffiliated third parties. The Home Retail Acquisition Corp. ("HRAC") Junior Participation; the Merger Agreement In March 1998, the Company and Cambridge Holdings, L.L.C. ("Cambridge") entered into a Term Sheet that provided for the sale of the Company and its subsidiaries as going concerns to Cambridge. The Term Sheet originally envisioned that Greenfield, would remain a lender to the Company through the Effective Date and that Cambridge would provide advisory services to the Company pursuant to an Advisory Agreement. However, it became apparent to the Company and to Cambridge that it was in the best interests of the Company for Greenfield to be paid out of its loan facility with respect to the Company prior to the Effective Date and for HRAC, an affiliate of Cambridge, to assume a more active advisory role in our business and perform in place of Cambridge under the Advisory Agreement. As a result, HRAC arranged for Fremont, to provide a loan facility, the proceeds of which were used to repay Greenfield. The Advisory Agreement was amended pursuant to a Stipulation and Order entered by the Court on April 27, 1998. In order to insure that the Fremont financing was sufficient in amount to (i) repay Greenfield in full, and (ii) provide the Company with sufficient working capital, the Court authorized HRAC to purchase participation interests in the Fremont financing. As a result, HRAC purchased the HRAC Junior Tranche, in the amount of $310,000. Pursuant to the Plan of Reorganization, on the Effective Date, HRAC merged with and into the Predecessor Entity with the Predecessor Entity being the surviving corporation and simultaneously changing its name to Home Retail Holdings, Inc. In consideration for the contribution of HRAC and the merger of HRAC with the Company, and in complete satisfaction of the HRAC Junior Tranche, and any amounts owed to HRAC prior to the confirmation date under the HRAC Advisory Agreement, on the Effective Date the stockholders of HRAC received 1,383,691 shares of Common Stock. In addition, the Company assumed all of the liabilities of HRAC. The Reorganization Pursuant to the Plan of Reorganization, the Company issued: (i) 1,522,041 shares of Common Stock, of which 1,383,691 shares were issued to the shareholders of HRAC and 138,350 were issued to other creditors with unsecured claims against the Predecessor Entity; (ii) 85,777 shares of Class B Common Stock to the holders of the Predecessor Entity's common stock; (iii) 69,174 shares of Class B Common Stock to the holders of the Predecessor Entity's preferred stock; (iv) 52,573 New Warrants; (v) 92,595 Bidco Warrants; and (vi) 29,261 Individual Warrants. These shares and warrants were issued pursuant to Section 1145(a) of the Bankruptcy Code which exempts the offer and sale of securities under a plan of reorganization from registration under the Securities Act and state laws if: (i) the securities are offered and sold under a plan of reorganization; (ii) the securities offered are these of the debtor or an affiliate of the debtor participating in a joint plan or of a successor to the debtor under the plan; and (iii) the recipients of the securities must hold a prepetition or administrative expense claim against the debtor or an interest in the debtor, or principally in such exchange and partly for cash or property. The Company believes that it satisfied all of the requirements of Section 1145(a) and as a result the securities 35 and warrants issued pursuant to the Plan of Reorganization were exempt from registration under the Securities Act and state securities laws. Other Transactions Greg E. Dukoff is currently the Secretary, interim Chief Financial Officer and a director of the Company. Mr. Dukoff is being compensated at a rate of $8,333 per month for financial and administrative services rendered as an independent consultant. It is anticipated that such consultancy will continue consistent with the Company's needs. Mr. Dukoff was President and a director of HRAC. In connection with the acquisition of Aropi, the Company granted Mr. Kaas an option to purchase 5,000 shares of Common Stock at the price per share equal to the public offering price. This option invested immediately. In addition to his employment agreement, Mr. Kaas will receive $125,000 paid in equal monthly payments of approximately $10,417 per month for a period of 12 months commencing 60 days after the closing of the acquisition. In addition, pursuant to a letter agreement between the Company and Mr. Kaas, the Company will also pay Mr. Kaas the aggregate amount of $100,000 on a monthly basis over a period of 12 months commencing 60 days after the closing of the acquisition. The entire amount remaining under the letter agreement will be accelerated and become due and payable upon the consummation of the Offering. The Company has also agreed to make a good faith effort to deliver to Mr. Kaas a letter of credit in the amount of $150,000 to secure a convertible promissory note in the amount of $250,000. In August 1998, the Company entered into an agreement to lease its executive offices from Glenn Kaas, the President, Chief Executive Officer and a director of the Company. The annual rental to be paid by the Company will equal $65,000 per year for the first 18 months of the lease, at which time the base rental will be adjusted by calculating the change in the Revised Consumer Price Index for All Urban Consumers published by the Bureau of Labor Statistics of the United States Department of Labor for the United States City Average, All Items ("CPI"), from the commencement date of the lease and as of the twelfth month of the lease and adding that percentage to the percentage arrived at by calculating the change in the CPI from the thirteenth month and as of the eighteenth month of the lease. The base rental for the remaining term of the lease will be adjusted by the sum of these two percentages. The lease commences on September 1, 1998 and terminates two and one half years from the commencement date. Pursuant to a demand note, Amelar Investments, L.L.C., TJQL Investments, LLC, Deltennium Group, Inc., and Sina Kinay, collectively, loaned $30,000 to the HRAC on June 12, 1998 with a monthly interest rate of 10.5%. This demand note was later amended to be held by DDG Management Services Corp. on behalf of the aforementioned parties. Control by Certain Directors Cambridge, its affiliates, and related persons currently own an aggregate of approximately 40% of the Common Stock, 22% after this Offering, and all but two of the Company's directors are principals of or are affiliated with Cambridge. As a result, Cambridge will be in a position to exercise significant influence over the Company and the election of its directors and otherwise essentially control the outcome of all matters requiring stockholder approval. In August 1998, the Company has entered into a management agreement with Deltennium Consulting, Inc., a Delaware corporation ("Deltennium Consulting"), to provide services in connection with the operations of the Company for the lessor of three years from the Effective Date or until the Company has sustained a market capitalization of at least $150 million for at least three months. Under the management agreement Deltennium Consulting receives $60,000 per year for such services. Gerald Czarnecki, the Chairman of the Board of Directors of the Company, is also the Chairman and Chief Executive Officer of Deltennium Consulting. 36 Global Strategic Holdings, Ltd. currently owns an aggregate of approximately 40% of the Common Stock, 22% after this Offering. Thomas Tuttle, a director of the Company, is the investment advisor to Global Strategic Holdings, Ltd. and as such will be in a position to exercise significant influence over the Company and the election of its directors and otherwise essentially control the outcome of all matters requiring stockholder approval. Advisory Agreement Pursuant to the Plan of Reorganization, HRAC entered into an advisory agreement with the Company which terminated on the Effective Date of the Reorganization. DDG Management Services Corp. currently has an advisory agreement with the Company to provide management services for the lesser of three years from the Effective Date or until the Company has sustained a market capitalization of at least $150 million for at least three months. Under the advisory agreement, DDG Management Services Corp. receives $20,000 per month, with payments to accrue until such time as the Company raises $4 million in a public or private equity offering, after which all amounts that have accrued shall be paid and future payments shall be made monthly. David Danovitch, a director of the Company, is a director to DDG Management Services Corp. See "The Reorganization." 37 PRINCIPAL STOCKHOLDERS As of September 14, 1998, the Company has outstanding 1,522,041 shares of Common Stock held by 345 holders of record. The following table sets forth certain information regarding the beneficial ownership of shares of Common Stock as of September 14, 1998, by (i) each of the Company's directors and executive officers, (ii) each person who beneficially owns more than 5% of the outstanding shares of Common Stock, and (iii) all of the Company's directors and executive officers as a group.
Percentage Owned ---------------------------- Name and Address Before After of Beneficial Owner(1) Shares Offering Offering ---------------------- ------ -------- -------- Gerald Czarnecki(2) ..................................... 100,830 6.6% 3.5% Glenn Kaas(3)............................................ 5,000 * * Greg Dukoff(4) .......................................... 73,813 4.8% 2.6% John Critser............................................. 8,937 * * David Danovitch(5)....................................... 132,627 8.7% 4.6% Donald Jackson(6)........................................ 132,627 8.7% 4.6% George Lucaci(7)......................................... 132,627 8.7% 4.6% Thomas Tuttle(8)......................................... 605,362 39.7% 21.0% Global Strategic Holdings, Ltd........................... 605,362 39.7% 21.0% Amelar Investments, LLC.................................. 132,627 8.7% 4.6% Alemer Productions, LLC.................................. 132,627 8.7% 4.6% TJQL Investments, LLC.................................... 132,627 8.7% 4.6% Cambridge Holdings, LLC.................................. 103,777 6.8% 3.6% Deltennium Group, Inc.................................... 100,830 6.6% 3.5% Bjorn Q. Aaserod(9)...................................... 172,962 4.5% 6.0% All Directors and Executive Officers as a Group (8 Persons) .............................................. 1,191,822 78.3% 41.3%
- ---------- * Less than one percent. (1) Unless indicated otherwise, the address of the beneficial owners is, Cambridge Holdings, L.L.C., 535 Madison Avenue, 19th Floor, New York, New York 10022. (2) Includes 100,830 shares held by Deltennium Group, Inc. Mr. Czarnecki is the Chairman and Chief Executive Officer of Deltennium Group, Inc. (3) Includes 5,000 shares which may be acquired upon the exercise of options. (4) Includes 72,063 shares held by Jamberry Lake Partners and 1,750 shares which may be acquired upon the exercise of warrants. Mr. Dukoff is a managing partner of Jamberry Lake Partners. (5) Includes 132,627 shares held by Amelar Investments, LLC. Mr. Danovitch is a manager of Amelar Investments, LLC. (6) Includes 132,627 shares held by TJQL Investments, LLC. Mr Jackson is a manager of TJQL Investments, LLC. (7) Includes 132,627 shares held by Alemer Productions, LLC. Mr. Lucaci is a member of Alemer Productions, LLC. (8) Includes 605,362 shares held by Global Strategic Holdings, Ltd. Thomas Tuttle is the investment advisor to Global Strategic Holdings, Ltd. Mr. Tuttle's address is 712 5th Avenue, 7th Floor, New York, New York 10019. (9) Includes 103,777 shares held by Cambridge Holdings, L.L.C. Bjorn Aaserod the Chairman of Cambridge Holdings, L.L.C. 38 SELLING STOCKHOLDERS The following sets forth information, as of September 14, 1998 concerning the Shares being registered hereunder by the Selling Stockholders. The shares held by the Selling Stockholders were acquired by them as creditors, pursuant to the Plan of Reorganization. The Company is registering all of the shares of Common Stock acquired by the Selling Stockholders in connection with said transactions pursuant to the Plan of Reorganization.
Shares Owned After Offering ------------------------------ Shares Owned Before Shares Being Name of Selling Stockholder(1) Offering Registered Number Percent(2) ------------------------------ -------- ---------- ------ ---------- AFLAC Airnet Systems, Inc. Alexander Hamilton Institute America's Amish Country American Business Forms, Inc. American Electric Power American Italian Moving Ameritech Ameritech Mobile Communication Bolton Flying Service Buckeye Printing and Mailing C&P Vending, Inc. Cadmus Calendar Models of America Cardinal Imaging Carlisle Patchen & Murphy Century Graphics Ceridian Employer Services Cincinnati Bell Cleveland Magazine Cobraserve National Service Columbus Alive Columbus Dispatch Columbus Gas Columbus Sports Publication Columbus Time Recorder Computer Group Printing Continental Stock Transfer & Trust Company Crystal Streams Daycoa, Inc. Depository Trust Company Doral Dynamex Eden Toys Elizabeth Guild Fasteners for Retail, Inc. Federal Express Corp. Flex One Frontier Telemanagement, Inc. G-Man Graphic Design
39
Shares Owned After Offering ------------------------------ Shares Owned Before Shares Being Name of Selling Stockholder(1) Offering Registered Number Percent(2) ------------------------------ -------- ---------- ------ ---------- Garborg's Heart 'N Home Gordon Flesch Company Great Lakes Booksellers Association Greenbook Greyden Press Hamco Cincinnati Co. Innovative Cooking Ent. Insiders' Publishing, Inc. J.W. Cleary Company John E. Sestina & Co. John Gaylord K&B Printing Kinko's Lane & Mittendorf Lawpack Leveck Lighting Products Lexis Document Services Liebert, Robert A. Smith, Craig A. Long's Commercial Art Lucent Technologies M&I First National Leasing Corp. Mad Hungarian Madison Leasing Co. Margaret S. Vickers Martha Wheeler Masada Security Metropolitan Armored Car Michael Citrin Midcom Communications, Inc. One Game Season Pitney Bowes Pitney Bowes Credit Corp. Pleasure Guild of Children's Pony Express Courier Corp. Progressive Business Ralph C. Liebert Family Trust No. 2 Smith, Craig A. Ralph C. Liebert Family Trust No. 2 Smith, Craig A. Reliable Office Supply Reynolds & Reynolds RGIS Rose Products & Services, Inc. Safeguard Bus. Systems SDL, Inc. Service Transport Signature Sports Sir Speedy Printing SMZ Squire Boone Squire Sanders & Dempsey
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Shares Owned After Offering ------------------------------ Shares Owned Before Shares Being Name of Selling Stockholder(1) Offering Registered Number Percent(2) ------------------------------ -------- ---------- ------ ---------- Staples Suburban News Publications T-Shirt Alert Teachers Ins. and Annuity The General Insurance Agency Thomson Central Ohio U.S. Postal Service U.S. Dairy Company United Financial Publishers United Parcel Service Victory Postcards Viserv, Inc. Washington Subscription Waste Management of Columbus, Ohio Wells Fargo Armored Service 3-A Mobile Lock 24 Hour Service 8700 Simon Debartolo Group 9750 Debartolo Capital ABCO Distribution, Inc. Acrylic Plastic Products Akron Beacon Journal All-Clad Metalcrafters Alpine West American Leather Products Anchor Hocking APA Transport Corp. Arccon Investments, Inc. Aspen Mulling Spices Auto-Tech Fire Systems B. Via Int'l Housewares Better Living & Savings BIA Cordon Bleu, Inc. Boone County Fiscal Court Bortner & Bortner, Ltd. Briel America, Inc. Bristol Publishing Enterprises Brita (U.S.A) Inc. Browne & Co. Ltd. Buckeye Beans & Herbs, Inc. Bureua of Workers' Compensation Calphalon Corporation Catamount Glassware, Inc. CBV, Inc. CF Motorfreight Charcoal Companion, Inc. Cherchies, Ltd. Chronicle Books Cincinnati Enquirer Clay Critters, Inc. Claybakers Clear Solutions, Inc. CM Products, Inc. Coloney Glass
41
Shares Owned After Offering ------------------------------ Shares Owned Before Shares Being Name of Selling Stockholder(1) Offering Registered Number Percent(2) ------------------------------ -------- ---------- ------ ---------- Community Press Conair Corporation, Inc. Consolidated Freightways CR Gibson Company Crinklaw Farms Custom Companies Cuthbertson Imports, Inc. D & J Masterclean, Inc. Dacus, Inc. DeBartolo Capitol Partnership Delta Heating & Cooling, Inc. Design Ideas Design Imports Ltd. Design Imports, India Dextille International Doral Packaging E. Mishan & Sons East Hampton Industries Edgecraft Corporation El Paso Chile Co. Emile Henry USA Corp. Eucalyptus Stoneware Faraway Farm Flavorbank Company, Inc. Foley Marters Company Fox Run Craftsmen Franklin County Treasurer Gems By Rochelle General Growth Management General Housewares Corp. Genin Trudeau & Co. Ltd. Glenn Earle's Glass, Inc. Goldrush Products Grant-Howard Associates H. George Caspari, Inc. HA Mack & Company, Inc. Haddon House Harold Import Company Hartin International Hill Design, Inc. Himark Enterprises, Inc. Hindostone Products, Inc. IM Press Indiana Department of Revenue Indianapolis County Treasurer Indianapolis Newspaper Indianapolis Water Co.
(1) Based upon 1,522,041 shares, which reflect the shares of Common Stock outstanding on September 14, 1998. 42 DESCRIPTION OF SECURITIES The authorized capital stock of the Company consists of 20,000,000 shares of Class A Common Stock, par value $0.01 per share (referred to as "Common Stock"), 155,000 shares of Class B Restricted Common Stock, par value $0.01 per share (the "Class B Common Stock"), and 1,000,000 shares of Preferred Stock, par value $0.01 per share ("Preferred Stock"). The following summary of certain terms of Company's capital stock describes material provisions of, but does not purport to be complete and is subject to and qualified in its entirety by, our Restated and Amended Certificate of Incorporation, Bylaws and the Delaware General Corporation Law. Common Stock The Common Stock and Class B Common Stock have the same rights, privileges and preferences except that the Class B Common Stock (i) has no dividend or liquidation rights except as required under the Delaware General Corporation Law, and (ii) is not be transferable except by operation of law in the event of the death, bankruptcy, or liquidation of the holder thereof. Subject to prior dividend rights and sinking fund or redemption or purchase rights which may be applicable to any outstanding preferred stock, the holders of Common Stock are entitled to share ratably in such dividends, if any, as may be declared from time to time by the Board of Directors in its discretion out of funds legally available therefor. The holders of Common Stock are entitled to share ratably in any assets remaining after satisfaction of all prior claims upon liquidation of Company, including prior claims of any outstanding preferred stock. Each share of Class B Common Stock shall be automatically converted into one share of Common Stock (the "Conversion Rate") if any one of the following events occurs (each, a "Trigger Event"): (i) the closing sale price of the Common Stock for twenty (20) consecutive trading days as quoted on the Nasdaq SmallCap Market or, if such shares are not trading on the Nasdaq SmallCap Market, then on the principal market on which such shares shall then be trading for twenty (20) consecutive trading days exceeds $11.57 per share of Common Stock (the "Trigger Price"); or (ii) of a sale of all or substantially all the assets of Company, a sale of all the equity interests of Company or a merger or consolidation of Company with or into another entity in which Company is not the surviving entity pursuant to which the holders of Common Stock would receive, on a fully diluted basis after giving effect to the conversion of the Class B Common Stock and any other convertible securities, consideration which exceeds the Trigger Price, in each case subject to adjustment in the event of any stock splits or other similar events. As soon as practicable after a Trigger Event, Company shall give or cause notice to be given to each holder of Class B Common Stock that the Class B Common Stock has been converted into Common Stock, and such conversion shall be deemed to have occurred on the sooner of the date of such notice and the date of such a merger or consolidation, if any, constituting a Trigger Event. Each holder of shares of Class B Common Stock outstanding immediately prior to the date of the Trigger Event, upon surrender of the certificate or certificates representing such shares to Company, shall receive in exchange therefor a certificate or certificates representing the number of whole shares of Common Stock which such holder shall be entitled to receive as provided herein. After the Trigger Event, each certificate which represented outstanding shares of Class B Common Stock, prior to such date, shall be deemed for all corporate purposes to evidence the ownership of the shares of Common Stock as provided herein. No dividend or other distribution payable with respect to the Common Stock shall be paid to any holder of any certificate representing shares of Class B Common Stock issued and outstanding immediately prior to such date until such holder surrenders such certificate for exchange. All shares of Common Stock for and into which shares of Class B Common Stock shall have been exchanged and converted shall be deemed to have been issued in full satisfaction of all rights 43 pertaining to such exchanged and converted shares. Except for such rights, the holder of certificate(s) representing shares of Class B Common Stock issued and outstanding immediately prior to such date shall have no rights with respect to such shares after such date other than to surrender such certificate for conversion. The Company shall at all times reserve a sufficient number of shares of authorized but unissued Common Stock for issuance upon conversion of the Class B Common Stock. No share of Class B Common Stock may be issued after a Trigger Event. There are 1,522,041 shares of Common Stock and 154,951 shares of Class B Common Stock issued and outstanding. The holders of Common Stock and Class B Common Stock are entitled to one vote per share on all matters to be submitted to a vote of the stock and are not entitled to cumulative voting in the election of directors, which means that the holders of the majority of the shares voting for the election of directors can elect all of the directors then standing for election by the holders of Common Stock. The holders of Common Stock and Class B Common Stock have no preemptive or other subscription rights, and shares of Common Stock and Class B Common Stock are not redeemable at the option of the holders, do not have any conversion rights, and are not subject to call. The rights, preferences and privileges of holders of Common Stock and Class B Common Stock are subject to, and may be adversely affected by, the rights of holders of shares of any series of preferred stock that the Company may designate and issue in the future or which is currently outstanding. Preferred Stock The authorized but undesignated Preferred Stock may be issued from time to time in one or more designated series or classes. The Board of Directors, without approval of the stockholders, is authorized to establish the voting, dividend, redemption, conversion, liquidation and other relevant provisions that may be provided with respect to a particular series or class. The issuance of Preferred Stock, while providing flexibility in connection with possible acquisitions and other corporate purposes, could, among other things, adversely affect the voting power of the holders of Common Stock and Class B Common Stock and, under certain circumstances, make it more difficult for a third party to acquire, or discourage a third party from acquiring, a majority of the outstanding voting stock of the Company. There are 310,000 shares of Convertible Series A Preferred Stock issued and outstanding. The holders of the Convertible Series A Preferred Stock have the right to receive dividends of 6% per annum, payable in stock or cash at the Company's discretion at the time of conversion. The investor has the right to convert the Preferred Stock into Common Stock at the lesser of (a) 80% of the five day average closing bid price for the Common Stock for the five trading days immediately preceding the conversion date, or (b) 150% of the five day average closing bid price for the Common Stock for the five trading days preceding the closing of the private placement. Registration Rights Registration rights were granted in connection with the issuance of the Individual Warrants, Other Financing Warrants, Greenfield Warrants, New Bidco Warrants and Bidco Warrants. The holders of the Individual Warrants, Other Financing Warrants, Greenfield Warrants, New Bidco Warrants and Bidco Warrants, or the shares of Common Stock issued on conversion of the such warrants, have the right to unlimited incidental registrations for a period of three years from the commencement of this Offering. Warrants New Warrants. Pursuant to the Plan of Reorganization, the Company granted the New Warrants for the purchase of 52,573 shares of Common Stock, exercisable at a price of $11.57 per share until January 1, 1999 and thereafter $14.40 per share, to the holders of all of the outstanding warrants of the Predecessor Entity. The New Warrants are exercisable for a period of 14 months, commencing August 12, 1998 and terminating on October 30, 1999. The New Warrants contain anti-dilution provisions providing for adjustments of the exercise price and the number of shares underlying the New 44 Warrants upon the occurrence of certain events, including any recapitalization, reclassification, stock dividend, stock split, stock combination or similar transactions. Commencing on February 1999, the Company may redeem all of the New Warrants at $0.05 per warrant, provided, that before the Company can call for redemption of the New Warrants the closing sale price of the Common Stock as quoted on the Nasdaq SmallCap Market, or if such shares are not quoted on the Nasdaq SmallCap Market, on the principal market on which such shares shall then be trading, shall have, for each of the twenty (20) consecutive trading days ending on the tenth (10th) day prior to the date on which the notice is given, equaled or exceeded $12.00 per share. Individual Warrants. Pursuant to the Plan of Reorganization, the Company granted the Individual Warrants for the purchase of 29,261 shares of Common Stock, exercisable at a price of $4.00 per share, to the holders of all of the individual junior tranche of the Predecessor Entity. The Individual Warrants are exercisable for a period of five-years, commencing on August 20, 1998 and terminating on June 30, 2003. The Individual Warrants contain anti-dilution provisions providing for adjustments of the exercise price and the number of shares underlying the Individual Warrants upon the occurrence of certain events, including any recapitalization, reclassification, stock dividend, stock split, stock combination or similar transactions. For a period of three years from the commencement of this Offering, the Individual Warrants grant to the holder thereof certain incidental registration rights with respect to the Common Stock issuable upon the exercise of the Individual Warrants. Bidco Warrants. The Company has granted warrants to Bidco for the purchase 92,595 shares of Common Stock. The Bidco Warrants are exercisable at a price of $0.01 per share for a five-year period, commencing on August 12, 1998 and terminating on August 12, 2003. Bidco has the right to have 25% of the Common Stock issued upon exercise of the Bidco Warrants, sold as a part of this Offering, and any remaining portion of Common Stock sold pursuant to subsequent securities registrations. Bidco, in its sole discretion, has the right to have the Bidco Warrants redeemed by the Company at the greater of (i) $400,000, or (ii) the difference between the purchase price of the warrants and the then current fair market value of such Common Stock; Bidco, in its sole discretion, has the right to have the Common Stock issued upon the exercise of the Bidco Warrants redeemed by the Company at the greater of (i) $400,000, or (ii) the then current fair market value of such Common Stock. Bidco's put option shall not be exercisable until the earlier of (i) thirteen (13) months following this Offering, or (ii) January 31, 2000. New Bidco Warrants. The Company has granted warrants to Bidco for the purchase 40,602 shares of Common Stock. The New Bidco Warrants are exercisable at a price per share equal to 165% of the public offering price for a five-year period, commencing on the effective date of this Offering and terminating on June 30, 2003. The New Bidco Warrants contain anti-dilution provisions providing for adjustments of the exercise price and the number of shares underlying the New Bidco Warrants upon the occurrence of certain events, including any recapitalization, reclassification, stock dividend, stock split, stock combination or similar transactions. For a period of three years from the commencement of this Offering, the New Bidco Warrants grant to the holder thereof certain incidental registration rights with respect to the Common Stock issuable upon the exercise of the New Bidco Warrants. Bidco, in its sole discretion, shall have the right to have the New Bidco Warrants redeemed by the Company at the greater of: (i) $165,000.00, or (ii) the difference between the purchase price and the then current fair market value; and Bidco, in its sole discretion, shall have the right to have all of the Common Stock issued upon the exercise of the New Bidco Warrants redeemed by the Company at the greater of: (i) $165,000.00 or (ii) the then current fair market value of such Common Stock. Bidco's put option shall not be exercisable until the earlier of: (x) eighteen (18) months following this Offering; or (y) June 30, 2000. Greenfield Warrants. The Company has granted warrants to Greenfield for the purchase 40,602 shares of Common Stock. The Greenfield Warrants are exercisable at a price per share equal to 165% of 45 the public offering price for a five-year period, commencing on the effective date of this Offering and terminating on June 30, 2003. The Greenfield Warrants contain anti-dilution provisions providing for adjustments of the exercise price and the number of shares underlying the Greenfield Warrants upon the occurrence of certain events, including any recapitalization, reclassification, stock dividend, stock split, stock combination or similar transactions. For a period of three years from the commencement of this Offering, the Greenfield Warrants grant to the holder thereof certain incidental registration rights with respect to the Common Stock issuable upon the exercise of the Greenfield Warrants. Greenfield, in its sole discretion, has the right to have the Greenfield Warrants, and all the Common Stock theretofore issued upon the exercise of the Greenfield Warrants, redeemed by the Company pursuant to the first put option at the greater of: (i) $125,000, or (ii) the then fair market value of such Common Stock; and pursuant to the second put option, at the greater of: (i) $25,000, or (ii) the then fair market value of such Common Stock. Greenfield's first put option shall not be exercisable until thirteen (13) months after August 20, 1998; and the second put option shall not be exercisable until fifteen (15) months after the same date. Underwriters' Warrants. The Company granted warrants to the Underwriters to purchase 150,000 shares of Common Stock. The Underwriters' Warrants are exercisable at a price per share equal to 165% of the public offering price for a four-year period, commencing one year from the effective date of this Offering. The Underwriters' Warrants contain anti-dilution provisions providing for adjustments of the exercise price and the number of shares underlying the Underwriters' Warrants upon the occurrence of certain events, including any recapitalization, reclassification, stock dividend, stock split, stock combination or similar transaction. The Underwriters' Warrants grant to the holders thereof certain demand and "piggyback" registration rights with respect to the Common Stock issuable upon the exercise of the Underwriters' Warrants. See "Underwriting." Other Financing Warrants. The Company has granted two warrants to Michael Leonard and two warrants to William Laux for the purchase of 98,246 shares of Common Stock in the aggregate. The Other Financing Warrants are exercisable at a price per share of 165% of the public offering price. The Other Financing Warrants are exercisable for a period of five-years, commencing on August 20, 1998 and terminating on August 31, 2003. The Other Financing Warrants contain anti-dilution provisions providing for adjustments of the exercise price and the number of shares underlying the Other Financing Warrants upon the occurrence of certain events, including any recapitalization, reclassification, stock dividend, stock split, stock combination or similar transactions. For a period of three years from the commencement of this Offering, the Other Financing Warrants grant to the holder thereof certain incidental registration rights with respect to the Common Stock issuable upon the exercise of the Other Financing Warrants. The holders of the Other Financing Warrants have the right to have such warrants redeemed by the Company at the greater of (i) $100,000 per warrant, or (ii) the difference between the purchase price of the warrants and the then current Common Stock. The holders also have the right to have the Common Stock issued upon the exercise of the Other Financing Warrants redeemed by the Company at the greater of (i) $100,000 per warrant, or (ii) the then current fair market value of the Common Stock. Transfer Agent and Registrar Continental Stock Transfer and Trust Company is acting as transfer agent and registrar for the Company's Common Stock. 46 SHARES ELIGIBLE FOR FUTURE SALE Upon completion of this Offering, the Company will have 2,883,691 outstanding shares of Common Stock (assuming no exercise of outstanding options, warrants or Underwriters' over-allotment option). Of these shares, the 1,500,000 shares sold to the public in this Offering will be freely tradable without restrictions or further registration under the Securities Act, except for any shares purchased by "affiliates" within the meaning of the Securities Act, which will be subject to the resale limitations of Rule 144. The remaining 1,383,691 shares held by existing stockholders were issued by the Company in private transactions in reliance upon one or more exemptions under the Securities Act, are "restricted securities" as that term is defined in Rule 144 promulgated under the Securities Act. Such restricted securities may be sold in compliance with such Rule, pursuant to registration under the Securities Act or pursuant to an exemption therefrom. Generally, under Rule 144, each person holding restricted securities for a period of one year may, every three months after such one year holding period, sell in ordinary brokerage transactions or to market makers an amount of shares equal to the greater of one percent of the Company's then outstanding Common Stock or the average weekly trading volume during the four weeks prior to the proposed sale. In addition, sales under Rule 144 may be made only through unsolicited "broker's transactions" or to a "market maker" and are subject to various other conditions. The limitation on the number of shares which may be sold under Rule 144 and the "broker's transaction" requirement do not apply to restricted securities sold for the account of a person who is not and has not been an "affiliate" (as that term is defined in the Securities Act) of the Company during the three months prior to the proposed sale and who has beneficially owned the securities for at least two years. Prior to the Offering, there has been no market for the Common Stock, and no predictions can be made as to the effect, if any, that sales of shares under Rule 144 or the availability of shares for sale will have on the market prices prevailing from time to time. Sales of substantial amounts of Common Stock in the public market following this Offering could lower the market price of the Common Stock. Of the 2,883,691 shares of Common Stock to be outstanding after this Offering (assuming no exercise of outstanding options, warrants or the over-allotment option), 1,500,000 shares will be freely tradable without restriction. Upon expiration of the lock-up agreements entered into by the officers, directors and existing stockholders of the Company, an additional 1,383,691 shares will become eligible for sale 13 months from the close of this Offering, subject to the provisions of Rule 144. In addition, the Company intends to file a registration statement on Form S-8 with respect to the shares of Common Stock issuable upon exercise of options under the Incentive Plan. The Incentive Plan authorizes the issuance of options relating to up to 180,000 shares of Common Stock. Currently, no options have been issued under the Incentive Plan. See "Management - 1998 Equity Incentive Plan." Upon filing of such registration statement, the holders of such options may, subject to vesting requirements, exercise and sell their shares immediately without restriction, except affiliates who are subject to certain volume limitations and manner of sale requirements of Rule 144. Holders of 451,306 warrants to purchase shares are entitled to certain registration rights with respect to such shares. Upon registration, such shares may be sold in the market without limitation. See "Description of Securities -Registration Rights." Sales of such shares may decrease the market price for our Common Stock. See "Underwriting;" and "Risk Factors-Negotiated Public Offering Price of the Common Stock;" "Our Stock Price May Fluctuate Which May Affect the Value of Your Shares." 47 UNDERWRITING CERTAIN PERSONS WHO PARTICIPATE IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE SHARES, INCLUDING PURCHASES OF SHARES TO MAINTAIN THEIR MARKET PRICE OR PURCHASES TO COVER SOME OR ALL OF THE UNDERWRITERS' SHORT POSITION IN THE SHARES. Subject to the terms and conditions set forth in the underwriting agreement (the "Underwriting Agreement"), the Company has agreed to sell to each of the underwriters named below (the "Underwriters"), and each of the Underwriters, for whom Nutmeg Securities, Ltd. is acting as representative (the "Representative"), has severally agreed to purchase, the number of shares of Common Stock set forth opposite its name below. Under certain circumstances, the commitments of nondefaulting Underwriters may be increased as set forth in the Agreement Among Underwriters. Underwriter Number of Shares - ----------- ---------------- Nutmeg Securities, Ltd. TOTAL ========= The Underwriting Agreement provides that the obligations of the Underwriters thereunder are subject to approval of certain legal matters by counsel and to various other conditions. The nature of the Underwriters' obligations are such that they are committed to purchase and pay for all of the above shares of Common Stock if any are purchased. The Underwriters propose to offer the shares of Common Stock directly to the public at the public offering price set forth on the cover page of this Prospectus. The Company has granted the Underwriters a 30-day over-allotment option to purchase up to 225,000 additional shares of Common Stock at the public offering price less the underwriting discount. The Underwriters may exercise such option only to cover over-allotments made in connection with the sale of the shares of Common Stock offered hereby. The Company has also agreed to sell to the Underwriters, for nominal consideration, warrants to purchase the number of shares of Common Stock equal to 10% of the total number of shares of Common Stock sold in this Offering at a price per share equal to 165% of the public offering price. The Underwriters' Warrants will be exercisable for a period of four years commencing one year from the effective date of this Offering and will contain certain demand and "piggyback" registration rights with respect to the Common Stock issuable upon the exercise of the Underwriters' Warrants. The Underwriters' Warrants are not transferable (except to members of the syndicate and their affiliates). The exercise price and the number of shares issuable upon exercise may, under certain circumstances, be subject to adjustment pursuant to antidilution provisions. The Company has agreed to allow the Underwriters a commission of ten percent (10%) of the public offering price of the shares of Common Stock. Additionally, the Company will be paying the Underwriters, following the closing of this Offering, a nonaccountable expense allowance equal to three percent (3%) of the aggregate public offering price of the shares of Common Stock, less any applicable deposits. 48 The Company has further agreed to indemnify the Underwriters against certain liabilities, losses and expenses, including liabilities under the Securities Act, or to contribute to payments that the Underwriters may be required to make in respect thereof. The Company also has agreed to reimburse the Underwriters for certain out-of-pocket expenses incurred in connection with the Offering. The Underwriters have advised the Company that they do not intend to make sales to discretionary accounts. The Company's officers, directors and existing stockholders have agreed not to, directly or indirectly, sell, offer, contract to sell, make any short sale, pledge or otherwise dispose of any of the Company's equity securities for a period of 13 months after the date of the closing of this Offering. In connection with this Offering certain underwriters may engage in passive market making transactions in the shares in accordance with Rule 103 of Regulation M. Further, the Underwriters' selling group members and their respective affiliates may engage in transactions that stabilize, maintain or otherwise affect the market price of the Shares. These transactions may include stabilization transactions permitted by Rule 104 of Regulation M, under which persons may bid for or purchase shares to stabilize the market price. The Underwriters may also create a "short position" for their own account by selling more shares in the Offering than they are committed to purchase, and in that case they may purchase shares in the open market after this Offering is completed to cover all or a part of their short position. The Representative may also cover all or a portion of their short position, up to 225,000 shares, by exercising their over-allotment option described above and on the cover of this Prospectus. Prior to the Offering, there has not been an active trading market for the Common Stock. Consequently, the public offering price of the Common Stock and the terms of the Underwriters' Warrants (including the exercise price) have been determined by negotiation between the Company and the Representative. Among the factors considered in such negotiations were the history of, and the prospect for, the Company's business, and assessment of the Company's management, its past and present operations, the Company's development and the general condition of the securities market at the time of the Offering. The public offering price does not necessarily bear any relationship to the Company's assets, book value, earnings or other established criteria of value. Such price is subject to change as a result of market conditions and other factors, and no assurance can be given that a public market for the Common Stock will develop after the close of the Offering, or if a public market in fact develops, that such public market will be sustained, or that the Common Stock can be resold at any time at the offering or any other price. 49 LEGAL MATTERS The validity of the issuance of the shares of Common Stock offered by this Prospectus will be passed upon by Brown & Wood LLP, Washington, D.C. Certain legal matters in connection with the Offering will be passed upon for the Underwriters by Gersten, Savage, Kaplowitz & Fredericks, LLP, New York, New York. EXPERTS The audited consolidated financial statements included elsewhere in this Prospectus and in the Registration Statement have been audited by Feldman & Sherb Ehrlich & Co., P.C., certified public accountants, and Smith & Radigan, certified public accountants, as indicated in their reports with respect thereto, and are included herein in reliance upon the authority of said firms as experts in giving said reports. ADDITIONAL INFORMATION The Company will be subject to the information requirements of the Exchange Act, and, in accordance therewith files reports, proxy statements and other information with the Commission. Such reports, proxy statements and other information can be inspected and copied at the public reference facilities maintained by the Commission at Judiciary Plaza Building, 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549 and its regional offices located at 7 World Trade Center, 13th Floor, New York, New York 10048 and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511. Copies of such materials can be obtained from the Commission at Judiciary Plaza, 450 Fifth Street, N.W. Washington, D.C. 20549, at prescribed rates. The Commission maintains an Internet web site that contains reports, proxy and information statements and other information regarding issuers that file electronically with the Commission. The address of that site is http://www.sec.gov. The Company's Common Stock will be traded on the Nasdaq SmallCap Market. Reports, proxy statements and other information concerning the Company can also be inspected at the offices of the Nasdaq SmallCap Market, 1735 K Street, Washington, D.C. 20006. The Company intends to furnish to its stockholders annual reports containing financial statements audited and reported upon by its independent public accountants. 50 GAYLORD COMPANIES, INC. AND SUBSIDIARIES INDEX TO FINANCIAL STATEMENTS
Page ---- Gaylord Companies, Inc.: Independent Auditors' Report F-3 Consolidated Balance Sheet at December 31, 1997 F-4 Consolidated Statement of Operations for the years ended December 31, 1997 and 1996 F-5 Consolidated Statement of Stockholders' Equity for the years ended December 31, 1997 and 1996 F-6 Consolidated Statement of Cash Flows for the years ended December 31, 1997 and 1996 F-7 Notes to Consolidated Financial Statements Unaudited Financial Statements F-8 Consolidated Balance Sheet at June 30, 1998 (Unaudited) F-14 Consolidated Statement of Operations (Unaudited) for the six months ended June 30, 1998 and 1997 F-15 Consolidated Statement of Cash Flows (Unaudited) for the six months ended June 30, 1998 and 1997 F-16 Aropi Incorporated: Independent Auditors' Report F-17 Balance Sheet at June 30, 1998 and 1997 F-18 Statement of Income for the years ended June 30, 1998 and 1997 F-20 Statement of Stockholders' Equity for the years ended June 30, 1998 and 1997 F-21 Statement of Cash Flows for the years ended June 30, 1998 and 1997 F-22 Notes to Financial Statements F-23
F-1
Page ---- (Unaudited) Pro-forma Financial Statements: - ------------------------------------------ Report on (Unaudited) Pro-forma Financial Statements F-28 (Unaudited) Pro-forma Condensed Consolidated Balance Sheet at June 30, 1998 F-29 (Unaudited) Pro-forma Statement of Operations for the six months ended June 30, 1998 F-30 (Unaudited) Pro-forma Condensed Consolidated Statement of Operations for the year ended December 31, 1997 F-31 Notes to (Unaudited) Pro-forma Financial Statements F-32
F-2 INDEPENDENT AUDITORS' REPORT To the Shareholders and Board of Directors Gaylord Companies, Inc. (Debtor-in-possession) We have audited the accompanying consolidated balance sheet of Gaylord Companies, Inc. and subsidiaries (Debtor-in-possession) as of December 31, 1997, and the related consolidated statements of operations, stockholders' equity (deficit), and cash flows for the years ended December 31, 1997 and 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Gaylord Companies, Inc.(Debtor-in-possession) as of December 31, 1997, and the results of its operations and its cash flows for the years ended December 31, 1997 and 1996 in conformity with generally accepted accounting principles. /s/ FELDMAN SHERB EHRLICH & CO., P.C. ------------------------------------- Feldman Sherb Ehrlich & Co., P.C. Certified Public Accountants New York, New York August 6, 1998 F-3 GAYLORD COMPANIES, INC. (DEBTOR-IN-POSSESSION) CONSOLIDATED BALANCE SHEET DECEMBER 31, 1997
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 910,000 Notes payable 348,675 ------------ 2,636,208 Net liabilities of discontinued operations 489,776 ------------ Total current liabilities 3,125,984 STOCKHOLDERS' DEFICIT: Cumulative preferred stock, par value $.01 per share; 1,500,000 shares authorized, 60,000 shares issued and outstanding 300,000 Common stock, par value $.01 per share; 10,000,000 shares authorized, 4,095,000 shares issued and outstanding 40,950 Additional paid-in-capital 2,641,838 Accumulated deficit (3,718,024) ------------ TOTAL STOCKHOLDERS' DEFICIT (735,236) ------------ $ 2,390,748 ============
See notes to consolidated financial statements. F-4 GAYLORD COMPANIES, INC. (DEBTOR-IN-POSSESSION) CONSOLIDATED STATEMENT OF OPERATIONS
Year ended December 31, --------------------------- 1997 1996 ------------ ----------- NET SALES $ 3,724,157 $ 3,497,940 COST OF GOODS SOLD, including store occupancy and delivery costs 3,508,874 2,899,932 ------------ ----------- GROSS PROFIT 215,283 598,008 ------------ ----------- OPERATING EXPENSES: Selling, general and administrative 1,072,706 390,123 Non-cash imputed stock compensation 469,255 0 Depreciation and amortization 107,640 68,334 ------------ ----------- 1,649,601 458,457 ------------ ----------- OPERATING INCOME (LOSS) (1,434,318) 139,551 ------------ ----------- OTHER INCOME (EXPENSE): Interest expense, net (79,710) (311,817) Amortization of debt issue costs and discounts (74,000) (149,986) Other - net (37,977) 37,409 ------------ ----------- (191,687) (424,394) ------------ ----------- INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES (1,626,005) (284,843) PROVISION FOR INCOME TAXES (400,649) 0 ------------ ----------- LOSS FROM CONTINUING OPERATIONS (2,026,654) (284,843) LOSS FROM DISCONTINUED OPERATIONS, including provision for gain on disposal of $556,468 (668,377) (702,966) ------------ ----------- NET LOSS $ (2,695,031) $ (987,809) ============ =========== BASIC LOSS PER COMMON SHARE: Continuing $ (0.53) $ (0.10) Discontinued (0.17) (0.23) ------------ ----------- $ (0.70) $ (0.33) ============ =========== WEIGHTED AVERAGE COMMON SHARES USED 3,870,000 3,103,957 ============ ===========
See notes to consolidated financial statements. F-5 GAYLORD COMPANIES, INC. (DEBTOR-IN-POSSESSION) STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
Preferred Stock Common Stock --------------------- ------------------------ Additional Shares Amount Shares Amount Paid-in Capital --------- -------- ----------- --------- ----------------- BALANCE - DECEMBER 31, 1995 60,000 $300,000 2,750,000 $27,500 $1,600,817 Sale of stock to consultant 0 0 300,000 3,000 297,000 Shares issued with note payable 0 0 180,000 1,800 94,200 Shares issued for services 0 0 170,000 1,700 112,050 Conversion of notes, net of associated deferred debt issue costs 0 0 235,000 2,350 234,871 Dividends on preferred stock 0 0 0 0 0 Amortization of unearned stock Compensation 0 0 0 0 0 Net loss 0 0 0 0 0 ------ -------- --------- ------- ---------- BALANCE - DECEMBER 31, 1996 60,000 $300,000 3,635,000 $36,350 $2,338,938 Sale of stock to consultant 0 0 160,000 1,600 155,900 Stock issuance to consultant 0 0 300,000 3,000 147,000 Amortization and write off of unearned stock compensation 0 0 0 0 Dividends on preferred stock Write off of stock receivable 0 0 0 0 0 Net loss 0 0 0 0 0 ------ -------- --------- ------- ---------- BALANCE - DECEMBER 31, 1997 60,000 $300,000 4,095,000 $40,950 $2,641,838 ====== ======== ========= ======= ==========
Unearned Retained Stock Receivable Earnings Compensation for Stock (deficit) Totals ---------------- ------------ ------------- ----------- BALANCE - DECEMBER 31, 1995 $ 0 $ 0 $ 24,591 $ 1,952,908 Sale of stock to consultant 0 (168,571) 0 131,429 Shares issued with note payable 0 0 0 96,000 Shares issued for services (110,000) 0 0 3,750 Conversion of notes, net of associated deferred debt issue costs 0 0 0 237,221 Dividends on preferred stock 0 0 (36,000) (36,000) Amortization of unearned stock Compensation 13,333 0 0 13,333 Net loss 0 0 (987,809) (987,809) ---------- ---------- ----------- ----------- BALANCE - DECEMBER 31, 1996 $ (96,667) $ (168,571) $ (999,218) $ 1,410,832 Sale of stock to consultant (143,750) 0 0 13,750 Stock issuance to consultant 0 0 0 150,000 Amortization and write off of unearned stock compensation 240,417 0 0 240,417 Dividends on preferred stock (23,775) (23,775) Write off of stock receivable 0 168,571 0 168,571 Net loss 0 0 (2,695,031) (2,695,031) ---------- ---------- ----------- ----------- BALANCE - DECEMBER 31, 1997 $ 0 $ 0 $(3,718,024) $ (735,236) ========== ========== =========== ===========
See notes to consolidated financial statements. F-6 GAYLORD COMPANIES, INC. AND SUBSIDIARIES (DEBTOR-IN-POSSESSION) CONSOLIDATED STATEMENT OF CASH FLOWS
Year ended December 31, --------------------------- 1997 1996 ------------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $(2,695,031) $ (987,810) Adjustments to reconcile net income (loss) to net cash provided (used) by operating activities: Depreciation and amortization 107,640 193,208 Non cash imputed compensation expense 469,255 57,012 Amortization of discount on notes payable 74,000 10,667 Write off of goodwill 114,933 0 Write off of investment 125,000 0 Changes in assets and liabilities: Decrease (increase) in accounts receivable 65,211 (38,231) Decrease (increase) in other receivables 177,217 16,490 Decrease (increase) in inventory 1,320,244 (399,788) Decrease (increase) in prepaid expenses and other assets 153,858 (96,668) Decrease (increase) in other assets 18,277 11,136 Decrease (increase) in deferred income taxes 398,196 0 Increase (decrease) in accounts payable (1,008,331) 551,627 Increase (decrease) in sales and other taxes payable (101,117) 11,171 Increase in net liabilities of discontinued operations 489,776 0 ------------ ----------- NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES (290,872) (671,186) ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property and equipment (34,915) (204,551) Proceeds from sale of property and equipment 0 3,785 ------------ ----------- NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES (34,915) (200,766) ------------ ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of common stock 0 69,721 Dividends paid (23,789) (36,000) Proceeds (repayments) from notes payable (300,986) 204,000 Proceeds from bank debt 1,297,547 395,000 Repayments of bank debt (395,000) (463,770) Proceeds from issuance of convertible notes 0 622,500 (Increase) decrease in restricted cash 0 250,000 ------------ ----------- NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES 577,772 1,041,451 ------------ ----------- NET INCREASE (DECREASE) IN CASH 251,985 169,499 CASH AT BEGINNING OF YEAR 818,518 649,019 ------------ ----------- CASH AT END OF YEAR $ 1,070,503 $ 818,518 ============ =========== SUPPLEMENTAL CASH FLOW DISCLOSURES: Cash paid during the year for: Interest $ 434,170 $ 318,612 ============ =========== Income taxes $ 0 $ 0 ============ =========== Non cash financing and investing activity: Conversion of notes payable to common stock $ 0 $ 352,500 ============ =========== Common stock issued for future services $ 0 $ 112,500 ============ =========== Receivable for common stock $ 0 $ 168,571 ============ =========== Credit line debt settled in bankruptcy plan $ 387,547 $ 0 ============ ===========
See notes to consolidated financial statements. F-7 GAYLORD COMPANIES, INC. AND SUBSIDIARIES (DEBTOR-IN-POSSESSION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1997 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (a) Basis of Presentation The financial statements of Gaylord Companies, Inc. (the "Company") include the accounts of the Company and its subsidiaries. All significant intercompany balances and transactions have been eliminated in the consolidated financial statements. The Company is a specialty retailer of quality cookware and serving equipment, with operations in Ohio, Indiana and Kentucky. (b) Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that effect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. (c) Inventories Inventories are stated at the lower of cost or market. Cost is determined using the retail method and the FIFO method. (d) Property and Equipment Property and equipment are stated at cost. Property and equipment held under capital leases are stated at the lower of the present value of minimum lease payments at the beginning of the lease term or fair value at the inception of the lease. Depreciation of property and equipment is calculated using the straight-line method over the estimated useful lives of the assets. Property and equipment held under capital leases and leasehold improvements are amortized using the straight-line method over the shorter of the lease term or estimated useful life of the asset. (e) Net Earnings (Loss) Per Share The Company follows the provisions of Statement of Financial Accounting Standards No. 128, "Earnings Per Share", which became effective for financial statements with fiscal years ending F-8 after December 15, 1997. Basic earnings (loss) per share is computed based on the weighted average number of common shares outstanding after giving effect to preferred stock dividends. (f) Fair Value of Financial Instruments The carrying amounts reported in the balance sheet for cash, receivables, accounts payable and accrued expenses approximate fair value based on the short-term maturity of these instruments. (g) Stock Based Compensation The Company accounts for stock transactions in accordance with APB Opinion No. 25, "Accounting For Stock Issued To Employees." In accordance with Statement of Financial Accounting Standards No. 123, "Accounting For Stock-Based Compensation," the Company has adopted the pro forma disclosure requirements of Statement No. 123 in fiscal 1996. 2. PLAN OF REORGANIZATION On November 14, 1997, the Company filed a voluntary petition under Chapter 11 of the United States Bankruptcy code. At the outset, the bankruptcy petition was organized to consolidate the cases of the entities that comprised the bookstore operations in distinction from those that comprised the cookstore operations. The bookstore operations were disposed of under their own separate plan of reorganization on July 1, 1998 and are being accounted for as discontinued operations. On June 24, 1998, the entities comprising the cookstores filed a plan of reorganization, which was confirmed by the Bankruptcy Court on July 10, 1998. Under the plan, Home Retail Acquisition Corp. ("HRAC") (which is a secured creditor of the cookstores by virtue of the its purchase of a junior participation in the Company's debt from Fremont Financial), will be merged into the Company. On the effective date, all previous equity interests will be extinguished and the reorganized company will issue a total of 1,522,041 shares of Class A common stock, 154,951 shares of Class B common stock and a total of 174,429 warrants. HRAC will receive a total of 1,383,684 of the newly issued Class A shares, thereby controlling the reorganized entity. 3. DISCONTINUED OPERATIONS Shortly after its November 1997 bankruptcy filing, in connection with its plans to return to financial viability, the Company reached a decision to dispose of its bookstore operations. In February 1998, certain principal managing shareholders proposed a plan of reorganization for the bookstores whereby they would assume the bookstore business, and proposed a formula for settlement of the liabilities. In April 1998, United Magazine Corporation ("Unimag") a major creditor of the bookstores put forth a competing plan, which was ultimately accepted by the creditors and the Bankruptcy Court. The plan was finalized on July 1, 1998, with all assets and liabilities of the bookstore business assumed by Unimag. F-9 The Company realized a gain on disposal of $556,468 representing an excess of liabilities over assets assumed of $1,216,889 (with includes the assumption of the $387,547 balance on the Greenfield term loan) and losses through to the disposal date of $660,421. The Company has accrued this gain at December 31, 1997, in light of its certainty. The following table presents the composition of the net liabilities of the discontinued business at December 31, 1997.
Cash $ 11,123 Accounts Receivable - trade 48,787 Other Receivables 208,932 Inventories 795,055 Prepaid expenses and other current assets 414,762 Net property and equipment 220,573 Investment 125,000 Other 3,801 ---------- Total Assets 1,828,033 ---------- Liabilities not subject to compromise: Accounts payable and accrued expenses 117,369 Liabilities subject to compromise Accounts payable and accrued expenses 2,484,294 ---------- Total Payables 2,601,663 ---------- Net liabilities (773,630) Loss through disposal date (660,421) Accrued gain on disposal 944,275 ---------- Net liabilities of discontinued business $ (489,776) ==========
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:
Depreciable Life ----------------- 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 ========
5. LOAN AGREEMENT In April 1997, the Company entered into a loan and security agreement (the "Agreement") with Greenfield Commercial Credit, L.L.C. (The "Lender"). Pursuant to the agreement, the Lender established a revolving credit loan facility for the Company in an amount of up to $1,000,000 F-10 (the "Revolving Credit Loan") and advanced $350,000 at closing as a term loan (the "Term Loan"). The Term Loan and Revolving Credit Loan are referred to as the "Loans". The Revolving Credit Loan bore interest at the prime rate plus eight percent per annum. The Term Loan bore interest at the prime rate plus five and eight-five hundredths percent per annum the loans was due no later than October 20, 1997. The Loans were secured by a lien on substantially all of the Company's assets. The Loans were guaranteed by the Company's Chairman of the Board and Chief Executive Officer and such guarantee is secured by a third mortgage on his principal residence. The proceeds of the loans were used primarily to repay amounts owed to Bank One Columbus, N.A. and for working capital purposes. Upon the loans not being repaid on the due date, they went into default. The balance on the revolving credit loan was $910,000 at December 31, 1997 and $387,547 on the term loan (including interest). In April 1998, the Company obtained debtor-in-possession financing form Fremont Financial Corporation which was used to repay the revolving credit loan. The term loan was assumed and settled by Unimag under its plan of reorganization for the bookstores in May 1998. 6. COMMITMENTS Leases In connection with the Bankruptcy Court's approval of the Company's plans of reorganization, all previous future lease commitments were voided by the court, and the Company selectively entered into new lease commitments for the cookstore operations. Future minimum lease payments under such noncancelable operating leases, subsequent to the July 1998 reorganization, are as follows: Operating Year ending December 31, leases ------------------------ ------ 1998 $174,670 1999 $386,926 2000 $389,988 2001 $393,881 2002 $402,073 Later years, through 2006 $617,042 Total rental expense for operating leases was $703,231 and $487,640 in 1997 and 1996, respectively. 7. INCOME TAX EXPENSE (BENEFIT) The Company accounts for income taxes under Statement of Financial Accounting Standards No. 109. The differences between income taxes computed by applying the statutory federal income tax rate (35%) and income tax expense (benefit) in the consolidated financial statements are: F-11
Years ended December 31, ------------------------------ 1997 1996 ------------- ----------- Tax benefit computed at statutory rate $ (865,000) $ (346,000) Change in valuation allowance 398,196 - Effect of permanent differences - 29,000 Other, net 2,453 3,000 Tax benefit not recognized 865,000 314,000 -------------- ---------- $ 400,649 $ - ============== ==========
The Company had deferred tax assets total $1,827,000 representing the tax effects of net operating loss carryforwards totaling $1,688,000, book depreciation in excess of tax depreciation of $110,000, and other items aggregating $29,000 as of December 31, 1996. The Company has a valuation allowance of approximately $1,827,000 as a reserve against such deferred tax assets. The net operating loss carryforwards totaling approximately $4,221,000, expire in the years 2009 and 2012. Annual utilization of the net operating loss carryforwards will be restricted due to the ownership change in the plan of reorganization. 8. STOCKHOLDERS' EQUITY In April 1996, a consultant was issued options to purchase 300,000 shares for $1.00 per share. These were subsequently exercised for cash of $89,000, services valued at $42,429 and a non-interest bearing receivable totaling $168,571. Such receivable has been written off as an expense during 1997. In November 1996, a consultant was issued 100,000 shares in exchange for a fifteen month service agreement. Such shares were valued at $1.00 per share (the fair market value), with the resulting charge being amortized over the fifteen month term of the agreement, and the balance written off during 1997. During 1996, an aggregate of 70,000 other shares were issued for services to various parties, which were valued at their aggregate fair value of $15,000. In February 1997, 150,000 shares were issued to a consultant, which were valued at $1.00 per share, with the resulting charge expensed during 1997. In March 1997, a consultant was issued 10,000 options exercisable at $.01 per share, which resulted in a $10,000 expense charge. In September 1997, the Company issued 300,000 shares of common stock to a consultant. The Company recorded a charge of $150,000 for the fair value of the stock. 9. INITIAL PUBLIC OFFERING The Company completed an Initial Public Offering in November 1995, selling a total of 750,000 shares of common stock for $3.00 per share, and 1,725,000 warrants at $0.10 per warrant. The warrants initially entitled the holder to purchase one share of Company common stock at $3.00 per share through October 30, 2000. At December 31, 1996, the total number of shares issuable upon the exercise of such warrants has been increased to 2,756,917 and the exercise price has been adjusted to $2.53 per share pursuant to anti-dilution provisions. Warrants are redeemable by the Company at $0.05 per warrant, generally, upon the common stock achieving certain price levels. Net proceeds to the Company after underwriter discounts and other expenses were F-12 approximately $1.4 million. In connection with the public offering, the underwriter received warrants which allow for the purchase of (after adjustment for anti-dilution provisions) an aggregate 269,103 shares at $3.01 per share at December 31, 1997. 10. CONVERTIBLE NOTES In June 1996, the Company issued six month, unsecured, convertible notes with an aggregate face of amount of $622,500, which bear interest at the rate of 5% per annum, and are convertible into common stock at the rate of $1.50 per share. Through December 31, 1996, $352,500 in principal was converted into 235,000 shares of common stock. Another $150,000 in principal was repaid in January 1997, $60,000 was extended through June 1997 at an interest rate of 17.5% and $60,000 was presented for payment in March 1997 and became in default upon not being repaid by the Company on March 27, 1997. Costs associated with this financing, consisting of professional fees, aggregated approximately $252,000. Such costs were amortized to expense over the original term, with a pro rata amount of unamortized costs charged to paid in capital upon conversions to stock. 11. NOTE PAYABLE In November 1996, the Company borrowed $300,000 under an 18 month note payable bearing interest at 8% per annum. The note is secured by the personal guarantees of certain of the Companies principal shareholders, and will be secured by all the assets of the Company upon the satisfaction of the Company's bank debt and release of the associated security interest. In connection with this borrowing, the Company issued 180,000 shares of common stock to the lender. In accordance with Accounting Principles Board Opinion No. 14, the proceeds were allocated between the debt and equity securities based on their relative fair value, resulting in a note discount of $96,000, which is being amortized to expense over the term of the note. The unamortized balance of the discount is $21,325 at December 31, 1997. F-13 GAYLORD COMPANIES, INC. (DEBTOR-IN-POSSESSION) JUNE 30, 1998 CONSOLIDATED BALANCE SHEET (UNAUDITED)
ASSETS CURRENT ASSETS: Cash $ 212,681 Accounts receivable - trade 4,329 Inventories 882,168 Prepaid expenses and other current assets 15,428 ------------ TOTAL CURRENT ASSETS 1,114,606 PROPERTY AND EQUIPMENT 308,028 OTHER ASSETS 13,603 ------------ $ 1,436,237 ============ LIABILITIES AND STOCKHOLDERS' DEFICIT CURRENT LIABILITIES: Liabilities Not Subject to Compromise: Accounts payable and accrued expenses $ 209,583 Line of credit 971,724 Liabilities Subject to Compromise: Accounts payable and accrued expenses 1,112,858 Sales and other taxes payable 122,426 Notes payable 370,000 ------------ TOTAL CURRENT LIABILITIES 2,786,591 ------------ STOCKHOLDERS' DEFICIT: Cumulative preferred stock, par value $.01 per share; 1,500,000 shares authorized, 60,000 shares issued and outstanding 300,000 Common stock, par value $.01 per share; 10,000,000 shares authorized, 4,095,000 shares issued and outstanding 40,950 Additional paid-in-capital 2,641,838 Accumulated deficit (4,333,142) ------------ TOTAL STOCKHOLDERS' DEFICIT (1,350,354) ------------ $ 1,436,237 ============
See notes to consolidated financial statements. F-14 GAYLORD COMPANIES, INC. (DEBTOR-IN-POSSESSION) CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
Six Months -------------------------------- ended June 30, -------------------------------- 1998 1997 --------------- -------------- NET SALES $ 1,135,645 $ 1,469,592 COST OF GOODS SOLD, including store occupancy and delivery costs 1,447,387 1,143,713 -------------- -------------- GROSS PROFIT (LOSS) (311,742) 325,879 -------------- -------------- OPERATING EXPENSES: Selling, general and administrative 172,815 284,013 Non-cash imputed stock compensation 150,000 0 Depreciation and amortization 44,675 49,184 -------------- -------------- 367,490 333,197 -------------- -------------- OPERATING INCOME (LOSS) (679,232) (7,318) -------------- -------------- OTHER INCOME (EXPENSE): Interest expense, net (56,504) (182,889) Amortization of debt issue costs and discounts (11,692) (37,000) Other - net (17,691) 495 -------------- -------------- (85,887) (219,394) -------------- -------------- INCOME (LOSS) FROM CONTINUING OPERATIONS (765,119) (226,712) LOSS FROM DISCONTINUED OPERATIONS 0 (1,079,483) -------------- -------------- NET LOSS $ (765,119) $ (1,306,195) ============== ============== BASIC LOSS PER COMMON SHARE: Continuing $ (0.20) $ (0.06) Discontinued 0.00 (0.29) -------------- -------------- $ (0.20) $ (0.35) ============== ============== WEIGHTED AVERAGE COMMON SHARES USED 3,870,000 3,735,000 ============== ==============
See notes to consolidated financial statements. F-15 GAYLORD COMPANIES, INC. AND SUBSIDIARIES (DEBTOR-IN-POSSESSION) CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
Six months ended June 30, ------------------------------ 1998 1997 ------------- ------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $ (765,119) $ (1,306,195) Adjustments to reconcile net income (loss) to net cash provided (used) by operating activities: Depreciation and amortization 44,675 105,738 Non cash imputed compensation expense 150,000 55,705 Changes in assets and liabilities: Decrease (increase) in accounts receivable 10,789 40,227 Decrease (increase) in other receivables 0 (21,013) Decrease (increase) in inventory 7,828 84,130 Decrease (increase) in prepaid expenses and other assets 41,253 (474,023) Decrease (increase) in other assets (4,903) 0 Decrease (increase) in deferred income taxes 0 2,061 Increase (decrease) in accounts payable 31,313 134,592 Increase (decrease) in sales and other taxes payable 33,069 (77,266) Increase (decrease) in other current liabilities (489,776) 228,101 ------------- ------------- NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES (940,871) (1,227,943) ------------- ------------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property and equipment 0 (6,929) ------------- ------------- NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES 0 (6,929) ------------- ------------- CASH FLOWS FROM FINANCING ACTIVITIES: Dividends paid 0 (9,000) Proceeds (repayments) from notes payable 21,325 (5,582) Proceeds from bank debt 971,724 885,263 Repayments of bank debt (910,000) (434,994) ------------- ------------- NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES 83,049 435,687 ------------- ------------- NET INCREASE (DECREASE) IN CASH (857,822) (799,185) CASH AT BEGINNING OF PERIOD 1,070,503 818,518 ------------- ------------- CASH AT END OF PERIOD $ 212,681 $ 19,333 ============= =============
See notes to consolidated financial statements. F-16 INDEPENDENT AUDITORS' REPORT To the Board of Directors AROPI, Incorporated We have audited the balance sheets of AROPI, Incorporated (an S corporation) as of June 30, 1998 and 1997, and the related statements of income, stockholders equity and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of AROPI, Incorporated as of June 30, 1998 and 1997, and the results of its operations and its cash flows for the years then ended, in conformity with generally accepted accounting principles. /s/ Smith & Radigan Atlanta, Georgia August 24, 1998 F-17 BALANCE SHEETS AROPI, INCORPORATED
ASSETS June 30 ---------------------------- 1998 1997 ---- ---- 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 ========== ==========
F-18 LIABILITIES AND STOCKHOLDERS EQUITY
June 30, ------------------------------------- CURRENT LIABILITIES 1998 1997 ---- ---- 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 ========== ==========
See notes to financial statements. F-19 STATEMENTS OF INCOME AROPI, INCORPORATED
June 30 -------------------------- 1998 1997 ---- ---- 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 ========== =========
See notes to financial statements. F-20 STATEMENTS OF STOCKHOLDER'S EQUITY AROPI, INCORPORATED
Common Paid-In Retained Treasury Stock Capital Earnings Stock Total ----- ------- -------- ----- --------- Stockholder's equity at June $ 485,502 $ 78,600 $ 598,347 $(500,000) $ 662,449 30, 1996 Net income for the year ended June 30, 1997 -0- -0- 40,342 -0- 40,342 --------- --------- -------- --------- -------- Stockholder's equity at June 485,502 78,600 638,689 (500,000) 702,791 30, 1997 Distributions -0- -0- (45,000) -0- (45,000) Net loss for the year ended June 30, 1998 -0- -0- (14,719) -0- (14,719) --------- --------- --------- --------- --------- Stockholder's equity at June 30, 1998 $ 485,502 $ 78,600 $ 578,970 $(500,000) $ 643,072 ========= ========= ========== ========== =========
See notes to financial statements. F-21 STATEMENTS OF CASH FLOWS AROPI, INCORPORATED
For the Year Ended June 30, --------------------------------- 1998 1997 ---- ---- 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 ========= ===========
See notes to financial statements. F-22 NOTES TO FINANCIAL STATEMENTS AROPI, INCORPORATED June 30, 1998 Note A - Organization and Summary of Significant Accounting Policies Organization AROPI, Incorporated ("the Company") was incorporated in Iowa in July, 1981. The Company operates thirteen retail stores in the eastern United States under the trade name of Rolling Pin Kitchen Emporium. These stores sell high quality kitchen utensils. There were also twenty-one franchised stores at June 30, 1998. Income Taxes Effective July 1, 1994, the Company elected, with the unanimous consent of its stockholders, to be taxed under the provisions of Subchapter S of the Internal Revenue Code. Under those provisions, the Company is not subject to federal and certain state corporate income taxes. Instead, the stockholder includes the Company's taxable income in his individual income tax return. Based on its financial position at July 1, 1994, the Company does not anticipate any significant liability for built-in-gains taxes. Income tax expense is recognized in the accompanying financial statements for taxes paid to states in which the Company conducts business that do not recognize S corporation status. Revenue Recognition and Deferred Franchise Fees Revenue from sales of individual franchises is recognized when substantially all significant services to be provided by the Company have been performed. Generally these services include assistance in site selection, financing, advertising, training of personnel and provision of certain inventory and equipment to provide a turnkey operation. Fees received in advance of these services are recorded as deferred franchise fees. In addition to the initial fees for the above services, the Company receives continuing franchise fees based on a percentage of the franchise's gross revenues. Inventories Inventories are stated at the lower of cost or market using the first-in, first-out (FIFO) method. F-23 NOTES TO FINANCIAL STATEMENTS AROPI, INCORPORATED June 30, 1998 Note A - Organization and Summary of Significant Accounting Policies - Continued Property and Equipment Property and equipment are stated at cost. Expenditures for new equipment and replacements or betterments are capitalized while expenditures for normal maintenance and repairs are charged to expense as incurred. When assets are retired or otherwise disposed of, the related cost and accumulated depreciation are removed from the accounts, and any gain or loss is credited or charged to income. Depreciation for leasehold improvements is computed using the straight-line method over a period of ten years. Depreciation for fixtures and equipment is computed using the straight-line method and accelerated methods over the useful lives of the assets which range from three to seven years. Depreciation expense was $155,354 and $206,039 for the years ended June 30, 1998 and 1997, respectively. Intangible Assets The Company is amortizing a non-competition agreement obtained from a former stockholder (Note B) over the ten-year term of the agreement using the straight-line method. Amortization expense was $9,500 for each of the years ended June 30, 1998 and 1997. The Company is amortizing loan acquisition costs over a seven-year term. Amortization expense was $2,682 for the year ended June 30, 1998 and $224 for the year ended June 30, 1997. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Note B - Line of Credit and Long-Term Debt The Company has obtained a credit commitment from a bank in the amount of $250,000 to be used for working capital. At June 30, 1998, $50,000 had been drawn against the line of credit. The line of credit is secured by accounts receivable, fixed assets and inventory and guaranteed by the stockholder. Interest accrues on the working capital line at the prime rate plus one percent. The prime rate was eight and one-half percent at June 30, 1998. The line of credit is cross-collateralized with a note payable to the Small Business Administration, as described below. F-24 NOTES TO FINANCIAL STATEMENTS AROPI, INCORPORATED June 30, 1998 Note B - Line of Credit and Long-Term Debt - Continued A summary of long-term debt is as follows:
June 30, ------------------------------ 1998 1997 ---- ---- Notes Payable - Banks Note payable to the Small Business Administration through a bank as $ 283,903 $ 360,000 agent. The note is secured by accounts receivable and inventory and --------- --------- guaranteed by the stockholder. Principal and interest payments of $7,430, including interest at 8.75%, are due monthly through May 2002. The note is cross-collateralized with the line of credit. Notes Payable - Others Note payable to an individual bearing interest at 8% and payable in 50,000 50,000 1998. ---------- ---------- Notes Payable - Former Stockholders Note payable to a former stockholder, bearing interest at 9%, payable 372,998 413,435 in monthly principal and interest installments of $6,334 through December 31, 2004. 69,045 76,530 Noncompetition agreement obligation to a former stockholder, evidenced by a note payable, bearing interest at 9%, payable in monthly principal and interest installments of $1,203 through December 31, 2004. 70,869 78,553 -------- -------- Note payable to a former stockholder, bearing interest at 9%, payable in monthly principal and interest installments of $1,172 through December 31, 2004. 512,912 568,518 ------- ------- 846,815 978,518 Less current portion 176,313 165,632 ------- ------- $ 670,502 $ 812,886 ========= =========
F-25 NOTES TO FINANCIAL STATEMENTS AROPI, INCORPORATED June 30, 1998 Note B - Line of Credit and Long-Term Debt - Continued Effective December 31, 1994, the Company repurchased one-hundred and seventy-four shares of its common stock, representing all holdings of the Company's stock by that individual, at a cost of $500,000. In connection therewith, the company executed a $500,000 note payable to the former stockholder and secured by the repurchased shares. Pursuant to the repurchase agreement, the repurchased shares will be held in escrow and will be released to the Company on a pro rata basis through December 2004 as payments are made on the note payable. Concurrent with the stock repurchase, the Company obtained the former stockholder's agreement not to compete with the Company for a period of ten years ending on December 31, 2004. In consideration for the former stockholder's noncompetition agreement, the Company executed a $95,000 note payable to the former stockholder. Also, concurrent with the stock repurchase, certain existing obligations payable to the former stockholder on or before June 30, 1998 were recast into a nine percent note payable in monthly installments through 2004. These obligations are also secured by the repurchased and escrowed shares. The Company incurred interest expense of $87,388 and $111,315 for the years ended June 30, 1998 and 1997, respectively, of which $48,908 and $49,661, respectively, was paid to the former stockholder. Future maturities of long-term debt are as follows:
Year Ending Former Others Total June 30, Stockholder -------- ----------- 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. F-26 NOTES TO FINANCIAL STATEMENTS AROPI, INCORPORATED June 30, 1998 Note C - Commitments- Continued The Company's future lease obligations for base rent for its company owned stores is as follows: Year Ending June 30, Stores -------------------- ------ 1999 $ 644,261 2000 612,129 2001 605,033 2002 567,220 2003 393,691 Thereafter 265,787 ---------- $3,088,121 ========== Note D - Employee Benefit Plans The Company sponsors a 401(k) plan which covers all eligible employees who work one thousand hours or more during the year. Under the plan, each participant has the right to defer up to fifteen percent of his or her compensation, not to exceed certain annual limits set by the Internal Revenue Service, by making a voluntary contribution to the plan. The Company's minimum required matching contribution is one-half of the first six percent of compensation deferred by the employee. Additional Company contributions are at the discretion of management. The Company made matching contributions of $16,687 and $19,894 and incurred additional plan expenses of $2,636 and $2,400 for the years ended June 30, 1998 and 1997, respectively. Note E - Subsequent Events Subsequent to year-end, the stockholder of the Company sold all outstanding shares of stock to a public company. Concurrent with the sale of stock, all outstanding notes payable were repaid. F-27 HOME RETAIL HOLDINGS, INC. (formerly The Gaylord Companies, Inc.) UNAUDITED PRO-FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS The following unaudited pro-forma condensed consolidated balance sheet presents the pro-forma financial position of Home Retail Holdings, Inc. (formerly "The Gaylord Companies, Inc.") at June 30, 1998 on a "Fresh Start" basis, as if the Plan of Reorganization of the Cookstore Operations, which was approved by the Bankruptcy Court on July 10,1998, had been effective as of June 30, 1998. The Fresh Start basis balance sheet is further adjusted to reflect the acquisition of Aropi, Incorporated ("Aropi"), which occurred on August 20, 1998. The unaudited pro-forma condensed consolidated statements of operation for the six months ended June 30, 1998 and the year ended December 31, 1997 reflect the combined results of Home Retail Holdings, Inc. and Aropi as if the acquisition had occurred on January 1, 1997. The unaudited pro-forma condensed consolidated statements of operations do not necessarily represent actual results that would have been achieved had the companies been together from January 1, 1997, nor may they be indicative of future operations. These unaudited pro-forma condensed consolidated financial statements should be read in conjunction with the historical financial statements and notes thereto of the respective companies. F-28 HOME RETAIL HOLDINGS, INC. (formerly The Gaylord Companies, Inc.) UNAUDITED PRO-FORMA CONDENSED CONSOLIDATED BALANCE SHEET JUNE 30, 1998
The Gaylord "Fresh Start" The Gaylord Companies, Inc. Adjustments Companies, Inc. Aropi, Inc. (historical) Dr (Cr) ("Fresh Start") (historical) ------------ ------- --------------- ------------- ASSETS CURRENT ASSETS: Cash $ 212,681 $ 212,681 $ 17,448(_) Accounts receivable = trade 4,329 4,329 49,845 Inventories 882,168 882,168 1,665,833 Prepaid expenses and other current assets 15,428 15,428 3,650 ---------- ---------- ---------- TOTAL CURRENT ASSETS 1,114,606 1,114,606 1,736,776 PROPERTY AND EQUIPMENT 308,028 308,028 276,417 REORGANIZATION VALUE IN EXCESS OF AMOUNTS ALLOCABLE TO --(1) 2,727,858 2,727,858 -- IDENTIFIABLE ASSETS GOODWILL -- -- --(1) OTHER ASSETS 13,603 13,603 78,403 ---------- ---------- ---------- $1,436,237 $ 4,164,095 $2,091,596 ========== =========== ========== LIABILITIES AND STOCKHOLDERS' DEFICIT CURRENT LIABILTIES: Liabilities Not Subject to Compromise: Accounts payable and accrued expenses $ 209,583 $ 209,583 $551,709(2) Notes payable -- -- -- Current portion of long-term debt -- -- 176,313 Line of Credit 971,724 971,724 50,000 Liabilities Subject to Compromise: Accounts payable and accrued expenses 1,112,858(1) 1,112,858 -- -- Sales and other taxes payable 122,426(1) 122,426 -- -- Notes payable 370,000(1) 370,000 -- -- ---------- ---------- ---------- TOTAL CURRENT LIABILTIES 2,786,591 1,181,307 778,022 ---------- ---------- ---------- LONG-TERM DEBT -- -- 670,502 STOCKHOLDERS' DEFICIT: Cumulative preferred stock 300,000(2) 300,000 -- -- Common stock 40,950(2) 24,180 16,770 485,502(1) Additional paid-in-capital 2,641,838(2) (324,180) 2,966,018 78,600(1) Accumulated earnings (deficit) (4,333,142)(2) (4,333,142) -- 78,970(1) ---------- ---------- ---------- TOTAL STOCKHOLDERS' DEFICIT (1,350,354) 2,982,788 643,072 ---------- ---------- ---------- $1,436,237 $4,164,095 $2,091,596 ========== ========== ==========
Pro-Forma Adjustments --------------------- Dr. Cr. Total --------- ------- ----------- ASSETS CURRENT ASSETS: Cash 946,626(1) 790,312 $ 386,443 Accounts receivable = trade 54,174 Inventories 2,548,001 Prepaid expenses and other current assets 19,078 ---------- TOTAL CURRENT ASSETS 3,007,696 PROPERTY AND EQUIPMENT 584,445 REORGANIZATION VALUE IN EXCESS OF AMOUNTS ALLOCABLE TO 2,727,858 IDENTIFIABLE ASSETS GOODWILL 647,240 647,240 OTHER ASSETS 92,006 ---------- $7,059,245 ========== LIABILITIES AND STOCKHOLDERS' DEFICIT CURRENT LIABILTIES: Liabilities Not Subject to Compromise: Accounts payable and accrued expenses $81,650 $679,642 Notes payable 500,000 500,000 Current portion of long-term debt (1) 176,313 Line of Credit (2, 3) 1,028,276 2,050,000 Liabilities Subject to Compromise: Accounts payable and accrued expenses -- Sales and other taxes payable -- Notes payable -- ---------- TOTAL CURRENT LIABILTIES 3,405,955 ---------- LONG-TERM DEBT 670,502 STOCKHOLDERS' DEFICIT: Cumulative preferred stock -- Common stock 485,502 16,770 Additional paid-in-capital 78,600 2,966,018 Accumulated earnings (deficit) 78,970 -- ---------- TOTAL STOCKHOLDERS' DEFICIT 2,982,788 ---------- $7,059,245 ==========
See notes to pro-forma financial statements. F-29 HOME RETAIL HOLDINGS, INC. (formerly The Gaylord Companies, Inc.) UNAUDITED PRO-FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS SIX MONTHS ENDED JUNE 30, 1998
Pro-Forma Adjustments --------------------- The Gaylord Companies, Inc. Aropi, Inc. (historical) (historical) Dr. Cr. Total --------------- ------------ --- --- ----- NET SALES $1,135,645 $2,240,561 $ $ $3,376,206 COST OF GOODS SOLD 1,447,387 1,065,972 2,513,359 ---------- --------- ---------- GROSS PROFIT (311,742) 1,174,589 862,847 ------------ --------- ----------- OPERATING EXPENSES: Selling, general and administrative 172,815 1,486,326 1,659,141 Non-cash imputed stock compensation 150,000 -- 150,000 Depreciation and amortization 44,675 --(1,2) 111,500 156,175 ----------- ---------- ------------ 367,490 1,486,326 1,965,316 ---------- --------- ----------- OPERATING INCOME (LOSS) (679,232) (311,737) (1,102,469) ----------- ----------- ----------- OTHER INCOME (EXPENSE): Interest expense, net (56,504) --(3) 75,000 (131,504) Amortization of debt issue costs and (11,692) -- (11,692) discounts Franchise fees -- 170,506 170,506 Franchise expenses -- (319,268) (319,268) Other - net (17,691) 52,191 34,500 ----------- ----------- ------ (85,887) (96,571) (257,458) ----------- ------------ ----------- NET LOSS $(765,119) $(408,308) $186,500 $(1,359,927) ========== ========== ======== =========== NET LOSS PER SHARE $ (0.20) $ (0.81) ========== =========== WEIGHTED AVERAGE SHARES 3,870,000 2,193,015 1,676,985 ========== ========= ===========
See notes to pro-forma financial statements. F-30 HOME RETAIL HOLDINGS, INC. (formerly The Gaylord Companies, Inc.) UNAUDITED PRO-FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS YEAR ENDED DECEMBER 31, 1997
Pro-Forma Adjustments --------------------- The Gaylord Companies, Inc. Aropi, Inc. (historical) (historical) Dr. Cr. Total --------------- ------------ --- --- ----- NET SALES $3,724,157 $6,397,922 $ $ $10,122,079 COST OF GOODS SOLD 3,508,874 3,231,302 6,740,176 ----------- --------- ---------- GROSS PROFIT 215,283 3,166,620 3,381,903 ----------- --------- ---------- OPERATING EXPENSES: Selling, general and administrative 1,072,706 3,153,074 4,225,780 Non-cash imputed stock compensation 469,255 -- 469,255 Depreciation and amortization 107,640 --(1,2) 223,000 330,640 ---------- --------- ----------- 1,649,601 3,153,074 5,025,675 ---------- --------- ----------- OPERATING INCOME (LOSS) (1,434,318) 13,546 (1,643,772) ----------- ---------- ----------- OTHER INCOME (EXPENSE): Interest expense, net (79,710) --(3) 150,000 (229,710) Amortization of debt issue costs and discounts (74,000) -- (74,000) Franchise fees -- 502,423 502,423 Franchise expenses -- (542,787) (542,787) Other - net (37,977) 45,534 7,557 ------------ --------- ------------ (191,687) 5,170 (336,517) ------------ ---------- ------------ INCOME (LOSS) BEFORE INCOME TAXES (1,626,005) 18,716 (1,980,289) PROVISION FOR INCOME TAXES (400,649) -- (400,649) ------------ ---------- ------------ NET INCOME (LOSS) $(2,026,654) $18,716 $373,000 $ $(2,380,938) ============ ======= ======== ========== =========== NET LOSS PER SHARE $ (0.53) $(1.42) =========== =========== WEIGHTED AVERAGE SHARES 3,870,000 2,193,015 1,676,985 =========== ========= ==========
See notes to pro-forma financial statements. F-31 HOME RETAIL HOLDINGS, INC. (formerly The Gaylord Companies, Inc.) NOTES TO UNAUDITED PRO-FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS A. The following unaudited "Fresh Start" adjustments are included in the accompanying unaudited pro-forma condensed consolidated balance sheet at June 30, 1998: (1) To record the reorganization value in conjunction with the "Fresh Start" of the Company as a result of the Bankruptcy Court's approval of its Plan of Reorganization, including the elimination of accumulated deficit and the settlement of the pre-petition liabilities. (2) To record the recapitalization of the Company's stockholders' equity. B. The following unaudited pro-forma acquisition adjustments are included in the accompanying unaudited pro-forma condensed consolidated balance sheet at June 30, 1998: (1) To record the acquisition of 100% of the common stock of Aropi for a purchase price of $1,290,312, including payment of $790,312 cash and a $500,000 issuance of a note payable. Goodwill resulting from the acquisition of $647,240. (2) To record initial advance from Liberty Bidco Investment Corporation ("Bidco") to be used to pay off the Fremont loan, with the excess going to working capital. (3) To record an additional advance from Bidco to fund the cash portion of the purchase price for Aropi. C. The following pro-forma adjustments are included in the accompanying unaudited pro-forma condensed consolidated statements of operations for the year ended December 31, 1997 and the six months ended June 30, 1998: (1) To record amortization of the reorganization value in excess of amounts allocable to identifiable assets over a 15 year term for the respective periods. (2) To record amortization of the goodwill resulting from the Aropi acquisition over a 15 year term for the respective periods. (3) To record interest expense on the approximately $1,500,000 of additional debt arising from the pro-forma transactions for the respective periods. F-32 ================================================================================ The Company has not authorized any dealer, salesperson or any other person to give any information or to represent anything not contained in this Prospectus. You must not rely on any unauthorized information. This Prospectus does not offer to sell or buy any shares in any jurisdiction where it is unlawful. The information in this Prospectus is current as of September , 1998. -------------------------- TABLE OF CONTENTS PROSPECTUS Page ---- Summary.................................................. 1 Risk Factors............................................. 5 The Company.............................................. 10 Use of Proceeds.......................................... 11 Dividend Policy.......................................... 11 Capitalization........................................... 12 Dilution................................................. 14 Management's Discussion and Analysis of Financial Condition and Results of Operations........................................... 17 Business................................................. 23 Management............................................... 29 Certain Relationships and Related Party Transactions......................................... 35 Principal Stockholders................................... 38 Selling Stockholders..................................... 39 Description of Securities................................ 43 Shares Eligible for Future Sale.......................... 47 Underwriting............................................. 48 Legal Matters............................................ 50 Experts.................................................. 50 Additional Information................................... 50 Index to Financial Statements............................ F-1 -------------------------- Until _____________, 1998, (25 days after the date of this Prospectus) all dealers that buy, sell or trade these securities, whether or not participating in this Offering, may be required to deliver a Prospectus. This is in addition to the dealers' obligation to deliver a Prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions. ================================================================================ ================================================================================ _____________ SHARES COMMON STOCK ROLLING PIN KITCHEN EMPORIUM, INC. [GRAPHIC OMITTED] ---------- PROSPECTUS _____________, 1998 Nutmeg Securities, LTD. ================================================================================ PART II -- INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS. The Company, to the fullest extent permitted by the provisions of ss. 145 of the General Corporation Law of the State of Delaware, indemnifies, and advances expenses to, any and all persons who is or was a party or is threatened to be made a party to any threatened, pending or completed action, suit, proceeding or claim, whether civil, criminal, administrative or investigative, by reason of the fact that such person is or was or has agreed to be a director or officer of the Company or while a director or officer is or was serving at the request of the Company as a director, officer, partner, trustee, employee or agent of any corporation, partnership, joint venture, trust or other enterprise, including service with respect to employee benefit plans, from and against any and all of the expenses, liabilities, or other matters referred to in or covered by said section (including without limitation attorneys fees and expenses). The indemnification provided by the Company is not exclusive of any other rights to which those indemnified may be entitled under any bylaw, agreement, vote of stockholders or disinterested directors or otherwise, both as to action in their official capacity and as to action in another capacity while holding such office, and shall continue as to a person who has ceased to be a director, officer, employee, or agent and shall inure to the benefit of the heirs, executors, and administrators of such a person. Any person seeking indemnification by the Company is deemed to have met the standard of conduct required for such indemnification unless the contrary shall be established by a court of competent jurisdiction. If the Delaware General Corporation Law is amended to authorize action further eliminating or limiting the personal liability of directors, then the liability of our directors will be eliminated or limited to the fullest extent permitted by such statutes, as so amended. Any amendment, repeal or modification of such provision shall be prospective only and shall not adversely affect any right or protection of any of our directors existing at the time of such amendment, repeal or modification. Subsection (a) of Section 145 of the General Corporation Law of the State of Delaware (the "DGCL") empowers a corporation to indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the corporation) by reason of the fact that he is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit or proceeding if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. Subsection (b) of Section 145 empowers a corporation to indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, or suit by or in the right of the corporation to procure a judgment in its favor by reason of the fact that such person acted in any of the capacities set forth above, against expenses (including attorneys' fees) actually and reasonably incurred by him in connection with the defense or settlement of such action or suit if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation, except that no indemnification may be made in respect of any claim, issue or matter as to which such person shall have been made to be liable to the corporation unless and only to the extent that the Court of Chancery or the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which the Court of Chancery or such other court shall deem proper. Section 145 further provides that to the extent a director or officer of a corporation has been successful on the merits or otherwise in the defense of any action, suit or proceeding referred to in subsections (a) and (b) of Section 145 in the defense of any claim, issue or matter therein, he shall be indemnified against expenses (including attorneys' fees) actually and reasonably incurred by him in connection therewith; that indemnification provided for by Section 145 shall not be deemed exclusive of any other rights to which the indemnified party may be entitled; that indemnification provided for by Section 145 shall, unless otherwise provided when authorized or ratified, continue as to a person who has ceased to be a director, officer, employee or agent and shall inure to the benefit of such person's heirs, executors and administrators; and empowers the corporation to purchase and maintain insurance on behalf of a director or officer of the corporation against any liability asserted against him and incurred by him in any such [capacity], or arising out of his status as such whether or not the corporation would have the power to indemnify him against such liabilities under Section 145. Section 102(b)(7) of the DGCL provides that a certificate of incorporation may contain a provision eliminating or limiting the personal liability of a director to the corporation or its stockholders for monetary damages for breach of fiduciary duty as a director provided that such provision shall not eliminate or limit the liability of a director: (i) for any breach of the director's duty of loyalty to the corporation or its stockholders; (ii) for acts or omissions not in good faith or which involve international misconduct or a knowing violation of law; (iii) under Section 174 of the DGCL; or (iv) for any transaction from which the director derived an improper personal benefit. ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. The following table sets forth the expenses in connection with this Registration Statement. The Selling Stockholders are responsible for ___% of the expenses in connection with the preparation and filing of this Prospectus. All of such expenses are estimates, other than the filing fees payable to the Commission. Filing Fee -- Securities and Exchange Commission 4,074 Nasdaq Listing Fee 7,800 Fees and Expenses of Accountants 75,000 Fees and Expenses of Counsel 250,000 Printing Expenses 80,000 Miscellaneous Expenses 33,126 ----------- Total $450,000 ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES Set forth below is certain information concerning all sales of securities by the Company within the past three years that were not registered under the Securities Act: (i) Reorganization. Pursuant to the Plan of Reorganization, the Company issued: (i) 1,522,041 shares of Common Stock, of which 1,383,691 shares were issued to the shareholders of HRAC and 138,350 were issued to other creditors with unsecured claims against the Predecessor Entity; (ii) 85,777 shares of Class B Common Stock to the holders of the Predecessor Entity's common stock; (iii) 69,174 shares of Class B Common Stock to the holders of the Predecessor Entity's preferred stock; (iv) 52,573 New Warrants; (v) 92,595 Bidco Warrants; and (vi) 29,261 Individual Warrants. These shares and warrants were issued pursuant to Section 1145(a) of the Bankruptcy Code which exempts the offer and sale of securities under a plan of reorganization from registration under the Securities Act and state laws if: (i) the securities are offered and sold under a plan of reorganization; (ii) the securities offered are these of the debtor or an affiliate of the debtor participating in a joint plan or of a successor to the debtor under the plan; and (iii) the recipients of the securities must hold a prepetition or administrative expense claim against the debtor or an interest in the debtor, or principally in such exchange and partly for cash or property. The Company believes that it satisfied all of the requirements of Section 1145(a) and as a result the securities and warrants issued pursuant to the Plan of Reorganization were exempt from registration under the Securities Act and state securities laws. (ii) Private Placement. In August 1998, the Company issued 310,000 shares of Preferred Convertible Stock of the Company that are immediately convertible into shares of Common Stock to an investor for cash. The offer and sale of the securities were exempt from registration under the Securities Act in reliance on Section 4(2) thereof because the offers and sales were made to sophisticated investors who had access to information about the Company and were able to bear the risk of loss of their investment. (iii) Warrants. In August 1998, the Company issued the Bidco Warrants, New Bidco warrants, Greenfield Warrants and Other Financing Warrants in connection with certain loan agreements entered into by the Company. The offer and sale of the securities were exempt from registration under the Securities Act in reliance on Section 4(2) thereof because the offers and sales were made to sophisticated investors who had access to information about the Company and were able to bear the risk of loss of their investment. ITEM 27. EXHIBITS. EXHIBIT * 1 Form of Underwriting Agreement. 2.1 Stock Purchase Agreement, dated as of August 20, 1998, among Home Retail Holdings, Inc., Glenn Kaas and Aropi, Incorporated. * 2.2 Amended Plan of Reorganization of Gaylord Companies, Inc., The Cookstore, Inc., and The Cookstore Worthington, Inc., dated June 24, 1998. * 2.3 Disclosure Statement to the Amended Plan of Reorganization. 3.1 Amended and Restated Certificate of Incorporation of the Company. 3.2 Amended and Restated Bylaws of the Company. * 4.1 Specimen of Stock Certificate. * 4.2 Underwriters' Warrant, dated ___, 1998. * 4.3 BIDCO Warrant, dated August 12, 1998. 4.4 New BIDCO Warrant, dated August 20, 1998. 4.5 Greenfield Warrant dated August 20, 1998. * 4.6 Form of New Warrants. 4.7 Form of Individual Warrants. * 4.8 Warrant, dated August 20, 1998, issued to Michael Leonard for the purchase of _____ shares of Common Stock. * 4.9 Warrant, dated August 20, 1998, issued to Michael Leonard for the purchase of _____ shares of Common Stock. * 4.10 Warrant, dated August 20, 1998, issued to William Laux for the purchase of _____ shares of Common Stock. * 4.11 Warrant, dated August 20, 1998, issued to William Laux for the purchase of _____ shares of Common Stock. * 5.1 Opinion of Brown & Wood LLP, as to the legality of the securities being registered. 10.1 Form of 1998 Equity Incentive Plan. 10.2 Business Loan Agreement With Covenants, dated August 12, 1998, among Home Retail Holdings, Inc., The Cookstore Worthington, Inc. and Liberty Bidco Investment Corporation. 10.3 First Amendment to Loan Agreement, dated August 20, 1998, among Liberty Bidco Investment Corporation, Home Retail Holdings, Inc., The Cookstore, Inc., The Cookstore Worthington, Inc., and Aropi, Incorporated. 10.4 Loan and Security Agreement, dated August 20, 1998, among Greenfield Commercial Credit, L.L.C., Home Retail Holdings, Inc., The Cookstore, Inc., The Cookstore Worthington, Inc., and Aropi, Incorporated. 10.5 Employment Agreement, entered into as of August 20, 1998, between Home Retail Holdings, Inc. and Glenn Kaas. 21 List of Subsidiaries. 23.1 Consent of Feldman Sherb Ehrlich & Co., P.C., as certified public accountants. 23.2 Consent of Smith & Radigan, as certified public accountants. * 23.3 Consent of Counsel (previously filed under Exhibit 5.1). 24 Power of Attorney (included in signature page). 27.1 Financial Data Schedule (December 31, 1997). 27.2 Financial Data Schedule (June 30, 1998). - --------------- * To be filed by amendment. All other exhibits are filed herewith. ITEM 28. UNDERTAKINGS. (a) The undersigned registrant hereby undertakes: (1) To file, during any period in which it offers or sells securities, a post-effective amendment to this registration statement to: (i) Include any prospectus required by Section 10(a)(3) of the Securities Act. (ii) Reflect in the prospectus any facts or events which, individually or together, represent a fundamental change in the information in the registration statement. (iii) Include any additional or changed material information on the plan of distribution. (2) That, for determining liability under the Securities Act, treat each post-effective amendment as a new registration statement of the securities offered, and the offering of the securities at that time to be the initial bona fide offering. (3) To file a post-effective amendment to remove from registration any of the securities that remain unsold at the end of the offering. (b) Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the small business issuer pursuant to the foregoing provisions, or otherwise, the small business issuer has been advised that in the opinion of the Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the small business issuer of expenses incurred or paid by a director, officer or controlling person of the small business issuer in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the small business issuer will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. (c) The undersigned registrant also hereby undertakes that, for determining any liability under the Securities Act, the small business issuer will treat the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the small business issuer under Rule 424(b)(1), or (4), or 497(h) under the Securities Act as part of this registration statement as of the time the Commission declared it effective. SIGNATURES In accordance with the requirements of the Securities Act of 1933, as amended, the registrant certifies that is has reasonable grounds to believe that it meets all of the requirements for filing on Form SB-2 and authorized this registration statement to be signed on its behalf by the undersigned, in the City of New York, State of New York, on September __, 1998. ROLLING PIN KITCHEN EMPORIUM, INC. By: /s/ GLENN KAAS ------------------------------------- President and Chief Executive Officer POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that each of the persons whose name and signature appears below constitutes and appoints Gerald Czarnecki, Greg Dukoff and David Danovitch each of them, his or her true and lawful attorneys-in-fact and agents with full power of substitution and resubstitution, for him or her and in his or her name, place and stead, in any and all capacities, to sign any and all amendments (including post-effective amendments) to this Registration Statement, and any and all Registration Statements filed pursuant to Rule 462 under the Securities Act, and to file the same with all exhibits thereto, and all documents in connection therewith, with the Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully and to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or any of them, or their or his or her substitute or substitutes may lawfully do or cause to be done by virtue hereof. In accordance with the requirements of the Securities Act of 1933, this registration statement has been signed by the following persons in the capacities and on the dates stated.
NAME TITLE DATE ---- ----- ---- /s/ GLENN KAAS President, Chief Executive Officer and September __, 1998 - ----------------------------------- Director Glenn Kaas /s/ GERALD M. CZARNECKI Chairman of the Board and Director September __, 1998 - ----------------------------------- Gerald M. Czarnecki /s/ GREG E. DUKOFF Secretary, Principal Accounting Officer September __, 1998 - ----------------------------------- and Director Greg E. Dukoff /s/ DAVID E. DANOVITCH Director September __, 1998 - ----------------------------------- David E. Danovitch /s/ DONALD J. JACKSON Director September __, 1998 - ----------------------------------- Donald J. Jackson /s/ GEORGE P. LUCACI Director September __, 1998 - ------------------------------------ George P. Lucaci /s/ THOMAS TUTTLE Director September __, 1998 - ------------------------------------ Thomas Tuttle
Exhibit Index Exhibit Number Description ------ ----------- * 1 Form of Underwriting Agreement. 2.1 Stock Purchase Agreement, dated as of August 20, 1998, among Home Retail Holdings, Inc., Glenn Kaas and Aropi, Incorporated. * 2.2 Amended Plan of Reorganization of Gaylord Companies, Inc., The Cookstore, Inc., and The Cookstore Worthington, Inc., dated June 24, 1998. * 2.3 Disclosure Statement to the Amended Plan of Reorganization. 3.1 Amended and Restated Certificate of Incorporation of the Company. 3.2 Amended and Restated Bylaws of the Company. * 4.1 Specimen of Stock Certificate. * 4.2 Underwriters' Warrant, dated ___, 1998. * 4.3 BIDCO Warrant, dated August 12, 1998. 4.4 New BIDCO Warrant, dated August 20, 1998. 4.5 Greenfield Warrant dated August 20, 1998. * 4.6 Form of New Warrants. 4.7 Form of Individual Warrants. * 4.8 Warrant, dated August 20, 1998, issued to Michael Leonard for the purchase of _____ shares of Common Stock. * 4.9 Warrant, dated August 20, 1998, issued to Michael Leonard for the purchase of _____ shares of Common Stock. * 4.10 Warrant, dated August 20, 1998, issued to William Laux for the purchase of _____ shares of Common Stock. * 4.11 Warrant, dated August 20, 1998, issued to William Laux for the purchase of _____ shares of Common Stock. * 5.1 Opinion of Brown & Wood LLP, as to the legality of the securities being registered. 10.1 Form of 1998 Equity Incentive Plan. 10.2 Business Loan Agreement With Covenants, dated August 12, 1998, among Home Retail Holdings, Inc., The Cookstore Worthington, Inc. and Liberty Bidco Investment Corporation. 10.3 First Amendment to Loan Agreement, dated August 20, 1998, among Liberty Bidco Investment Corporation, Home Retail Holdings, Inc., The Cookstore, Inc., The Cookstore Worthington, Inc., and Aropi, Incorporated. 10.4 Loan and Security Agreement, dated August 20, 1998, among Greenfield Commercial Credit, L.L.C., Home Retail Holdings, Inc., The Cookstore, Inc., The Cookstore Worthington, Inc., and Aropi, Incorporated. 10.5 Employment Agreement, entered into as of August 20, 1998, between Home Retail Holdings, Inc. and Glenn Kaas. 21 List of Subsidiaries. 23.1 Consent of Feldman Sherb Ehrlich & Co., P.C., as certified public accountants. 23.2 Consent of Smith & Radigan, as certified public accountants. * 23.3 Consent of Counsel (previously filed under Exhibit 5.1). 24 Power of Attorney (included in signature page). 27.1 Financial Data Schedule (December 31, 1997). 27.2 Financial Data Schedule (June 30, 1998). - --------------- * To be filed by amendment. All other exhibits are filed herewith. EX-2.1 2 EXHIBIT 2.1 STOCK PURCHASE AGREEMENT STOCK PURCHASE AGREEMENT (the "Agreement"), dated August 20, 1998, by and among HOME RETAIL HOLDINGS, INC., a Delaware corporation (Home Retail"), GLENN KAAS, an individual resident of the State of Georgia (the "Shareholder") and AROPI, INCORPORATED, an Iowa corporation (the "Company"), WHEREAS, the Shareholder owns all of the issued and outstanding shares of capital stock of the Company, consisting of 174 shares of the voting Common Stock, no par value (the "Aropi Common Stock" or "Aropi Shares"); WHEREAS, Home Retail desires to purchase from the Shareholder and the Shareholder desires to sell to Home Retail, all of the issued and outstanding shares of the Aropi Common Stock in exchange for the Purchase Price (as hereafter defined); NOW, THEREFORE, the parties hereto agree as follows: 1. Definitions. For purposes of this Agreement, the following terms have the meanings specified or referred to in this Section. (a) "Aropi Common Stock" or "Aropi Shares" is any and all of the voting common stock of the Company, no par value, owned by Glenn Kaas. (b) "Audited Financial Statements" is defined in Section 4.4 hereof. (c) "Bankruptcy Court" is defined in Section 5.2 hereof. (d) "Bankruptcy Court Order" is defined in Section 5.2 hereof. (e) "Benefit Plans" is defined in Section 4.17(a) hereof. (f) "Blue Sky" are the various state security laws applicable to the Shareholder or shareholders of Home Retail. (g) "Closing" is defined in Section 3.2 hereof. (h) "Closing Date" is defined in Section 3.2 hereof. (i) "Closing Documents" are those documents set forth on Exhibit 1(j) attached hereto and incorporated herein by reference. (j) "Closing Liabilities" are those liabilities set forth on Exhibit 6.2 attached hereto and incorporated herein by reference. (k) "Code" is the Internal Revenue Code of 1986, as amended. (l) "Confidentiality Agreement" is defined in Section 11.2 hereof. (m) "Conversion Date" is the date on which the Offering has been consummated in accordance with the underwriting agreement. (n) "Convertible Promissory Note No. 1" is defined in Section 3.1(b) hereof. (o) "Convertible Promissory Note No. 2" is defined in Section 3.1(b) hereof. (p) "Convertible Promissory Note No. 1 and Stock Escrow Agreement" is the escrow agreement attached hereto as Exhibit 7. (q) "Current-Operating Liabilities" are any and all liabilities of the Company arising in the ordinary course of business. (r) "Disclosure Documents" is defined in Section 5.2 hereof. (s) "ERISA" is defined in Section 4.17(a) hereof. (t) "Escrow Agreement" is that certain Escrow Agreement dated June 30, 1998 by and between Glenn Kaas, Home Retail Acquisition Corporation, a Delaware corporation, and Arnall Golden & Gregory, LLP, Escrow Agent. (u) "Home Retail Shares" is defined in Section 3.1(b) hereof. (v) "Home Retail Information" is defined in Section 4.21(b) hereof. (w) "Insurance Policies" is defined in Section 4.18 hereof. (x) "Interim Financials" is defined in Section 4.4 hereof. (y) "Lease" is defined in Section 6.5 hereof. (z) "Letter of Credit" is defined in Section 6.6 hereof. (aa) "Loan and Financing Agreement" are those certain loan documents set forth on Exhibit 1(aa) attached hereto and incorporated herein by reference. -2- (ab) "Material-Adverse Effect" or "Material-Adverse Change" is defined on Exhibit 1(ab) attached hereto and incorporated herein by reference. (ac) "May 1998 Balance Sheet" is the financial statement attached hereto as Exhibit 4.4. (ad) "Offering" is defined on Exhibit 1(ad) attached hereto and incorporated herein by reference. (ae) "Offering Price" is defined on Exhibit 1(ae) attached hereto and incorporated herein by reference. (af) "Plan" is defined in Section 5.2 hereof. (ag) "Purchase Price" is defined in Section 2 hereof. (ah) "Rule 144" is defined in Section 5.5(a)(ii) hereof. (ai) "Securities Act" is defined in Section 4.21(a) hereof. (aj) "Tag Along Agreement" is defined in Section 8.2(j) hereof. 2. Sale and Purchase of the Aropi Shares. Subject to the terms and conditions hereof and in reliance upon the representations, warranties and covenants contained herein, the Shareholder will sell the Aropi Shares to Home Retail, and Home Retail will purchase the Aropi Shares from the Shareholder on the Closing Date for an aggregate purchase price equal to $1,290,312, (the "Purchase Price") payable as set forth in Section 3.1 below. 3. The Closing; Purchase Price, etc. 3.1. Payment At Closing. At the Closing, Home Retail shall pay the Purchase Price as follows: (a) $790,312.21 in cash by wire transfer to the Shareholder of immediately available funds or by certified bank check. (b) the balance of the Purchase Price, $500,000, shall be evidenced by two convertible promissory notes each in the amount of $250,000 and each bearing interest at the rate of 8% per annum, principal and interest due and payable as follows: (i) the first convertible promissory note in one lump sum 365 days from the Closing Date, similar to that attached hereto as Exhibit 3.1(b)(i) and incorporated herein by reference ("Convertible Promissory Note No. 1"), and (ii) the second convertible promissory note in one lump sum 180 days from the Closing Date, similar to that attached hereto as Exhibit 3.1(b)(ii) ("Convertible Promissory Note No. 2") (collectively, the "Convertible Promissory Notes"). The Convertible Promissory Notes shall be convertible as set forth in Section 10.3 hereof into shares of the Class A Voting Common Stock of Home Retail, par value of $.01 per share having a fair market value as of the Conversion Date of not less than $500,000 ("Home Retail Shares") which shares as -3- of the Conversion Date shall represent not less than 2% of all of the issued and outstanding shares of Home Retail on a fully diluted basis. It is understood, acknowledged and agreed by the Parties hereto, that the Shareholder's purchase price per share for the Home Retail Shares, on the Conversion Date will be at the Offering Price per share as that sold to the Public in the Offering. 3.2. The Closing. The Closing (the "Closing") of the transactions contemplated by this Agreement shall take place at the offices of Cambridge Holdings LLC, 535 Madison Avenue, New York, New York, at 10:00 a.m. New York time on August 20, 1998 or at such place and on such other date as may be mutually agreed upon by Home Retail and the Shareholder. The date of the closing is herein referred to as the "Closing Date". 3.3. Delivery of Aropi Shares. At the Closing, Shareholder will deliver to Home Retail certificates representing the Aropi Shares duly endorsed for transfer by the Shareholder or accompanied by stock powers duly executed by the Shareholder in form reasonably satisfactory to Home Retail and in exchange therefor Shareholder shall receive (i) the Convertible Promissory Notes and (ii) the cash portion of the Purchase Price as provided in Section 3.1(a) above. 4. Representations and Warranties of the Shareholder and the Company. The Shareholder and the Company, jointly and severally, to the best of their knowledge and belief, represent and warrant to Home Retail as follows: 4.1. (a) Organization and Qualification. The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of Iowa and has all requisite power and authority to own, lease and operate its properties and carry on its business as now being conducted. The Company is duly qualified and in good standing as a foreign corporation authorized to do business in each jurisdiction where the character of the properties owned or leased or the nature of activities conducted makes such qualification necessary except where the failure to so qualify would not have a Material-Adverse Effect on the Company. (b) Certificate of Incorporation and By-Laws. Attached hereto and incorporated herein by reference as Exhibits 4.1(b)(i) and (b)(ii) hereto, are true, correct and complete copies, in full force and effect, of the Company's Certificate of Incorporation and By-Laws, as amended or restated. The Company is not in violation of any of the provisions of its Certificate of Incorporation or By-Laws. 4.2. Capitalization. The authorized capital stock of the Company consists of (i) 10,000 shares of Voting Common Stock, of which 174 shares will be issued and outstanding as of the Closing Date after the cancellation of the 174 shares of Voting Common Stock held in escrow to secure the Company's indebtedness to Dennis Kaas which indebtedness will be paid as provided for in Sections 6.2 and 10.1 hereof, (ii) 10,000 shares of Non-Voting Common Stock and (iii) 10,000 shares of Non-Voting Preferred Common, none of which are issued or outstanding. All of the issued and outstanding shares of Aropi Common Stock are duly authorized, validly issued, fully paid, non-assessable and free of preemptive rights. There are no options, warrants, calls subscriptions, convertible securities, or other rights or agreements or commitments of any character whatsoever obligating the Company to issue or sell any shares of Aropi Common Stock or any other class of capital stock of the Company, or any securities convertible into or exchangeable or exercisable for or otherwise -4- evidencing a right to acquire any shares of capital stock or other securities of any kind of the Company. There are no voting trusts or other agreements or understandings to which the Company or the Shareholder is a party with respect to the voting of the Aropi Common Stock or any other class of capital stock of the Company, except as set forth on Exhibit 4.2 attached hereto and incorporated herein by reference. 4.3. Agreement; Title to Aropi Shares. (a) Each of the Shareholder and the Company has the legal capacity to enter into this Agreement. This Agreement has been duly executed and delivered by the Shareholder and the Company and, assuming due execution by Home Retail, constitutes the legal and binding obligation of the Shareholder and the Company enforceable in accordance with its terms except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization of other similar laws of general application relating to the rights of creditors and is subject to general principles of equity. The execution and delivery by the Shareholder and the Company of this Agreement, the consummation of the transactions contemplated hereby, and the performance by the Shareholder and the Company of their respective obligations hereunder will not conflict with or result in any violation of, or default under (either immediately or with notice or lapse of time), or in any right to accelerate or the creation of any lien, charge or encumbrance pursuant to, any provision of (i) the certificate of incorporation or by-laws of the Company, (ii) any agreement, contract, lease, license, note, bond, mortgage, indenture, deed of trust or other instrument to which the Shareholder or the Company is a party or by which any of the properties or other assets of the Company is bound, (iii) any franchise, license, permit or authorization, or any judgment or order of any tribunal or governmental body applicable to the Shareholder or the Company, or any of the properties or other assets of the Company, (iv) any law, statute, decree, rule or regulation of any jurisdiction. (b) No authorization, consent or approval of, or declaration of, filing with or notice to any governmental body or authority by the Shareholder or the Company is necessary for the execution of this Agreement, the consummation by the Shareholder and the Company of the transactions contemplated hereby or the performance by the Shareholder and the Company of their respective obligations hereunder other than (i) satisfaction of applicable requirements, if any, of the Securities Act or state securities, "Blue Sky" or takeover laws and (ii) other regulatory rules, as required by law. (c) Since January 1, 1998, the Company has not declared or paid any dividend on any of the Aropi Common Stock, or directly or indirectly redeemed, or made any distribution with respect to, or authorized or effected any split-up or any other purchase or otherwise acquired any of its outstanding capital stock or agreed to take any such action and will not take any such action during the period between the date of this Agreement and the Closing Date, except as set forth on Exhibit 4.3 which is attached hereto and incorporated herein by reference. (d) The Shareholder is the record and beneficial owner of the Aropi Shares, has the sole and undivided ownership of said Aropi Shares with the full power, right, and authority to enter into and perform this Agreement and to transfer the Aropi Shares to Home Retail. -5- (e) The Aropi Shares represent all of the Aropi Shares which the Shareholder owns in the Company. (f) The Aropi Shares are free and clear of all liens, security interests, claims, pledges, community property rights and encumbrances of any nature whatsoever and are not subject to any shareholder agreements, voting trusts, contractual restrictions, or outstanding proxies. (g) The Shareholder has not granted any options, warrants or purchase rights with respect to the Aropi Shares to any individual, group, partnership, corporation or other legal entity. (h) The delivery by the Shareholder to Home Retail of the certificate(s) representing the Aropi Shares shall pass good and marketable title to the Aropi Shares to Home Retail. 4.4. Financial Statements. The Shareholder has delivered to Home Retail true and correct copies of the audited financial statements of the Company for the fiscal years ending June 30, 1996 and June 30, 1997 prepared by Smith & Radigan, certified public accountants, Atlanta, Georgia (the "Audited Financial Statements"). The unaudited balance sheet of the Company for the period ending May 31, 1998 ("the May 1998 Balance Sheet") and the related unaudited statements of operations and accumulated deficit for the period from July 1, 1997 to the May 1998 Balance Sheet, certified by the President of the Company (collectively, the "Interim Financials") were prepared from the books and records of the Company and fairly present in all material respects the financial position of the Company as of their respective dates and the results of operations of the Company for the periods then ended. The Audited Financial Statements and the Interim Financials, including the notes to all such statements, are referred to herein collectively as the "Financial Statements." The Audited Financial Statements have been prepared in accordance with generally accepted accounting principles applied on a consistent basis throughout the periods specified, and present fairly in all material respects and in accordance with generally accepted accounting principles the financial position of the Company as of the respective dates specified. Except as reflected or reserved against in the Interim Financials, the Company has no debts, liabilities, or obligations of any nature, whether accrued, absolute, contingent, or otherwise, arising out of transactions entered into, or any state of facts existing, other than (a) liabilities and obligations as disclosed or contemplated in this Agreement, (b) liabilities and obligations described in the exhibits to this Agreement, (c) liabilities and obligations arising after the May 1998 Balance Sheet in the ordinary course of the business of the Company that do not have and cannot reasonable be expected to have, individually or in the aggregate, a Material-Adverse Effect, and (d) those set forth on Exhibit 4.4 attached hereto and incorporated herein by reference. 4.5. Title to Property, Absence of Encumbrances. etc. Except for leased property and as set forth on Exhibit 4.5 attached hereto and incorporated herein by reference, the Company has good and marketable title, and is the sole owner of, all material assets, real or personal, tangible or intangible, owned or used by it, including, without limitation, all assets reflected in the balance sheets included in the Interim Financials (other than any assets sold or -6- otherwise disposed of in the ordinary course of business since June 1, 1998), free and clear of all mortgages, pledges, liens, security interests or encumbrances of any nature (other than liens for taxes, assessments or other governmental charges not yet due and payable, or presently payable without penalty or interest) including, without limitation, any governmental restrictions on the operation of such assets, except for such leases and such mortgages, liens and encumbrances, or as otherwise disclosed in Exhibit 4.5 or other Exhibits to this Agreement. All buildings, other improvements and leasehold improvements, and all machinery, equipment, tools, furniture and fixtures except as listed on Exhibit 4.5 owned or leased by the Company are in good operating condition and repair, except for reasonable wear and tear. The Company has not received notice of any outstanding enforcement actions or notices of violation issued by any Federal, state, county or municipal authority having jurisdiction over any such property, including but not limited to any notice from any state or Federal environmental agency. 4.6. Inventory; Accounts Receivable. Subject to the aggregate of the reserves reflected on the May 1998 Balance Sheet with respect to inventory, the inventories of the Company in all material respects (a) are in good marketable condition, and (b) conform to generally accepted standards in the industry of which the Company is a part. The accounts receivable reflected on the books of the Company on the May 1998 Balance Sheet were valid and existing and represent monies owed to the Company for services provided or goods sold and delivered in the ordinary course of the business as of that date. Except as reflected on the May 1998 Balance Sheet, there were no refunds, discounts, or other adjustments payable relating to a material amount of the accounts receivable, and the Company has not received any written notice, or to its knowledge, any notice, asserting any defenses, rights of set-off, assignments, or conditions enforceable by third parties against the Company relating to a material amount of the accounts receivable. The accounts receivable reflected on the May 1998 Balance Sheet were net of a write-off determined in accordance with the Company's past practices. 4.7. Patents, Trademarks, etc. Exhibit 4.7 attached hereto and incorporated herein by reference contains a complete and correct list of all patents, trademarks registered or claimed by the Company, trade names and registered copyrights owned by, or registered in the name of the Company, and all applications for patents or for registration of trademarks, trade names or copyrights made by the Company, or by any of its employees for the benefit of the Company. Except as otherwise indicated on Exhibit 4.7, the Company is the registered and beneficial owner of all such patents, trademarks, trade names and registered copyrights, free and clear of any license, royalty, lien or encumbrance. The Company owns or has the right to use all patents, patent applications, trademarks, trade names, copyrights and other intellectual property rights, including, without limitation, inventions, processes, designs, formula, trade secrets, technology and know-how necessary for the conduct of its business. There is no pending or threatened claim by the Company against any third party for infringement, misuse or misappropriation of any patent, trademark, trade name, copyright or other intellectual property (including, without limitation, any trade secrets or know-how) owned by the Company or in which the Company has an interest, whether as licensee or otherwise. Except as set forth in Exhibit 4.7, there is no pending or, to the knowledge of the Shareholder, threatened action, suit or proceeding against the Company or the Shareholder for infringement, misuse or appropriation of any patent, trademark, trade name, copyright or other intellectual property (including, without limitation, any trade secret or know-how) owned by any third party or, to the knowledge of the Shareholder, any basis therefor. -7- 4.8. Employee Remuneration, etc. Exhibit 4.8 attached hereto and incorporated herein by reference lists the current salaries and bonuses (together with pending or anticipated increases therein) of each director, officer employee, and other remuneration with respect to any consultant or agent of the Company currently paid at a rate in excess of $30,000 per year. No officer or other key employee of the Company has indicated to the Shareholder, or to the Shareholder's knowledge has any intention to terminate his or her employment with the Company. 4.9. Union and Employment Agreements. The Company is not a party to any collective bargaining agreement, or to any written or oral employment agreement, including without limitation any agreement regarding severance or compensation due upon a change of control, with any of its respective officers, directors, employees, consultants or agents. No attempts to organize the employees of the Company have been made, nor, to the knowledge of the Shareholder, are any such attempts now threatened or, being planned. The Company is in compliance in all material respects with all applicable Federal, state and local laws, rules and regulations regarding employment conditions and practices, has withheld all amounts required by law or agreement to be withheld from the wages or salaries of its employees and is not liable for any arrears of wages or any taxes or penalties for failure to comply with any of the foregoing. The Company has not engaged, nor has it been alleged to have engaged in any unfair labor practices and has not discriminated, nor has it been alleged to have discriminated on the basis of age, sex or other bases prohibited by law in its respective employment conditions or practices. There are no unfair labor practice or age or sex discrimination charges or complaints or other charges or complaints alleging illegal discriminatory practices pending or, to the knowledge of the Shareholder, threatened against the Company before any Federal, state or local board, department, commission or agency. There are no existing or, to the knowledge of the Shareholder, threatened labor strikes, disputes, grievances, controversies or other labor troubles affecting the Company. There are no pending or threatened representation questions respecting the employees of the Company or any pending arbitration proceedings. 4.10. Officers, Directors and Bank Accounts. Exhibit 4.10 attached hereto and incorporated herein by reference lists (a) the names of all directors and officers of the Company, and (b) the name and location of each bank or other institution in which the Company has any account or safe deposit box, the number or other identification thereof, and the names of all persons authorized to draw thereon or have access thereto. 4.11. No Adverse Change. Since the May 1998 Balance Sheet, there has not been any Material-Adverse Change in the financial condition, operations or business of the Company, it being understood and agreed that (i) any adverse changes generally affecting national, regional or local economic conditions or adverse changes generally affecting industry conditions as a whole, and (ii) the financial impact to the Company for any fees or expenses incurred in regard to the consummation of this Agreement shall not be construed to constitute a breach of the foregoing representation. -8- Home Retail (A) acknowledges that the Shareholder has disclosed to it that (i) due to an Internal Revenue Service audit for the fiscal years 1995, 1996 and 1997 there will be an adjustment (decrease) to the depreciation reflected on the Audited Financial Statements of approximately $145,000.00 ("Depreciation Adjustment"), and (ii) for the fiscal year ending June 30, 1998 the Company may incur a net operating loss of approximately $10,000.00 to $20,000.00 ("Loss"), and (B) agrees that neither the Depreciation Adjustment nor the Loss shall constitute a Material-Adverse Change to the Audited Financial Statements. 4.12. Absence of Certain Changes. Except as set forth on Exhibit 4.12, since the May 1998 Balance Sheet, the Company has not (a) issued, sold or delivered or agreed to issue, sell or deliver any shares of its capital stock or any options or rights to acquire any such capital stock or securities convertible into or exchangeable for such capital stock, (b) incurred any obligations or liabilities, whether absolute, accrued, contingent or other, other than obligations and liabilities incurred in the ordinary course of business, (c) mortgaged, pledged or subjected to any lien, lease, security interest or other encumbrance (other than liens for taxes, penalty or interest) any of its assets, real or personal, tangible or intangible, (d) acquired or disposed of any assets or properties, or entered into any agreement for any such acquisition or disposition, except in the ordinary course of business, (e) declared, made, paid or set apart any sum for any dividend or other distribution to its Shareholder, or purchased or redeemed any shares of its capital stock or granted any option, warrant or right to purchase any such capital stock, (f) forgiven or cancelled any debts or claims other than in the ordinary course of business or waived any rights of material value not previously accrued for, (g) granted any increase in compensation in any form to any officer, salaried employee or any class of other employees, or granted any severance or termination pay, or entered into any employment agreement, or any modification of a previously existing employment agreement, with any officer or any other salaried employee, other than increases in compensation of less than 10% granted in the ordinary course of business consistent with prior practice to employees whose base pay at the time of such increase was less than $30,000, (h) adopted, amended or entered into any collective bargaining, bonus, profit sharing, compensation, stock option, pension, retirement, deferred compensation or other plan, agreement or arrangement for the benefit of employees, (i) granted any rights or licenses under any of its patents, trademarks, trade names, copyrights or other intellectual property rights, (j) suffered any loss of, or adverse change in its relationship with, any supplier or customer, or has reason to know of any action which would constitute or lead to such a loss or adverse change, (k) suffered any damage, destruction or loss (whether or not covered by insurance) which has a Material-Adverse Effect on its business, (l) suffered any strike or other labor trouble which has had a Material-Adverse Effect on its operations, (m) terminated or made any substantial revision of, or engaged in any renegotiation of, any material contract, (n) decreased the level of maintenance on, or its expenditures for maintenance of, the real property, machinery, equipment, tools, furniture and fixtures owned or leased by it, (o) made any change in accounting principles or methods or in classification, depreciation or amortization policies or rates except as set forth in Section 4.11 above, (p) settled any dispute involving payment by the Company in excess of $10,000, (q) made any loan or advance in excess of $10,000 to any person or entity, other than travel or expense advances in accordance with its normal policies which have been accounted for, or repaid and extensions of trade credit in accordance with its normal business practices, or (r) entered into any material transaction other than in the ordinary course of business. -9- 4.13. Litigation. Except as set forth on Exhibit 4.13 attached hereto and incorporated herein by reference, there are no judicial or administrative actions, suits, proceedings or governmental investigations pending or, to the knowledge of the Shareholder, threatened before any court or tribunal or governmental instrumentality, or any citation, order or notice of violation of any law, decree, rule or regulation, by or against the Company or any of its properties, or which relate in any way to the Company's business, properties, assets or operations, or which have or are likely to result in an imposition of a lien on any of the properties or assets owned or leased by the Company, or which question the validity of this Agreement, or any action to be taken in connection herewith or therewith, nor is there any such action, suit, proceeding or investigation, to the knowledge of the Shareholder, pending or threatened against the Company. Neither the Company nor any property or assets of the Company is subject to any judicial or administrative order, judgement, injunction or decree. 4.14. Contracts, etc. Exhibit 4.14 attached hereto and incorporated herein by reference contains a complete and correct list of each (a) mortgage, debenture, note or installment obligation, or other instrument or contract for the borrowing or lending of money by the Company, including, without limitation, any agreement or arrangement relating to the maintenance of compensation balances or the availability of a line of credit, (b) license agreement, sales agency agreement or distribution agreement to which the Company is a party, (c) guaranty of any obligation by the Company, including, without limitation, any keep-well, make-whole or maintenance of working capital or earnings or similar agreement, (d) agreement for the sale of any properties or assets by the Company other than sales of products in the ordinary course of business, (e) contract (other than a contract, purchase order or other agreement for the purchase of raw materials or other supplies in the ordinary course of business or for the purchase of machinery, equipment, tools, furniture or fixtures with a cost of less than $10,000) pursuant to which the Company is or may be obligated to make payments, contingent or otherwise, on account of or arising out of the acquisition, prior, pending or future, of the shares, business, or other assets of another enterprise, (f) secrecy or invention agreement under which the Company or, to the Shareholder's knowledge, any of the present officers or employees of the Company has any obligation and relating to the business of the Company, (g) requirements contract with the Company as purchaser or seller or other agreement for the purchase or sale of goods or services not terminable without liability by the Company on 30 days' (or less) notice or involving payments by or to the Company in excess of $10,000, (h) agreement or arrangement with a customer or supplier of the Company for rebates, sharing of expenses or any similar device for the effective reduction or increase of prices or other charges and involving products with a value in excess of $10,000, (i) agreement of the Company with, or loan or advance by the Company to or from, or other obligation of the Company to or from any officer or director of the Company, (j) lease of real or personal property with the Company as lessor or lessee, involving rents of more than $5,000 per year, (k) agreement or arrangement limiting the freedom of the Company or, to the shareholder's knowledge, any of the present officers or employees of the Company to compete in any line of business similar to the Company business, with any person or other entity or in any geographical area, (l) governmental license, franchise, permit or authorization held by and material to the business of the Company and not listed on any other Exhibit hereto, (m) joint venture agreement, partnership or profit sharing to which the Company is a party, (n) agreement pursuant to which the Company has indemnified or shared tax liability with any party; and (o) contract, commitment or agreement not referred to above in this Section 4.14 or in any other Exhibit to this Agreement and which involves aggregate payments by or to the Company of $10,000 or more. All such contracts and agreements are in -10- full force and effect, the Company is not in default thereunder and no event has occurred which, whether with notice, lapse of time or otherwise, would constitute a default thereunder. No consent of any party or the payment of any penalty or incurrence of additional obligations or change of any terms is necessary upon or prior to the consummation of the transaction contemplated by this Agreement so that all rights of the Company under the contracts to which it is a party shall continue unimpaired on and after the Closing Date. 4.15. Taxes. (a) The Company has been since 1994, and continues to be an S corporation, as defined by Section 1361 of the Internal Revenue Code (the "Code"). The Company has delivered to Home Retail true and correct copies of (i) the statement that the Company received from the IRS regarding its status as an S corporation and (ii) its three (3) most recently filed U.S. federal income tax returns as an S corporation. All taxes due and owing by The Company (whether or not shown on any tax return, whether known or unknown, asserted or unasserted) have been paid other than matters previously disclosed in writing, for which adequate accruals or reserves have been established. The Company is not a party to any tax sharing or other agreement that will require any payment with respect to taxes. The Company is not the beneficiary of any extension of time within which to file any tax return. The Company has not waived any statute of limitations in respect of taxes or agreed to any extension of time with respect to a tax assessment or deficiency or the collection of taxes. (b) Except as set forth on Exhibit 4.15 which is attached hereto and incorporated herein by reference, no taxing authority or other governmental unit has claimed, raised with the Shareholder, discussed with the Shareholder, proposed, or to the Shareholder knowledge threatened any assessment, deficiency, adjustment, dispute, or claim concerning any tax return or any tax liability of the Company. There is no asserted unpaid assessment, deficiency, or adjustment concerning any tax return or tax liability of the Company. To the knowledge of the Company, none of the tax returns of the Company has been selected for or are now under audit or examination by any taxing authority or other governmental unit, and there are no suits, actions, proceedings, or investigations pending or, to the knowledge of the Shareholder, threatened against the Company with respect to any taxes, except as set forth on Exhibit 4.15. (c) The Company has withheld and timely deposited or paid all taxes required to have been withheld and deposited or paid in connection with amounts paid or owing to any employee, independent contractor, creditor, shareholder, or other third party. -11- (d) The Company (A) has not been a member of an affiliated group filing a consolidated federal income tax return; and (B) has no liability for the taxes of any Person (other than the Company) under Treas. Reg. Sec. 1.1502-6 or any similar provision of state, local, or foreign law), as transferee or successor, by contract, or otherwise. None of the Company or any shareholder of the Company is a Person other than a United States person within the meaning of the Code and payments of purchase price made pursuant to the transaction contemplated herein are not subject to the withholding provisions of Sec. 3406 of the Code or subchapter A of Chapter 3 of the Code. 4.16. Licenses. The licenses listed on Exhibit 4.16 attached hereto and incorporated herein by reference (the "Licenses"), represent all of the licenses, permits, approvals, and clearances issued to the Company as of the date hereof by all foreign, Federal, state or local governmental authorities and currently used by or useful to the Company in connection with the operation of its business except for those which the failure to hold has not and cannot reasonably be expected to have a Material-Adverse Effect. The Licenses represent all government licenses, permits, approvals, or clearances that the Company is required to maintain by applicable statute or regulation in connection with the business as presently conducted except for those which the failure to hold has not and cannot reasonably be expected to have a Material-Adverse Effect. The Licenses are full in full force and effect in accordance with their terms, and there is no outstanding notice of cancellation or termination in connection therewith. 4.17. Employee Benefit Plans and Arrangements and Compliance with ERISA. (a) Exhibit 4.17 attached hereto and incorporated herein by reference sets forth all employee benefit plans (within the meaning of Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA")) and any other deferred compensation, bonus, overtime, fringe benefit, insurance, welfare, medical, health, life, company car, disability, injury, illness, accident, sick pay, sick leave, vacation, termination, severance, retention, executive compensation, incentive, commission, or other plan, agreement, policy, trust fund, or arrangement, not otherwise listed on any exhibit to this Agreement, maintained or to which contributions are being made by the Company or which provide benefits to the Company's current or former employees (collectively, the "Benefit Plans"). True and correct copies of each Benefit Plan have been delivered to Home Retail. To the extent applicable, for each Benefit Plan, the Company has provided to Home Retail copies of (i) the most recent determination letter and any outstanding request for a determination letter; (ii) IRS Forms 5500 with respect to the last two plan years; (iii) certified financial statements; (iv) summary plan descriptions to employees purporting to inform them of the Benefit Plan; (v) any related trust agreement; (vi) all insurance contracts or other funding arrangements; and (vii) all material communications received from or sent to the IRS or the Department of Labor within the last two years. All contributions or premiums required to be made by the Company as of the Closing Date on account of, or under, each Benefit -12- Plan have been paid or adequate accruals have been made therefore on the books of the Company and, except as disclosed on Exhibit 4.17, no such contribution or premium is delinquent under the terms of the applicable Benefit Plan. The Company does not maintain any Benefit Plan that provides post retirement or post termination welfare benefits for retired employees, except for continuing benefits required by applicable state and federal laws. (b) The only Benefit Plan that is an "employee pension benefit plan" (as defined in Section 3(2) of ERISA) maintained or to which contributions are being made by The Company or which provide benefits to the Company's Employees is the Retirement Plan. The Retirement Plan has received a favorable determination letter from the IRS that it is qualified under Section 401(a) of the Code, and the trust established in connection with the Retirement Plan has received a determination letter from the IRS that it is exempt under Section 501(a) of the Code. To the knowledge of the Shareholder, nothing has occurred with respect to the operation of the Retirement Plan that could cause the loss of such qualification or exemption or the imposition of any material penalty or tax under ERISA or the Code. The Company does not contribute to, and has not within the five-year period ending on the Closing Date, contributed to any "multi-employer plan" (as defined in Section 4001(a)(3) of ERISA) or any plan which is subject to Section 412 of the Code or Title IV of ERISA. (c) No termination, retention, severance, or similar benefit will become payable as a result of any transaction contemplated under the Agreement. (d) Benefits under any Benefit Plan are as represented in said documents and have not been increased or modified (whether written or not written) subsequent to the dates of such documents. The Company has not communicated to any employee or former employee any intention or commitment to modify any Benefit Plan or to establish or implement any other employee or retiree benefit or compensation arrangement. (e) Each Benefit Plan has been maintained and administered in compliance in all material respects with its terms and in all material respects with the requirements (including reporting requirements) prescribed by any and all applicable statutes, orders, rules, and regulations, including, but not limited to, ERISA and the Code. 4.18. Insurance. Exhibit 4.18 attached hereto and incorporated herein by reference lists all insurance policies to which the Company is, as of the date of this Agreement, a party or which have been obtained by the Company and relate to the employees of the Company (the "Insurance Policies") and, on attachment if necessary, a claims history for each Insurance Policy since July 1, 1996. The Insurance Policies are in full force and effect, all premiums with respect thereto covering all periods up to and including the date hereof have been paid when due, and no notice of cancellation or termination has been received with respect to any Insurance Policy. 4.19. Other Liabilities. The Company does not have any liabilities or obligations (direct or indirect, contingent or absolute, matured or unmatured) of whatever nature, whether arising out of contract, tort, statute or otherwise, except (a) as reflected in the balance sheets included in the Interim -13- Financials, (b) disclosed in the Exhibits of this Agreement, (c) as contemplated by this Agreement or (d) liabilities and obligations incurred in the ordinary course of business since the May 1998 Balance Sheet. 4.20. Absence of Certain Payments. Neither the Shareholder nor the Company nor, to the best of the Shareholder's and the Company's knowledge, any officers, directors, employees, agents representatives, or independent contractors of the Company has made, or arranged for the making of, any unlawful payment to any official, officer or employee of any Federal, state, county, municipal or other governmental or regulatory body or authority or any self regulatory body or authority, or made any payment to any customer or supplier of the Company or any officer, director, partner, employee or agent of any customer or supplier, for the unlawful sharing of fees or to any such customer or supplier or any such officer, director, partner, employee or agent for the unlawful rebating of charges, or engaged in any other unlawful reciprocal practice, or made any other unlawful payment or given any other unlawful consideration to any such customer or supplier or any such officer, director, partner, employee or agent, in respect of the Company. 4.21. Investment Representation. (a) On the Conversation Date, the Shareholder represents and warrants that he will acquire the Home Retail Shares for his own account only, for investment purposes and not with a view to distribution and acknowledges that the Home Retail Shares are and will be "restricted securities" within the meaning of the Rules and Regulations under the Securities Act of 1933 (the "Securities Act"), that the disposition of such securities is subject to compliance with the registration and prospectus provisions of the Securities Act, and that certificates for the securities issued hereunder will bear a legend to that effect. (b) The Shareholder acknowledges receipt of and has read, carefully considered and fully understands this Agreement and all other documents, including without limitation the exhibits and schedules hereto and, prior to the Closing, the Disclosure Documents (as hereafter defined) requested by and furnished to the Shareholder (such documents are herein collectively referred to as the "Home Retail Information"). The Shareholder acknowledges that he has not been furnished with or solicited by any offering literature, leaflet, public promotional meeting, circular, newspaper or magazine article, radio or television advertisement, or any other form of general advertising. (c) The Shareholder is able to (i) bear the economic risk of his investment in the Home Retail Shares and (ii) hold Home Retail Shares for an indefinite period of time. (d) The Shareholder understands the business in which Home Retail is engaged and has such knowledge and experience in financial and business matters that he is capable of evaluating the merits and risks of his investment in the Home Retail Shares and of making an informed investment decision with respect thereto. The Shareholder has obtained sufficient information to evaluate the merits and risks of his investments and to make such a decision. -14- (e) The Shareholder confirms that neither Home Retail nor any of its affiliates or agents have made any representations or warranties (oral or written) concerning Home Retail's investment in the Home Retail Shares, Home Retail, its business, prospects or anticipated financial results, or other matters, other than as set forth in the Home Retail Information. 4.22. Disclosure. This Agreement (except for Section 5), the Exhibits hereto and the Financial Statements do not contain any untrue statements of a material fact or omit or will omit to state any material fact necessary to make the statements contained therein, in such light of the circumstances under which they were made, not false or misleading. 5. Representations and Warranties of Home Retail. Home Retail represents and warrants to the Shareholder as follows: 5.1. (a) Organization and Qualification. Home Retail is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware and has all requisite power and authority to own, lease and operation its properties and carry on its business as it is now being conducted. (b) Exhibits 5.1(b)(i) and 5.1(b)(ii) attached hereto and incorporated herein by reference are true, correct and complete copies, in full force and effect, of Home Retail's Certificate of Incorporation and By-Laws, in each case as amended. Home Retail is not in violation of any of the provisions of its Certificate of Incorporation or By-Laws. 5.2. Disclosure Documents. Home Retail has heretofore furnished the Shareholder, with true, correct and complete copies of the Plan of Reorganization of Gaylord Companies, Inc., the Cookstore and Worthington, Inc. dated June 19, 1998 as amended and supplemented, (the "Plan"), the Disclosure Statement for the Plan dated June 19, 1998 and all exhibits thereto, as amended and supplemented (collectively, the "Disclosure Documents"). The Plan has been confirmed by the Bankruptcy Court for the Southern District of Ohio, Eastern Division (the "Bankruptcy Court") by order dated July 10, 1998 ("Bankruptcy Court Order") (which Bankruptcy Court Order has not been appealed) attached hereto as Exhibit 5.2 and incorporated herein by reference. The Disclosure Documents fairly summarize the business, operations, properties and management of Home Retail and its subsidiaries as of the dates of filing. The Disclosure Documents, as of respective dates on which such documents were confirmed by the Bankruptcy Court, and the representations made by Home Retail herein do not and did not contain any misstatements of a material fact or omit to state a material fact necessary to make the statements contained therein, in the light of the circumstances under which they were made, not misleading. 5.3. Agreement. (a) This Agreement has been duly executed and delivered by Home Retail and constitutes the legal and binding obligation of Home Retail enforceable in accordance with its terms. The execution and delivery by Home Retail of this Agreement, the consummation of the transactions contemplated hereby, and the performance by Home Retail of its obligations hereunder will not conflict with or result in any violation of, or default under (either immediately or with notice or lapse of time), or in any right to accelerate or the creation of any lien, charge or encumbrance pursuant, to any provision of (a) the Certificate of Incorporation of Home Retail, (b) any -15- agreement, contract, lease, license, note, bond, mortgage, indenture, deed of trust or other instrument to which Home Retail is a party or by which any of Home Retail's properties or other assets is bound, (c) any governmental franchise, license, permit or authorization, or any judgment or order of any tribunal or governmental body applicable to Home Retail, or any of Home Retail's properties or other assets, or (d) any law, statute, decree, rule or regulation of any jurisdiction. (b) No authorization, consent or approval of, or declaration of, filing with or notice to any governmental body or authority by Home Retail is necessary for the execution of this Agreement by Home Retail, the consummation by Home Retail of the transactions contemplated hereby or the performance by Home Retail of its obligations hereunder other than the satisfaction of the applicable requirements, if any, of (i) the Securities Act or state securities, "Blue Sky" or takeover laws and (ii) other regulatory rules, as required by law. 5.4. Capitalization. The authorized capital stock of Home Retail consists of (i) 20,000,000 shares of Class A Voting Common Stock, par value $.01 per share, of which 1,535,945 shares are issued and outstanding, (ii) 156,000 shares of Class B Restricted Common Stock, par value $.01 per share, of which 156,100 shares are issued and outstanding, and (iii) one million (1,000,000) shares of Serial Preferred Stock, $.01 par value per share, none of which shares are issued and outstanding. All of the issued and outstanding shares of Home Retail's capital stock are duly authorized, validly issued, fully paid, nonassessable and free of preemptive rights. Except as set forth on Exhibit 5.4 attached hereto and incorporated herein by reference, there are no options, warrants, calls, subscriptions, convertible securities, or other rights or other agreements or commitments of any character whatsoever obligating Home Retail to issue or sell any shares of its capital stock, or any securities convertible into or exchangeable or exercisable for or otherwise evidencing a right to acquire any shares of its capital stock or other securities of any kind of Home Retail. To the best knowledge of Home Retail, there are no voting trusts or other agreements or understandings with respect to the voting of the capital stock of Home Retail. 5.5. Home Retail Share. On the Conversion Date, (a) The Home Retail Shares (i) will, upon issuance in accordance with the terms of this Agreement, be duly authorized, validly issued, fully paid, non-assessable and free of preemptive rights; and (ii) will be listed on the Nasdaq Small CAP Marketsm subject to the notice of issuance which will be given on the Conversion Date. (b) Upon delivery of Home Retail Shares as provided in Section 10.3 hereof, the Shareholder will acquire good, marketable and valid title thereto, free and clear of any and all liens or other encumbrances. -16- 5.6. Information Requirements. On the Conversion Date, Home Retail will meet the "information" requirements of Rule 144(c). 5.7. No Adverse Change. Since May 31, 1998 there has not been any Material-Adverse Change in the financial condition, operations or business of Home Retail, it being understood and agreed that any adverse changes generally affecting national, regional or local economic conditions or adverse changes generally affecting industry conditions as a whole shall not be construed to constitute a breach of the foregoing representation. 5.8. Investment Representation. Home Retail represents and warrants that it is acquiring the Aropi Shares for its own account only, for investment purposes and not with a view to distribution and acknowledges that the Aropi Shares are and will be "restricted securities" within the meaning of the Rules and Regulations under the Securities Act, that the disposition of such securities is subject to compliance with the registration and prospectus provisions of the Securities Act, and that certificates for the securities issued hereunder will bear a legend to that effect. 5.9. Brokers. No finder, broker, agent or other intermediary has acted on behalf of Home Retail in connection with this Agreement or the transactions contemplated hereby for whose fees the Company or the Shareholder is liable. 5.10. Home Retail's Knowledge. Home Retail has no knowledge of any inaccuracy in any of the representations and warranties of the Shareholder or the Company contained in this Agreement or the Exhibits hereto which may give rise to a claim for indemnification. 6. Covenants and Agreements of Home Retail. Home Retail covenants and agrees as follows: 6.1. Retention of Records. To facilitate the resolution of any claims made by or against or incurred by the Shareholder or the Company, or for any other reasonable purpose, Home Retail shall, for a period of five years after the date hereof, (a) retain the books and records of the Company which Home Retail receives as a result of this transaction, and (b) upon reasonable notice, afford the officers, employees, and authorized agents and representatives of the Company reasonable access (including the right to make, at the Company's expense, photocopies), during normal business hours, to the books and records of the Company which the Company receives as a result of this transaction; provided, however, that such investigation shall not unreasonably interfere with the business or operations of Home Retail. 6.2. Payments at Closing. At the Closing, to provide the Company with sufficient funds to pay in full the Closing Liabilities set forth on Exhibit 6.2 attached hereto and incorporated herein by reference. 6.3. Further Assurances. Upon the request of the Shareholder or the Company at any time after the Closing Date, to execute and deliver such documents as the Shareholder or the Company may reasonably request or effectuate the purposes of this Agreement. -17- 6.4. Payment of Obligations. From and after the Closing, to pay the Current-Operating Liabilities of the Company in the ordinary course of business. 6.5. Lease. To enter into the Lease attached hereto as Exhibit 6.5 and incorporated herein by reference for the premises located at 4264-B Winters Chapel Road, Atlanta, Georgia 30360. 6.6. Letter of Credit. At the Closing, Home Retail will provide the Shareholder with a $250,000 irrevocable standby letter of credit similar to that attached hereto as Exhibit 6.6 and incorporated herein by reference to secure payment of both Convertible Promissory Notes ("Letter of Credit"). The Letter of Credit shall have a maturity date of not less than fourteen (14) months from the date of issuance. 7. Covenants and Agreements of Shareholder. To secure the Shareholder's indemnification obligation set forth in Section 9 hereof and his covenant and agreement to convert the Convertible Promissory Note No. 1 to Home Retail Shares set forth in Section 10.3 hereof, the Shareholder covenants and agrees (i) to place in escrow for a period of twelve (12) months from the Closing Date the Convertible Promissory Note No. 1, or (ii) in the event the Convertible Promissory Note No. 1 is converted, to place in escrow for a period of six (6) months from the Closing Date a sufficient number of Home Retail Shares to equal $125,000 (based upon the value of the shares on the Closing Date) pursuant to the terms and conditions of the Convertible Promissory Note No. 1 and Stock Escrow Agreement attached hereto as Exhibit 7 and incorporated herein by reference. 8. Conditions Precedent. 8.1. Conditions Precedent to Each Party's Obligations. The respective obligation of each party to consummate the transactions contemplated in this Agreement is subject to the satisfaction at or prior to the Closing Date of the following conditions precedent: (a) no order, decree or injunction shall have been enacted, entered, promulgated or enforced by any United States court of competent jurisdiction or any United States governmental authority which prohibits the consummation of the transactions contemplated herein; provided, however, that the parties hereto shall use their commercially reasonable best efforts to have any such order, decree or injunction vacated or reversed; (b) the Shareholder and the Company shall have entered into a three-year Employment Agreement in the form attached hereto as Exhibit 8.1(b) and incorporated herein by reference; and (c) the transactions contemplated by this Agreement shall (i) be permitted by the laws and regulations of each jurisdiction or Governmental Entity to which the Shareholder, the Company or any of their respective Affiliates are subject and (ii) not violate any applicable law. -18- 8.2. Conditions Precedent to Obligations of the Shareholder and the Company. The obligations of the Company and the Shareholder to consummate the transactions contemplated in this Agreement are subject to the satisfaction or waiver at or prior to the Closing Date of the following conditions precedent: (a) the representations and warranties of Home Retail contained in Section 5 shall be true and correct in all material respects when made and at and as of the Closing Date with the same force and effect as if those representations and warranties had been made at and as of such time except (i) to the extent such representations and warranties speak as of a specified earlier date, and (ii) as otherwise contemplated or permitted by this Agreement; (b) Home Retail shall, in all material respects, have performed all obligations and complied with all covenants necessary to be performed or complied with by it on or before the Closing Date; (c) all proceedings, corporate or other, to be taken by Home Retail in connection with the transactions contemplated by this Agreement, and all documents incident thereto, shall be reasonably satisfactory in form and substance to the Company and the Shareholder and the Company's and the Shareholder's counsel, and Home Retail shall have made available to the Company and the Shareholder for examination the originals or true, correct and complete copies of all documents that the Company or the Shareholder may reasonably request in connection with the transactions contemplated by this Agreement; (d) each of the representations and warranties of Home Retail contained in this Agreement that contains a materiality qualifier shall be true and accurate in all respects as of the date hereof and on the Closing Date, and each of the representations and warranties of Home Retail contained in this Agreement that does not contain a materiality qualifier shall be true and accurate in all material respects as of the date hereof and on the Closing Date. Home Retail shall have performed in all material respects all covenants and agreements on their part required to be performed on or before the Closing Date; (e) payment of the Purchase Price shall be made to the Shareholder at the Closing in the amount and in the manner prescribed in Section 3.1; (f) Home Retail shall have consummated the Loan and Financing Agreement; (g) the Shareholder and the Company shall have received copies, certified by the duly qualified and acting Secretary or Assistant Secretary of Home Retail, of resolutions adopted by the Board of Directors of Home Retail approving the Closing Documents to which it is a party and the consummation of the transactions contemplated by the Closing Documents; -19- (h) the Shareholder and the Company shall have received an opinion of Brown & Wood, Washington, D.C., counsel for Home Retail, dated the Closing Date, in substantially the form set forth in Exhibit 8.2(h) attached hereto and incorporated herein by reference and based on qualifications and limitations that are reasonably acceptable to the Shareholder and the Company; (i) Home Retail shall have executed and delivered the Lease; (j) the stockholders of Home Retail shall have entered into a mutually acceptable Tag Along Agreement similar to that attached hereto as Exhibit 8.2(j) and incorporated herein by reference; (k) at the Closing, the Company and the Shareholder shall have received a certificate of a senior officer of Home Retail, in form satisfactory to counsel for the Company and the Shareholder, certifying fulfillment of the matters referred to in paragraphs (a) through (j) of this Section 8.2; and (l) Home Retail shall have delivered the Letter of Credit. 8.3. Conditions Precedent to Obligations of Home Retail. The obligations of Home Retail to consummate the transactions contemplated by this Agreement are subject to the satisfaction or waiver at or prior to the Closing Date of the following conditions precedent: (a) there shall have occurred no Material-Adverse Change from the date hereof to the Closing Date in the condition or affairs of the Company; (b) the representations and warranties of the Shareholder and the Company contained in Section 4 shall be true and correct in all material respects when made and at and as of the Closing Date with the same force and effect as if those representations and warranties had been made at and as of such time except (i) to the extent such representations and warranties speak as of a specified earlier date, and (ii) as otherwise contemplated or permitted by this Agreement; (c) the Shareholder and the Company shall have received all necessary and material third party consents; (d) the Shareholder and the Company shall, in all material respects, have performed all obligations and complied with all covenants necessary to be performed or complied with by each of them on or before the Closing Date; (e) Home Retail shall have received a certificate of the President of the Company, in form satisfactory to counsel for Home Retail, certifying fulfillment of the matters referred to in paragraphs (a) through (d) of this Section 8.3; -20- (f) all proceedings, corporate or other, to be taken by the Shareholder or the Company in connection with the transactions contemplated by this Agreement, and all documents incident thereto, shall be reasonably satisfactory in form and substance to Home Retail and Home Retail's counsel, and the Shareholder and the Company shall have made available to Home Retail for examination the originals or true, correct and complete copies of all documents that Home Retail may reasonably request in connection with the transactions contemplated by this Agreement; (g) Home Retail shall have received (i) the opinion of Arnall Golden & Gregory, LLP, counsel for the Shareholder and the Company, dated the Closing Date, in substantially the form attached as Exhibit 8.3(g) hereto; (h) Each director of the Company other than Shareholder and each officer of the Company other than Shareholder shall have delivered a written resignation effective as of the Closing Date; (i) all options, warrants and other rights to purchase any equity securities of the Company, if any, shall be irrevocably cancelled and any instruments or agreements evidencing such options, etc, shall be delivered to Home Retail for cancellation. (j) the Shareholder and the Company shall have delivered to Home Retail (i) a long form good standing certificate from the Secretary of State of Iowa confirming as of a date within five days of the Closing Date the good standing of the Company and a good standing certificate from any state in which the Company is qualified to do business and (ii) a copy of the current Certificate of Incorporation of the Company certified by the Secretary of State of Iowa. 9. Indemnification. 9.1. Survival of Representations and Warranties. All covenants and agreements shall survive the Closing in accordance with their terms. The representations and warranties contained in Sections 4 and 5 of this Agreement shall survive any investigation by either party and the Closing but shall expire and be extinguished on the secondary anniversary of the Closing Date, except that (i) the representations and warranties of the Shareholder set forth in Sections 4.3(d) and (e) shall survive without limitation as to time, and (ii) the representations and warranties of the Shareholder set forth in Section 4.15 shall survive until 90 days after expiration of the applicable statute of limitations for any affected taxable period. No action for indemnification under this Section 9 may be brought with respect to such representations and warranties after the applicable date indicated in the preceding sentence unless, before the date such representations and warranties expire, the party seeking indemnification has notified in reasonable detail in writing the party from whom indemnification is sought of a claim for indemnity hereunder. 9.2. Indemnification by the Shareholder. Subject to the limitations set forth in this Section 9, from and after the Closing, the Shareholder agrees to indemnify and defend Home Retail and the Company, and hold Home Retail and the Company harmless from and against any loss, liability, damage, penalty, claim or expense, including reasonable attorneys' and technical consultants' -21- fees and other costs and expenses (collectively, "Damage") incurred or sustained by Home Retail or the Company as a result of or relating to the non-fulfillment or breach of covenant or agreement or the breach of any representation or warranty of the Shareholder set forth in this Agreement. As security for the payment of amounts which may be due to Home Retail pursuant to this Section 9, the Shareholder shall deliver to the Escrow Agent the Convertible Promissory Note No. 2 to be held and disposed of by the Escrow Agent pursuant to the terms of the Stock Escrow Agreement. 9.3. Indemnification by Home Retail. Home Retail agrees to indemnify and hold harmless the Shareholder from and against any and all Damages, as defined in Section 9.2 above, the Shareholder may suffer or incur, resulting from or arising out of the non-fulfillment or breach of any covenant or agreement or the breach of any representation or warranty of Home Retail in this Agreement. 9.4. Indemnification Procedures. A party entitled to indemnification hereunder shall herein be referred to as an "Indemnitee." A party obligated to indemnify an Indemnitee hereunder shall herein be referred to as an "Indemnitor." Promptly after receipt by an Indemnitee of notice of any claim or the commencement of any action, or upon discovery of any facts which an Indemnitee believes may give rise to a claim for indemnification from an Indemnitor hereunder, such Indemnitee shall, if a claim in respect thereof is to be made against an Indemnitor under this Section 9, notify such Indemnitor in writing in reasonable detail of the claim or the commencement of such action. If any such claim shall be brought against such Indemnitee, it shall notify the Indemnitor thereof, the Indemnitor shall be entitled to participate therein, and to assume the defense thereof with counsel reasonably satisfactory to the Indemnitee, and to settle or compromise any such claim or action; provided that the terms of such settlement or compromise provide for the unconditional release of the Indemnitee and require the payment by the Indemnitor of monetary damages only. After notice to the Indemnitee of the Indemnitor's election to assume the defense of such claim or action, the Indemnitor shall be entitled to participate therein, and to assume the defense thereof with counsel reasonably satisfactory to the Indemnitee, and to settle or compromise any such claim or action; provided that the terms of such settlement or compromise provide for the unconditional release of the Indemnitee and require the payment by the Indemnitor of monetary damages only. After notice to the Indemnitee of the Indemnitor's election to assume the defense of such claim or action, the Indemnitor shall not be liable to the Indemnitee under this Section 9 for any legal or other expenses subsequently incurred by the Indemnitee in connection with the defense thereof; provided, however, that the Indemnitee shall have the right to employ counsel to represent it if, in the Indemnitee's reasonable judgment, it is advisable for the Indemnitee to be represented by separate counsel, and in that event the fees and expenses of such separate counsel shall be paid by the Indemnitee. If the Indemnitor does not elect to assume the defense of such claim or action, the Indemnitee shall act reasonably and in accordance with its good faith business judgment with respect thereto, and shall not settle or compromise any such claim or action without the consent of the Indemnitor, which consent shall not be unreasonably withheld. The parties hereto agree to render to each other such assistance as may reasonably be requested in order to insure the proper and adequate defense of any such claim or proceeding. -22- 9.5. Limits to the Right to Indemnification. As Indemnitee's rights to indemnification under this Section 9 shall be limited as follows: (a) The Indemnitee shall be entitled to indemnification with respect to a breach of a representation or warranty, and with respect to indemnification as may be owed by the Shareholder under Section 9.2, only if the aggregate amount of all such Damages for which indemnification is otherwise available hereunder exceeds $125,000. If such Damages owed by the Indemnitor exceed $125,000, then the Indemnitor shall be liable to the full extent the Damages exceed $50,000. The maximum aggregate amount of indemnification payable by the Shareholder or Home Retail under this Agreement shall not exceed $125,000. (b) Any indemnification hereunder shall be net of: (i) any insurance proceeds recovered by the Shareholder, Home Retail, the Company or any subsidiary on account of, or applicable to, the satisfaction of claims for which indemnification is provided hereunder, provided, however, that the term "insurance proceeds", as used in this subdivision, shall mean the payment received under any applicable insurance policy less the amount of additional premium payable, or the reduction of any premium refund, consequent to the application of any retrospective loss adjustment provisions of such insurance policy to such insurance payments; and (ii) any Tax Benefit. As used in this Section 9.5, "Tax Benefit," with respect to any Damage shall mean any reduction in the net federal or state income tax liability of the Shareholder or the Company or the entity filing consolidated tax returns which will following the Closing include the Company, as a result of such Damage, provided, that any calculation of Tax Benefit, with respect to any Damage, shall include any increase in federal income tax liability attributable to a reduction in state or local taxes as a result of such loss. (c) No indemnification shall be available with respect to the breach of any representation or warranty made herein if the party claiming indemnification had received written notice prior to the Closing that the Indemnitor was in breach of such representation and warranty. 9.6. Exclusive Remedy. The rights to indemnification provided by this Section 9 shall be exclusive and shall be construed to exclude and preclude the exercise of, and shall be in substitution and replacement of, any other rights of the parties hereto, express or implied, under this Agreement or applicable law, except in the event of a fraudulent breach of a representation, warranty or covenant contained in this Agreement. 10. Joint Covenants and Agreements of Home Retail, the Shareholder and the Company. 10.1. Indebtedness to Dennis Kaas. At the Closing, the Company shall pay in full any and all monies due or owing to Dennis T. Kaas in regard to (i) the Stock Redemption Agreement dated December 31, 1994, evidenced by (a) the -23- Promissory Note dated December 31, 1994 in the original principal amount of $500,000.00 and (b) the Promissory Note dated December 31, 1994 in the original principal amount of $92,554.00, (ii) the Employment Agreement and (iii) the Covenant Not to Compete set forth on Exhibit 10.1 attached hereto and incorporated herein by reference. At the Closing, the Shareholder shall deliver to the Company the stock certificate of Dennis Kaas for 174 shares of the Company's Class A Voting Common Stock which shares have been held in escrow pursuant to the Stock Redemption Agreement with the appropriate Stock Power attached thereto and a letter authorizing the Company to cancel the stock certificate of record. 10.2. Tax Distributions. Before the Closing, the Company shall be entitled to make cash distributions to its shareholders in amounts equal to the estimated federal and state income Tax payments due on September 15, 1998 and January 15, 1999 with respect to the Company's fiscal year ended December 31, 1998, in each case calculated consistent with past practices and distributed no more than 20 days before the respective dates on which those payments are due; provided, however, that the Purchase Price shall be reduced by an amount equal to the distributions made. 10.3. Conversion of Convertible Promissory Notes. If within 365 days of the Closing Date, Home Retail shall have completed the Offering, the Shareholder covenants and agrees and Home Retail covenants and agrees to convert and exchange the Convertible Promissory Notes (or Convertible Promissory Note No. 1 plus $250,000 cash) for shares of the Class A Voting Common Stock of Home Retail, par value of $.01 per share having a fair market value as of the Conversion Date of not less than $500,000 which shares as of the Conversion Date shall represent not less than 2% of all of the issued and outstanding shares of Home Retail on a fully diluted basis. The interest accrued on the Convertible Promissory Notes shall be paid when due irrespective of whether the principal of the Convertible Promissory Notes has been converted to Home Retail Shares. The Shareholder's obligation to convert the Convertible Promissory Notes is conditioned on (i) the capital structure of Home Retail (on the Conversion Date) being not less than that described in Exhibit 10.3 attached hereto and incorporated herein by reference and (ii) Home Retail delivering evidence satisfactory to the Shareholder that Home Retail has received at least Five Million Dollars ($5,000,000.00) for the purchase of its Common Stock and/or Preferred Stock (other than the stock to be purchased by Shareholder) from the Offering. If the Offering has not been completed within 365 days from the Date of Closing, the Shareholder's obligation to convert the Convertible Promissory Notes shall terminate forthwith. 10.4. Delivery of Home Retail Shares. On the Conversion Date, Home Retail will deliver to Shareholder (or the Escrow Agent if the Conversion Date is within 180 days of the Closing Date) certificates representing the Home Retail Shares in exchange for the Convertible Promissory Notes duly endorsed. -24- 11. Termination. 11.1. Termination. This Agreement may be terminated at any time before the Closing: (a) by the mutual written consents of Home Retail, the Shareholder and the Company; or (b) by either Home Retail, the Shareholder or the Company (by written notice) if the Closing shall not have occurred on or before October 15, 1998, provided, however, that the right to terminate this Agreement under this Section 11.1(b) shall not be available to any party whose failure to fulfill any obligation under this Agreement shall have been the cause of, or shall have resulted in, the failure of the Closing to occur on such date, and nothing contained herein shall relieve such party from liability for breach of this Agreement. 11.2. Effect of Termination. Upon termination of this Agreement pursuant to Section 11.1, neither Home Retail nor the Shareholder nor the Company shall have any further duties, obligations, or liabilities under this Agreement except for the confidentiality obligations set forth in the Confidentiality Agreement attached hereto as Exhibit 11.2 and incorporated herein by reference, and the obligations for expenses under the Escrow Agreement. 12. Miscellaneous. 12.1. Expenses. Home Retail shall pay its expenses and costs, including, without limitation, expenses of their respective counsel and auditors, incidental to the preparation of this Agreement, the performance and compliance with all agreements and conditions contained in this Agreement to be performed or complied with by them and the consummation of the transactions contemplated hereby and thereby. Home Retail acknowledges and agrees that the professional fees and expenses of the Company and the Shareholder incurred in regard to (i) this transaction and (ii) the preparation of the various agreements and documents related to the Agreement have been billed to and will be paid by the Company at or prior to the Closing. The Shareholder expressly stipulates that except as set forth in the preceding sentence, the Company shall not pay or be liable for any expenses and costs of the Shareholder in connection with this Agreement or the transaction contemplated hereby. Home Retail shall be responsible for the payment of fees and expenses owed to any finder, agent or broker who has acted on behalf of Home Retail in connection with this Agreement or the transactions contemplated hereby. 12.2. Notices, etc. Any and all notices and other communications made pursuant to this Agreement shall be in writing and shall be deemed to have been given if delivered by personal delivery or by messenger or overnight delivery or facsimile, or mailed by registered or certified mail, to the parties at the following addresses (or such other address for a party as shall be specified by notice given, from time to time, pursuant hereto): -25- If to Home Retail, to: Home Retail Holdings, Inc. c/o Cambridge Holdings LLC 535 Madison Avenue New York, NY 10022-4212 Attention: David E. Danovitch Fax: (212) 508-6501 with a copy to: Brown & Wood, LLP 815 Connecticut Avenue, N.W. Suite 701 Washington, DC 20006 Attention: William E. Sudow, Esq. Fax: (202) 223-0485 If to the Shareholder: Mr. Glenn Kaas 4135 Station Mill Court Norcross, Georgia 30092 Fax: (770) 448-9758 with a copy to: Arnall Golden & Gregory, LLP 2800 One Atlantic Center 1201 West Peachtree Street Atlanta, GA 30309 Attention: Jack K. Holland, Esq. Fax: (404) 873-8611 If to the Company: Aropi, Incorporated 4264-B Winters Chapel Road Atlanta, GA 30360 Attention: Glenn Kaas, President 12.3. Further Assurances. The parties hereto shall do and perform or cause to be done and performed all such further acts and things and shall execute and deliver all such other agreements, certificates, instruments or documents as the other party hereto may reasonably request in order to carry out the intent and purposes of this Agreement and the consummation of the transactions contemplated hereby. -26- 12.4. Amendments, etc. This Agreement may be amended, waived, discharged or terminated only by an instrument in writing executed by the party against which enforcement of such amendment, waiver, discharge or termination is sought. 12.5. Miscellaneous. The headings in this Agreement are for convenience of reference only and shall not constitute a part of this Agreement. This Agreement shall be construed in accordance with the laws of the State of Georgia without regard to principles of conflicts of laws. This Agreement may be executed in several counterparts, each of which is an original but all of which shall constitute one instrument. Any term or provision of this Agreement which is invalid or unenforceable shall be ineffective to the extent of such invalidity or unenforceability without rendering invalid or unenforceable the remaining terms and provisions of this Agreement. Neither this Agreement nor any rights or obligations hereunder may be assigned by one party without the consent of the other. Subject to the previous sentence, this Agreement shall be binding upon and inure to the benefit of the successors and assigns of Home Retail and the successors, assigns, heirs, administrators, executors and legal representatives of the Shareholder. Time is of the Essence. 12.6. Counterparts. This Agreement may be executed in one or more counterparts, all of which shall be one and the same Agreement and shall become effective when one or more counterparts have been signed by each of the parties and delivered to each of the other parties. 12.7. Entire Agreement. This Agreement, the exhibits to this Agreement and the Escrow Agreement constitute the entire understanding and agreement among the parties with respect to the subject matter hereof and shall supersede any prior agreements, representations and understandings among the parties with respect to such subject matter, including without limitation that certain Summary of Terms dated May 6, 1998 by and between Home Retail Acquisition Corporation and Aropi, Inc. d/b/a Rolling Pin/Kitchen Emporium. No representations or disclosures, whether oral or in writing, made before the date hereof, but not made or confirmed herein, shall be of any force or effect, and the parties acknowledge and agree that they have not relied on any such representations or disclosures in entering into this Agreement. Prior drafts of this Agreement shall not be used as a basis for interpreting this Agreement. 12.8. Public Announcements. Any press release or other public disclosure issued or made by either Home Retail or the Shareholder or the Company relating to the transactions contemplated hereby shall be first provided in draft form to the other party, as the case may be, and such other party shall have the opportunity within a reasonable period of time to review and comment on such draft before it is released; provided that approval of such press release or other public disclosure shall not be required if any party is advised by its legal counsel that disclosure is required by law. -27- 12.9. Exhibits. The information disclosed on any Exhibit hereto shall be deemed to have been disclosed in every other Exhibit where the disclosure of such information would be pertinent. The parties hereto may, at their option, include in the Exhibits or elsewhere items which by virtue of such disclosure shall be deemed not to be material or to have a Material-Adverse Effect to avoid any misunderstanding, and such inclusion shall not be deemed to be an acknowledgment by a party hereto that such items would but for such disclosure be material or have a Material-Adverse Effect. 12.10. Knowledge. Whenever in this Agreement a reference is made to the "knowledge" of the Company or the Shareholder, such reference shall mean the actual knowledge of the Shareholder, without giving effect to imputed knowledge, and does not connote a duty to investigate or an obligation to know. -28- IN WITNESS WHEREOF, the parties have duly executed this Agreement as of the date first above written. HOME RETAIL: HOME RETAIL HOLDINGS, INC. By: /S/ DAVID E. DANOVITCH ---------------------- Name: Title: THE SHAREHOLDER: /S/ GLENN KAAS ------------------------- Glenn Kaas THE COMPANY: AROPI, INCORPORATED By: /S/ GLENN KAAS --------------------- Name: Title: -29- Exhibits Exhibit 1(j) Closing documents Exhibit 1(aa) List of Loan Documents Exhibit 1(ab) Material-Adverse Effect or Material-Adverse Change Exhibit 1(ad) Offering Exhibit 1(ae) Offering Price Exhibit 3.1(b)(i) Convertible Promissory Note No. 1 Exhibit 3.1(b)(ii) Convertible Promissory Note No. 2 Exhibit 4.1(b)(i) Certificate of Incorporation of Aropi Exhibit 4.1(b)(ii) By-Laws of Aropi Exhibit 4.2 Voting trusts and other agreements Exhibit 4.3(c) Distribution of Stock or Dividends Exhibit 4.4 May 1998 Balance Sheet Exhibit 4.5 Leased property Exhibit 4.7 List of Patents, trademarks, trade names, registered copyrights Exhibit 4.8 List of Salaries and Bonuses of each Director, Officer, and Consultant or Agent Paid in Excess of $30,000 per year Exhibit 4.10 List of Directors and Officers of the Company and Bank Accounts Exhibit 4.12 Changes with regard to Company's assets Exhibit 4.13 Litigation Exhibit 4.14 List of contracts and agreements Exhibit 4.15 Exceptions to any tax returns Exhibit 4.16 List of licenses Exhibit 4.17 Employee benefit plans Exhibit 4.18 List of insurance policies Exhibit 5.1(b)(i) Certificate of Incorporation of Home Retail Exhibit 5.1(b)(ii) By-Laws of Home Retail Exhibit 5.2 Order of Bankruptcy Court Exhibit 5.4 Options, warrants, calls, etc. of Home Retail Exhibit 6.2 Closing Liabilities Exhibit 6.5 Lease for 4264-B Winters Chapel Road, Atlanta, Georgia 30360 Exhibit 6.6 Letter of Credit from Home Retail Exhibit 7 Convertible Promissory Note No. 1 and Stock Escrow Agreement Exhibit 8.1(b) Employment Agreement between Shareholder & Company Exhibit 8.2(h) Opinion letter from Brown & Wood, LLP Exhibit 8.2(j) Tag Along Agreement Exhibit 8.3(g) Opinion letter from Arnall Golden & Gregory, LLP Exhibit 10.1 Indebtedness to Dennis Kaas Exhibit 10.3 Capital Structure of Home Retail Exhibit 11.2 Confidentiality Agreement EX-3.1 3 EXHIBIT 3.1 AMENDED AND RESTATED CERTIFICATE OF INCORPORATION OF HOME RETAIL HOLDINGS, INC. Home Retail Holdings, Inc., a corporation organized and existing under the laws of the State of Delaware, hereby certifies as follows: 1. The name of the corporation (the "Corporation") is Home Retail Holdings, Inc. (formerly Gaylord Companies, Inc.), and its original Certificate of Incorporation was filed with the Secretary of State of the State of Delaware on July 19, 1994. 2. This Amended and Restated Certificate of Incorporation of the Corporation restates and integrates and further amends the Certificate of Incorporation of the Corporation, as the same heretofore has been amended, supplemented or restated (the "Certificate of Incorporation"). 3. The text of the Certificate of Incorporation is hereby further amended and restated to read in full as herein set forth: FIRST: The name of the Corporation is Home Retail Holdings, Inc. SECOND: The address of its registered office in the State of Delaware is 1013 Centre Road, City of Wilmington, Delaware, 19805, County of New Castle. The name of the registered agent at such address is The Prentice-Hall Corporation System, Inc. THIRD: The purpose of the Corporation is to engage in any lawful act or activity for which Corporations may be organized under the General Corporation Law of the State of Delaware. FOURTH: (a) The total number of shares of all classes of stock which the Corporation shall have authority to issue is twenty-one million one hundred fifty-six thousand (21,156,000), which are divided into twenty million (20,000,000) shares of Class A Common Stock of a par value of $0.01 per share ("Class A Common Stock"), one hundred fifty-six thousand (156,000) shares of Class B Restricted Common Stock of a par value of $0.01 per share ("Class B Common Stock") and one million (1,000,000) shares of Serial Preferred Stock of a par value of $0.01 per share ("Preferred Stock"). The Class A Common Stock and Class B Common Stock shall have the same rights, privileges and preferences except that the Class B Common Stock (i) shall have no dividend or liquidation rights except as otherwise required under the General Corporation Law of the State of Delaware, and (ii) shall not be transferable except by operation of law in the event of the death, bankruptcy or liquidation of the holder thereof. Each share of Class B Common Stock shall be automatically converted into one share of Class A Common Stock (the "Conversion Rate") in any one of the following events (each, a "Trigger Event"): (i) the closing sale price for twenty (20) consecutive trading days of the Class A Common Stock as quoted on Nasdaq or, if such shares are not trading on Nasdaq, then on the principal market on which such shares shall then be trading exceeds $11.57 per share of Class A Common Stock (the "Trigger Price") or (ii) of a sale of all or substantially all the assets of the Corporation, a sale of all the equity interests of the Corporation or a merger or consolidation of the Corporation with or into another entity in which the Corporation is not the surviving entity pursuant to which the holders of Class A Common Stock would receive, on a fully diluted basis after giving effect to the conversion of the Class B Common Stock and any other convertible securities, consideration which exceeds the Trigger Price, in each case subject to adjustment in the event of any stock splits or other similar events as provided in ARTICLE FOURTH Subsection (b) hereof. As soon as practicable after a Trigger Event, the Corporation shall give or cause notice to be given to each holder of Class B Common Stock that the Class B Common Stock has been converted into Class A Common Stock, and such conversion shall be deemed to have occurred on the sooner of the date of such notice and the date of such a merger or consolidation, if any, constituting a Trigger Event. Each holder of shares of Class B Common Stock outstanding immediately prior to the date of the Trigger Event, upon surrender of the certificate or certificates representing such shares to the Corporation, shall receive in exchange therefor a certificate or certificates representing the number of whole shares of Class A Common Stock which such holder shall be entitled to receive as provided herein. The certificate or certificates so surrendered shall be duly endorsed as the Corporation may require. Subject to the following provision of this ARTICLE FOURTH Subsection (a), after the Trigger Event, each certificate which represented outstanding shares of Class B Common Stock, prior to such date, shall be deemed for all corporate purposes to evidence the ownership of the shares of Class A Common Stock as provided herein. No dividend or other distribution payable with respect to the Class A Common Stock shall be paid to any holder of any certificate representing shares of Class B Common Stock issued and outstanding immediately prior to such date until such holder surrenders such certificate for exchange as provided in this ARTICLE FOURTH Subsection (a). All shares of Class A Common Stock for and into which shares of Class B Common Stock shall have been exchanged and converted shall be deemed to have been issued in full satisfaction of all rights pertaining to such exchanged and converted shares. Except for such rights, the holder of certificate(s) representing shares of Class B Common Stock issued and outstanding immediately prior to such date shall have no rights with respect to such shares after such date other than to surrender such certificate or certificates pursuant to this ARTICLE FOURTH Subsection (a). The Corporation shall at all times reserve a number of shares of authorized but unissued Class A Common Stock for issuance upon conversion of the Class B Common Stock. No share of Class B Common Stock may be issued after a Trigger Event. (b) In order to prevent dilution of the conversion rights granted to the Class B Common Stock under this ARTICLE FOURTH, the Conversion Rate and Trigger Price will be subject to adjustment from time to time pursuant to this ARTICLE FOURTH Subsection (c) as follows: (i) If the Corporation at any time subdivides (by any stock split, stock dividend or otherwise) its outstanding shares of Class A Common Stock into a greater number of shares, the Conversion Rate and the Trigger Price in effect immediately prior to such subdivision will be proportionately increased and reduced, respectively, and if the Corporation at any time combines (by reverse stock split or otherwise) its outstanding shares of Class A Common Stock into a smaller number of shares, the Conversion Rate 2 and the Trigger Price in effect immediately prior to such combination will be proportionately reduced and increased, respectively. (ii) If the Corporation at any time subdivides (by any stock split, stock dividend or otherwise) its outstanding shares of Class B Common Stock into a greater number of shares, the Conversion Rate in effect immediately prior to such subdivision will be proportionately reduced, and if the Corporation at any time combines (by reverse stock split or otherwise) its outstanding shares of Class B Common Stock into a smaller number of shares, the Conversion Rate in effect immediately prior to such combination will be proportionately increased. (iii) After any reorganization or any consolidation or merger of the Corporation or any sale, lease, mortgage, pledge, exchange, transfer, or other disposition of all or substantially all of the assets of the Corporation other than a Trigger Event, the holders of Class B Common Stock shall thereafter be entitled to receive, upon conversion in accordance with ARTICLE FOURTH Subsection (a), the kind and amount of shares or other securities or property which they would have been entitled to receive had they converted their shares of Class B Stock into shares of Class A Common Stock of the Corporation as of the record date for the determination of holders of Class A Common Stock entitled to cast their votes for or against or to express any dissent to such reorganization, consolidation, merger, sale, lease, exchange, or other disposition; and, after the happening of one or more of the aforesaid events, if any, the rights of the holders of Class B Common Stock with respect to the adjustment of the Conversion Rate and Trigger Price shall be appropriately continued and preserved in order to afford, as nearly as possible, protection against dilution of the conversion rights and privileges comparable to those conferred herein. (iv) In the event of a judicial or non-judicial dissolution of the Corporation, the conversion rights and privileges of the holders of Class B Common Stock in accordance with ARTICLE FOURTH Subsection (a) shall terminate on a date, as fixed by the Board of Directors of the Corporation, not more than 45 days and not less than 30 days before the date of such dissolution. The reference to shares of Class A Common Stock in this Subsection (b) shall be deemed to include shares of any class into which said shares of Class A Common Stock may be changed. (c) The Board of Directors of the Corporation is expressly authorized at any time, and from time to time, to provide for the issuance of shares of Preferred Stock in one or more series, with such designations, preferences and relative, participating, optional or other special rights, and qualifications, limitations, or restrictions thereof, as shall be stated and expressed in the resolution or resolutions providing for the issue thereof adopted by the Board of Directors. FIFTH: The Corporation is to have perpetual existence. SIXTH: Whenever a compromise or arrangement is proposed between the Corporation and its creditors or any class of them and/or between the Corporation and its stockholders or any class of them, any court of equitable jurisdiction within the State of 3 Delaware may, on the application in a summary way of the Corporation or of any creditor or stockholder thereof or on the application of any receiver or receivers appointed for the Corporation under the provisions of ss.291 of Title 8 of the Delaware Code or on the application of trustees in dissolution or of any receiver or receivers appointed for the Corporation under the provisions of ss.279 of Title 8 of the Delaware Code, order a meeting of the creditors or class of creditors and/or of the stockholders or class of stockholders of the Corporation, as the case may be, to be summoned in such manner as the said court directs. If a majority in number representing three fourths in value of the creditors or class of creditors, and/or of the stockholders or class of stockholders of the Corporation, as the case may be, agree to any compromise or arrangement and to any reorganization of the Corporation as consequence of such compromise or arrangement, the said compromise or arrangement and the said reorganization shall, if sanctioned by the court to which the said application has been made, be binding on all the creditors or class of creditors, and/or on all the stockholders or class of stockholders, of the Corporation, as the case may be, and also on the Corporation. SEVENTH: For the management of the business and for the conduct of the affairs of the Corporation, and in further definition, limitation, and the regulation of the powers of the Corporation and of its directors and of its stockholders or any class thereof, as the case may be, it is further provided: 1. Number of Directors. The management of the business and the conduct of the affairs of the Corporation shall be vested in its Board of Directors. The number of directors which shall constitute the whole Board of Directors shall be fixed by, or in the manner provided in, the Bylaws. The phrase "whole Board" and the phrase "total number of directors" shall be deemed to have the same meaning, to wit, the total number of directors which the Corporation would have if there were no vacancies. No election of directors need be by written ballot. 2. Terms of Directors. Except as otherwise provided in or fixed by or pursuant to the provisions of Article FOURTH hereof relating to the rights of the holders of any class or series of stock having a preference over the Class A Common Stock as to dividends or upon liquidation or to elect directors under specified circumstances, the directors shall be classified, with respect to the time for which they severally hold office, into three classes, as nearly equal in number as possible, as shall be provided in the manner specified in the By-Laws of the Corporation. One class shall be originally elected for a term expiring at the annual meeting of stockholders to be held in 1999, another class shall be originally elected for a term expiring at the annual meeting of stockholders to be held in 2000, and another class shall be originally elected for a term expiring at the annual meeting of stockholders to be held in 2001, with each member of each class to hold office until a successor is elected and qualified. At each annual meeting of stockholders of the Corporation and except as otherwise provided in or fixed by or pursuant to the provisions of Article FOURTH hereof relating to the rights of the holders of any class or series of stock having a preference over the Common Stock as to dividends or upon liquidation to elect directors under specified circumstances, the successors of the class of directors whose term expires at that meeting shall be elected to hold office for a term of three years. 4 3. Newly Created Directorships and Vacancies. Except as otherwise required by law and except as otherwise provided in or fixed by or pursuant to the provisions of Article FOURTH hereof relating to the rights of the holders of any class or series of stock having a preference over the Common Stock as to dividends or upon liquidation to elect directors under specified circumstances: (i) newly created directorships resulting from any increase in the number of directors and any vacancies on the Board of Directors resulting from death, resignation, disqualification, removal or other cause shall be filled by the affirmative vote of a majority of the remaining directors then in office, even though less than a quorum of the Board of Directors; (ii) any director elected in accordance with the preceding clause (i) shall hold office for the remainder of the full term of the class of directors in which the new directorship was created or the vacancy occurred and until such director's successor shall have been elected and qualified; and (iii) no decrease in the number of directors constituting the Board of Directors shall shorten the term of any incumbent director. 4. Removal. Except as otherwise provided in or fixed by or pursuant to the provisions of Article FOURTH hereof relating to the rights of the holders of any class or series of stock having a preference over the Common Stock as to dividends or upon liquidation to elect directors under specified circumstances, any director may be removed from office only for cause by the affirmative vote of the holders of at least a majority of the combined voting power of the then outstanding shares of the Corporation's stock entitled to vote generally, voting together as a single class. Whenever in this Article SEVENTH hereof, the phrase, "the then outstanding shares of the Corporation's stock entitled to vote generally" is used, such phrase shall mean each then outstanding share of any class or series of the Corporation's stock that is entitled to vote generally in the election of the Corporation's directors. 5. Amendment or Repeal of this Article. Notwithstanding any other provisions of this Article SEVENTH or any other Article hereof or of the By-Laws of the Corporation (and notwithstanding the fact that a lesser percentage may be specified from time to time by law, this Article SEVENTH, any other Article hereof, or the By-Laws of the Corporation), the provisions of this Article SEVENTH may not be altered, amended or repealed in any respect, nor may any provision inconsistent therewith be adopted, unless such alteration, amendment, repeal or adoption is approved by the affirmative vote of at least 75% of the combined voting power of the then outstanding shares of the Corporation's capital stock entitled to vote generally, voting together as a single class. 6. Amendment of Bylaws. The power to adopt, amend, or repeal the By-Laws of the Corporation may be exercised by the Board of Directors of the Corporation, unless otherwise provided in the By-Laws. 7. Voting Power. Whenever the Corporation shall be authorized to issue only one class of stock, each outstanding share shall entitle the holder thereof to notice of, and the right to vote at, any meeting of stockholders. Whenever the Corporation shall be authorized to issue more than one class of stock, no outstanding share of any class of stock which is denied voting power under the provisions of the Certificate of Incorporation shall entitle the holder thereof to the right to vote at any meeting of 5 stockholders except as the provisions of paragraph (2) of subsection (b) of 242 of the General Corporation Law of the State of Delaware shall otherwise require; provided, that no share of any such class which is otherwise denied voting power shall entitle the holder thereof to vote upon the increase or decrease in the number of authorized shares of said class. EIGHTH: The personal liability of the directors of the Corporation is hereby eliminated to the fullest extent permitted by the provisions of paragraph (7) of subsection (b) of ss.102 of the General Corporation Law of the State of Delaware, as the same may be amended and supplemented. No amendment or repeal of this Article EIGHTH shall apply to or have any effect on the liability or alleged liability of any director of this Corporation for or with respect to any acts or omissions of such director occurring prior to such amendment or repeal. NINTH: The Corporation shall, to the fullest extent permitted by the provisions of ss. 145 of the General Corporation Law of the State of Delaware, as the same may be amended and supplemented, indemnify, and upon request advance expenses to, any and all persons who is or was a party or is threatened to be made a party to any threatened, pending or completed action, suit, proceeding or claim, whether civil, criminal, administrative or investigative, by reason of the fact that such person is or was or has agreed to be a director or officer of this Corporation or while a director or officer is or was serving at the request of this Corporation as a director, officer, partner, trustee, employee or agent of any corporation, partnership, joint venture, trust or other enterprise, including service with respect to employee benefit plans, from and against any and all of the expenses, liabilities, or other matters referred to in or covered by said section (including without limitation attorneys fees and expenses); provided, however, that the foregoing shall not require this Corporation to indemnify or advance expenses to any person in connection with any action, suit, proceeding, claim or counterclaim initiated by or on behalf of such person other than solely to enforce rights under this ARTICLE NINTH. The indemnification provided for herein shall not be deemed exclusive of any other rights to which those indemnified may be entitled under any Bylaw, agreement, vote of stockholders or disinterested directors or otherwise, both as to action in his official capacity and as to action in another capacity while holding such office, and shall continue as to a person who has ceased to be a director, officer, employee, or agent and shall inure to the benefit of the heirs, executors, and administrators of such a person. Any person seeking indemnification under this Article NINTH shall be deemed to have met the standard of conduct required for such indemnification unless the contrary shall be established by a court of competent jurisdiction. No amendment or repeal of the foregoing provisions of this Article NINTH shall adversely affect any right or protection of a director or officer of the Corporation with respect to any acts or omissions of such director or officer occurring prior to such amendment or repeal. TENTH: From time to time any of the provisions of this Certificate of Incorporation may be amended, altered, or repealed, and the provisions authorized by the laws of the State of Delaware at the time in force may be added or inserted in the manner and at the time prescribed by said laws, and all rights at any time conferred upon the stockholders of the Corporation by this Certificate of Incorporation are granted subject to the provisions of this Article TENTH. 6 ELEVENTH: The Corporation hereby elects to be governed by Section 203 of the Delaware General Corporation Law. TWELFTH: If at any time the Corporation shall have a class of stock registered pursuant to the provisions of the Securities Exchange Act of 1934, for so long as such class is so registered, any action by the stockholders of such class must be taken at an annual or special meeting of stockholders and may not be taken by written consent. THIRTEENTH: The Board of Directors of the Corporation, when evaluating any offer of another party (a) to make a tender or exchange offer for any equity security of the Corporation or (b) to effect a business combination, shall, in connection with the exercise of its judgment in determining what is in the best interests of the Corporation as a whole, be authorized to give due consideration to any such factors as the Board of Directors determines to be relevant, including without limitation: a. the interests of the Corporation's stockholders; b. whether the proposed transaction might violate federal or state laws; c. not only the consideration being offered in the proposed transaction, in relation to the then current market price for the outstanding capital stock of this Corporation, but also to the market price for the capital stock of the Corporation over a period of years, the estimated price that might be achieved in a negotiated sale of the Corporation as a whole or in part or through orderly liquidation, the premiums over market price for the securities of other corporations in similar transactions, current political, economic and other factors bearing on securities prices and the Corporation's financial condition and future prospects; and d. the social, legal and economic effects upon employees, suppliers, customers and others having similar relationships with the Corporation, and the communities in which the Corporation conducts its business. In connection with any such evaluation, the Board of Directors is authorized to conduct such investigations and engage in such legal proceedings as the Board of Directors may determine. FOURTEENTH: Notwithstanding any other provisions of this Certificate of Incorporation or the Bylaws (and notwithstanding the fact that a lesser percentage may be specified by law, this Certificate of Incorporation or the Bylaws of this Corporation), the affirmative vote of 75% of the total number of votes of the then outstanding shares of capital stock of the Corporation entitled to vote generally in the election of directors, voting together as a single class, shall be required to amend or repeal, or to adopt any provision inconsistent with the purpose or intent of ARTICLES SEVENTH, EIGHTH, NINTH, TENTH, ELEVENTH, TWELFTH, THIRTEENTH and this ARTICLE FOURTEENTH. Notice of any such proposed amendment, repeal or adoption, shall be contained in the notice of the meeting at which it is to be 7 considered. Subject to the provisions set forth herein, this Corporation reserves the right to amend, alter, repeal or rescind any provision contained in this Certificate of Incorporation in the manner now or hereafter prescribed by law. 4. This Amended and Restated Certificate of Incorporation was duly adopted in accordance with Sections 242, 245 and 303 of the General Corporation Law of the State of Delaware. IN WITNESS WHEREOF, the Corporation has caused this Amended and Restated Certificate of Incorporation to be signed and attested to by its duly authorized officers on this 16th day of August, 1998. HOME RETAIL HOLDINGS, INC. ATTEST: By: /S/ GREG DUKOFF By: /S/ DAVID DANOVITCH --------------- -------------------- Secretary EX-3 4 EXHIBIT 3.2 RESTATED AND AMENDED BYLAWS OF HOME RETAIL HOLDINGS, INC. (a Delaware corporation) Effective 1998 ARTICLE I STOCKHOLDERS 1. CERTIFICATES REPRESENTING STOCK. Certificates representing stock in the Corporation shall be signed by, or in the name of, the Corporation by the Chairman or Vice-Chairman of the Board of Directors, if any, or by the President or a Vice President and by the Treasurer or an Assistant Treasurer or the Secretary or an Assistant Secretary of the Corporation. Any or all the signatures on any such certificate may be a facsimile. In case any officer, transfer agent, or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent, or registrar before such certificate is issued, it may be issued by the Corporation with the same effect as if he were such officer, transfer agent or registrar at the date of issue. Whenever the Corporation shall be authorized to issue more than one class of stock or more than one series of any class of stock, and whenever the Corporation shall issue any shares of its stock as partly paid stock, the certificates representing shares of any such class or series or of any such partly paid stock shall set forth thereon the statements prescribed by the General Corporation Law. Any restrictions on the transfer or registration of transfer of any shares of stock of any class or series shall be noted conspicuously on the certificate representing such shares. The Corporation may issue a new certificate of stock or uncertificated shares in place of any certificate theretofore issued by it, alleged to have been lost, stolen, or destroyed, and the Board of Directors may require the owner of the lost, stolen, or destroyed certificate, or his legal representative, to give the Corporation a bond sufficient to indemnify the Corporation against any claim that may be made against it on account of the alleged loss, theft, or destruction of any such certificate or the issuance of any such new certificate or uncertificated shares. 2. UNCERTIFICATED SHARES. Subject to any conditions imposed by the General Corporation Law, the Board of Directors of the Corporation may provide by resolution or resolutions that some or all of any or all classes or series of the stock of the Corporation shall be uncertificated shares. Within a reasonable time after the issuance or transfer of any uncertificated shares, the Corporation shall send to the registered owner thereof any written notice prescribed by the General Corporation Law. 3. FRACTIONAL SHARE INTERESTS. The Corporation may, but shall not be required to, issue fractions of a share. If the corporation does not issue fractions of a share, it shall (1) arrange for the disposition of fractional interests by those entitled thereto, (2) pay in cash fair value of fractions of a share as of the time when those entitled to receive such fractions are determined, or (3) issue scrip or warrants in registered form (either represented by a certificate or uncertificated) or bearer form (represented by a certificate) which shall entitle the holder to receive a full share upon the surrender of such scrip or warrants aggregating a full share. A certificate for a fractional share or an uncertificated fractional share shall, but scrip or warrants shall not unless otherwise provided therein, entitle the holder to exercise voting rights, to receive dividends thereon, and to participate in any of the assets of the Corporation in the event of liquidation. The Board of Directors may cause scrip or warrants to be issued subject to the conditions that they shall become void if not exchanged for certificates representing the full shares or uncertificated full shares before a specified date, or subject to the conditions that the shares for which scrip or warrants are exchangeable may be sold by the Corporation and the proceeds thereof distributed to the holders of scrip or warrants, or subject to any other conditions which the Board of Directors may impose. 4. STOCK TRANSFERS. Upon compliance with provisions restricting the transfer or registration of transfer of shares of stock, if any, transfers or registration of transfers of shares of stock of the Corporation shall be made only on the stock ledger of the Corporation by the registered holder thereof, or by his attorney thereunto authorized by power of attorney duly executed and filed with the Secretary of the Corporation or with a transfer agent or a registrar, if any, and, in the case of shares represented by certificates, on surrender of the certificate or certificates for such shares of stock properly endorsed and the payment of all taxes due thereon. 5. RECORD DATE FOR STOCKHOLDERS. In order that the Corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, the Board of Directors may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted by the Board of Directors, and which record date shall not be more than sixty nor less than ten days before the date of such meeting. If no record date is fixed by the Board of Directors, the record date for determining stockholders entitled to notice of or to vote at a meeting of stockholders shall be at the close of business on the day next preceding the day on which notice is given, or, if notice is waived, at the close of business on the day next preceding the day on which notice is given, or, if notice is waived, at the close of business on the day next preceding the day on which the meeting is held. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the Board of Directors may fix a new record date for the adjourned meeting. In order that the Corporation may determine the stockholders entitled to consent to corporate 2 action in writing without a meeting, the Board of Directors may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted by the Board of Directors, and which date shall not be more than ten days after the date upon which the resolution fixing the record date is adopted by the Board of Directors. If no record date has been fixed by the Board of Directors, the record date for determining the stockholders entitled to consent to corporate action in writing without a meeting, when no prior action by the Board of directors is required by the General Corporation law, shall be the first date on which a signed written consent setting forth the action taken or proposed to be taken is delivered to the Corporation by delivery to its registered office in the State of Delaware, its principal place of business, or an office or agent of the Corporation having custody of the book in which proceedings of meetings of stockholders are recorded. Delivery made to the Corporation's registered office shall be by hand or by certified or registered mail, return receipt requested. If no record date has been fixed by the Board of Directors and prior action by the Board of Directors is required by the General Corporation Law, the record date for determining stockholders entitled to consent to corporate action in writing without a meeting shall be at the close of business on the day on which the Board of Directors adopts the resolution taking such prior action. In order that the Corporation may determine the stockholders entitled to receive payment of any dividend or other distribution or allotment of any rights or the stockholders entitled to exercise any rights in respect of any change, conversion, or exchange of stock, or for the purpose of any other lawful action, the Board of Directors may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted, and which record date shall be not more than sixty days prior to such action. If no record date is fixed, the record date for determining stockholders for any such purpose shall be at the close of business on the day on which the Board of Directors adopts the resolution relating thereto. 6. MEANING OF CERTAIN TERMS. As used herein in respect of the right to notice of a meeting of stockholders or a waiver thereof or to participate or vote thereat or to consent or dissent in writing in lieu of a meeting, as the case may be, the term "share" or "shares" or "share of stock" or "shares of stock" or "stockholder" or "stockholders" refers to an outstanding share or shares of stock and to a holder or holders of record of outstanding shares of stock when the Corporation is authorized to issue only one class of shares of stock, and said reference is also intended to include any outstanding share or shares of stock and any holder or holders of record of outstanding shares of stock of any class upon which or upon whom the certificate of incorporation confers such rights where there are two or more classes or series of shares of stock or upon which or upon whom the General Corporation Law confers such rights notwithstanding that the certificate of incorporation may provide for more than one class or series of shares of stock, one or more of which are limited or denied such rights thereunder, provided, however, that no such right shall vest in the event of an increase or a decrease in the authorized number of shares of stock of any class or series which is otherwise denied voting rights under the provisions of the certificate of incorporation, except as any provision of law may otherwise require. 7. STOCKHOLDER MEETINGS. -- TIME. The annual meeting shall be held on the date and at the time fixed, from time to time, by the directors. A special meeting shall be held on the date and at the time fixed by the directors. -- PLACE. Annual meetings and special meetings shall be held at such place, within or without the State of Delaware, as the directors may, from time to time, fix. Whenever the directors shall fail to fix such place, the meeting shall be held at the registered office of the Corporation in the State of Delaware. 3 -- CALL. Annual meetings and special meetings may be called by a majority of the directors or by any officer instructed by a majority of the directors to call the meeting. -- NOTICE OR WAIVER OF NOTICE. Written notice of all meetings shall be given, stating the place, date, and hour of the meeting and stating the place within the city or other municipality or community at which the list of stockholders of the Corporation may be examined. The notice of an annual meeting shall state that the meeting is called for the election of directors and for the transaction of other business which may properly come before the meeting, and shall (if any other action which could be taken at a special meeting is to be taken at such annual meeting) state the purpose or purposes. The notice of a special meeting shall in all instances state the purpose or purposes for which the meeting is called. The notice of any meeting shall also include, or be accompanied by, any additional statements, information, or documents prescribed by the General Corporation Law. Except as otherwise provided by the General Corporation Law, a copy of the notice of any meeting shall be given, personally or by mail, not less than ten days nor more than sixty days before the date of the meeting, unless the lapse of the prescribed period of time shall have been waived, and directed to each stockholder at his record address or at such other address which he may have furnished by request in writing to the Secretary of the Corporation. Notice by mail shall be deemed to be given when deposited, with postage thereon prepaid, in the United states Mail. No business shall be conducted at an annual meeting except in accordance with this procedure. The Chairman of an annual meeting shall, if the facts warrant, determine and declare to the meeting that business was not properly brought before the meeting and in accordance with the provisions of this section, and if so determined, shall declare to the meeting that any such business not properly brought before the meeting shall not be transacted. If a meeting is adjourned to another time, not more than thirty days hence, and/or to another place, and if an announcement of the adjourned time and/or place is made at the meeting, it shall not be necessary to give notice of the adjourned meeting unless the directors, after adjournment, fix a new record date for the adjourned meeting. Notice need not be given to any stockholder who submits a written waiver of notice signed by him before or after the time stated therein. Attendance of a stockholder at a meeting of stockholders shall constitute a waiver of notice of such meeting, except when the stockholder attends the meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the stockholders need be specified in any written waiver of notice. -- STOCKHOLDER LIST. The officer who has charge of the stock ledger of the Corporation shall prepare and make, at least ten days before every meeting of stockholders, a complete list of the stockholders, arranged in alphabetical order, and showing the address of each stockholder and the number of shares registered in the name of each stockholder. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least ten days prior to the meeting, either at a place within the city or other municipality or community where the meeting is to be held, which place shall be specified in the notice of the meeting, or if not so specified, at the place where the meeting is to be held. The list shall also be produced and kept at the time and place of the meeting the whole time thereof, and may be inspected by any stockholder who is present. The stock ledger shall be the only evidence as to who are the stockholders entitled to examine the 4 stock ledger, the list required by this section or the books of the Corporation, or to vote at any meeting of stockholders. -- CONDUCT OF MEETING. Meetings of the stockholders shall be presided over by one of the following officers in the order of seniority and if present and acting - the Chairman of the Board, if any, the Vice-Chairman of the Board, if any, the President, a Vice-President, or, if none of the foregoing is in office and present and acting, by a chairman to be chosen by the stockholders. The Secretary of the Corporation, or in his absence, an Assistant Secretary, shall act as secretary of every meeting, but if neither the Secretary nor an Assistant Secretary is present the Chairman of the meeting shall appoint a secretary of the meeting. -- PROXY REPRESENTATION. Every stockholder may authorize another person or persons to act for him by proxy in all matters in which a stockholder is entitled to participate, whether by waiving notice of any meeting, voting or participating at a meeting, or expressing consent or dissent without a meeting. Every proxy must be signed by the stockholder or by his attorney-in-fact. No proxy shall be voted or acted upon after three years from its date unless such proxy provides for a longer period. A duly executed proxy shall be irrevocable if it states that it is irrevocable and, if, and only as long as, it is coupled with an interest sufficient in law to support an irrevocable power. A proxy may be made irrevocable regardless of whether the interest with which it is coupled is an interest in the stock itself or an interest in the Corporation generally. -- INSPECTORS. The directors, in advance of any meeting, may, but need not, appoint one or more inspectors of election to act at the meeting or any adjournment thereof. If an inspector or inspectors are not appointed, the person presiding at the meeting may, but need not, appoint one or more inspectors. In case any person who may be appointed as an inspector fails to appear or act, the vacancy may be filled by appointment made by the directors in advance of the meeting or at the meeting by the person presiding thereat. Each inspector, if any, before entering upon the discharge of his duties, shall take and sign an oath faithfully to execute the duties of inspectors at such meeting with strict impartiality and according o the best of his ability. The inspectors, if any, shall determine the number of shares of stock outstanding and the voting power of each, the shares of stock represented at the meeting, the existence of a quorum, the validity and effect of proxies, and shall receive votes, ballots, or consents, hear and determine all challenges and questions arising in connection with the right to vote, count and tabulate all votes, ballots, or consents, determine the result, and do such acts as are proper to conduct the election or vote with fairness to all stockholders. On request of the person presiding at the meeting, the inspector or inspectors, if any, shall make a report in writing of any challenge, question, or matter determined by him or them and execute a certificate of any fact found by him or them. Except as otherwise required by subsection (e) of Section 231 of the General Corporation Law, the provisions of that Section shall not apply to the Corporation. -- QUORUM. The holders of a majority of the outstanding shares of stock shall constitute a quorum at a meeting of stockholders for the transaction of any business. The stockholders present may adjourn the meeting despite the absence of a quorum. -- VOTING. Each share of stock shall entitle the holder thereof to one vote. Directors shall be elected by a plurality of the votes of the shares present in person or represented 5 by proxy at the meeting and entitled to vote on the election of directors. Any other action shall be authorized by a majority of the votes cast except where the General Corporation Law prescribes a different percentage of votes and/or a different exercise of voting power, and except as may be otherwise prescribed by the provisions of the certificate of incorporation and these Bylaws. In the election of directors, and for any other action, voting need not be by ballot. 8. STOCKHOLDER ACTION WITHOUT MEETINGS. Any action required by the General Corporation Law to be taken at any annual or special meeting of stockholders, or any action which may be taken at any annual or special meeting of stockholders, may be taken without a meeting, without prior notice and without a vote, if a consent in writing, setting forth the action so taken, shall be signed by the holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted; provided that if at any time the Corporation shall have a class of stock registered pursuant to the provisions of the Securities Exchange Act of 1934, for so long as such class is so registered, any action by the stockholders of such class must be taken at an annual or special meeting of stockholders and may not be taken by written consent. Prompt notice of the taking of the corporation action without a meeting by less than unanimous written consent shall be given to those stockholders who have not consented in writing. Action taken pursuant to this paragraph shall be subject to the provisions of Section 228 of the General Corporation Law. ARTICLE II DIRECTORS 1. FUNCTIONS AND DEFINITION. The business and affairs of the Corporation shall be managed by or under the direction of the Board of Directors of the Corporation. The Board of Directors shall have the authority to fix the compensation of the members thereof. The use of the phrase "whole board" herein refers to the total number of directors which the Corporation would have if there were no vacancies. 2. QUALIFICATIONS AND NUMBER. A director need not be a stockholder, a citizen of the United States, or a resident of the State of Delaware. The initial Board of Directors shall consist of three persons. Thereafter the number of directors containing the whole board shall be at least three. Subject to the foregoing limitation and except for the first Board of Directors, the number of directors shall be fixed by resolution of the Board of Directors and may be increased at any time or from time to time by the directors by vote of a majority of the directors then in office but not to a greater number than nine without action by the stockholders. The number of directors may be decreased to any number permitted by the foregoing at any time by the directors by vote of a majority of the directors then in office, but only to eliminate vacancies existing by reason of the death, resignation or removal of one or more directors. 3. ELECTION AND TERM. All members of the Board of Directors shall be classified, with respect to the time for which they each hold office, into three classes. One class shall originally be elected for an initial one year term expiring at the annual meeting of stockholders to be held in 1999, another class shall be originally elected for an initial two year term expiring at 6 the annual meeting of stockholders to be held in 2000, and another class shall be originally elected for an initial three year term expiring at the annual meeting of stockholders to be held in 2001, with each member of each class to hold office until a successor is elected and qualified or until his earlier resignation or removal. Thereafter, at each annual meeting of stockholders, the successors of the class of directors whose term expires at that meeting shall be elected to hold office for a three year term until their successors are elected and qualified or until their earlier resignation or removal. Except as otherwise provided in or fixed by or pursuant to the Corporation's Certificate of Incorporation, nominations for the election of directors may be made by the Board of Directors or by any stockholder of record entitled to vote in the election of directors generally. However, any such stockholders may nominate one or more persons for election as director or directors at a stockholders' meeting only if written notice of intent to make such nomination or nominations has been given either by personal delivery or by mail to the Secretary of the Corporation not less than 30 days before the meeting of stockholders at which such election is held. Each such notice shall state (a) the name and address of the stockholder who intends to make the nomination and of the person or persons to be nominated; (b) a representation that the stockholder is a holder of record of stock of the Corporation entitled to vote at such meeting and intends to appear in person or by proxy at the meeting to nominate the person or persons specified in the notice; (c) a description of all arrangements or understandings between the stockholder and each nominee and any other person or persons (naming such person or persons) pursuant to which the nomination or nominations are to be made by the nominee proposed by such stockholder as would be required to be included in a proxy statement filed pursuant to the proxy rules of the Securities and Exchange Commission, had the nominee been nominated, or intended to be nominated, by the Board of Directors; and (d) the consent of each nominee to serve as a director of the Corporation if so elected, and shall be accompanied by a petition in support of such nomination signed by at least 50 holders of record of stock entitled to vote in the election of directors holding in the aggregate not less than 5% of such stock. The chairman of the meeting may refuse to acknowledge the nomination of any person not made in compliance with the foregoing procedure. 4. MEETINGS. -- TIME. Meetings shall be held at such time as the Board shall fix, except that the first meeting of a newly elected Board shall be held as soon after its election as the directors may conveniently assemble. -- PLACE. Meetings shall be held at such place within or without the State of Delaware as shall be fixed by the Board. -- CALL. No call shall be required for regular meetings for which the time and place have been fixed. Special meetings may be called: by or at the direction of the Chairman of the Board, if any, the Vice-Chairman of the Board, if any, or the President, or of a majority of the directors in office. -- NOTICE OR ACTUAL OR CONSTRUCTIVE WAIVER. No notice shall be required for regular meetings for which the time and place have been fixed. Written, oral, or 7 any other mode of notice of the time and place shall be given for special meetings in sufficient time for the convenient assembly of the directors thereat. Notice need not be given to any director or to any member of a committee of directors who submits a written waiver of notice signed by him before or after the time stated therein. Attendance of any such person at a meeting shall constitute a waiver of notice of such meeting, except when he attends a meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the directors need be specified in any written waiver of notice. -- QUORUM AND ACTION. A majority of the whole Board shall constitute a quorum except when a vacancy or vacancies prevents such majority, whereupon a majority of the directors in office shall constitute a quorum, provided, that such majority shall constitute at least one-third of the whole Board. A majority of the directors present, whether or not a quorum is present, may adjourn a meeting to another time and place. Except as herein otherwise provided, and except as otherwise provided by the General Corporation Law, the vote of the majority of the directors present at a meeting at which a quorum is present shall be the act of the Board. The quorum and voting provisions herein stated not be construed as conflicting with any provisions of the General Corporation Law and these Bylaws which govern a meeting of directors held to fill vacancies and newly created directorships in the Board or action of disinterested directors. Any member or members of the Board of Directors or of any committee designated by the Board, may participate in a meeting of the Board, or any such committee, as the case may be, by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other. -- CHAIRMAN OF THE MEETING. The Chairman of the Board, if any and if present and acting, shall preside at all meetings. Otherwise, the Vice-Chairman of the Board, if any and if present and acting, or the President, if present and acting, or any other director chosen by the Board, shall preside. 5. RESIGNATION AND REMOVAL OF DIRECTORS. Any director may resign at any time by delivering his resignation in writing to the chairman of the board, if any, the president, or the secretary or to a meeting of the board of directors. Such resignation shall be effective upon receipt unless specified to be effective at some other time, and without in either case the necessity of it being accepted unless the resignation shall so state. Except as otherwise provided in the certificate of incorporation or these by-laws relating to the rights of the holders of any class or series of preferred stock, voting separately by class or series, to elect directors under specified circumstances, any director or directors may be removed from office at any time, but only for cause and only by the affirmative vote, at any regular meeting or special meeting of the stockholders, of not less than 50% of the total number of votes of the then outstanding shares of capital stock of the corporation entitled to vote generally in the election of directors, voting together as a single class, but only if notice of such proposal was contained in the notice of such meeting. Any vacancy in the board of directors resulting from any such removal shall be filled only by vote of a majority of the directors then in office, although less than a quorum, and any director or directors so chosen shall hold office until the next election of the class for which such 8 directors shall have been chosen and until their successors shall be elected and qualified or until their earlier death, resignation or removal. No director resigning and (except where a right to receive compensation shall be expressly provided in a duly authorized written agreement with the corporation) no director removed shall have any right to any compensation as such director for any period following his resignation or removal, or any right to damages on account of such removal, whether his compensation be by the month or by the year or otherwise; unless, in the case of a resignation, the directors, or, in the case of removal, the body acting on the removal, shall in their or its discretion provide for compensation. 6. VACANCIES. Vacancies and any newly created directorships resulting from any increase in the number of directors shall be filled only by vote of a majority of the directors then in office, although less than a quorum, or by a sole remaining director. Stockholders shall have no power to fill any vacancies or newly created directorships. When one or more directors shall resign from the board, effective at a future date, a majority of the directors then in office, including those who have resigned, shall have power to fill such vacancy or vacancies, the vote or action by writing thereon to take effect when such resignation or resignations shall become effective. The directors shall have and may exercise all their powers notwithstanding the existence of one or more vacancies in their number, subject to any requirement of law or of the certificate of incorporation or of these by-laws as to the number of directors required for a quorum or for any vote or other actions. 7. COMMITTEES. The Board of Directors may, by resolution passed by a majority of the whole Board, designate one or more committees, each committee to consist of one or more of the directors of the Corporation. The Board may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. Any such committee, to the extent provided in the resolution of the Board, shall have and may exercise the powers and authority of the Board of Directors in the management of the business and affairs of the Corporation with the exception of any authority the delegation of which is prohibited by Section 141 of the General Corporation Law, and may authorize the seal of the Corporation to be affixed to all papers which may require it. 8. WRITTEN ACTION. Any action required or permitted to be taken at any meeting of the Board of Directors or any committee thereof may be taken without a meeting if all members of the Board or committee, as the case may be, consent thereto in writing, and the writing or writings are filed with the minutes of proceedings of the Board or committee. 9. INTERESTED DIRECTORS AND OFFICERS. (a) No contract or transaction between the Corporation and one or more of its directors or officers, or between the Corporation and any other corporation, partnership, association, or other organization in which one or more of the Corporation's directors or officers are directors or officers, or have a financial interest, shall be void or voidable solely for this reason, or solely because the director or officer is present at or participates in the meeting of the board or committee thereof which authorizes the contract or transaction, or solely because his or their votes are counted for such purpose, if: 9 (1) The material facts as to his relationship or interest and as to the contract or transaction are disclosed or are known to the board of directors or the committee, and the board or committee in good faith authorizes the contract or transaction by the affirmative votes of a majority of the disinterested directors, even though the disinterested directors be less than a quorum; or (2) The material facts as to his relationship or interest and as to the contract or transaction are disclosed or are known to the stockholders entitled to vote thereon, and the contract or transaction is specifically approved in good faith by vote of the stockholders; or (3) The contract or transaction is fair as to the corporation as of the time it is authorized, approved or ratified, by the Board of Directors, a committee thereof, or the stockholders. (b) Common or interested directors may be counted in determining the presence of a quorum at a meeting of the Board of Directors or of a committee which authorizes the contract or transaction. (b) Common or interested directors may be counted in determining the presence of a quorum at a meeting of the Board of Directors or of a committee which authorizes the contract or transaction. ARTICLE III OFFICERS The officers of the Corporation shall consist of a President, a Secretary, a Treasurer, and, if deemed necessary, expedient, or desirable by the Board of Directors, a Chairman of the Board, a Vice-Chairman of the Board, one or more Executive Vice Presidents, one or more other Vice-Presidents, one or more Assistant Secretaries, one or more Assistant Treasurers, and such other officers with such titles as the resolution of the Board of Directors choosing them shall designate. Except as may otherwise be provided in the resolution of the Board of Directors choosing him, no officer other than the Chairman or Vice-Chairman of the Board, if any, need by a director. Any number of offices may be held by the same person, as the directors may determine. Unless otherwise provided in the resolution choosing him, each officer shall be chosen for a term which shall continue until the meeting of the Board of Directors following the next annual meeting of stockholders and until his successor shall have been chosen and qualified. All officers of the Corporation shall have such authority and perform such duties in the management and operation of the Corporation as shall be prescribed in the resolutions of the Board of Directors designating and choosing such officers and prescribing their authority and duties, and shall have such additional authority and duties as are incident to their office except to the extent that such resolutions may be inconsistent therewith. The Secretary or an Assistant Secretary of the Corporation shall record all of the proceedings of all meetings and actions in writing of stockholders, directors, and committees of directors, and shall exercise such additional authority and perform such additional duties as the Board shall assign to him. Any officer may be removed, with or without cause, by the Board of Directors. Any vacancy in any office may be filled by the Board of Directors. 10 ARTICLE IV CORPORATE SEAL The corporate seal shall be in such form as the Board of Directors shall prescribe. ARTICLE V FISCAL YEAR The fiscal year of the Corporation shall be fixed, and shall be subject to change, by the Board of Directors. ARTICLE VI CONTROL OVER BYLAWS Subject to the provisions of the certificate or incorporation and the provisions of the General Corporation Law, the power to amend, alter, or repeal these Bylaws and to adopt new Bylaws may be exercised by the Board of Directors or by the stockholders except that the power to amend, alter or repeal Article II Sections 2 and 3 may be exercised only by the stockholders acting by at least 75% vote of the outstanding voting shares. EX-4.4 5 EXHIBIT 4.4 Void after June 30, 2003 This Warrant and any shares acquired upon the exercise of this Warrant have not been registered under the Securities Act of 1933. This Warrant and such shares may not be sold or transferred in the absence of such registration or an exemption therefrom under said Act and no transfer of this Warrant or such shares shall be valid or effective unless and until such conditions shall have been complied with. HOME RETAIL HOLDINGS, INC. COMMON STOCK PURCHASE WARRANT HOME RETAIL HOLDINGS, INC. (the "Company"), having its principal office at c/o Cambridge Partners, LLC, 535 Madison Avenue, 19th Floor, New York, New York 10022 hereby certifies that, for value received, Liberty BIDCO Investment Corporation, a Michigan corporation ("Bidco") or assigns, is entitled, subject to the terms set forth below, to purchase from the Company at any time on or from time to time after August 20, 1998 and before 5:00 P.M., New York City time, on June 30, 2003 (the "Expiration Date") 40,602 fully paid and non-assessable shares of Common Stock of the Company, at the price per share of the Purchase Price. The number and character of such shares of Common Stock and the Purchase Price as hereinafter defined are subject to adjustment as provided herein. This Warrant is one of the Common Stock Purchase Warrants (the "Warrants") originally issued to Liberty BIDCO Investment Corporation as of the Original Issue Date (as defined below) and evidencing the right to purchase an aggregate of 40,602 shares of Common Stock of the Company (representing approximately 2% of the Company's Common Stock and Class B Common Stock on a fully diluted basis as of the Original Issue Date), subject to adjustment as provided herein. As used herein the following terms, unless the context otherwise requires, have the following respective meanings: (a) The term "Company" includes any corporation which shall succeed to or assume the obligations of the Company hereunder. (b) The term "Common Stock" means the Class A Common Stock, $.01 par value, of the Company and its successors. (c) The "Original Issue Date" is August 20, 1998, the date as of which the Warrant was first issued. (d) The term "Other Securities" refers to any stock (other than Common Stock) and other securities of the Company or any other person (corporate or otherwise) which the holder of the Warrant at any time shall be entitled to receive, or shall have received, upon the exercise of the Warrant, in lieu of or in addition to Common Stock, or which at any time shall be issuable or shall have been issued in exchange for or in replacement of Common Stock or Other Securities pursuant to Section 6 or otherwise. (e) The term "Purchase Price" shall be 165% of the initial price to the public pursuant to which the Company first sells more than $5 million of Common Stock (taking into account gross proceeds, not net proceeds), as set forth on the cover page of the prospectus contained in the registration statement pertaining to such offering, as such price may be adjusted pursuant to the terms hereof. (f) The terms "registered" and "registration" refer to a registration effected by filing a registration statement in compliance with the Securities Act, to permit the disposition of Common Stock (or Other Securities) issued or issuable upon the exercise of Warrants, and any post-effective amendments and supplements filed or required to be filed to permit any such disposition. (g) The term "Registrable Securities" shall mean the shares of Common Stock or Other Securities issuable upon exercise of the Warrants, excluding Common Stock or other Securities that (a) have been registered under the Securities Act pursuant to an effective registration statement filed thereunder and disposed of in accordance with such registration statement or (b) are eligible for sale under Rule 144(k) under the Securities Act, or have been sold pursuant to Rule 144 under the Securities Act. (h) The term "Registration Period" shall mean the period commencing immediately after the closing of the Company's first public offering of securities registered under the Securities Act that takes place after the Original Issue Date and ending on the earlier of the third anniversary thereof and the Expiration Date. (i) The term "Securities Act" means the Securities Act of 1933 as the same shall be in effect at the time. 1. Registration Rights. 1.1. Incidental Registration. During the Registration Period, each holder of Registrable Securities will have a right to have its Registrable Securities included in registration statements filed by the Company on general registration forms under the Securities Act, except as otherwise provided herein. The Company will notify each such holder in writing (the "Company Notice") promptly after making the decision to file a registration statement under the Securities Act with respect to the proposed sale of the Company's equity securities (except with respect to registration statements filed on Forms S-4 or S-8 or such others in similar form then in effect under the Securities Act), specifying in the Company Notice the form of registration statement, the number of shares of securities the Company proposes to register, the name of the managing underwriter or underwriters (if any) and the general terms and conditions of the proposed registration and sale. Subject to Section 1.6 and the remainder of this Section 1.1, if requested by any holder of Registrable Securities in a writing (the "Investor Notice"), delivered to the Company not later than 30 days after the Company gives the Company Notice, to include in such registration statement Registrable Securities (the "Requested Shares"), the 2 Company will use its best efforts to include the Requested Shares in the registration statement, and, if the proposed sale is to be underwritten, to cause the underwriters of securities to be sold by the Company in such registration statement to purchase such Requested Shares. In the event that any registration pursuant to this Section 1.1 shall be an underwritten offering of securities of the Company, any request by such holders pursuant to this Section 1.1 to register the Requested Shares, may, but need not, specify that such shares are to be included in the underwriting on the same terms and conditions as the securities, if any, otherwise being sold through underwriters under such registration. In the event of an underwritten offering by the Company, such notice shall also specify as to whether such holder of Registrable Securities desires that any of such Requested Shares to be included in any such registration statement be subject to any over-allotment option granted the underwriters of such offering. No holder shall be required to have its Requested Shares be part of any underwritten offering and/or subject to any over-allotment option granted any underwriter by the Company. Notwithstanding the foregoing, if the managing underwriter or underwriters shall inform the Company of its opinion, at least 15 days prior to the date that the registration statement becomes effective, that part or all the Requested Shares be excluded from the registration statement on the ground that the inclusion of such Requested Shares will materially adversely affect the orderly sales and distribution of the Common Stock being sold, the Company shall include first all securities to be sold by the Company for its own account, second, Requested Shares and last all securities to holders which have the right to require that their securities be included in the registration, all on a pro rata basis. If the underwriters agree to purchase any of the Requested Shares beneficially owned by any holder who has agreed that such Requested Shares shall be sold pursuant to the underwritten offering or pursuant to the exercise of any over-allotment option as described above, such holders will enter into an underwriting agreement with the underwriters and will sell such Requested Shares to the underwriters unless, and except to the extent that, upon written notice to the Company and the managing underwriter or underwriters at least two days prior to the effective date of the registration statement, any such holder withdraws any portion of such Requested Shares. If the underwriters elect to purchase less than all the Requested Shares beneficially owned by holders who have agreed that such Requested Shares shall be sold pursuant to the underwritten offering or pursuant to the exercise of any over-allotment option, the underwriters shall purchase such Requested Shares on a pro rata basis among the Requested Shares that were included in the timely requests from holders of Registrable Securities under this subsection and the Requested Shares requested to be included in the registration statement by other stockholders holding registration rights and who have requested that such shares be sold pursuant to the underwritten offering or pursuant to the exercise of an over-allotment option. Notwithstanding the foregoing, the Company may withdraw any registration statement referred to in this Section 1 without any liability to the holders of Registrable Securities. 1.2. Market Standoff. Each holder of Registrable Securities agrees that if the managing underwriter or underwriters of the offering contemplated by Section 1.1 so request, such holder shall not effect any public sale or distribution of any Registrable Securities being registered thereunder or of any securities convertible into or exchangeable or exercisable for such Registrable Securities being registered thereunder for a period equal to the lesser of (x) the period management of the Company has agreed to lockup and (y) 90 days after the effective date of the registration statement filed in connection with the public offering. 3 1.3. Obligations of the Company. When required under Section 1.1 to use its best efforts to effect the registration of any Registrable Securities, the Company shall, as expeditiously as is reasonably possible: (a) Prepare and file with the SEC a registration statement with respect to such Registrable Securities and such amendments and supplements to such registration statement and the prospectus used in connection therewith as may be necessary to exercise the Company's best efforts to cause such registration statement to become effective at the earliest practicable date and to remain effective for a period of 90 days or until the holders and any underwriter purchasing such Registrable Securities have sold or otherwise disposed of the Registrable Securities registered in such registration statement, whichever is earlier. (b) Furnish to each holder selling Registrable Securities such number of copies of conformed copies of such registration statement and of each such amendment and supplement thereto (with all exhibits) and such number of copies of the prospectus, including a preliminary prospectus, in conformity with the requirements of the Securities Act, and such other documents as such holder may reasonably request in order to facilitate the disposition of Registrable Securities to be sold by such holder pursuant to such registration statement. (c) Exercise the Company's best efforts to register and qualify the Registrable Securities covered by such registration statement under other securities laws or State Securities Laws of such states or jurisdictions where a self-executing exemption is not available and as any seller of such Registrable Securities shall reasonably request, but in any event no fewer than five such states or jurisdictions; provided, however, that the Company shall not be required in connection therewith or as a condition thereto to qualify to do business or to file a general consent to service of process in any such states or jurisdictions (for purposes of this Warrant, the Form U-2 Uniform Consent to Service of Process in effect on the Original Issue Date shall not constitute general consent to service of process). (d) Cause all securities covered by such registration statement to be registered with or approved by such other federal or state governmental agencies or authorities as may be necessary in the opinion of counsel to the Company and counsel to the seller or sellers of securities to enable the seller or sellers thereof to consummate the disposition of such securities. (e) Notify each seller of securities covered by such registration statement at any time when a prospectus relating thereto is required to be delivered under the Securities Act, upon discovery that, or upon the happening of any event as a result of which, the prospectus included in such registration statement, as then in effect, includes an untrue statement of a material fact or omits to state any material fact required to be stated therein or necessary to make the statements therein not misleading, in the light of the circumstances under which they were made, and at the request of any such seller promptly prepare and furnish to it a reasonable number of copies of a supplement to or an amendment of such prospectus as may be necessary so that, as thereafter delivered to the purchasers of such securities, such prospectus shall not include an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statement therein not misleading in the light of the circumstances under which they were made. 4 (f) Comply with all applicable rules and regulations of the SEC, and make available to its securities holders, as soon as reasonably practicable, an earnings statement covering the period of at least twelve months, but not more than eighteen months, beginning with the first full calendar month after the effective date of such registration statement, which earnings statement shall satisfy the provisions of Section 11(a) of the Securities Act and Rule 158 promulgated thereunder, and promptly furnish to each such seller of securities a copy of such earnings statement. (g) Use its best efforts to list all securities covered by such registration statement on any national securities exchange on which securities of the same class and, if applicable, series, covered by such registration statement are then listed or on the Nasdaq Small Cap Market ("Nasdaq") if the securities are reported on Nasdaq. 1.4. Information to be Furnished. It shall be a condition precedent to the obligation of the Company to take any action pursuant to this Section 1 that the holders of Registrable Securities promptly furnish to the Company such information regarding them, the securities of the Company held by them and the intended method of disposition of such securities as the Company shall reasonably request and as shall be required in connection with the Company's obligations under this Section 1. 1.5. Underwritten Offerings. (a) Incidental Underwritten Offerings. If the Company proposes to register any of its securities under the Securities Act as contemplated by Section 1.1 and such securities are to be distributed by or through one or more underwriters, the Company will, if requested by any holder of Registrable Securities, use its best efforts to arrange for such underwriters to include all the securities to be offered and sold by such requesting holder among the securities of the Company to be distributed by such underwriters. The holders of Registrable Securities to be distributed by such underwriters shall be parties to the underwriting agreement between the Company and such underwriters and may, at their option, require that any or all of the representations and warranties by, and the other agreements on the part of, the Company to and for the benefit of such underwriters shall also be made to and for the benefit of such holders of Registrable Securities and that any or all of the conditions precedent to the obligations of such underwriters under such underwriting agreement be conditions precedent to the obligations of such holders of Registrable Securities. Any such requesting holder of Registrable Securities shall not be required to make any representations or warranties to or agreements with the Company other than representations, warranties or agreements regarding such holder, such holder's securities and such holder's intended method of distribution or any other representations required by applicable law. 1.6. Notice. In connection with the preparation and filing of each registration statement under the Securities Act pursuant to this Agreement, the Company shall promptly notify the holders of Registrable Securities included in the Registration Statement and their respective counsel of any stop order issued or threatened by the SEC and take all reasonable actions required to prevent the entry of such stop order or to remove it if entered. 5 1.7. Registration Expenses. All expenses incurred by the Company and the holders of Registrable Securities in complying with this Section 1, including, without limitation, all registration, NASD and filing fees, duplication and printing expenses, travel expenses, fees and disbursements of counsel for the Company or its independent public accountants, reasonable fees and disbursements of counsel for holders of securities included in a Company registration statement and the expense of any special audits incident to or required by any such registration shall be paid by the Company, except that each holder of Registrable Securities shall pay underwriting discounts and commissions attributable to such holder's shares, and transfer taxes on shares held by such holder. 1.8. Indemnification. In the event any of the Common Stock of a holder of Registrable Securities is included in a registration statement pursuant to this Section 1: (a) To the extent permitted by law, the Company will indemnify and hold harmless each holder of Registrable Securities (and its officers, directors, employees, partners and affiliates) selling Registrable Securities, any underwriter (as defined in the Securities Act) with respect to the Registrable Securities, and each person, if any, who controls such holder or underwriter within the meaning of the Securities Act, against any losses, claims, damages or liabilities, to which they may become subject under the Securities Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any untrue or allegedly untrue statement of any material fact contained in such registration statement, including any preliminary prospectus or final prospectus contained therein or any amendments or supplements thereto, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or allegedly necessary to make the statements therein not misleading; and will reimburse each such holder of Registrable Securities (and its officers, directors, employees, partners and affiliates), underwriter or controlling person for any legal or other expenses reasonably incurred by them in connection with investigating or defending any such loss, claim, damage, liability or action; provided, however, that the indemnity agreement contained in this Section 1.8(a) shall not apply to amounts paid in settlement of any such loss, claim, damage, liability or action if such settlement is effected without the written consent of the Company, which shall not be unreasonably withheld, nor shall the Company be liable under this Section 1.8(a) to such a holder, underwriter or controlling person for any such loss, claim, damage, liability or action to the extent that it arises out of, or is based upon, an untrue statement or allegedly untrue statement or omission or alleged omission made in connection with such registration statement, preliminary prospectus, final prospectus, or amendments or supplements thereto, in reliance upon and in conformity with information furnished in writing expressly for use in connection with such registration by such holder, such underwriter or such controlling person. (b) To the extent permitted by law, each holder selling Registrable Securities pursuant to this Section 1 will indemnify and hold harmless the Company, each of its directors, officers and employees, each person, if any, who controls the Company within the meaning of the Securities Act, and any underwriter for the Company (within the meaning of the Securities Act) against any losses, claims, damages or liabilities to which the Company or any 6 such person or underwriter may become subject, under the Securities Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereto) arise out of, or are based upon, any untrue or allegedly untrue statement of any material fact contained in such registration statement, including any preliminary prospectus or final prospectus contained therein or any amendments or supplements thereto, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or allegedly necessary to make the statements therein not misleading, in each case to the extent that such untrue statement or allegedly untrue statement or omission or alleged omission was made in such registration statement, preliminary prospectus, or amendments or supplements thereto in reliance upon and in conformity with information furnished in writing by such holder expressly for use in connection with such registration; provided, however, that the indemnity agreement contained in this Section 1.8(b) shall not apply to amounts paid in settlement of any such loss, claim, damage, liability or action if such settlement is effected without the written consent of such holder, which shall not be unreasonably withheld; and each such holder will reimburse the Company or any such person or underwriter for any legal or other expenses reasonably incurred by the Company or any such person or underwriter in connection with investigating or defending any such loss, claim, damage, liability or action. (c) Promptly after receipt by an indemnified party under this Section 1.8 of notice of the commencement of any action, such indemnified party will, if a claim in respect thereof is to be made against any indemnifying party under this Section 1.8, notify the indemnifying party in writing of the commencement thereof and generally summarize such action. The indemnifying party shall have the right to participate in and to assume the defense thereof with counsel mutually satisfactory to the parties; provided that each indemnified party shall have the right to employ its own counsel in any such case, but the fees and expense of such counsel shall be at the expense of such indemnified party unless the employment of such counsel shall have been authorized in writing by the indemnifying party in connection with the defense of such action or the indemnifying party shall not have employed counsel to have charge of the defense of such action or such indemnified party or the indemnified parties shall have reasonably concluded that there may be defenses available to it or them that are different from or additional to those available to the indemnifying party (in which case the indemnifying party shall not have the right to direct the defense of such action on behalf of the indemnified party or parties) in any of which events the fees and expenses of such counsel shall be borne by the indemnifying parties. The failure of any indemnified party to give notice as provided herein shall not relieve the indemnifying party of its obligations under this Section 1.8, except to the extent that the indemnifying party is actually and materially prejudiced by such failure to give notice. 2. Sale or Exercise Without Registration. If, at the time of any exercise, transfer or surrender for exchange of a Warrant or Common Stock (or Other Securities) previously issued upon the exercise of Warrants, such Warrant or Common Stock (or Other Securities) shall not be registered under the Securities Act, the Company may require, as a condition of allowing such exercise, transfer or exchange, that the holder or transferee of such Warrant or Common Stock (or Other Securities), as the case may be, furnish to the Company a satisfactory opinion of counsel to the effect that such exercise, transfer or exchange may be made without registration under the Securities Act, provided that nothing contained in this Section 2 shall relieve the Company from complying with any request for registration pursuant to Section 1 hereof. 7 3. Exercise of Warrant; Partial Exercise; Cashless Exercise; Redemption. 3.1. Exercise in Full. Subject to the provisions hereof, this Warrant may be exercised in full by the holder hereof by surrender of this Warrant, with the form of subscription attached hereto as Schedule I ("Subscription Form") duly executed by such holder, to the Company at its principal office accompanied by payment, in cash or by certified or official bank check payable to the order of the Company, in the amount obtained by multiplying the number of shares of Common Stock called for on the face of this Warrant, as adjusted herein, by the Purchase Price. 3.2. Partial Exercise. Subject to the provisions hereof, this Warrant may be exercised in part by the holder hereof by surrender of this Warrant in the manner and at the place provided in Section 3.1 except that the amount payable by the holder upon any partial exercise shall be the amount obtained by multiplying (a) the number of shares of Common Stock, as adjusted herein, designated by the holder in the Subscription Form, by (b) the Purchase Price. Upon any such partial exercise, the Company at its expense will forthwith issue and deliver to or upon the order of the holder hereof a new Warrant or Warrants of like tenor, in the name of the holder hereof or as such holder (upon payment by such holder of any applicable transfer taxes) may request, calling in the aggregate on the face or faces thereof for the number of shares of Common Stock equal (without giving effect to any adjustment therein) to the number of such shares called for on the face of this Warrant minus the number of such shares designated by the holder in the Subscription Form. 3.3. Exercise by Surrender of Warrant. In addition to the method of payment set forth in Sections 3.1 and 3.2 and in lieu of any cash payment required thereunder, the holder of the Warrant shall have the right at any time and from time to time to exercise the Warrants in full or in part by surrendering the Warrant Certificate in the manner and at the place specified in Section 3.1 as payment of the aggregate Purchase Price. The number of shares subject to the portion of the Warrant to be surrendered in payment of the aggregate Exercise Price for the shares to be purchased shall be determined by multiplying the number of shares to be purchased by the Purchase Price, and then dividing the product thereof by an amount equal to the Market Price (as defined below). Upon any such partial exercise, the Company, at its expense will forthwith issue and deliver to or upon the order of the holder hereof a new Warrant of like tenor, in the name of such holder or as such holder may designate (upon payment by such holder of any applicable transfer taxes), calling in the aggregate on the face thereof for the number of shares of Common Stock equal (without giving effect to any adjustment therein) to (A) the number of shares called for on the face of this Warrant minus (B) the sum of (i) the number of shares so surrendered by the holder pursuant to this Section plus (ii) the number of shares issued in the exchange. Solely for the purposes of this paragraph, Market Price shall be calculated as the average of the Market Prices for each of the ten (10) trading days preceding the date which the form of election attached hereto is deemed to have been sent to the Company ("Notice Date"). 8 3.4. Definition of Market Price. As used herein, the phrase "Market Price" at any date shall be deemed to be (i) if the principal trading market for such securities is an exchange, the last reported sale price, as officially reported on any consolidated tape, (ii) if the principal market for such securities is the over-the-counter market, the closing bid price on such date as reported by Nasdaq or, if there is no closing bid price reported on Nasdaq or if the security is not quoted on Nasdaq, then the high bid price as set forth in the National Quotation Bureau sheet listing such securities for such day. Notwithstanding the foregoing, if there is no reported closing price or high bid price, as the case may be, on the date next preceding the event requiring an adjustment hereunder, then the Market Price shall be determined as of the latest date prior to such day for which such closing price or high bid price is available, or if the securities are not quoted on Nasdaq, as determined in good faith by resolution of the Board of Directors of the Company, based on the best information available to it. 3.5. Company to Reaffirm Obligations. The Company will, at the time of any exercise of this Warrant, upon the request of the holder hereof, acknowledge in writing its continuing obligation to afford to such holder any rights (including, without limitation, any right to registration of the shares of Common Stock or Other Securities issued upon such exercise) to which such holder shall continue to be entitled after such exercise in accordance with the provisions of this Warrant, provided that if the holder of this Warrant shall fail to make any such request, such failure shall not affect the continuing obligation of the Company to afford such holder any such rights. 3.6. Redemption. The Warrant and/or the Common Stock issued upon the exercise of the Warrant shall be subject to a put option by Bidco on the terms contained in this section (the "Put Option"). Bidco, in its sole discretion, shall have the right and option to have the Warrant redeemed by the Company at the greater of: (i) $165,000.00 or (ii) the difference between the Purchase Price and the then current Fair Market Value (the "Warrant Put Price"); and Bidco, in its sole discretion, shall have the right and option to have all of the Common Stock issued upon the exercise of the Warrant redeemed by the Company at the greater of: (i) $165,000.00 or (ii) the then current Fair Market Value of such Common Stock (the "Stock Put Price") (in each respective case the "Put Price"). In the event that the Put Option is exercised and Bidco has partially exercised this Warrant such that it is a Holder of both Warrants and Common Stock, the Put Price shall be the sum of the number of unexercised Warrants over the original number of Warrants multiplied by the amount of the Warrant Put Price had the Warrant remained completely unexercised, plus the number of Shares issued upon exercise over the number of Shares originally Issuable under the Warrant multiplied by the amount of the Stock Put Price had the Warrant been completely exercised. In making such determination adjustments to the number of Warrants and Shares provided for in the Warrant shall be taken into account. For purposes of this Section 3.6, the term "fair market value" of such Common Stock shall mean the average trading price for the Common Stock over the ten (10) days immediately prior to the date of the Put Notice reported on the Nasdaq, or if the Common Stock is not reported on the Nasdaq then as reported on any nationally recognized securities exchange, or if not reported on any nationally recognized securities exchange then as reported on the over the counter market. Upon provision by Bidco of written notice to the Company of Bidco's exercise of the Put Option (the "Put Notice"), the Company shall pay to Bidco the Put Price in cash. Bidco's Put Option shall not be exercisable until the earlier of: (x) eighteen (18) months following a registration of the Common Stock by filing a registration statement in compliance with the Securities Act; or (y) June 30, 2000; provided, however, that Bidco agrees to provide the Company notice six months prior to the exercise of the Put Option (the "Intent Notice"), which Intent Notice shall be non-binding on Bidco such that Bidco shall not be required to actually exercise the Put Option and that Bidco shall have absolutely no liability or obligation whatsoever for costs, expenses or fees, of any nature, incurred by the Company, its representatives or agents in reliance upon or because of the Intent Notice. 9 4. Delivery of Stock Certificates, etc., on Exercise. As soon as practicable after the exercise of this Warrant in full or in part, and in any event within 10 days thereafter, the Company at its expense (including the payment by it of any applicable issue taxes) will cause to be issued in the name of and delivered to the holder hereof, or as such holder (upon payment by such holder of any applicable transfer taxes) may direct, a certificate or certificates for the number of fully paid and non-assessable shares of Common Stock (or Other Securities) to which such holder shall be entitled upon such exercise, plus, in lieu of any fractional share to which such holder would otherwise be entitled, cash equal to such fraction multiplied by the then current Market Price of one full share, together with any other stock or other securities and property (including cash, where applicable) to which such holder is entitled upon such exercise pursuant to Section 5 or otherwise. 5. Adjustment for Dividends in Other Stock, Property, etc.; Reclassification, etc. In case at any time or from time to time after the Original Issue Date the holders of Common Stock (or Other Securities) shall have received, or (on or after the record date fixed for the determination of stockholders eligible to receive) shall have become entitled to receive, without payment therefor (a) other or additional stock or other securities or property (other than cash) by way of dividend, or (b) other or additional (or less) stock or other securities or property other than by way of spin-off, split-up, reclassification, recapitalization, combination of shares or similar corporate rearrangement, then, and in each such case, the holder of this Warrant, upon the exercise hereof as provided in Section 3, shall be entitled to receive the amount of stock and other securities and property which such holder would hold on the date of such exercise if on the Original Issue Date he had been the holder of record of the number of shares of Common Stock called for on the face of this Warrant and had thereafter, during the period from the Original Issue Date to and including the date of such exercise, retained such shares and all such other or additional (or less) stock and other securities and property receivable by him as aforesaid during such period, giving effect to all adjustments called for during such period by Sections 6 and 7 hereof. 6. Reorganization, Consolidation, Merger, etc. In case the Company after the Original Issue Date shall (a) effect a reorganization, (b) consolidate with or merge into any other person, or (c) transfer all or substantially all of its properties or assets to any other person under any plan or arrangement contemplating the dissolution of the Company, then, in each such case, the holder of this Warrant, upon the exercise hereof as provided in Section 3 at any time after the consummation of such reorganization, consolidation or merger or the effective date of such dissolution, as the case may be, shall be entitled to receive (and the Company shall be entitled to deliver), in lieu of the Common Stock (or Other Securities) issuable upon such exercise prior to such consummation or such effective date, the stock and other securities and property (including cash) to which such holder would have been entitled upon such consummation or in connection with such dissolution, as the case may be, if such holder had so exercised this Warrant immediately prior thereto, all subject to further adjustment thereafter as provided in Sections 5 and 7 hereof. 10 In case the Company after the Original Issue Date shall (i) subdivide the outstanding Common Stock, (ii) combine the outstanding Common Stock into a smaller number of shares, or (iii) issue any Other Securities by reclassification of the Common Stock (including any such reclassification in connection with a consolidation or merger in which the Company is the continuing corporation), then the number and kind of shares of Common Stock and/or Other Securities issuable, at the time of the effective date of such subdivision, combination or reclassification shall be proportionately adjusted so that the holder of this Warrant after such time shall be entitled to receive upon exercise of its Warrant the aggregate number and kind of shares of Common Stock and/or Other Securities which, if its Warrant had been exercised immediately prior to such time, it would have owned upon such exercise and been entitled to receive by virtue of such dividend, subdivision, combination or reclassification, all subject to further adjustment thereafter as provided in Sections 5 and 7 hereof. 7. Other Adjustments. 7.1. General. Except as provided in Section 7.4, in case the Company shall issue or sell shares of its Common Stock after the Original Issue Date for a consideration per share less than the Purchase Price in effect pursuant to the terms of this Warrant at the time of issuance or sale of such additional shares, then the Purchase Price in effect hereunder shall simultaneously with such issuance or sale be reduced to a price determined by dividing (1) an amount equal to (a) the total number of shares of Common Stock outstanding immediately prior to such issuance or sale multiplied by the Purchase Price in effect hereunder at the time of such issuance and sale, plus (b) the consideration, if any, received by the Company upon such issuance or sale, by (2) the total number of shares of Common Stock outstanding immediately after such issuance or sale of such additional shares; and the number of shares of Common Stock which may be purchased upon exercise of this Warrant shall be increased so that the aggregate amount to be paid upon full exercise of this Warrant, after giving effect to each reduction in the Purchase Price, shall not be reduced. 7.2. Convertible Securities. Except as provided in Section 7.4, in case the Company shall issue or sell any securities convertible into Common Stock of the Company ("Convertible Securities") after the Original Issue Date, there shall be determined the price per share for which Common Stock is issuable upon the conversion or exchange thereof, such determination to be made by dividing (a) the total amount received or receivable by the Company as consideration for the issue or sale of such Convertible Securities, plus the minimum aggregate amount of additional consideration, if any, payable to the Company upon the conversion or exchange thereof, by (b) the maximum number of shares of Common Stock issuable upon the conversion or exchange of all of such Convertible Securities. 11 If the price per share so determined shall be less than the applicable Purchase Price, then such issue or sale shall be deemed to be an issue or sale for cash (as of the date of issue or sale of such Convertible Securities) of such maximum number of shares of Common Stock at the price per share so determined, provided that, if such Convertible Securities shall by their terms provide for an increase or increases, with the passage of time, in the amount of additional consideration, if any, to the Company, or in the rate of exchange, upon the conversion or exchange thereof, the adjusted Purchase Price shall, forthwith upon any such increase becoming effective, be readjusted to reflect the same, and provided further, that upon the expiration of such rights of conversion or exchange of such Convertible Securities, if any thereof shall not have been exercised, the adjusted Purchase Price shall forthwith be readjusted and thereafter be the price which it would have been had an adjustment been made on the basis that the only shares of Common Stock so issued or sold were issued or sold upon the conversion or exchange of such Convertible securities, and that they were issued or sold for the consideration actually received by the Company upon such conversion or exchange, plus the consideration, if any, actually received by the Company for the issue or sale of all of such Convertible Securities which shall have been converted or exchanged; provided that, notwithstanding the foregoing, no readjustment shall be effectuated hereunder with respect to any shares of Common Stock already issued upon exercise of the Warrant. 7.3. Rights and Options. Except as provided in Section 7.4, in case the Company shall grant any rights or options to subscribe for, purchase or otherwise acquire Common Stock after the Original Issue Date, there shall be determined the price per share for which Common Stock is issuable upon the exercise of such rights or options, such determination to be made by dividing (a) the total amount, if any, received or receivable by the Company as consideration for the granting of such rights or options, plus the minimum aggregate amount of additional consideration payable to the Company upon the exercise of such rights or options, by (b) the maximum number of shares of Common Stock of the Company issuable upon the exercise of such rights or options. If the price per share so determined shall be less than the applicable Purchase Price, then the granting of such rights or options shall be deemed to be an issue or sale for cash (as of the date of the granting of such rights or options) of such maximum number of shares of Common Stock at the price per share so determined, provided that, if such rights or options shall by their terms provide for an increase or increases, with the passage of time, in the amount of additional consideration payable to the Company upon the exercise thereof, the adjusted purchase price per share shall, forthwith upon any such increase becoming effective, be readjusted to reflect the same, and provided, further, that upon the expiration of such rights or options, if any thereof shall not have been exercised, the adjusted Purchase Price shall forthwith be readjusted and thereafter be the price which it would have been had an adjustment been made on the basis that the only shares of Common Stock so issued or sold were those issued or sold upon the exercise of such rights or options and that they were issued or sold for the consideration actually received by the Company upon such exercise, plus the consideration, if any, actually received by the Company for the granting of all such rights or options, whether or not exercised. 7.4. Exceptions. The provisions of Sections 7.1, 7.2 and 7.3 do not apply to (i) the exercise of any Warrant,(ii) the exercise of any right or option with respect to which an adjustment shall have been made at the time of the issuance of such right or option pursuant to Section 7.3, (iii) conversion or exchange of any Convertible Security with respect to which an adjustment shall have been made at the time of the issuance of such Convertible Security pursuant to Section 7.2, (iv) any transaction with respect to which an adjustment shall have been made pursuant to Sections 5 or 6; (v) the issuance or sale of any Options or Convertible Securities in connection with any future debt financings of $5,000,000 or more of the Company or any of its subsidiaries; (vi) the issuance or sale of any Common Stock pursuant to the exercise or conversion of any option, right or Convertible Security that was issued on or prior to the Original Issue Date; and (vii) any public offering of Common Stock that results in at least $4,000,000 in net proceeds to the Company. 12 8. Further Assurances. The Company will take all such action as may be necessary or appropriate in order that the Company may validly and legally issue fully paid and non-assessable shares of stock upon the exercise of the Warrants. 9. Accountants' Certificate as to Adjustments. In each case of any adjustment or readjustment in the shares of Common Stock (or Other Securities) issuable upon the exercise of the Warrant, the Company at its expense will promptly cause the Company's regularly retained auditor to compute such adjustment or readjustment in accordance with the terms of the Warrant and prepare a certificate setting forth such adjustment or readjustment and showing in detail the facts upon which such adjustment or readjustment is based, and the number of shares of Common Stock outstanding or deemed to be outstanding. The Company will forthwith mail a copy of each such certificate to the holder of this Warrant. 10. Notices of Record Date, etc. In the event of. (a) any taking by the Company of a record of the holders of any class of securities for the purpose of determining the holders thereof who are entitled to receive any dividend (other than a cash dividend payable out of earned surplus of the Company) or other distribution, or any right to subscribe for, purchase or otherwise acquire any shares of stock of any class or any other securities or property, or to receive any other right, or (b) any capital reorganization of the Company, any reclassification or recapitalization of the capital stock of the Company or any transfer of all or substantially all the assets of the Company to or consolidation or merger of the Company with or into any other person, or (c) any voluntary or involuntary dissolution, liquidation or winding-up of the Company, or (d) any proposed issue or grant by the Company of any shares of stock of any class or any other securities, or any right or option to subscribe for, purchase or otherwise acquire any shares of stock of any class or any other securities (other than the issue of Common Stock on the exercise of the Warrant), then and in each such event the Company will mail or cause to be mailed to each holder of the Warrant a notice specifying (i) the date on which any such record is to be taken for the purpose of such dividend, distribution or right, and stating the amount and character of such dividend, distribution or right, (ii) the date on which any such reorganization, reclassification, recapitalization, transfer, consolidation, merger, dissolution, liquidation or winding-up is to take place, and the time, if any, as of which the holders of record of Common Stock (or Other Securities) shall be entitled to exchange their shares of Common Stock (or Other Securities) for securities or other property deliverable upon such reorganization, reclassification, recapitalization, transfer, consolidation, merger, dissolution, liquidation or winding-up, and (iii) the amount and character of any stock or other securities, or rights or options with respect thereto, proposed to be issued or granted, the date of such proposed issue or grant and the persons or class of persons to whom such proposed issue or grant is to be offered or made. Such notice shall be mailed at least 20 days prior to the date therein specified. 13 11. Reservation of Stock, etc., Issuable on Exercise of Warrants. The Company will at all times reserve and keep available, solely for issuance and delivery upon the exercise of the Warrant, all shares of Common Stock (or Other Securities) from time to time issuable upon the exercise of the Warrant. 12. Listing on Securities Exchanges; Registration. If the Company at any time shall list any Common Stock on any national securities exchange and shall register such Common Stock under the Securities Exchange Act of 1934 (as then in effect, or any similar statute then in effect), the Company will, at its expense, simultaneously list on such exchange, upon official notice of issuance upon the exercise of the Warrant, and maintain such listing of all shares of Common Stock from time to time issuable upon the exercise of the Warrant; and the Company will so list on any national securities exchange, will so register and will maintain such listing of, any Other Securities if and at the time that any securities of like class or similar type shall be listed on such national securities exchange by the Company. 13. Exchange of Warrants. Subject to the provisions of Section 2 hereof, upon surrender for exchange of the Warrant, properly endorsed, to the Company, the Company at its own expense will issue and deliver to or upon the order of the holder thereof a new Warrant or Warrants of like tenor, in the name of such holder or as such holder (upon payment by such holder of any applicable transfer taxes) may direct, calling in the aggregate on the face or faces thereof for the number of shares of Common Stock called for on the face or faces of the Warrant or Warrants so surrendered. 14. Replacement of Warrant. Upon receipt of evidence reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of the Warrant and, in the case of any such loss, theft or destruction, upon delivery of an indemnity agreement reasonably satisfactory in form and amount to the Company or, in the case of any such mutilation, upon surrender and cancellation of the Warrant, the Company at its expense will execute and deliver, in lieu thereof, a new Warrant of like tenor. 15. Warrant Agent. The Company may, by written notice to each holder of a Warrant, appoint an agent having an office in New York, New York, for the purpose of issuing Common Stock (or Other Securities) upon the exercise of the Warrants pursuant to Section 3, exchanging Warrants pursuant to Section 13, and replacing Warrants pursuant to Section 14, or any of the foregoing, and thereafter any such issuance, exchange or replacement, as the case may be, shall be made at such office by such agent. 14 16. Negotiability, etc. This Warrant is issued upon the following terms, to all of which each holder or owner hereof by the taking hereof consents and agrees: (a) subject to the provisions hereof, title to this Warrant may be transferred by endorsement (by the holder hereof executing the form of assignment attached hereto as (Schedule II) and delivery in the same manner as in the case of a negotiable instrument transferable by endorsement and delivery; (b) subject to the foregoing, any person in possession of this Warrant properly endorsed is authorized to represent himself as absolute owner hereof and is empowered to transfer absolute title hereto by endorsement and delivery hereof to a bona fide purchaser hereof for value; each prior taker or owner waives and renounces all of his equities or rights in this Warrant in favor of each such bona fide purchaser and each such bona fide purchaser shall acquire absolute title hereto and to all rights represented hereby; and (c) until this Warrant is transferred on the books of the Company, the Company may treat the registered holder hereof as the absolute owner hereof for all purposes, notwithstanding any notice to the contrary. 17. Notices, etc. All notices and other communications from the Company to the holder of this Warrant shall be mailed by first class registered or certified mail, postage prepaid, at such address as may have been furnished to the Company in writing by such holder, or, until an address is so furnished, to and at the address of the last holder of this Warrant who has so furnished an address to the Company. 18. Miscellaneous. This Warrant and any term hereof may be changed, waived, discharged or terminated only by an instrument in writing signed by the party against which enforcement of such change, waiver, discharge or termination is sought. This Warrant is being delivered in the State of Ohio and shall be construed and enforced in accordance with and governed by the laws of such State. The headings in this Warrant are for purposes of reference only, and shall not limit or otherwise affect any of the terms hereof. 19. Assignability. Subject to the transfer conditions referred to in the legend endorsed hereon, this Warrant is fully assignable at any time upon surrender of this Warrant with a properly executed Assignment (in the form of Schedule II hereto) at the principal office of the Company. Dated: August 20, 1998 HOME RETAIL HOLDINGS, INC. By: /S/ DAVID DANOVITCH -------------------------- President [Corporate Seal] Attest: /S/ GREG DUKOFF - -------------------- Secretary 15 SCHEDULE I FORM OF SUBSCRIPTION (To be signed only upon exercise or surrender of each Warrant) To: HOME RETAIL HOLDINGS, INC. The undersigned, the holder of the within Warrant, hereby irrevocably elects to exercise the purchase right represented by such Warrant for, and to purchase thereunder, * shares of Common Stock of HOME RETAIL HOLDINGS, INC., and herewith [use version (a) in the event of the payment of cash purchase price] (a) makes payment of $_________ therefor, and requests that the certificates for such shares be issued in the name of, and delivered to, __________ , whose address is __________________________ or [use version (b) in the event of a cashless exercise] (b) surrenders that portion of the Warrant representing ____ shares of Common Stock, and requests that the certificates for such shares be issued in the name of, and delivered to ___________________, whose address is_____________________. To the extent that the exercise hereunder is for less than all of the shares of Common Stock represented by the Warrant, the undersigned hereby requests that a new Warrant for the remaining amount of shares of Common Stock be issued to __________________ whose address is______________________________. Dated: _____________________________________ (Signature must conform in all respects to name of holder as specified on the face of the Warrant) (Address) _____________________________________ _____________________________________ Insert here the number of shares called for on the face of the Warrant (or, in the case of a partial exercise, the portion thereof as to which the Warrant is being exercised), in either case without making any adjustment for additional Common Stock or any other stock or other securities or property or cash which, pursuant to the adjustment provisions of the Warrant, may be deliverable upon exercise. 16 SCHEDULE II FORM OF ASSIGNMENT (To be signed only upon transfer of Warrant) For value received, the undersigned hereby sells, assigns and transfers unto _________________ the right represented by the within Warrant to purchase ____________ shares of Common Stock of Home Retail Holdings, Inc., to which the within Warrant relates, and appoints _____________ as attorney to transfer such right on the books of Home Retail Holdings, Inc. with full power of substitution in the premises. Dated: ___________________________ (Signature must conform in all respects to name of holder as specified on the face of the Warrant) (Address) _____________________________________________________ _____________________________________________________ _______________________________ (Signature guaranteed by a Bank or Trust Company having its principal office in New York City or by a Member Firm of the New York or American Stock Exchange) 17 EX-4.5 6 EXHIBIT 4.5 Void after June 30, 2003 This Warrant and any shares acquired upon the exercise of this Warrant have not been registered under the Securities Act of 1933. This Warrant and such shares may not be sold or transferred in the absence of such registration or an exemption therefrom under said Act and no transfer of this Warrant or such shares shall be valid or effective unless and until such conditions shall have been complied with. HOME RETAIL HOLDINGS, INC. COMMON STOCK PURCHASE WARRANT HOME RETAIL HOLDINGS, INC. (the "Company"), having its principal office at c/o Cambridge Partners, LLC, 535 Madison Avenue, 19th Floor, New York, New York 10022 hereby certifies that, for value received, Greenfield Commercial Credit, L.L.C., a Michigan corporation ("Greenfield") or assigns, is entitled, subject to the terms set forth below, to purchase from the Company at any time on or from time to time after August 20, 1998 and before 5:00 P.M., New York City time, on June 30, 2003 (the "Expiration Date") 40,602 fully paid and non-assessable shares of Common Stock of the Company, at the price per share of the Purchase Price. The number and character of such shares of Common Stock and the Purchase Price as hereinafter defined are subject to adjustment as provided herein. This Warrant is one of the Common Stock Purchase Warrants (the "Warrants") originally issued to Greenfield as of the Original Issue Date (as defined below) and evidencing the right to purchase an aggregate of 40,402 shares of Common Stock of the Company (representing approximately 2% of the Company's Common Stock and Class B Common Stock on a fully diluted basis as of the Original Issue Date), subject to adjustment as provided herein. As used herein the following terms, unless the context otherwise requires, have the following respective meanings: (a) The term "Company" includes any corporation which shall succeed to or assume the obligations of the Company hereunder. (b) The term "Common Stock" means the Class A Common Stock, $.01 par value, of the Company and its successors. (c) The "Original Issue Date" is August 20, 1998, the date as of which the Warrant was first issued. (d) The term "Other Securities" refers to any stock (other than Common Stock) and other securities of the Company or any other person (corporate or otherwise) which the holder of the Warrant at any time shall be entitled to receive, or shall have received, upon the exercise of the Warrant, in lieu of or in addition to Common Stock, or which at any time shall be issuable or shall have been issued in exchange for or in replacement of Common Stock or Other Securities pursuant to Section 6 or otherwise. (e) The term "Purchase Price" shall be 165% of the initial price to the public pursuant to which the Company sells more than $5 million of Common Stock (taking into account gross proceeds, not net proceeds), as set forth on the cover page of the prospectus contained in the registration statement pertaining to such offering, as such price may be adjusted pursuant to the terms hereof. (f) The terms "registered" and "registration" refer to a registration effected by filing a registration statement in compliance with the Securities Act, to permit the disposition of Common Stock (or Other Securities) issued or issuable upon the exercise of Warrants, and any post-effective amendments and supplements filed or required to be filed to permit any such disposition. (g) The term "Registrable Securities" shall mean the shares of Common Stock or Other Securities issuable upon exercise of the Warrants, excluding Common Stock or other Securities that (a) have been registered under the Securities Act pursuant to an effective registration statement filed thereunder and disposed of in accordance with such registration statement or (b) are eligible for sale under Rule 144(k) under the Securities Act, or have been sold pursuant to Rule 144 under the Securities Act. (h) The term "Registration Period" shall mean the period commencing immediately after the closing of the Company's first public offering of securities registered under the Securities Act that takes place after the Original Issue Date and ending on the earlier of the third anniversary thereof and the Expiration Date. (i) The term "Securities Act" means the Securities Act of 1933 as the same shall be in effect at the time. 1. Registration Rights. 1.1. Incidental Registration. During the Registration Period, each holder of Registrable Securities will have a right to have its Registrable Securities included in registration statements filed by the Company on general registration forms under the Securities Act, except as otherwise provided herein. The Company will notify each such holder in writing (the "Company Notice") promptly after making the decision to file a registration statement under the Securities Act with respect to the proposed sale of the Company's equity securities (except with respect to registration statements filed on Forms S-4 or S-8 or such others in similar form then in effect under the Securities Act), specifying in the Company Notice the form of registration statement, the number of shares of securities the Company proposes to register, the name of the managing underwriter or underwriters (if any) and the general terms and conditions of the proposed registration and sale. Subject to Section 1.6 and the remainder of this Section 1.1, if requested by any holder of Registrable Securities in a writing (the "Investor Notice"), delivered to the Company not later than 30 days after the Company gives the Company Notice, to include in such registration statement Registrable Securities (the "Requested Shares"), the Company will use its best efforts to include the Requested Shares in the registration statement, 2 and, if the proposed sale is to be underwritten, to cause the underwriters of securities to be sold by the Company in such registration statement to purchase such Requested Shares. In the event that any registration pursuant to this Section 1.1 shall be an underwritten offering of securities of the Company, any request by such holders pursuant to this Section 1.1 to register the Requested Shares, may, but need not, specify that such shares are to be included in the underwriting on the same terms and conditions as the securities, if any, otherwise being sold through underwriters under such registration. In the event of an underwritten offering by the Company, such notice shall also specify as to whether such holder of Registrable Securities desires that any of such Requested Shares to be included in any such registration statement be subject to any over-allotment option granted the underwriters of such offering. No holder shall be required to have its Requested Shares be part of any underwritten offering and/or subject to any over-allotment option granted any underwriter by the Company. Notwithstanding the foregoing, if the managing underwriter or underwriters shall inform the Company of its opinion, at least 15 days prior to the date that the registration statement becomes effective, that part or all the Requested Shares be excluded from the registration statement on the ground that the inclusion of such Requested Shares will adversely affect the orderly sales and distribution of the Common Stock being sold, the Company shall include first all securities to be sold by the Company for its own account and then all securities (including the Requested Shares) to holders which have the right to require that their securities be included in the registration on a pro rata basis. If the underwriters agree to purchase any of the Requested Shares beneficially owned by any holder who has agreed that such Requested Shares shall be sold pursuant to the underwritten offering or pursuant to the exercise of any over-allotment option as described above, such holders will enter into an underwriting agreement with the underwriters and will sell such Requested Shares to the underwriters unless, and except to the extent that, upon written notice to the Company and the managing underwriter or underwriters at least two days prior to the effective date of the registration statement, any such holder withdraws any portion of such Requested Shares. If the underwriters elect to purchase less than all the Requested Shares beneficially owned by holders who have agreed that such Requested Shares shall be sold pursuant to the underwritten offering or pursuant to the exercise of any over-allotment option, the underwriters shall purchase such Requested Shares on a pro rata basis among the Requested Shares that were included in the timely requests from holders of Registrable Securities under this subsection and the Requested Shares requested to be included in the registration statement by other stockholders holding registration rights and who have requested that such shares be sold pursuant to the underwritten offering or pursuant to the exercise of an over-allotment option. Notwithstanding the foregoing, the Company may withdraw any registration statement referred to in this Section 1 without any liability to the holders of Registrable Securities. 1.2. Market Standoff. Each holder of Registrable Securities agrees that if the managing underwriter or underwriters of the offering contemplated by Section 1.1 so request, such holder shall not effect any public sale or distribution of any Registrable Securities being registered thereunder or of any securities convertible into or exchangeable or exercisable for such Registrable Securities being registered thereunder for a period equal to the lesser of (x) the period management of the Company has agreed to lockup and (y) 90 days after the effective date of the registration statement filed in connection with the public offering. 3 1.3. Obligations of the Company. When required under Section 1.1 to use its best efforts to effect the registration of any Registrable Securities, the Company shall, as expeditiously as is reasonably possible: (a) Prepare and file with the SEC a registration statement with respect to such Registrable Securities and such amendments and supplements to such registration statement and the prospectus used in connection therewith as may be necessary to exercise the Company's best efforts to cause such registration statement to become effective at the earliest practicable date and to remain effective for a period of 90 days or until the holders and any underwriter purchasing such Registrable Securities have sold or otherwise disposed of the Registrable Securities registered in such registration statement, whichever is earlier. (b) Furnish to each holder selling Registrable Securities such number of copies of conformed copies of such registration statement and of each such amendment and supplement thereto (with all exhibits) and such number of copies of the prospectus, including a preliminary prospectus, in conformity with the requirements of the Securities Act, and such other documents as such holder may reasonably request in order to facilitate the disposition of Registrable Securities to be sold by such holder pursuant to such registration statement. (c) Exercise the Company's best efforts to register and qualify the Registrable Securities covered by such registration statement under other securities laws or State Securities Laws of such states or jurisdictions where a self-executing exemption is not available and as any seller of such Registrable Securities shall reasonably request, but in any event no fewer than five such states or jurisdictions; provided, however, that the Company shall not be required in connection therewith or as a condition thereto to qualify to do business or to file a general consent to service of process in any such states or jurisdictions. (d) Cause all securities covered by such registration statement to be registered with or approved by such other federal or state governmental agencies or authorities as may be necessary in the opinion of counsel to the Company and counsel to the seller or sellers of securities to enable the seller or sellers thereof to consummate the disposition of such securities. (e) Notify each seller of securities covered by such registration statement at any time when a prospectus relating thereto is required to be delivered under the Securities Act, upon discovery that, or upon the happening of any event as a result of which, the prospectus included in such registration statement, as then in effect, includes an untrue statement of a material fact or omits to state any material fact required to be stated therein or necessary to make the statements therein not misleading, in the light of the circumstances under which they were made, and at the request of any such seller promptly prepare and furnish to it a reasonable number of copies of a supplement to or an amendment of such prospectus as may be necessary so that, as thereafter delivered to the purchasers of such securities, such prospectus shall not include an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statement therein not misleading in the light of the circumstances under which they were made. 4 (f) Comply with all applicable rules and regulations of the SEC, and make available to its securities holders, as soon as reasonably practicable, an earnings statement covering the period of at least twelve months, but not more than eighteen months, beginning with the first full calendar month after the effective date of such registration statement, which earnings statement shall satisfy the provisions of Section 11(a) of the Securities Act and Rule 158 promulgated thereunder, and promptly furnish to each such seller of securities a copy of such earnings statement. (g) Use its best efforts to list all securities covered by such registration statement on any national securities exchange on which securities of the same class and, if applicable, series, covered by such registration statement are then listed or on the Nasdaq Small Cap Market ("Nasdaq") if the securities are reported on Nasdaq. 1.4. Information to be Furnished. It shall be a condition precedent to the obligation of the Company to take any action pursuant to this Section 1 that the holders of Registrable Securities promptly furnish to the Company such information regarding them, the securities of the Company held by them and the intended method of disposition of such securities as the Company shall reasonably request and as shall be required in connection with the Company's obligations under this Section 1. 1.5. Underwritten Offerings. (a) Incidental Underwritten Offerings. If the Company proposes to register any of its securities under the Securities Act as contemplated by Section 1.1 and such securities are to be distributed by or through one or more underwriters, the Company will, if requested by any holder of Registrable Securities, use its best efforts to arrange for such underwriters to include all the securities to be offered and sold by such requesting holder among the securities of the Company to be distributed by such underwriters. The holders of Registrable Securities to be distributed by such underwriters shall be parties to the underwriting agreement between the Company and such underwriters and may, at their option, require that any or all of the representations and warranties by, and the other agreements on the part of, the Company to and for the benefit of such underwriters shall also be made to and for the benefit of such holders of Registrable Securities and that any or all of the conditions precedent to the obligations of such underwriters under such underwriting agreement be conditions precedent to the obligations of such holders of Registrable Securities. Any such requesting holder of Registrable Securities shall not be required to make any representations or warranties to or agreements with the Company other than representations, warranties or agreements regarding such holder, such holder's securities and such holder's intended method of distribution or any other representations required by applicable law. 1.6. Notice. In connection with the preparation and filing of each registration statement under the Securities Act pursuant to this Agreement, the Company shall promptly notify the holders of Registrable Securities included in the Registration Statement and their respective counsel of any stop order issued or threatened by the SEC and take all reasonable actions required to prevent the entry of such stop order or to remove it if entered. 5 1.7. Registration Expenses. All expenses incurred by the Company and the holders of Registrable Securities in complying with this Section 1, including, without limitation, all registration, NASD and filing fees, duplication and printing expenses, travel expenses, fees and disbursements of counsel for the Company or its independent public accountants, reasonable fees and disbursements of counsel for holders of securities included in a Company registration statement and the expense of any special audits incident to or required by any such registration shall be paid by the Company, except that each holder of Registrable Securities shall pay underwriting discounts and commissions attributable to such holder's shares, and transfer taxes on shares held by such holder. 1.8. Indemnification. In the event any of the Common Stock of a holder of Registrable Securities is included in a registration statement pursuant to this Section 1: (a) To the extent permitted by law, the Company will indemnify and hold harmless each holder of Registrable Securities (and its officers, directors, employees, partners and affiliates) selling Registrable Securities, any underwriter (as defined in the Securities Act) with respect to the Registrable Securities, and each person, if any, who controls such holder or underwriter within the meaning of the Securities Act, against any losses, claims, damages or liabilities, to which they may become subject under the Securities Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any untrue or allegedly untrue statement of any material fact contained in such registration statement, including any preliminary prospectus or final prospectus contained therein or any amendments or supplements thereto, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or allegedly necessary to make the statements therein not misleading; and will reimburse each such holder of Registrable Securities (and its officers, directors, employees, partners and affiliates), underwriter or controlling person for any legal or other expenses reasonably incurred by them in connection with investigating or defending any such loss, claim, damage, liability or action; provided, however, that the indemnity agreement contained in this Section 1.8(a) shall not apply to amounts paid in settlement of any such loss, claim, damage, liability or action if such settlement is effected without the written consent of the Company, which shall not be unreasonably withheld, nor shall the Company be liable under this Section 1.8(a) to such a holder, underwriter or controlling person for any such loss, claim, damage, liability or action to the extent that it arises out of, or is based upon, an untrue statement or allegedly untrue statement or omission or alleged omission made in connection with such registration statement, preliminary prospectus, final prospectus, or amendments or supplements thereto, in reliance upon and in conformity with information furnished in writing expressly for use in connection with such registration by such holder, such underwriter or such controlling person. (b) To the extent permitted by law, each holder selling Registrable Securities pursuant to this Section 1 will indemnify and hold harmless the Company, each of its directors, officers and employees, each person, if any, who controls the Company within the meaning of the Securities Act, and any underwriter for the Company (within the meaning of the Securities Act) against any losses, claims, damages or liabilities to which the Company or any such person or underwriter may become subject, under the Securities Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereto) arise out of, or are based upon, any untrue or allegedly untrue statement of any material fact contained in such registration 6 statement, including any preliminary prospectus or final prospectus contained therein or any amendments or supplements thereto, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or allegedly necessary to make the statements therein not misleading, in each case to the extent that such untrue statement or allegedly untrue statement or omission or alleged omission was made in such registration statement, preliminary prospectus, or amendments or supplements thereto in reliance upon and in conformity with information furnished in writing by such holder expressly for use in connection with such registration; provided, however, that the indemnity agreement contained in this Section 1.8(b) shall not apply to amounts paid in settlement of any such loss, claim, damage, liability or action if such settlement is effected without the written consent of such holder, which shall not be unreasonably withheld; and each such holder will reimburse the Company or any such person or underwriter for any legal or other expenses reasonably incurred by the Company or any such person or underwriter in connection with investigating or defending any such loss, claim, damage, liability or action. (c) Promptly after receipt by an indemnified party under this Section 1.8 of notice of the commencement of any action, such indemnified party will, if a claim in respect thereof is to be made against any indemnifying party under this Section 1.8, notify the indemnifying party in writing of the commencement thereof and generally summarize such action. The indemnifying party shall have the right to participate in and to assume the defense thereof with counsel mutually satisfactory to the parties; provided that each indemnified party shall have the right to employ its own counsel in any such case, but the fees and expense of such counsel shall be at the expense of such indemnified party unless the employment of such counsel shall have been authorized in writing by the indemnifying party in connection with the defense of such action or the indemnifying party shall not have employed counsel to have charge of the defense of such action or such indemnified party or the indemnified parties shall have reasonably concluded that there may be defenses available to it or them that are different from or additional to those available to the indemnifying party (in which case the indemnifying party shall not have the right to direct the defense of such action on behalf of the indemnified party or parties) in any of which events the fees and expenses of such counsel shall be borne by the indemnifying parties. The failure of any indemnified party to give notice as provided herein shall not relieve the indemnifying party of its obligations under this Section 1.8, except to the extent that the indemnifying party is actually and materially prejudiced by such failure to give notice. 2. Sale or Exercise Without Registration. If, at the time of any exercise, transfer or surrender for exchange of a Warrant or Common Stock (or Other Securities) previously issued upon the exercise of Warrants, such Warrant or Common Stock (or Other Securities) shall not be registered under the Securities Act, the Company may require, as a condition of allowing such exercise, transfer or exchange, that the holder or transferee of such Warrant or Common Stock (or Other Securities), as the case may be, furnish to the Company a satisfactory opinion of counsel to the effect that such exercise, transfer or exchange may be made without registration under the Securities Act, provided that nothing contained in this Section 2 shall relieve the Company from complying with any request for registration pursuant to Section 1 hereof. 7 3. Exercise of Warrant; Partial Exercise; Cashless Exercise; Redemption. 3.1. Exercise in Full. Subject to the provisions hereof, this Warrant may be exercised in full by the holder hereof by surrender of this Warrant, with the form of subscription attached hereto as Schedule I ("Subscription Form") duly executed by such holder, to the Company at its principal office accompanied by payment, in cash or by certified or official bank check payable to the order of the Company, in the amount obtained by multiplying the number of shares of Common Stock called for on the face of this Warrant, as adjusted herein, by the Purchase Price. 3.2. Partial Exercise. Subject to the provisions hereof, this Warrant may be exercised in part by the holder hereof by surrender of this Warrant in the manner and at the place provided in Section 3.1 except that the amount payable by the holder upon any partial exercise shall be the amount obtained by multiplying (a) the number of shares of Common Stock, as adjusted herein, designated by the holder in the Subscription Form, by (b) the Purchase Price. Upon any such partial exercise, the Company at its expense will forthwith issue and deliver to or upon the order of the holder hereof a new Warrant or Warrants of like tenor, in the name of the holder hereof or as such holder (upon payment by such holder of any applicable transfer taxes) may request, calling in the aggregate on the face or faces thereof for the number of shares of Common Stock equal (without giving effect to any adjustment therein) to the number of such shares called for on the face of this Warrant minus the number of such shares designated by the holder in the Subscription Form. 3.3. Exercise by Surrender of Warrant. In addition to the method of payment set forth in Sections 3.1 and 3.2 and in lieu of any cash payment required thereunder, the holder of the Warrant shall have the right at any time and from time to time to exercise the Warrants in full or in part by surrendering the Warrant Certificate in the manner and at the place specified in Section 3.1 as payment of the aggregate Purchase Price. The number of shares subject to the portion of the Warrant to be surrendered in payment of the aggregate Exercise Price for the shares to be purchased shall be determined by multiplying the number of shares to be purchased by the Purchase Price, and then dividing the product thereof by an amount equal to the Market Price (as defined below). Upon any such partial exercise, the Company, at its expense will forthwith issue and deliver to or upon the order of the holder hereof a new Warrant of like tenor, in the name of such holder or as such holder may designate (upon payment by such holder of any applicable transfer taxes), calling in the aggregate on the face thereof for the number of shares of Common Stock equal (without giving effect to any adjustment therein) to (A) the number of shares called for on the face of this Warrant minus (B) the sum of (i) the number of shares so surrendered by the holder pursuant to this Section plus (ii) the number of shares issued in the exchange. Solely for the purposes of this paragraph, Market Price shall be calculated as the average of the Market Prices for each of the ten (10) trading days preceding the date which the form of election attached hereto is deemed to have been sent to the Company ("Notice Date"). 3.4. Definition of Market Price. As used herein, the phrase "Market Price" at any date shall be deemed to be (i) if the principal trading market for such securities is an exchange, the last reported sale price, as officially reported on any consolidated tape, (ii) if the principal market for such securities is the over-the-counter market, the closing bid price on 8 such date as reported by Nasdaq or, if there is no closing bid price reported on Nasdaq or if the security is not quoted on Nasdaq, then the high bid price as set forth in the National Quotation Bureau sheet listing such securities for such day. Notwithstanding the foregoing, if there is no reported closing price or high bid price, as the case may be, on the date next preceding the event requiring an adjustment hereunder, then the Market Price shall be determined as of the latest date prior to such day for which such closing price or high bid price is available, or if the securities are not quoted on Nasdaq, as determined in good faith by resolution of the Board of Directors of the Company, based on the best information available to it. 3.5. Company to Reaffirm Obligations. The Company will, at the time of any exercise of this Warrant, upon the request of the holder hereof, acknowledge in writing its continuing obligation to afford to such holder any rights (including, without limitation, any right to registration of the shares of Common Stock or Other Securities issued upon such exercise) to which such holder shall continue to be entitled after such exercise in accordance with the provisions of this Warrant, provided that if the holder of this Warrant shall fail to make any such request, such failure shall not affect the continuing obligation of the Company to afford such holder any such rights. 3.6. Redemption. The Warrant and the Common Stock issued upon the exercise of the Warrant shall be subject to two put options by Greenfield (each, respectively, the "First Put Option" and the "Second Put Option"). Greenfield, in its sole discretion, shall have the right and option to have five-sixths (5/6) of the Warrant, and five-sixths (5/6) of the Class A Common Stock theretofore issued upon the exercise of the Warrant, redeemed by the Company pursuant to the First Put Option at the greater of: (i) $125,000, or (ii) the then fair market value of such Common Stock; and pursuant to the Second Put Option, the remaining one-sixth (1/6) of the Warrant and one-sixth (1/6) of the Class A Common Stock heretofore issued, at the greater of: (i) $25,000 or (ii) the then fair market value of such Common Stock. For purposes of this Section 3.6, the term "fair market value" of such Common Stock shall mean the average trading price for the Common Stock over the ten (10) days immediately prior to the date of the Put Notice reported on the Nasdaq, or if the Common Stock is not reported on the Nasdaq then as reported on any nationally recognized securities exchange, or if not reported on any nationally recognized securities exchange then as reported on the over the counter market. Upon provision by Greenfield of written notice to the Company of Greenfield's exercise of the First Put Option or Second Put Option (the "Put Notice"), the Company shall pay to Greenfield the put price in cash. Greenfield's First Put Option shall not be exercisable until thirteen (13) months after the date hereof; and the Second Put Option shall not be exercisable until fifteen (15) months after the date hereof; provided, however, that Greenfield agrees to provide the Company notice six months prior to the exercise of the First Put Option Option (the "Intent Notice"), which Intent Notice shall be non-binding on Greenfield., such that Greenfield shall not be required to actually exercise the Put Option and that Greenfield shall have absolutely no liability or obligation whatsoever for costs, expenses or fees, of any nature, incurred by the Company, its representatives or agents in reliance upon or because of the Intent Notice. 4. Delivery of Stock Certificates, etc., on Exercise. As soon as practicable after the exercise of this Warrant in full or in part, and in any event within 10 days thereafter, the 9 Company at its expense (including the payment by it of any applicable issue taxes) will cause to be issued in the name of and delivered to the holder hereof, or as such holder (upon payment by such holder of any applicable transfer taxes) may direct, a certificate or certificates for the number of fully paid and non-assessable shares of Common Stock (or Other Securities) to which such holder shall be entitled upon such exercise, plus, in lieu of any fractional share to which such holder would otherwise be entitled, cash equal to such fraction multiplied by the then current Market Price of one full share, together with any other stock or other securities and property (including cash, where applicable) to which such holder is entitled upon such exercise pursuant to Section 5 or otherwise. 5. Adjustment for Dividends in Other Stock, Property, etc.; Reclassification, etc. In case at any time or from time to time after the Original Issue Date the holders of Common Stock (or Other Securities) shall have received, or (on or after the record date fixed for the determination of stockholders eligible to receive) shall have become entitled to receive, without payment therefor (a) other or additional stock or other securities or property (other than cash) by way of dividend, or (b) other or additional (or less) stock or other securities or property other than by way of spin-off, split-up, reclassification, recapitalization, combination of shares or similar corporate rearrangement, then, and in each such case, the holder of this Warrant, upon the exercise hereof as provided in Section 3, shall be entitled to receive the amount of stock and other securities and property which such holder would hold on the date of such exercise if on the Original Issue Date he had been the holder of record of the number of shares of Common Stock called for on the face of this Warrant and had thereafter, during the period from the Original Issue Date to and including the date of such exercise, retained such shares and all such other or additional (or less) stock and other securities and property receivable by him as aforesaid during such period, giving effect to all adjustments called for during such period by Sections 6 and 7 hereof. 6. Reorganization, Consolidation, Merger, etc. In case the Company after the Original Issue Date shall (a) effect a reorganization, (b) consolidate with or merge into any other person, or (c) transfer all or substantially all of its properties or assets to any other person under any plan or arrangement contemplating the dissolution of the Company, then, in each such case, the holder of this Warrant, upon the exercise hereof as provided in Section 3 at any time after the consummation of such reorganization, consolidation or merger or the effective date of such dissolution, as the case may be, shall be entitled to receive (and the Company shall be entitled to deliver), in lieu of the Common Stock (or Other Securities) issuable upon such exercise prior to such consummation or such effective date, the stock and other securities and property (including cash) to which such holder would have been entitled upon such consummation or in connection with such dissolution, as the case may be, if such holder had so exercised this Warrant immediately prior thereto, all subject to further adjustment thereafter as provided in Sections 5 and 7 hereof. 10 In case the Company after the Original Issue Date shall (i) subdivide the outstanding Common Stock, (ii) combine the outstanding Common Stock into a smaller number of shares, or (iii) issue any Other Securities by reclassification of the Common Stock (including any such reclassification in connection with a consolidation or merger in which the Company is the continuing corporation), then the number and kind of shares of Common Stock and/or Other Securities issuable, at the time of the effective date of such subdivision, combination or reclassification shall be proportionately adjusted so that the holder of this Warrant after such time shall be entitled to receive upon exercise of its Warrant the aggregate number and kind of shares of Common Stock and/or Other Securities which, if its Warrant had been exercised immediately prior to such time, it would have owned upon such exercise and been entitled to receive by virtue of such dividend, subdivision, combination or reclassification, all subject to further adjustment thereafter as provided in Sections 5 and 7 hereof. 7. Other Adjustments. 7.1. General. Except as provided in Section 7.4, in case the Company shall issue or sell shares of its Common Stock after the Original Issue Date for a consideration per share less than the Purchase Price in effect pursuant to the terms of this Warrant at the time of issuance or sale of such additional shares, then the Purchase Price in effect hereunder shall simultaneously with such issuance or sale be reduced to a price determined by dividing (1) an amount equal to (a) the total number of shares of Common Stock outstanding immediately prior to such issuance or sale multiplied by the Purchase Price in effect hereunder at the time of such issuance and sale, plus (b) the consideration, if any, received by the Company upon such issuance or sale, by (2) the total number of shares of Common Stock outstanding immediately after such issuance or sale of such additional shares; and the number of shares of Common Stock which may be purchased upon exercise of this Warrant shall be increased so that the aggregate amount to be paid upon full exercise of this Warrant, after giving effect to each reduction in the Purchase Price, shall not be reduced. 7.2. Convertible Securities. Except as provided in Section 7.4, in case the Company shall issue or sell any securities convertible into Common Stock of the Company ("Convertible Securities") after the Original Issue Date, there shall be determined the price per share for which Common Stock is issuable upon the conversion or exchange thereof, such determination to be made by dividing (a) the total amount received or receivable by the Company as consideration for the issue or sale of such Convertible Securities, plus the minimum aggregate amount of additional consideration, if any, payable to the Company upon the conversion or exchange thereof, by (b) the maximum number of shares of Common Stock issuable upon the conversion or exchange of all of such Convertible Securities. If the price per share so determined shall be less than the applicable Purchase Price, then such issue or sale shall be deemed to be an issue or sale for cash (as of the date of issue or sale of such Convertible Securities) of such maximum number of shares of Common Stock at the price per share so determined, provided that, if such Convertible Securities shall by their terms provide for an increase or increases, with the passage of time, in the amount of additional consideration, if any, to the Company, or in the rate of exchange, upon the conversion or exchange thereof, the adjusted Purchase Price shall, forthwith upon any such increase becoming effective, be readjusted to reflect the same, and provided further, that upon 11 the expiration of such rights of conversion or exchange of such Convertible Securities, if any thereof shall not have been exercised, the adjusted Purchase Price shall forthwith be readjusted and thereafter be the price which it would have been had an adjustment been made on the basis that the only shares of Common Stock so issued or sold were issued or sold upon the conversion or exchange of such Convertible securities, and that they were issued or sold for the consideration actually received by the Company upon such conversion or exchange, plus the consideration, if any, actually received by the Company for the issue or sale of all of such Convertible Securities which shall have been converted or exchanged; provided that, notwithstanding the foregoing, no readjustment shall be effectuated hereunder with respect to any shares of Common Stock already issued upon exercise of the Warrant. 7.3. Rights and Options. Except as provided in Section 7.4, in case the Company shall grant any rights or options to subscribe for, purchase or otherwise acquire Common Stock after the Original Issue Date, there shall be determined the price per share for which Common Stock is issuable upon the exercise of such rights or options, such determination to be made by dividing (a) the total amount, if any, received or receivable by the Company as consideration for the granting of such rights or options, plus the minimum aggregate amount of additional consideration payable to the Company upon the exercise of such rights or options, by (b) the maximum number of shares of Common Stock of the Company issuable upon the exercise of such rights or options. If the price per share so determined shall be less than the applicable Purchase Price, then the granting of such rights or options shall be deemed to be an issue or sale for cash (as of the date of the granting of such rights or options) of such maximum number of shares of Common Stock at the price per share so determined, provided that, if such rights or options shall by their terms provide for an increase or increases, with the passage of time, in the amount of additional consideration payable to the Company upon the exercise thereof, the adjusted purchase price per share shall, forthwith upon any such increase becoming effective, be readjusted to reflect the same, and provided, further, that upon the expiration of such rights or options, if any thereof shall not have been exercised, the adjusted Purchase Price shall forthwith be readjusted and thereafter be the price which it would have been had an adjustment been made on the basis that the only shares of Common Stock so issued or sold were those issued or sold upon the exercise of such rights or options and that they were issued or sold for the consideration actually received by the Company upon such exercise, plus the consideration, if any, actually received by the Company for the granting of all such rights or options, whether or not exercised. 7.4. Exceptions. The provisions of Sections 7.1, 7.2 and 7.3 do not apply to (i) the exercise of any Warrant,(ii) the exercise of any right or option with respect to which an adjustment shall have been made at the time of the issuance of such right or option pursuant to Section 7.3, (iii) conversion or exchange of any Convertible Security with respect to which an adjustment shall have been made at the time of the issuance of such Convertible Security pursuant to Section 7.2, (iv) any transaction with respect to which an adjustment shall have been made pursuant to Sections 5 or 6; (v) the issuance or sale of any Options or Convertible Securities in connection with any future debt financings of $5,000,000 or more of the Company or any of its subsidiaries; (vi) the issuance or sale of any Common Stock pursuant to the exercise or conversion of any option, right or Convertible Security that was issued on or prior to the 12 Original Issue Date; and (vii) any public offering of Common Stock that results in at least $4,000,000 in net proceeds to the Company. 8. Further Assurances. The Company will take all such action as may be necessary or appropriate in order that the Company may validly and legally issue fully paid and non-assessable shares of stock upon the exercise of the Warrants. 9. Accountants' Certificate as to Adjustments. In each case of any adjustment or readjustment in the shares of Common Stock (or Other Securities) issuable upon the exercise of the Warrant, the Company at its expense will promptly cause the Company's regularly retained auditor to compute such adjustment or readjustment in accordance with the terms of the Warrant and prepare a certificate setting forth such adjustment or readjustment and showing in detail the facts upon which such adjustment or readjustment is based, and the number of shares of Common Stock outstanding or deemed to be outstanding. The Company will forthwith mail a copy of each such certificate to the holder of this Warrant. 10. Notices of Record Date, etc. In the event of (a) any taking by the Company of a record of the holders of any class of securities for the purpose of determining the holders thereof who are entitled to receive any dividend (other than a cash dividend payable out of earned surplus of the Company) or other distribution, or any right to subscribe for, purchase or otherwise acquire any shares of stock of any class or any other securities or property, or to receive any other right, or (b) any capital reorganization of the Company, any reclassification or recapitalization of the capital stock of the Company or any transfer of all or substantially all the assets of the Company to or consolidation or merger of the Company with or into any other person, or (c) any voluntary or involuntary dissolution, liquidation or winding-up of the Company, or (d) any proposed issue or grant by the Company of any shares of stock of any class or any other securities, or any right or option to subscribe for, purchase or otherwise acquire any shares of stock of any class or any other securities (other than the issue of Common Stock on the exercise of the Warrant), then and in each such event the Company will mail or cause to be mailed to each holder of the Warrant a notice specifying (i) the date on which any such record is to be taken for the purpose of such dividend, distribution or right, and stating the amount and character of such dividend, distribution or right, (ii) the date on which any such reorganization, reclassification, recapitalization, transfer, consolidation, merger, dissolution, liquidation or winding-up is to take place, and the time, if any, as of which the holders of record of Common Stock (or Other Securities) shall be entitled to exchange their shares of Common Stock (or Other Securities) for securities or other property deliverable upon such reorganization, reclassification, recapitalization, transfer, consolidation, merger, dissolution, liquidation or winding-up, and (iii) the amount and character of any stock or other securities, or rights or options with respect thereto, proposed to be issued or granted, the date of such proposed issue or 13 grant and the persons or class of persons to whom such proposed issue or grant is to be offered or made. Such notice shall be mailed at least 20 days prior to the date therein specified. 11. Reservation of Stock, etc., Issuable on Exercise of Warrants. The Company will at all times reserve and keep available, solely for issuance and delivery upon the exercise of the Warrant, all shares of Common Stock (or Other Securities) from time to time issuable upon the exercise of the Warrant. 12. Listing on Securities Exchanges; Registration. If the Company at any time shall list any Common Stock on any national securities exchange and shall register such Common Stock under the Securities Exchange Act of 1934 (as then in effect, or any similar statute then in effect), the Company will, at its expense, simultaneously list on such exchange, upon official notice of issuance upon the exercise of the Warrant, and maintain such listing of all shares of Common Stock from time to time issuable upon the exercise of the Warrant; and the Company will so list on any national securities exchange, will so register and will maintain such listing of, any Other Securities if and at the time that any securities of like class or similar type shall be listed on such national securities exchange by the Company. 13. Exchange of Warrants. Subject to the provisions of Section 2 hereof, upon surrender for exchange of the Warrant, properly endorsed, to the Company, the Company at its own expense will issue and deliver to or upon the order of the holder thereof a new Warrant or Warrants of like tenor, in the name of such holder or as such holder (upon payment by such holder of any applicable transfer taxes) may direct, calling in the aggregate on the face or faces thereof for the number of shares of Common Stock called for on the face or faces of the Warrant or Warrants so surrendered. 14. Replacement of Warrant. Upon receipt of evidence reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of the Warrant and, in the case of any such loss, theft or destruction, upon delivery of an indemnity agreement reasonably satisfactory in form and amount to the Company or, in the case of any such mutilation, upon surrender and cancellation of the Warrant, the Company at its expense will execute and deliver, in lieu thereof, a new Warrant of like tenor. 15. Warrant Agent. The Company may, by written notice to each holder of a Warrant, appoint an agent having an office in New York, New York, for the purpose of issuing Common Stock (or Other Securities) upon the exercise of the Warrants pursuant to Section 3, exchanging Warrants pursuant to Section 13, and replacing Warrants pursuant to Section 14, or any of the foregoing, and thereafter any such issuance, exchange or replacement, as the case may be, shall be made at such office by such agent. 16. Negotiability, etc. This Warrant is issued upon the following terms, to all of which each holder or owner hereof by the taking hereof consents and agrees: (a) subject to the provisions hereof, title to this Warrant may be transferred by endorsement (by the holder hereof executing the form of assignment attached hereto as (Schedule II) and delivery in the same manner as in the case of a negotiable instrument transferable by endorsement and delivery; 14 (b) subject to the foregoing, any person in possession of this Warrant properly endorsed is authorized to represent himself as absolute owner hereof and is empowered to transfer absolute title hereto by endorsement and delivery hereof to a bona fide purchaser hereof for value; each prior taker or owner waives and renounces all of his equities or rights in this Warrant in favor of each such bona fide purchaser and each such bona fide purchaser shall acquire absolute title hereto and to all rights represented hereby; and (c) until this Warrant is transferred on the books of the Company, the Company may treat the registered holder hereof as the absolute owner hereof for all purposes, notwithstanding any notice to the contrary. 17. Notices, etc. All notices and other communications from the Company to the holder of this Warrant shall be mailed by first class registered or certified mail, postage prepaid, at such address as may have been furnished to the Company in writing by such holder, or, until an address is so furnished, to and at the address of the last holder of this Warrant who has so furnished an address to the Company. 18. Miscellaneous. This Warrant and any term hereof may be changed, waived, discharged or terminated only by an instrument in writing signed by the party against which enforcement of such change, waiver, discharge or termination is sought. This Warrant is being delivered in the State of New York and shall be construed and enforced in accordance with and governed by the laws of such State. The headings in this Warrant are for purposes of reference only, and shall not limit or otherwise affect any of the terms hereof. 19. Assignability. Subject to the transfer conditions referred to in the legend endorsed hereon, this Warrant is fully assignable at any time upon surrender of this Warrant with a properly executed Assignment (in the form of Schedule II hereto) at the principal office of the Company. Dated: August 20, 1998 HOME RETAIL HOLDINGS, INC. By: /S/ DAVID DANOVITCH --------------------------- President [Corporate Seal] Attest: /S/ GREG DUKOFF - --------------- Secretary 15 SCHEDULE I FORM OF SUBSCRIPTION (To be signed only upon exercise or surrender of each Warrant) To: HOME RETAIL HOLDINGS, INC. The undersigned, the holder of the within Warrant, hereby irrevocably elects to exercise the purchase right represented by such Warrant for, and to purchase thereunder, * shares of Common Stock of HOME RETAIL HOLDINGS, INC., and herewith [use version (a) in the event of the payment of cash purchase price] (a) makes payment of $_________ therefor, and requests that the certificates for such shares be issued in the name of, and delivered to, __________ , whose address is __________________________ or [use version (b) in the event of a cashless exercise] (b) surrenders that portion of the Warrant representing ____ shares of Common Stock, and requests that the certificates for such shares be issued in the name of, and delivered to ___________________, whose address is ______________________________. To the extent that the exercise hereunder is for less than all of the shares of Common Stock represented by the Warrant, the undersigned hereby requests that a new Warrant for the remaining amount of shares of Common Stock be issued to __________________ whose address is _____________________________________. Dated: - -------------------------------------- (Signature must conform in all respects to name of holder as specified on the face of the Warrant) (Address) _____________________________________ _____________________________________ Insert here the number of shares called for on the face of the Warrant (or, in the case of a partial exercise, the portion thereof as to which the Warrant is being exercised), in either case without making any adjustment for additional Common Stock or any other stock or other securities or property or cash which, pursuant to the adjustment provisions of the Warrant, may be deliverable upon exercise. 16 SCHEDULE II FORM OF ASSIGNMENT (To be signed only upon transfer of Warrant) For value received, the undersigned hereby sells, assigns and transfers unto _________________ the right represented by the within Warrant to purchase ____________ shares of Common Stock of Home Retail Holdings, Inc., to which the within Warrant relates, and appoints _____________ as attorney to transfer such right on the books of Home Retail Holdings, Inc. with full power of substitution in the premises. Dated: ___________________________ (Signature must conform in all respects to name of holder as specified on the face of the Warrant) (Address) _____________________________________________________ _____________________________________________________ ____________________________________________ (Signature guaranteed by a Bank or Trust Company having its principal office in New York City or by a Member Firm of the New York or American Stock Exchange) 17 EX-4.7 7 COMMON STOCK PURCHASE WARRANT Void after June 30, 2003 This Warrant and any shares acquired upon the exercise of this Warrant have not been registered under the Securities Act of 1933. This Warrant and such shares may not be sold or transferred in the absence of such registration or an exemption therefrom under said Act and no transfer of this Warrant or such shares shall be valid or effective unless and until such conditions shall have been complied with. HOME RETAIL HOLDINGS, INC. COMMON STOCK PURCHASE WARRANT HOME RETAIL HOLDINGS, INC. (the "Company"), having its principal office at c/o Cambridge Partners, LLC, 535 Madison Avenue, 19th Floor, New York, New York 10022 hereby certifies that, for value received, ____________________ or assigns, is entitled, subject to the terms set forth below, to purchase from the Company at any time on or from time to time after August __, 1998 and before 5:00 P.M., New York City time, on June 30, 2003 (the "Expiration Date") ____ fully paid and non-assessable shares of Common Stock of the Company, at the price per share of $4.00. The number and character of such shares of Common Stock and the Purchase Price as hereinafter defined are subject to adjustment as provided herein. This Warrant is one of the Common Stock Purchase Warrants (the "Warrants") originally issued as of the Original Issue Date (as defined below) and evidencing the right to purchase an aggregate of 29,261 shares of Common Stock of the Company, subject to adjustment as provided herein. As used herein the following terms, unless the context otherwise requires, have the following respective meanings: (a) The term "Company" includes any corporation which shall succeed to or assume the obligations of the Company hereunder. (b) The term "Common Stock" means the Class A Common Stock, $.01 par value, of the Company and its successors. (c) The "Original Issue Date" is August __, 1998, the date as of which the Warrant was first issued. (d) The term "Other Securities" refers to any stock (other than Common Stock) and other securities of the Company or any other person (corporate or otherwise) which the holder of the Warrant at any time shall be entitled to receive, or shall have received, upon the exercise of the Warrant, in lieu of or in addition to Common Stock, or which at any time shall be issuable or shall have been issued in exchange for or in replacement of Common Stock or Other Securities pursuant to Section 6 or otherwise. (e) The term "Purchase Price" shall be the then applicable exercise price for one share of Common Stock. (f) The terms "registered" and "registration" refer to a registration effected by filing a registration statement in compliance with the Securities Act, to permit the disposition of Common Stock (or Other Securities) issued or issuable upon the exercise of Warrants, and any post-effective amendments and supplements filed or required to be filed to permit any such disposition. (g) The term "Registrable Securities" shall mean the shares of Common Stock or Other Securities issuable upon exercise of the Warrants, excluding Common Stock or other Securities that (a) have been registered under the Securities Act pursuant to an effective registration statement filed thereunder and disposed of in accordance with such registration statement or (b) are eligible for sale under Rule 144(k) under the Securities Act, or have been sold pursuant to Rule 144 under the Securities Act. (h) The term "Registration Period" shall mean the period commencing immediately after the closing of the Company's first public offering of securities registered under the Securities Act that takes place after the Original Issue Date and ending on the earlier of the third anniversary thereof and the Expiration Date. (i) The term "Securities Act" means the Securities Act of 1933 as the same shall be in effect at the time. 1. Registration Rights. 1.1. Incidental Registration. During the Registration Period, each holder of Registrable Securities will have a right to have its Registrable Securities included in registration statements filed by the Company on general registration forms under the Securities Act, except as otherwise provided herein. The Company will notify each such holder in writing (the "Company Notice") promptly after making the decision to file a registration statement under the Securities Act with respect to the proposed sale of the Company's equity securities (except with respect to registration statements filed on Forms S-4 or S-8 or such others in similar form then in effect under the Securities Act), specifying in the Company Notice the form of registration statement, the number of shares of securities the Company proposes to register, the name of the managing underwriter or underwriters (if any) and the general terms and conditions of the proposed registration and sale. Subject to Section 1.6 and the remainder of this Section 1.1, if requested by any holder of Registrable Securities in a writing (the "Investor Notice"), delivered to the Company not later than 30 days after the Company gives the Company Notice, to include in such registration statement Registrable Securities (the "Requested Shares"), the Company will use its best efforts to include the Requested Shares in the registration statement, and, if the proposed sale is to be underwritten, to cause the underwriters of securities to be sold by the Company in such registration statement to purchase such Requested Shares. In the event that any registration pursuant to this Section 1.1 shall be an underwritten offering of securities of the Company, any request by such holders pursuant to this Section 1.1 to register the Requested Shares, may, but need not, specify that such shares are to be included in the underwriting on the same terms and conditions as the securities, if any, otherwise being sold through underwriters under such registration. In the event of an underwritten offering by the Company, such notice shall also specify as to whether such holder of Registrable Securities desires that any of such Requested Shares to be included in any such registration statement be subject to any over-allotment option granted the underwriters of such offering. No holder shall be required to have its Requested Shares be part of any underwritten offering and/or subject to any over-allotment option granted any underwriter by the Company. Notwithstanding the foregoing, if the managing underwriter or underwriters shall inform the Company of its opinion, at least 15 days prior to the date that the registration statement becomes effective, that part or all the Requested Shares be excluded from the registration statement on the ground that the inclusion of such Requested Shares will adversely affect the orderly sales and distribution of the Common Stock being sold, the Company shall include first all securities to be sold by the Company for its own account and then all securities (including the Requested Shares) to holders which have the right to require that their securities be included in the registration on a pro rata basis. If the underwriters agree to purchase any of the Requested Shares beneficially owned by any holder who has agreed that such Requested Shares shall be sold pursuant to the underwritten offering or pursuant to the exercise of any over-allotment option as described above, such holders will enter into an underwriting agreement with the underwriters and will sell such Requested Shares to the underwriters unless, and except to the extent that, upon written notice to the Company and the managing underwriter or underwriters at least two days prior to the effective date of the registration statement, any such holder withdraws any portion of such Requested Shares. If the underwriters elect to purchase less than all the Requested Shares beneficially owned by holders who have agreed that such Requested Shares shall be sold pursuant to the underwritten offering or pursuant to the exercise of any over-allotment option, the underwriters shall purchase such Requested Shares on a pro rata basis among the Requested Shares that were included in the timely requests from holders of Registrable Securities under this subsection and the Requested Shares requested to be included in the registration statement by other stockholders holding registration rights and who have requested that such shares be sold pursuant to the underwritten offering or pursuant to the exercise of an over-allotment option. Notwithstanding the foregoing, the Company may withdraw any registration statement referred to in this Section 1 without any liability to the holders of Registrable Securities. 1.2. Market Standoff. Each holder of Registrable Securities agrees that if the managing underwriter or underwriters of the offering contemplated by Section 1.1 so request, such holder shall not effect any public sale or distribution of any Registrable Securities being registered thereunder or of any securities convertible into or exchangeable or exercisable for such Registrable Securities being registered thereunder for a period equal to the lesser of (x) the period management of the Company has agreed to lockup and (y) 90 days after the effective date of the registration statement filed in connection with the public offering. 1.3. Obligations of the Company. When required under Section 1.1 to use its best efforts to effect the registration of any Registrable Securities, the Company shall, as expeditiously as is reasonably possible: (a) Prepare and file with the SEC a registration statement with respect to such Registrable Securities and such amendments and supplements to such registration statement and the prospectus used in connection therewith as may be necessary to exercise the Company's best efforts to cause such registration statement to become effective at the earliest practicable date and to remain effective for a period of 90 days or until the holders and any underwriter purchasing such Registrable Securities have sold or otherwise disposed of the Registrable Securities registered in such registration statement, whichever is earlier. (b) Furnish to each holder selling Registrable Securities such number of copies of conformed copies of such registration statement and of each such amendment and supplement thereto (with all exhibits) and such number of copies of the prospectus, including a preliminary prospectus, in conformity with the requirements of the Securities Act, and such other documents as such holder may reasonably request in order to facilitate the disposition of Registrable Securities to be sold by such holder pursuant to such registration statement. (c) Exercise the Company's best efforts to register and qualify the Registrable Securities covered by such registration statement under other securities laws or State Securities Laws of such states or jurisdictions where a self-executing exemption is not available and as any seller of such Registrable Securities shall reasonably request, but in any event no fewer than five such states or jurisdictions; provided, however, that the Company shall not be required in connection therewith or as a condition thereto to qualify to do business or to file a general consent to service of process in any such states or jurisdictions. (d) Cause all securities covered by such registration statement to be registered with or approved by such other federal or state governmental agencies or authorities as may be necessary in the opinion of counsel to the Company and counsel to the seller or sellers of securities to enable the seller or sellers thereof to consummate the disposition of such securities. (e) Notify each seller of securities covered by such registration statement at any time when a prospectus relating thereto is required to be delivered under the Securities Act, upon discovery that, or upon the happening of any event as a result of which, the prospectus included in such registration statement, as then in effect, includes an untrue statement of a material fact or omits to state any material fact required to be stated therein or necessary to make the statements therein not misleading, in the light of the circumstances under which they were made, and at the request of any such seller promptly prepare and furnish to it a reasonable number of copies of a supplement to or an amendment of such prospectus as may be necessary so that, as thereafter delivered to the purchasers of such securities, such prospectus shall not include an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statement therein not misleading in the light of the circumstances under which they were made. (f) Comply with all applicable rules and regulations of the SEC, and make available to its securities holders, as soon as reasonably practicable, an earnings statement covering the period of at least twelve months, but not more than eighteen months, beginning with the first full calendar month after the effective date of such registration statement, which earnings statement shall satisfy the provisions of Section 11(a) of the Securities Act and Rule 158 promulgated thereunder, and promptly furnish to each such seller of securities a copy of such earnings statement. (g) Use its best efforts to list all securities covered by such registration statement on any national securities exchange on which securities of the same class and, if applicable, series, covered by such registration statement are then listed or on the Nasdaq Stock Market ("Nasdaq") if the securities are reported on Nasdaq. 1.4. Information to be Furnished. It shall be a condition precedent to the obligation of the Company to take any action pursuant to this Section 1 that the holders of Registrable Securities promptly furnish to the Company such information regarding them, the securities of the Company held by them and the intended method of disposition of such securities as the Company shall reasonably request and as shall be required in connection with the Company's obligations under this Section 1. 1.5. Underwritten Offerings. (a) Incidental Underwritten Offerings. If the Company proposes to register any of its securities under the Securities Act as contemplated by Section 1.1 and such securities are to be distributed by or through one or more underwriters, the Company will, if requested by any holder of Registrable Securities, use its best efforts to arrange for such underwriters to include all the securities to be offered and sold by such requesting holder among the securities of the Company to be distributed by such underwriters. The holders of Registrable Securities to be distributed by such underwriters shall be parties to the underwriting agreement between the Company and such underwriters and may, at their option, require that any or all of the representations and warranties by, and the other agreements on the part of, the Company to and for the benefit of such underwriters shall also be made to and for the benefit of such holders of Registrable Securities and that any or all of the conditions precedent to the obligations of such underwriters under such underwriting agreement be conditions precedent to the obligations of such holders of Registrable Securities. Any such requesting holder of Registrable Securities shall not be required to make any representations or warranties to or agreements with the Company other than representations, warranties or agreements regarding such holder, such holder's securities and such holder's intended method of distribution or any other representations required by applicable law. 1.6. Notice. In connection with the preparation and filing of each registration statement under the Securities Act pursuant to this Agreement, the Company shall promptly notify the holders of Registrable Securities included in the Registration Statement and their respective counsel of any stop order issued or threatened by the SEC and take all reasonable actions required to prevent the entry of such stop order or to remove it if entered. 1.7. Registration Expenses. All expenses incurred by the Company and the holders of Registrable Securities in complying with this Section 1, including, without limitation, all registration, NASD and filing fees, duplication and printing expenses, travel expenses, fees and disbursements of counsel for the Company or its independent public accountants, reasonable fees and disbursements of counsel for holders of securities included in a Company registration statement and the expense of any special audits incident to or required by any such registration shall be paid by the Company, except that each holder of Registrable Securities shall pay underwriting discounts and commissions attributable to such holder's shares, and transfer taxes on shares held by such holder. 1.8. Indemnification. In the event any of the Common Stock of a holder of Registrable Securities is included in a registration statement pursuant to this Section 1: (a) To the extent permitted by law, the Company will indemnify and hold harmless each holder of Registrable Securities (and its officers, directors, employees, partners and affiliates) selling Registrable Securities, any underwriter (as defined in the Securities Act) with respect to the Registrable Securities, and each person, if any, who controls such holder or underwriter within the meaning of the Securities Act, against any losses, claims, damages or liabilities, to which they may become subject under the Securities Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any untrue or allegedly untrue statement of any material fact contained in such registration statement, including any preliminary prospectus or final prospectus contained therein or any amendments or supplements thereto, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or allegedly necessary to make the statements therein not misleading; and will reimburse each such holder of Registrable Securities (and its officers, directors, employees, partners and affiliates), underwriter or controlling person for any legal or other expenses reasonably incurred by them in connection with investigating or defending any such loss, claim, damage, liability or action; provided, however, that the indemnity agreement contained in this Section 1.8(a) shall not apply to amounts paid in settlement of any such loss, claim, damage, liability or action if such settlement is effected without the written consent of the Company, which shall not be unreasonably withheld, nor shall the Company be liable under this Section 1.8(a) to such a holder, underwriter or controlling person for any such loss, claim, damage, liability or action to the extent that it arises out of, or is based upon, an untrue statement or allegedly untrue statement or omission or alleged omission made in connection with such registration statement, preliminary prospectus, final prospectus, or amendments or supplements thereto, in reliance upon and in conformity with information furnished in writing expressly for use in connection with such registration by such holder, such underwriter or such controlling person. (b) To the extent permitted by law, each holder selling Registrable Securities pursuant to this Section 1 will indemnify and hold harmless the Company, each of its directors, officers and employees, each person, if any, who controls the Company within the meaning of the Securities Act, and any underwriter for the Company (within the meaning of the Securities Act) against any losses, claims, damages or liabilities to which the Company or any such person or underwriter may become subject, under the Securities Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereto) arise out of, or are based upon, any untrue or allegedly untrue statement of any material fact contained in such registration statement, including any preliminary prospectus or final prospectus contained therein or any amendments or supplements thereto, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or allegedly necessary to make the statements therein not misleading, in each case to the extent that such untrue statement or allegedly untrue statement or omission or alleged omission was made in such registration statement, preliminary prospectus, or amendments or supplements thereto in reliance upon and in conformity with information furnished in writing by such holder expressly for use in connection with such registration; provided, however, that the indemnity agreement contained in this Section 1.8(b) shall not apply to amounts paid in settlement of any such loss, claim, damage, liability or action if such settlement is effected without the written consent of such holder, which shall not be unreasonably withheld; and each such holder will reimburse the Company or any such person or underwriter for any legal or other expenses reasonably incurred by the Company or any such person or underwriter in connection with investigating or defending any such loss, claim, damage, liability or action. (c) Promptly after receipt by an indemnified party under this Section 1.8 of notice of the commencement of any action, such indemnified party will, if a claim in respect thereof is to be made against any indemnifying party under this Section 1.8, notify the indemnifying party in writing of the commencement thereof and generally summarize such action. The indemnifying party shall have the right to participate in and to assume the defense thereof with counsel mutually satisfactory to the parties; provided that each indemnified party shall have the right to employ its own counsel in any such case, but the fees and expense of such counsel shall be at the expense of such indemnified party unless the employment of such counsel shall have been authorized in writing by the indemnifying party in connection with the defense of such action or the indemnifying party shall not have employed counsel to have charge of the defense of such action or such indemnified party or the indemnified parties shall have reasonably concluded that there may be defenses available to it or them that are different from or additional to those available to the indemnifying party (in which case the indemnifying party shall not have the right to direct the defense of such action on behalf of the indemnified party or parties) in any of which events the fees and expenses of such counsel shall be borne by the indemnifying parties. The failure of any indemnified party to give notice as provided herein shall not relieve the indemnifying party of its obligations under this Section 1.8, except to the extent that the indemnifying party is actually and materially prejudiced by such failure to give notice. 2. Sale or Exercise Without Registration. If, at the time of any exercise, transfer or surrender for exchange of a Warrant or Common Stock (or Other Securities) previously issued upon the exercise of Warrants, such Warrant or Common Stock (or Other Securities) shall not be registered under the Securities Act, the Company may require, as a condition of allowing such exercise, transfer or exchange, that the holder or transferee of such Warrant or Common Stock (or Other Securities), as the case may be, furnish to the Company a satisfactory opinion of counsel to the effect that such exercise, transfer or exchange may be made without registration under the Securities Act, provided that nothing contained in this Section 2 shall relieve the Company from complying with any request for registration pursuant to Section 1 hereof. 3. Exercise of Warrant; Partial Exercise; Cashless Exercise. 3.1. Exercise in Full. Subject to the provisions hereof, this Warrant may be exercised in full by the holder hereof by surrender of this Warrant, with the form of subscription attached hereto as Schedule I ("Subscription Form") duly executed by such holder, to the Company at its principal office accompanied by payment, in cash or by certified or official bank check payable to the order of the Company, in the amount obtained by multiplying the number of shares of Common Stock called for on the face of this Warrant, as adjusted herein, by the Purchase Price. 3.2. Partial Exercise. Subject to the provisions hereof, this Warrant may be exercised in part by the holder hereof by surrender of this Warrant in the manner and at the place provided in Section 3.1 except that the amount payable by the holder upon any partial exercise shall be the amount obtained by multiplying (a) the number of shares of Common Stock, as adjusted herein, designated by the holder in the Subscription Form, by (b) the Purchase Price. Upon any such partial exercise, the Company at its expense will forthwith issue and deliver to or upon the order of the holder hereof a new Warrant or Warrants of like tenor, in the name of the holder hereof or as such holder (upon payment by such holder of any applicable transfer taxes) may request, calling in the aggregate on the face or faces thereof for the number of shares of Common Stock equal (without giving effect to any adjustment therein) to the number of such shares called for on the face of this Warrant minus the number of such shares designated by the holder in the Subscription Form. 3.3. Exercise by Surrender of Warrant. In addition to the method of payment set forth in Sections 3.1 and 3.2 and in lieu of any cash payment required thereunder, the holder of the Warrant shall have the right at any time and from time to time to exercise the Warrants in full or in part by surrendering the Warrant Certificate in the manner and at the place specified in Section 3.1 as payment of the aggregate Purchase Price. The number of shares subject to the portion of the Warrant to be surrendered in payment of the aggregate Exercise Price for the shares to be purchased shall be determined by multiplying the number of shares to be purchased by the Purchase Price, and then dividing the product thereof by an amount equal to the Market Price (as defined below). Upon any such partial exercise, the Company, at its expense will forthwith issue and deliver to or upon the order of the holder hereof a new Warrant of like tenor, in the name of such holder or as such holder may designate (upon payment by such holder of any applicable transfer taxes), calling in the aggregate on the face thereof for the number of shares of Common Stock equal (without giving effect to any adjustment therein) to (A) the number of shares called for on the face of this Warrant minus (B) the sum of (i) the number of shares so surrendered by the holder pursuant to this Section plus (ii) the number of shares issued in the exchange. Solely for the purposes of this paragraph, Market Price shall be calculated as the average of the Market Prices for each of the ten (10) trading days preceding the date which the form of election attached hereto is deemed to have been sent to the Company ("Notice Date"). 3.4. Definition of Market Price. As used herein, the phrase "Market Price" at any date shall be deemed to be (i) if the principal trading market for such securities is an exchange, the last reported sale price, as officially reported on any consolidated tape, (ii) if the principal market for such securities is the over-the-counter market, the closing bid price on such date as reported by Nasdaq or, if there is no closing bid price reported on Nasdaq or if the security is not quoted on Nasdaq, then the high bid price as set forth in the National Quotation Bureau sheet listing such securities for such day. Notwithstanding the foregoing, if there is no reported closing price or high bid price, as the case may be, on the date next preceding the event requiring an adjustment hereunder, then the Market Price shall be determined as of the latest date prior to such day for which such closing price or high bid price is available, or if the securities are not quoted on Nasdaq, as determined in good faith by resolution of the Board of Directors of the Company, based on the best information available to it. 3.5. Company to Reaffirm Obligations. The Company will, at the time of any exercise of this Warrant, upon the request of the holder hereof, acknowledge in writing its continuing obligation to afford to such holder any rights (including, without limitation, any right to registration of the shares of Common Stock or Other Securities issued upon such exercise) to which such holder shall continue to be entitled after such exercise in accordance with the provisions of this Warrant, provided that if the holder of this Warrant shall fail to make any such request, such failure shall not affect the continuing obligation of the Company to afford such holder any such rights. 4. Delivery of Stock Certificates, etc., on Exercise. As soon as practicable after the exercise of this Warrant in full or in part, and in any event within 10 days thereafter, the Company at its expense (including the payment by it of any applicable issue taxes) will cause to be issued in the name of and delivered to the holder hereof, or as such holder (upon payment by such holder of any applicable transfer taxes) may direct, a certificate or certificates for the number of fully paid and non-assessable shares of Common Stock (or Other Securities) to which such holder shall be entitled upon such exercise, plus, in lieu of any fractional share to which such holder would otherwise be entitled, cash equal to such fraction multiplied by the then current Market Price of one full share, together with any other stock or other securities and property (including cash, where applicable) to which such holder is entitled upon such exercise pursuant to Section 5 or otherwise. 5. Adjustment for Dividends in Other Stock, Property, etc.; Reclassification, etc. In case at any time or from time to time after the Original Issue Date the holders of Common Stock (or Other Securities) shall have received, or (on or after the record date fixed for the determination of stockholders eligible to receive) shall have become entitled to receive, without payment therefor (a) other or additional stock or other securities or property (other than cash) by way of dividend, or (b) other or additional (or less) stock or other securities or property other than by way of spin-off, split-up, reclassification, recapitalization, combination of shares or similar corporate rearrangement, then, and in each such case, the holder of this Warrant, upon the exercise hereof as provided in Section 3, shall be entitled to receive the amount of stock and other securities and property which such holder would hold on the date of such exercise if on the Original Issue Date he had been the holder of record of the number of shares of Common Stock called for on the face of this Warrant and had thereafter, during the period from the Original Issue Date to and including the date of such exercise, retained such shares and all such other or additional (or less) stock and other securities and property receivable by him as aforesaid during such period, giving effect to all adjustments called for during such period by Sections 6 and 7 hereof. 6. Reorganization, Consolidation, Merger, etc. In case the Company after the Original Issue Date shall (a) effect a reorganization, (b) consolidate with or merge into any other person, or (c) transfer all or substantially all of its properties or assets to any other person under any plan or arrangement contemplating the dissolution of the Company, then, in each such case, the holder of this Warrant, upon the exercise hereof as provided in Section 3 at any time after the consummation of such reorganization, consolidation or merger or the effective date of such dissolution, as the case may be, shall be entitled to receive (and the Company shall be entitled to deliver), in lieu of the Common Stock (or Other Securities) issuable upon such exercise prior to such consummation or such effective date, the stock and other securities and property (including cash) to which such holder would have been entitled upon such consummation or in connection with such dissolution, as the case may be, if such holder had so exercised this Warrant immediately prior thereto, all subject to further adjustment thereafter as provided in Sections 5 and 7 hereof. In case the Company after the Original Issue Date shall (i) subdivide the outstanding Common Stock, (ii) combine the outstanding Common Stock into a smaller number of shares, or (iii) issue any Other Securities by reclassification of the Common Stock (including any such reclassification in connection with a consolidation or merger in which the Company is the continuing corporation), then the number and kind of shares of Common Stock and/or Other Securities issuable, at the time of the effective date of such subdivision, combination or reclassification shall be proportionately adjusted so that the holder of this Warrant after such time shall be entitled to receive upon exercise of its Warrant the aggregate number and kind of shares of Common Stock and/or Other Securities which, if its Warrant had been exercised immediately prior to such time, it would have owned upon such exercise and been entitled to receive by virtue of such dividend, subdivision, combination or reclassification, all subject to further adjustment thereafter as provided in Sections 5 and 7 hereof. 7. Other Adjustments. 7.1. General. Except as provided in Section 7.4, in case the Company shall issue or sell shares of its Common Stock after the Original Issue Date for a consideration per share less than the Purchase Price in effect pursuant to the terms of this Warrant at the time of issuance or sale of such additional shares, then the Purchase Price in effect hereunder shall simultaneously with such issuance or sale be reduced to a price determined by dividing (1) an amount equal to (a) the total number of shares of Common Stock outstanding immediately prior to such issuance or sale multiplied by the Purchase Price in effect hereunder at the time of such issuance and sale, plus (b) the consideration, if any, received by the Company upon such issuance or sale, by (2) the total number of shares of Common Stock outstanding immediately after such issuance or sale of such additional shares; and the number of shares of Common Stock which may be purchased upon exercise of this Warrant shall be increased so that the aggregate amount to be paid upon full exercise of this Warrant, after giving effect to each reduction in the Purchase Price, shall not be reduced. 7.2. Convertible Securities. Except as provided in Section 7.4, in case the Company shall issue or sell any securities convertible into Common Stock of the Company ("Convertible Securities") after the Original Issue Date, there shall be determined the price per share for which Common Stock is issuable upon the conversion or exchange thereof, such determination to be made by dividing (a) the total amount received or receivable by the Company as consideration for the issue or sale of such Convertible Securities, plus the minimum aggregate amount of additional consideration, if any, payable to the Company upon the conversion or exchange thereof, by (b) the maximum number of shares of Common Stock issuable upon the conversion or exchange of all of such Convertible Securities. If the price per share so determined shall be less than the applicable Purchase Price, then such issue or sale shall be deemed to be an issue or sale for cash (as of the date of issue or sale of such Convertible Securities) of such maximum number of shares of Common Stock at the price per share so determined, provided that, if such Convertible Securities shall by their terms provide for an increase or increases, with the passage of time, in the amount of additional consideration, if any, to the Company, or in the rate of exchange, upon the conversion or exchange thereof, the adjusted Purchase Price shall, forthwith upon any such increase becoming effective, be readjusted to reflect the same, and provided further, that upon the expiration of such rights of conversion or exchange of such Convertible Securities, if any thereof shall not have been exercised, the adjusted Purchase Price shall forthwith be readjusted and thereafter be the price which it would have been had an adjustment been made on the basis that the only shares of Common Stock so issued or sold were issued or sold upon the conversion or exchange of such Convertible securities, and that they were issued or sold for the consideration actually received by the Company upon such conversion or exchange, plus the consideration, if any, actually received by the Company for the issue or sale of all of such Convertible Securities which shall have been converted or exchanged; provided that, notwithstanding the foregoing, no readjustment shall be effectuated hereunder with respect to any shares of Common Stock already issued upon exercise of the Warrant. 7.3. Rights and Options. Except as provided in Section 7.4, in case the Company shall grant any rights or options to subscribe for, purchase or otherwise acquire Common Stock after the Original Issue Date, there shall be determined the price per share for which Common Stock is issuable upon the exercise of such rights or options, such determination to be made by dividing (a) the total amount, if any, received or receivable by the Company as consideration for the granting of such rights or options, plus the minimum aggregate amount of additional consideration payable to the Company upon the exercise of such rights or options, by (b) the maximum number of shares of Common Stock of the Company issuable upon the exercise of such rights or options. If the price per share so determined shall be less than the applicable Purchase Price, then the granting of such rights or options shall be deemed to be an issue or sale for cash (as of the date of the granting of such rights or options) of such maximum number of shares of Common Stock at the price per share so determined, provided that, if such rights or options shall by their terms provide for an increase or increases, with the passage of time, in the amount of additional consideration payable to the Company upon the exercise thereof, the adjusted purchase price per share shall, forthwith upon any such increase becoming effective, be readjusted to reflect the same, and provided, further, that upon the expiration of such rights or options, if any thereof shall not have been exercised, the adjusted Purchase Price shall forthwith be readjusted and thereafter be the price which it would have been had an adjustment been made on the basis that the only shares of Common Stock so issued or sold were those issued or sold upon the exercise of such rights or options and that they were issued or sold for the consideration actually received by the Company upon such exercise, plus the consideration, if any, actually received by the Company for the granting of all such rights or options, whether or not exercised. 7.4 .Exceptions. The provisions of Sections 7.1, 7.2 and 7.3 do not apply to (i) the exercise of any Warrant,(ii) the exercise of any right or option with respect to which an adjustment shall have been made at the time of the issuance of such right or option pursuant to Section 7.3, (iii) conversion or exchange of any Convertible Security with respect to which an adjustment shall have been made at the time of the issuance of such Convertible Security pursuant to Section 7.2, (iv) any transaction with respect to which an adjustment shall have been made pursuant to Sections 5 or 6; (v) the issuance or sale of any Options or Convertible Securities in connection with any future debt financings of $5,000,000 or more of the Company or any of its subsidiaries; (vi) the issuance or sale of any Common Stock pursuant to the exercise or conversion of any option, right or Convertible Security that was issued on or prior to the Original Issue Date; and (vii) any public offering of Common Stock that results in at least $4,000,000 in net proceeds to the Company. 8. Further Assurances. The Company will take all such action as may be necessary or appropriate in order that the Company may validly and legally issue fully paid and non-assessable shares of stock upon the exercise of the Warrants. 9. Accountants' Certificate as to Adjustments. In each case of any adjustment or readjustment in the shares of Common Stock (or Other Securities) issuable upon the exercise of the Warrant, the Company at its expense will promptly cause the Company's regularly retained auditor to compute such adjustment or readjustment in accordance with the terms of the Warrant and prepare a certificate setting forth such adjustment or readjustment and showing in detail the facts upon which such adjustment or readjustment is based, and the number of shares of Common Stock outstanding or deemed to be outstanding. The Company will forthwith mail a copy of each such certificate to the holder of this Warrant. 10. Notices of Record Date, etc. In the event of (a) any taking by the Company of a record of the holders of any class of securities for the purpose of determining the holders thereof who are entitled to receive any dividend (other than a cash dividend payable out of earned surplus of the Company) or other distribution, or any right to subscribe for, purchase or otherwise acquire any shares of stock of any class or any other securities or property, or to receive any other right, or (b) any capital reorganization of the Company, any reclassification or recapitalization of the capital stock of the Company or any transfer of all or substantially all the assets of the Company to or consolidation or merger of the Company with or into any other person, or (c) any voluntary or involuntary dissolution, liquidation or winding-up of the Company, or (d) any proposed issue or grant by the Company of any shares of stock of any class or any other securities, or any right or option to subscribe for, purchase or otherwise acquire any shares of stock of any class or any other securities (other than the issue of Common Stock on the exercise of the Warrant), then and in each such event the Company will mail or cause to be mailed to each holder of the Warrant a notice specifying (i) the date on which any such record is to be taken for the purpose of such dividend, distribution or right, and stating the amount and character of such dividend, distribution or right, (ii) the date on which any such reorganization, reclassification, recapitalization, transfer, consolidation, merger, dissolution, liquidation or winding-up is to take place, and the time, if any, as of which the holders of record of Common Stock (or Other Securities) shall be entitled to exchange their shares of Common Stock (or Other Securities) for securities or other property deliverable upon such reorganization, reclassification, recapitalization, transfer, consolidation, merger, dissolution, liquidation or winding-up, and (iii) the amount and character of any stock or other securities, or rights or options with respect thereto, proposed to be issued or granted, the date of such proposed issue or grant and the persons or class of persons to whom such proposed issue or grant is to be offered or made. Such notice shall be mailed at least 20 days prior to the date therein specified. 11. Reservation of Stock, etc., Issuable on Exercise of Warrants. The Company will at all times reserve and keep available, solely for issuance and delivery upon the exercise of the Warrant, all shares of Common Stock (or Other Securities) from time to time issuable upon the exercise of the Warrant. 12. Listing on Securities Exchanges; Registration. If the Company at any time shall list any Common Stock on any national securities exchange and shall register such Common Stock under the Securities Exchange Act of 1934 (as then in effect, or any similar statute then in effect), the Company will, at its expense, simultaneously list on such exchange, upon official notice of issuance upon the exercise of the Warrant, and maintain such listing of all shares of Common Stock from time to time issuable upon the exercise of the Warrant; and the Company will so list on any national securities exchange, will so register and will maintain such listing of, any Other Securities if and at the time that any securities of like class or similar type shall be listed on such national securities exchange by the Company. 13. Exchange of Warrants. Subject to the provisions of Section 2 hereof, upon surrender for exchange of the Warrant, properly endorsed, to the Company, the Company at its own expense will issue and deliver to or upon the order of the holder thereof a new Warrant or Warrants of like tenor, in the name of such holder or as such holder (upon payment by such holder of any applicable transfer taxes) may direct, calling in the aggregate on the face or faces thereof for the number of shares of Common Stock called for on the face or faces of the Warrant or Warrants so surrendered. 14. Replacement of Warrant. Upon receipt of evidence reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of the Warrant and, in the case of any such loss, theft or destruction, upon delivery of an indemnity agreement reasonably satisfactory in form and amount to the Company or, in the case of any such mutilation, upon surrender and cancellation of the Warrant, the Company at its expense will execute and deliver, in lieu thereof, a new Warrant of like tenor. 15. Warrant Agent. The Company may, by written notice to each holder of a Warrant, appoint an agent having an office in New York, New York, for the purpose of issuing Common Stock (or Other Securities) upon the exercise of the Warrants pursuant to Section 3, exchanging Warrants pursuant to Section 13, and replacing Warrants pursuant to Section 14, or any of the foregoing, and thereafter any such issuance, exchange or replacement, as the case may be, shall be made at such office by such agent. 16. Negotiability, etc. This Warrant is issued upon the following terms, to all of which each holder or owner hereof by the taking hereof consents and agrees: (a) subject to the provisions hereof, title to this Warrant may be transferred by endorsement (by the holder hereof executing the form of assignment attached hereto as Schedule II) and delivery in the same manner as in the case of a negotiable instrument transferable by endorsement and delivery; (b) subject to the foregoing, any person in possession of this Warrant properly endorsed is authorized to represent himself as absolute owner hereof and is empowered to transfer absolute title hereto by endorsement and delivery hereof to a bona fide purchaser hereof for value; each prior taker or owner waives and renounces all of his equities or rights in this Warrant in favor of each such bona fide purchaser and each such bona fide purchaser shall acquire absolute title hereto and to all rights represented hereby; and (c) until this Warrant is transferred on the books of the Company, the Company may treat the registered holder hereof as the absolute owner hereof for all purposes, notwithstanding any notice to the contrary. 17. Notices, etc. All notices and other communications from the Company to the holder of this Warrant shall be mailed by first class registered or certified mail, postage prepaid, at such address as may have been furnished to the Company in writing by such holder, or, until an address is so furnished, to and at the address of the last holder of this Warrant who has so furnished an address to the Company. 18. Miscellaneous. This Warrant and any term hereof may be changed, waived, discharged or terminated only by an instrument in writing signed by the party against which enforcement of such change, waiver, discharge or termination is sought. This Warrant is being delivered in the State of New York and shall be construed and enforced in accordance with and governed by the laws of such State. The headings in this Warrant are for purposes of reference only, and shall not limit or otherwise affect any of the terms hereof. 19. Assignability. Subject to the transfer conditions referred to in the legend endorsed hereon, this Warrant is fully assignable at any time upon surrender of this Warrant with a properly executed Assignment (in the form of Schedule II hereto) at the principal office of the Company. Dated: August ___, 1998 HOME RETAIL HOLDINGS, INC. By: __________________________________ President [Corporate Seal] Attest: ________________________________ Secretary SCHEDULE I FORM OF SUBSCRIPTION (To be signed only upon exercise or surrender of each Warrant) To: HOME RETAIL HOLDINGS, INC. The undersigned, the holder of the within Warrant, hereby irrevocably elects to exercise the purchase right represented by such Warrant for, and to purchase thereunder, * shares of Common Stock of HOME RETAIL HOLDINGS, INC., and herewith [use version (a) in the event of the payment of cash purchase price] (a) makes payment of $_________ therefor, and requests that the certificates for such shares be issued in the name of, and delivered to, __________ , whose address is _________________________________. or [use version (b) in the event of a cashless exercise] (b) surrenders that portion of the Warrant representing ____ shares of Common Stock, and requests that the certificates for such shares be issued in the name of, and delivered to ___________________, whose address is ______________________________. To the extent that the exercise hereunder is for less than all of the shares of Common Stock represented by the Warrant, the undersigned hereby requests that a new Warrant for the remaining amount of shares of Common Stock be issued to __________________ whose address is _____________________________. Dated: -------------------------------------- (Signature must conform in all respects to name of holder as specified on the face of the Warrant) (Address) __________________________ __________________________ o Insert here the number of shares called for on the face of the Warrant (or, in the case of a partial exercise, the portion thereof as to which the Warrant is being exercised), in either case without making any adjustment for additional Common Stock or any other stock or other securities or property or cash which, pursuant to the adjustment provisions of the Warrant, may be deliverable upon exercise. 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 EX-10 8 EXHIBIT 10.1 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 required of Participants (as defined below), and change such forms from time to time; (h) adopt, amend and rescind rules and regulations for the administration of the Plan; and (i) interpret the Plan and decide any questions and settle all controversies and disputes that may arise in connection with the Plan. Such determinations and actions of the Committee, and all other determinations and actions of the Committee made or taken under authority granted by any provision of the Plan, will be conclusive and will bind all parties. Nothing in this paragraph shall be construed as limiting the power of the Committee to make adjustments under Section 7.3 or Section 8.6. With respect to persons subject to Section 16 of the 1934 Act, transactions under the Plan are intended to comply with all applicable conditions of Rule 16b-3 or its successors under the 1934 Act 3. EFFECTIVE DATE AND TERM OF PLAN The Plan will become effective on the date on which it is approved by the stockholders of the Company. No Award may be granted under the Plan ten years following the date of stockholder approval, but Awards previously granted may extend beyond that date. 4. SHARES SUBJECT TO THE PLAN Subject to the adjustment as provided in Section 8.6 below, the aggregate number of shares of Stock that may be delivered under the Plan will be 180,000. If any Award requiring exercise by the Participant for delivery of Stock terminates without having been exercised in full, or if any Award payable in Stock or cash is satisfied, in cash rather than Stock, the number of shares of Stock as to which such Award was not exercised or for which cash was substituted will be available for future grants. Subject to Section 8.6(a) the maximum number of shares of Stock as to which Options and Stock Appreciation Rights may be granted to any Participant in any one calendar year is 80,000, which limitation shall be construed and applied consistently with the rules under Section 162(m) of the Internal Revenue Code. Stock delivered under the Plan may be authorized but unissued Stock or previously issued Stock acquired by the Company and held in treasury. No fractional shares of Stock will be delivered under the Plan. 5. ELIGIBILITY AND PARTICIPATION Each person in the employ of the Company or any of its subsidiaries (an "Employee") and each other person or entity (including without limitation non-Employee directors of the Company or a subsidiary of the Company) who, in the opinion of the Committee, is in a position to make a significant contribution to the success of the Company or its subsidiaries will be eligible to receive Awards under the Plan (each such Employee, person or entity receiving an Award, a "Participant"). A "subsidiary" for purposes of the Plan will be a corporation in which the Company owns, directly or indirectly, stock possessing 50 % or more of the total combined voting power of all classes, of stock 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. (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: (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 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 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, shall an Option or Stock Appreciation Right remain exercisable beyond the latest date on which it could have been exercised without regard to this Section 7. Except as otherwise determined by the Committee, all Options and Stock Appreciation Right held by a Participant immediately prior to death that are not then exercisable shall terminate at death. (b) Except as otherwise determined by theCommittee, all Restricted Stock held by the Participant must be transferred to the Company (and, in the event the certificates representing such Restricted Stock are held by the company, such Restricted Stock will be so transferred without any further action by the Participant) in accordance with Section 6.3(d) above. (c) Any payment or benefit under a Deferred Stock Award, Performance Award, or Supplemental Grant to which the Participant was not irrevocably entitled prior to death will be forfeited and the Award canceled as of the time of death, unless otherwise determined by the Committee. 7.2. Termination of Service (Other Than By Death). If a participant who is an Employee ceases to be an Employee for any reason other than death, or if there is a termination (other than by reason of death) of the consulting, service or similar relationship in respect of which a non-Employee Participant was granted an Award hereunder (such termination of the employment or other relationship being hereinafter referred to as a "Status Change"), the following will apply: (a) Except as otherwise determined by the Committee, all Options and Stock Appreciation Rights held by the Participant that were not exercisable immediately prior to the Status Change shall terminate at the time of the Status Change. Any Options or Rights that were exercisable immediately prior to the Status Change will continue to be exercisable for a period of three months (or such longer period as the Committee may determine), and shall thereupon terminate, unless the Award provides by its terms for immediate termination in the event of a Status Change (unless otherwise determined by the Committee) or unless the Status Change results from a discharge for cause which in the opinion of the Committee casts such discredit on the participant as to justify immediate termination of the Award (unless otherwise determined by the Committee). In no event, however, shall an Option or Stock Appreciation Right remain exercisable beyond the latest date on which it could have been exercised without regard to this Section 7. For purposes of this paragraph, in the case of a Participant who is an Employee, a Status Change shall not be deemed to have resulted by reason of (i) a sick leave or other bona fide leave of absence approved for purposes of the Plan by the committee, so long as the Employee's right to reemployment is guaranteed either by statute or by contract, or (ii) a transfer of employment between the Company and a subsidiary or between subsidiaries, or to the employment of a corporation (or a parent or subsidiary corporation of such corporation) issuing or assuming an option in a transaction to which section 424(a) of the Code applies. (b) Except as otherwise determined by the Committee, all Restricted Stock held by the Participant at the time of the Status Change must be transferred to the Company (and, in the event the certificates representing such Restricted Stock are held by the Company, such Restricted Stock will be so transferred without any further action by the Participant) in accordance with Section 6.3(c) above. (c) Any payment or benefit under a Deferred Stock Award, Performance Award, or Supplemental Grant to which the Participant was not irrevocably entitled prior to the Status Change will be forfeited and the Award cancelled as of the date of such Status Change unless otherwise determined by the Committee. 7.3. Certain Corporate Transactions. Except as otherwise provided by the Committee at the time of grant, in the event of a consolidation or merger in which the Company is not the surviving corporation or which results in the acquisition of substantially all the Company's outstanding Stock by a single person or entity or by a group of persons and/or entities acting in concert, or in the event of the sale or transfer of substantially all the Company's assets or a dissolution or liquidation of the Company (a covered transaction"), the following rules shall apply: (a) Subject to paragraph (b) below, all outstanding Awards requiring exercise will cease to be exercisable, and all other Awards to the extent not fully vested (including Awards subject to conditions not yet satisfied or determined) will be forfeited, as of the effective time of the covered transaction, provided that the Committee may in its sole discretion, on or prior to the effective date of the covered transaction, (1) make any outstanding Option and Stock Appreciation Right exercisable in full, (2) remove the restrictions from any Restricted Stock, (3) cause the Company to make any payment and provide any benefit under any Deferred Stock Award, Performance Award, or Supplemental Grant, (4) remove any performance or other conditions or restrictions on any Award, and (5) forgive all or any portion of the principal of or interest on a Loan; or (b) With respect to an outstanding Award held by a participant who, following the covered transaction, will be employed by or otherwise providing services to a corporation which is a surviving or acquiring corporation in the covered transaction or an affiliate of such a corporation, the Committee may at or prior to the effective time of the covered transaction, in its sole discretion and in lieu of the action desccribed in paragraph (a) above, arrange to have such surviving or acquiring corporation or affiliate assume any Award held by such participant outstanding hereunder or grant a replacement award which, in the judgment of the Committee, is substantilly equivalent to any Award being replaced. 7.4. Termination Following Change of Control. Notwithstandng any other provision of this Plan, if the Participant's employment terminates because of a "Qualified Termination" as defined in Exhibit A, all unvested Options and Stock Appreciation Rights then held by such person shall immediately become fully vested, all Options and Stock Appreciation Rights then held by such person shall remain exercisable until the earlier of (i) the fourth anniversary of such Qualified Termination and (ii) the latest date on which such Option or Right could have been exercised without regard to Seciton 7.1 and Section 7.2, and all other Awards shall immediately become fully vested and all restrictions, conditions and performance goals with respect to such Awards shall be deemed satisfied and shall no longer be applicable. 8. GENERAL PROVISIONS 8.1. Documentation of Awards. Awards will be evidenced by such written instruments, if any, as may be prescribed by the Committee from time to time. Such instruments may be in the form of agreements to be executed by both the Participant and the Company, or certificates, letters or similar instruments, which need not be executed by the Participant but acceptance of which will evidence agreement to the terms thereof. 8.2. Rights as a Stockholder, Dividend Equivalents. Except as specifically provided by the Plan, the receipt of an Award will not give a Participant rights as a stockholer, the Participant will obtain such rights, subject to any limitations imposed by the Plan or the instrument evidencing the Award, upon actual receipt of Stock. However, the Committee may, on such conditions as it deems appropriate, provide that a Participant will receive a benefit in lieu of cash dividends that would have been payable on any or all Stock subject to the Participant's Award had such Stock been outstanding. Without limitation, the Committee may provide for payment to the Participant of amounts representing such dividends, either currently or in the future, or for the investment of such amounts on behalf of the Participant. 8.3. Conditions on Delivery of Stock. The Company will not be obligated to deliver any shares of Stock pursuant to the Plan or to remove restriction from shares previously delivered under the Plan (a) until all conditions of the Award have been satisfied or removed, (b) until, in the opinion of the Company's counsel, all applicable Federal and state laws and regulation have been complied with, (c) if the outstanding Stock is at the time listed on any stock exchange or The Nasdaq National Market, until the shares to be delivered have been listed or authorized to be listed on such exchange or market upon official notice of notice of issuance, and (d) until all othe legal matters in connection with the issuance and delivery of such shares have been approved by the Company's counsel. If the sale of Stock has not been registered under the Securities Act of 1933, as amended, the Company may require, as a condition to exercise of the Award, such representations or agreements as counsel for the Company may consider appropriate to avoid violation of such Act and may require that the certificates evidencing such Stock bear an appropriate legend restricting transfer. If an Award is exercised by the Participant's legal representative, the Company will be under no obligation to deliver Stock pursuant to such exercise until the company is satisfied as to the authority of such representative. 8.4. Tax Withholding. The Company will withhold from any cash payment made pursuant to an Award an amount sufficient to satisfy all federal, state and local withholding tax requirements (the "withholding requirements"). In the case of an Award pursuant to which Stock may be delivered, the Committee will have the right to require that the Participant or other appropriate person remit to the Company an amount sufficient to satisfy the withholding requirements, or make other arrangements satsifactory to the Committee with regard to such requirements, prior to the delivery of any Stock. If and to the extent that such withholding is required, the Committee may permit the Participant or such other person to elect at such time and in such manner as the committee provides to have the Company hold back from the shares to be delivered, or to deliver to the Company, Stock having a value calculated to satisfy the withholding requirement. The Committee may make such share withholding mandatory with respect to any Award at the time such Award is made to a Participant. If at the time an ISO exercised the Committee determines that the Company could be liable for withholding requirements with respect to a disposition of the Stock received upon exercise, the Committee may require as a condition of exercise that the person exercising the ISO agree (a) to inform the Company promptly of any disposition (within the meaning of section 424(c) of the Code) of Stock received upon exercise, and (b) to give such security as the Committee deems adequate to meet the potential liability of the Company for the withholding requirements and to augment such security from time to time in any amount reasonably deemed necessary by the Committee to preserve the adequacy of such security. 8.5. Nontransferability of Awards. Unless otherwise permitted by the Committee, no Award (other than an Award in the form of an outright transfer of cash or Unrestricted Stock) may be transferred other than by will or by the laws of descent and distribution, and during a Participant's lifetime an Award requiring exercise may be exercised only by the Participant (or in the event of the Participant's incapacity, the person or persons legally appointed to act on the Participant's behalf). 8.6. Adjustments in the Event of Certain Transactions. (a) In the event of a stock dividend, stock split or combination of shares, recapitalization or other change in the Company's capitalization, or other distribution to common stockholders other than normal cash dividends after the effective date of the Plan, the Committee will make any appropriate adjustments to the maximum number of shares that may be delivered under the Plan under Section 4 above. (b) In any event referred to in paragraph (a), the Committee will also make any appropriate adjustments to the number and kind of shares to stock or securities subject to Awards then outstanding or subsequently granted, any exercise prices relating to Awards and any other provision of Awards affected by such change. The Committee may also make such adjustments to take into account material changes in law or in accounting practices or principles, merger, consolidations, acquisitions, dispositions or similar corporate transactions, or any other event, if it is determined by the Committee that adjustments are appropriate to avoid distortion in the operation of the Plan. (c) In the case of ISOs or or purposes of the limts set forth in the second paragraph of Section 4, the adjustments described in (a) and (b) will be made only to the extent consistent with continued qualification of the option under Section 422 of the Code (in the case of an ISO) or Section 162(m) of the Code (in the case of the limits in Section 4). 8.7. Employment Rights, Etc. Neither the adoption of the Plan nor the grant of Awards will confer upon any person any right to continued retention by the Company or any subsidiary as an Employee or otherwise, or affect in any way the right of the Company or subsidiary to terminate an employment, service or similar relationship at any time. Except as specifically provided by the Committee in any particular case, the loss of existing or potential profit in Awards granted under the Plan will not constitute an element of damages, in the event of termination of an employment, service or similar relationship even if the termination is in violation of an obligation of the Company to the Participant. 8.8. Deferral of Payments. The Committee may agree at any time, upon request of the Participant, to defer the date an which any payment under an Award will be made. 8.9. Past Services as Consideration. Where a Participant purchases Stock under an Award for a price equal to the par value of the Stock the Committee may determine that such price has been satisfied by past services rendered by the Participant. 9. EFFECT, AMENDMENT AND TERMINATION Neither adoption of the Plan nor the grant of Awards to a Participant will affect the Company's right to grant to such Participant awards that are not subject to the Plan, to issue to such Participant Stock as a bonus or otherwise, or to adopt other plans or arrangements under which Stock may be issued to Employees. The Committee may at any time or times amend the Plan or any outstanding Award for any purpose, which may at the time be permitted by law, or may at any time terminate the Plan as to any further grants of Awards, provided that (except to the extent expressly required or permitted by the Plan) no such amendment will, without the approval of the stockholders of the Company, effectuate a change for which stockholder approval is required in order for the Plan to continue to qualify for the award of ISOs under section 422 of the Code, for the award of performance-based compensation under Section 162(m) of the Code or under rule16b-3 promulgated under Section 16 of the 1934 Act. 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. "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. EX-10.2 9 BUSINESS LOAN AGREEMENT WITH COVENANTS Exhibit 10.2 BUSINESS LOAN AGREEMENT WITH COVENANTS THIS BUSINESS LOAN AGREEMENT WITH COVENANTS (this "Agreement") is made this 12 day of August, at Cleveland, Ohio, by and among HOME RETAIL HOLDINGS, INC. (formerly known as Gaylord Companies, Inc., and the surviving entity of a merger between Gaylord Companies, Inc. and Home Retail Acquisition Corp.), a Delaware Corporation, THE COOKSTORE, INC, an Ohio Corporation, and THE COOKSTORE WORTHINGTON, INC., an Ohio Corporation, jointly and severally, (collectively, the "Borrower", and each a "Borrower", unless the context otherwise requires), with their principal place of business located at 4006 Venture Court, Columbus, Ohio 43228, and LIBERTY BIDCO INVESTMENT CORPORATION, a Michigan Corporation ("BIDCO"), at 30833 Northwestern Highway, Suite 211, Farmington Hills, Michigan 48334-2582. This Agreement is intended to, and shall be, deemed effective as of the Effective Date of the Reorganization Plan described below. Furthermore, this Agreement and the financing described herein is intended by the parties hereto to constitute the Exit Financing as that term is described in the Reorganization Plan. WHEREAS, the Borrowers filed for protection under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court, Southern District of Ohio, Eastern Division, Case No. 97-60560, et seq. (the "Bankruptcy Case"); and WHEREAS, an Amended Plan of Reorganization Of Gaylord Companies, Inc., The Cookstore, Inc., and The Cookstore Worthington, Inc., dated June 24, 1998, As Modified (the "Reorganization Plan"), has been Confirmed on July 10, 1998 by the Bankruptcy Court (the "Confirmation Order") in the Bankruptcy Cases, enabling the Borrowers to emerge from the Bankruptcy Cases as viable going businesses, provided that the Borrowers obtain appropriate exit financing; WHEREAS, during the pendency of the Bankruptcy Cases, Fremont Financial Corporation, a California Corporation ("Fremont") lent up to $1,500,000 to The Cookstore, Inc. and The Cookstore Worthington, Inc. pursuant to a certain Loan and Security Agreement, Promissory Notes, Guarantees and other loan documents dated April 23, 1998 (collectively, the "Fremont Financing Agreement"); and WHEREAS, the Borrowers and BIDCO desire to payout, terminate and replace the Fremont Financing Agreement by and through this Agreement; NOW, THEREFORE, in consideration of the terms, covenants and conditions hereinafter set forth, the above recitals which are incorporated herein by reference, and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties agree as follows: 1. EXIT FINANCING: BIDCO shall lend or otherwise make available to Borrower, upon the satisfaction of the terms and conditions hereinafter set forth, and Borrower may borrow from BIDCO, the aggregate principal sum of One Million Three Hundred Thousand Dollars ($1,300,000.00) (the "Exit Financing") together with interest thereon calculated on the basis of a 360 day year, counting the actual number of days elapsed, at the rate of: three (3) percentage points above the rate published by the Wall Street Journal for the first business day of every month as the "prime" rate per annum (the "Note Rate"), until maturity. The "prime" rate published for the first business day of each month will change the Note Rate effective for that month and shall be used to calculate the payment due (whether interest only or principal and interest, as set forth below) on the last business day of that month. The "prime" rate may not necessarily be the lowest interest rate at which BIDCO is willing to extend its credit facilities, nor is it necessarily the interest rate used by BIDCO for its most credit-worthy customers. After maturity hereof, the interest rate on all principal or interest outstanding, whether by acceleration or otherwise, shall be eleven (11) percentage points above such "prime" rate. Any and all advances for the Exit Financing shall be evidenced by a Promissory Note (the "$1,300,000 Note"). The funding of the Exit Financing is expressly subject to the following criteria being met to the sole satisfaction of BIDCO: favorable findings upon completion of due diligence by BIDCO; subordination of officer and shareholder debt to the obligations owed to BIDCO; the execution and delivery of a valid and binding definitive acquisition agreement between Home Retail Holdings, Inc and Aropi, Incorporated upon terms acceptable to BIDCO. Borrower acknowledges that the Exit Financing shall be funded in the following manner, and for the following purposes: (i) $1,053,373.69 has been simultaneously herewith paid via wire transfer to Fremont being an amount equal to the total principal and accrued interest then owed by the Borrowers to Fremont (and to any and all participants in the Fremont Financing Agreement); and (ii) The remaining balance of $246,626.31 shall be wire transferred to such account or accounts as shall be designated by Borrowers in a separate written Draw Instruction, to be used for the working capital of the Borrowers to enable them to cause the Reorganization Plan to become effective and the Borrowers emerge as viable going businesses from the Bankruptcy Cases. 2. EXIT FINANCING WARRANTS: Effective on even date herewith, Home Retail Holdings, Inc. shall execute and deliver to BIDCO Warrants for the purchase of five percent (5%) of Home Retail Holdings, Inc.'s Common Stock and Class B Common Stock on a fully diluted basis as of August 11, 1998 upon such terms and at an exercise price of $.01 as adjusted pursuant to the Warrant of even date, as are acceptable to BIDCO in accordance with the Letter of Understanding (Revised) dated August 5, 1998, between BIDCO and Home Retail Holdings, Inc. Such Warrants shall have registration rights that provide BIDCO the right to have twenty-five percent (25%) of the Borrower's stock sold as a part of the first following securities registration conducted by the Borrower, and any remaining portion sold pursuant to subsequent securities registrations. 3. PAYMENT: Commencing on the last business day of the month in which the Closing occurs, Borrower shall pay the outstanding obligations as follows: FIRST SIX MONTHS: Payment of interest only, based on the Note Rate, due on the last business day of each month, commencing on August 31, 1998 through and including January 31, 1999. PAYMENT UPON PUBLIC OFFERING OR PRIVATE PLACEMENT: Home Retail Holdings, Inc. will make every reasonable effort to accomplish and complete a public offering of additional capital stock to be traded on the NASDAQ or a recognized stock market in October, 1998. In such public offering, Home Retail Holdings, Inc. will cause sufficient shares of its Class A Common Stock to be included in the registration statement such that up to twenty-five percent (25%) of the shares received by BIDCO upon the exercise of its Warrant shall be sold pursuant to such public offering. Furthermore, Home Retail Holdings, Inc. will make every reasonable effort to accomplish similar and additional public offerings in order that any remaining portion of shares shall be registered in such subsequent offerings, which render such shares freely tradeable by BIDCO or its assignee. Furthermore, Home Retail Holdings, Inc. shall reserve and make available such shares necessary until the exercise of the Warrant. In the event due to market conditions or other business factors Home Retail Holdings, Inc. does not conduct the public offering of additional capital stock, it has agreed that it shall conduct a private placement offering of additional capital stock (Borrower shall use its best efforts to sell all of the stock offered through the private placement offering, although Home Retail Holdings, Inc. nor any other Borrower can guaranty or assure BIDCO that such stock so offered will be fully subscribed). The Exit Financing, as evidenced by this Agreement and the $1,300,000 Note, shall be paid in full with the proceeds of the public offering or private placement offering, whichever occurs first. MATURITY: In all events, payment in full of the obligations hereunder shall be due January 31, 1999 (the "Maturity Date"), at which time the entire balance of principal of the Exit Financing, as evidenced by this Agreement, and the $1,300,000 Note, together with all accrued but unpaid interest, shall be due and immediately payable. Each payment received by BIDCO shall be applied first to all outstanding fees and expenses due to BIDCO, then to accrued but unpaid interest, then to principal. All payments shall be made to BIDCO at the address set forth above or as otherwise directed in writing to Borrower. It is understood and agreed that the amortization of the loan will result in a "balloon payment" on the Maturity Date and there has been no agreement by BIDCO to refinance such balloon payment. In the event any payment is not received by BIDCO on or before the date when due, a late fee in the amount of five percent (5%) of the past-due payment shall be immediately payable by Borrower to BIDCO. 4. PREPAYMENT: The $1,300,000 Note may be prepaid at any time and to the extent such Prepayment occurs, Borrower shall pay to BIDCO a prepayment penalty in an amount equal to twenty percent (20%) of the amount so prepaid, which shall be due at the time of such Prepayment. The term "Prepayment" shall include any payment or reduction of the balance due under the $1,300,000 Note, regardless of whether such payment or other reduction, (a) is voluntary or involuntary; (b) is occasioned by BIDCO's acceleration of the $1,300,000 Note; (c) is made by Borrower or by a third party; (d) results from BIDCO's receipt or collection of proceeds of its collateral, including condemnation awards; (e) results from BIDCO's exercise of its right of setoff; and/or (f) is made during a bankruptcy, reorganization or other proceeding, or is made pursuant to any plan of reorganization or liquidation; provided, however, the term "Prepayment" shall not include (1) payment of the $1,300,000 Note from the proceeds of the public stock offering or private placement stock offering described in Section 3 above, or (2) an amendment or restructuring of the Loan and Note Agreement whereby BIDCO hereafter extends additional or substitute financing or refinancing to Borrowers. Notwithstanding any prepayment of the $1,300,000 Note, the Warrant, executed and delivered by Borrower on even date herewith, shall remain in full force and effect in accordance with the terms thereof. 5. SECURITY: To secure the payment of the $1,300,000 Note, this Agreement, and any other present or future liability of Borrower to BIDCO, whether several, joint, or joint and several, Borrower hereby pledges and grants to BIDCO a first continuing security interest in all of Borrower's accounts, chattel paper, instruments and general intangibles, machinery and equipment, inventory and supplies, all furniture and fixtures and interest in joint ventures or other entities, as more fully defined in the Security Agreement, of even date, and all additions, accessions, replacements, substitutions, increments, proceeds and products thereof and thereto, whether now owned or hereafter acquired ("Collateral"). 6. REPRESENTATIONS AND WARRANTIES: Borrower represents that: 6.1 Home Retail Holdings, Inc. is a corporation duly organized and validly existing under the laws of the State of Delaware, in good standing, and duly licensed or qualified as a foreign corporation in all states wherein the nature of its property owned or business transacted by it makes such licensing or qualification necessary; 6.2 The Cookstore, Inc. is a corporation duly organized and validly existing under the laws of the State of Ohio, in good standing, and duly licensed or qualified as a foreign corporation in all states wherein the nature of its property owned or business transacted by it makes such licensing or qualification necessary; 6.3 The Cookstore Worthington, Inc. is a corporation duly organized and validly existing under the laws of the State of Ohio, in good standing, and duly licensed or qualified as a foreign corporation in all states wherein the nature of its property owned or business transacted by it makes such licensing or qualification necessary; 6.4 All necessary corporate proceedings of each Borrower have been duly taken to authorize the execution, delivery and performance of the Loan Documents by Borrower and the consummation of the loan transaction; 6.5 The execution and delivery of this Agreement, the $1,300,000 Note, the Security Agreement, and the Warrant (collectively, the "Loan Documents") to which Borrower is a party are within the power and authority of Borrower. The Loan Documents to which Borrower is a party will be a legal, valid and binding obligation of Borrower, enforceable against Borrower in accordance with their respective terms except to the extent that enforceability may be limited by applicable bankruptcy, insolvency or similar laws affecting the enforcement of creditor's rights generally and subject to general principles of equity. The obligation of Borrower to pay the principal of the $1,300,000 Note, together with all interest accrued thereon and other charges, is absolute and unconditional, and there exists no right of setoff or recoupment, counterclaim, cross-claim or defense of any nature whatsoever to payment of the Obligations; 6.6 Neither the execution nor delivery of this Agreement, the other Loan Documents, or the consummation of the loan transaction contemplated hereby, will conflict with or result in a breach of, or constitute a default under, any of the terms, obligations, covenants, conditions or provisions of: (1) the governing documents (the Articles of Incorporation, By-Laws or Code of Regulations) of Borrower, or any other corporate restriction, or (2) any contract, indenture, mortgage, deed of trust, pledge, bank loan or credit agreement or instrument to which Borrower is now a party, or by which its properties may be bound or affected, or (3) the Reorganization Plan and/or Confirmation Order, or (4) any judgment, order, writ, injunction, decree or demand of any court, arbitrator, grand jury, or any governmental agency, or result in the creation or imposition of any lien, charge or encumbrance of any nature whatsoever upon any property or asset of Borrower (except in the favor of BIDCO) under the terms or provisions of any of the foregoing. Borrower is not in default of the performance, observance or fulfillment of any of the terms, obligations, covenants, conditions or provisions contained in the Reorganization Plan; 6.7 The balance sheets, profits and loss statements, and statements of income and retained earnings and statement of cash flows of Borrower, previously furnished to BIDCO, are true and correct in all material respects and fairly represent the financial condition of Borrower as at the dates of said financial statements and the results of their operations for the periods ending on said dates. Borrower does not have any material contingent obligations, liabilities for taxes, long-term leases, or unusual forward or long-term commitments not disclosed by, or reserved against in, said balance sheets or the notes thereto; and at the present time there are no material unrealized or anticipated losses from any unfavorable commitments of Borrower. Said financial statements were prepared in accordance with generally accepted accounting procedures consistently applied ("GAAP"). Since the date of the latest of such statements there has been no material adverse change in the financial condition of Borrower from that set forth in said balance sheets as at that date. 6.8 Borrower has good and marketable title to all of its properties and assets, including those which constitute the Collateral, free and clear of any liens, charges, encumbrances or other adverse claims, whether legal or equitable, except for the first security interest of BIDCO upon the Collateral as of the date first set forth above. 6.9 There are no actions or proceedings pending (including, without limitation, any adversary proceedings in the Bankruptcy Case) by or against a Borrower before any court or administrative agency, and Borrower has no knowledge or notice of any pending, threatened or imminent litigation, governmental investigations, or claims, complaints, actions or prosecutions involving a Borrower, except for the Bankruptcy Case and such ongoing collection matters in which the Borrower is the plaintiff. 6.10 Borrower has filed all federal, state and local tax returns (including, but not limited to, sales taxes, personal property taxes, franchise taxes and income taxes) together with all other reports which it is required by law to file. Borrower has paid all taxes, assessments and other similar charges that are due and payable prior to such taxes becoming a delinquency or lien against the Borrower's property (except for any such state and local taxes, assessments or charges, in an amount not in excess of $92,000 in the aggregate, which are due and payable with respect to periods prior to the Petition Date of the Bankruptcy Case, which taxes shall be duly paid in accordance with the terms of the Reorganization Plan). 6.11 Each Borrower is solvent and able to pay all of its debts (including trade debts) as they come due. No transfer of property is being made by a Borrower, and no obligation is being incurred by a Borrower in connection with the transactions contemplated by this Agreement or the other Loan Documents with the intent to hinder, delay or defraud either present or future creditors of Borrower. 6.12 Borrower is in compliance in all material respects with the Employee Retirement Income Security Act of 1974, as amended ("ERISA"). No Reportable Event or Prohibited Transaction has occurred or is continuing with respect to any Plan; no circumstances exist which would entitle the PBGC to institute proceedings to terminate or appoint a trustee to administer a Plan; the PBGC has instituted no such proceedings; neither Borrower nor any Commonly Controlled Entity has completely or partially withdrawn from a Multiemployer Plan; Borrower and each Commonly Controlled Entity have met their respective minimum funding requirements under ERISA with respect to all of their Plans, and the present value of all vested benefits under each Plan does not exceed the fair market value of all Plan assets allocable to such benefits, as determined on the most recent valuation date of the Plan in accordance with ERISA; and neither Borrower nor any Commonly Controlled Entity has incurred any liability to the PBGC. 6.13 Borrower is in compliance and conformity, in all material respects, with all laws (including without limitation all applicable foreign, federal, state and local laws, including environmental laws, safety laws, pension laws and employment or labor laws), ordinances, rules, regulations and all other legal requirements, the violation of which would have a material adverse effect on Borrower's business, operations, properties, assets or financial condition. Borrower has not received any notice or order of any violation or claim of violation of any such law, ordinance, rule, regulation, or requirement from any governmental authority wherein the effect of any such violation or violations in the aggregate may have a material adverse effect on the business, properties, operations, or financial condition of Borrower. 7. AFFIRMATIVE COVENANTS: So long as the $1,300,000 Note remains outstanding, as regards its business operations, Borrower shall: 7.1 Maintain insurance with financially sound and reputable insurers covering its properties and business against those casualties and contingencies and in the types and amounts as shall be in accordance with sound business practices and industry standards. All such policies shall name BIDCO as a loss payee, as its interests may appear, and must provide for not less than thirty (30) days prior written notice to BIDCO of any cancellation, change or modification of any term, condition or amount of protection therein. Such insurance policy shall be issued by insurance carriers and BIDCO may reject any insurance carrier with a "Best Insurance Report" rating of less than A, and a financial size category of less than Class X. 7.2 Maintain its existence and business operations as presently in effect in accordance with all applicable laws and regulations, pay its debts and perform all of its obligations when due under normal terms (including, but not limited to all debts and obligations set forth in the Loan Documents), and pay all taxes, assessments, fees and other governmental monetary obligations on or before the date they are last payable without penalty, except as they may be contested in good faith if they have been properly reflected on its books and, at BIDCO's request, adequate funds or security has been pledged, escrowed or reserved to insure payment. 7.3 Maintain proper books, records and accounts in accordance with GAAP, consistent with financial statements previously submitted to BIDCO. 7.4 Furnish to BIDCO whatever information, books and records BIDCO may reasonably request, including at a minimum: A. Within thirty (30) days after each month, a balance sheet as of the end of that month, and a statement of profit and loss and surplus (including a comparison to previously submitted budgets), for that month and from the beginning of that fiscal year to the end of that month. B. Within ninety (90) days after, and as of the end of each of its fiscal years, detailed financial and operating statements, including a balance sheet and a statement of profit and loss and surplus. The statements shall be audited by an independent certified public accounting firm reasonably acceptable to BIDCO. C. As soon as they become available, Borrower's Form 10-Q , 10-K or 8-K, and any other filings made by Borrower with the Securities Exchange Commission. All financial and operating statements submitted to BIDCO shall be prepared in accordance with GAAP, applied on a consistent basis, and shall be accompanied by a Certificate of Compliance, in the form attached as Exhibit A, executed by an officer of Borrower. From time to time upon request by BIDCO, and as BIDCO may reasonably require, such further information regarding the business affairs and financial condition of Borrower, including, but not limited to, accounts payable and accounts receivable agings, accounting and management recommendations and a statement from Borrower certified by Borrower's Secretary or Assistant Secretary affirming Borrower's compliance with all terms and conditions of this Agreement and that no Event of Default or unmatured default exists (the "No-Default Certificates") 7.5 Furnish to BIDCO a written and detailed, forecasted annual operating budget for each fiscal year during the Term not less than sixty (60) days prior to the beginning of the subject fiscal year. 7.6 Furnish BIDCO with copies of all of Borrower's material correspondence, if any, with Borrower's shareholders, directors, executive committees and the financial community. 7.7 Hold Board of Directors meetings no less than once each quarter annum and invite BIDCO to send a representative to each Directors meeting. 7.8 Notify BIDCO in the event that Borrower is or reasonably expects to be in default of any of the provisions hereof. 7.9 Borrower will execute such other and further documents and instruments as BIDCO may request to implement the provisions of this Agreement and to perfect and protect the security interests to BIDCO contemplated herein. 7.10 Home Retail Holdings, Inc. will make every reasonable effort to accomplish and complete a public offering of additional capital stock to be traded on the NASDAQ or a recognized stock market in October, 1998. In such public offering, Home Retail Holdings, Inc. will cause sufficient shares of its Class A Common Stock to be included in the registration statement such that up to twenty-five percent (25%) of the shares received by BIDCO upon the exercise of its Warrant shall be sold pursuant to such public offering. Furthermore, Home Retail Holdings, Inc. will make every reasonable effort to accomplish similar and additional public offerings in order that any remaining portion of shares shall be registered in such subsequent offerings, which render such shares freely tradeable by BIDCO or its assignee. Furthermore, Home Retail Holdings, Inc. shall reserve and make available such shares necessary until the exercise of the Warrant. In the event due to market conditions or other business factors Home Retail Holdings, Inc. does not conduct the public offering of additional capital stock, it has agreed that it shall conduct a private placement offering of additional capital stock (Borrower shall use its best efforts to sell all of the stock offered through the private placement offering, although Home Retail Holdings, Inc. nor any other Borrower can guaranty or assure BIDCO that such stock so offered will be fully subscribed). The proceeds sought from such public and/or private financing will be sufficient to pay in full the Exit Financing, and the actual proceeds (after payment of the expenses of such offering) shall be first used to pay in full the $1,300,000 Note, together with any accrued but unpaid interest. 8. NEGATIVE COVENANTS: So long as the $1,300,000 Note remains outstanding, as regards its business operations, Borrower will not without the written consent of BIDCO: 8.1 Permit the ratio of its current assets to its current liabilities at any time to be less than: 1.25:1.00 The above ratio of current assets to current liabilities shall be computed on a basis consistent with financial statements previously submitted to BIDCO and in conformance with GAAP. 8.2 Permit its net worth at any time to be less than: ($600,000.00) through 11/30/98, and $500,000.00 by 12/31/98 and thereafter. The above ratio of net worth shall be computed on a basis consistent with financial statements previously submitted to BIDCO and in conformance with GAAP. For the purpose of this calculation, net worth shall be reduced by loans to stockholders and related party receivables. 8.3 Acquire, repurchase, redeem or retire any shares of any class of its capital stock, or declare or pay dividends or make any other distributions upon any shares of any class of its capital stock, without the consent of BIDCO, which shall not be unreasonably withheld. 8.4 Incur, or permit to remain outstanding, debt for borrowed money or installment obligations, except debt to BIDCO, unsecured debt incurred in the ordinary course of business, debt disclosed in writing to BIDCO prior to the date hereof (including all obligations pursuant to the Reorganization Plan) (the "Permitted Debt"). For the purposes of this covenant, the sale of Borrower's accounts receivable shall be deemed the incurring of debt for borrowed money. 8.5 Create or permit to exist any lien on any of its property, real or personal, except: liens to BIDCO; liens incurred in the ordinary course of business securing current nondelinquent liabilities for taxes, worker's compensation, unemployment insurance, social security and pension liabilities, and liens for taxes being contested in good faith. 8.6 Except in the ordinary course of business or with the consent of BIDCO (which consent shall not be unreasonably withheld), consolidate with or merge into any corporation or business entity, or permit any corporation or business entity to merge into it (provided, that The Cookstore, Inc. and/or The Cookstore Worthington, Inc. may be merged into their parent, Home Retail Holdings, Inc.); nor convey, lease or sell all or a material portion of its assets or business, nor lease, purchase or otherwise acquire all or a material portion of the assets or business of any other person, corporation or business entity. 8.7 Guarantee or otherwise become or remain secondarily liable on the undertaking of another, except on endorsement for deposit and collection in the ordinary course of business. 8.8 Purchase or acquire any securities of, or make any loans or advances to, or investment in, any person, firm or corporation, except obligations of the United States Government, open market commercial paper rated one of the top two ratings by a rating agency of recognized standing and/or certificates of deposit in commercial banks; provided, however, that so long as Borrower is not then in default hereunder or the payment thereof would cause the Borrower to be in default hereunder, Borrower may also pay the Advisory Agreement payments as approved by the Reorganization Plan to Cambridge Partners, LLC, such Advisory Agreement payments being subordinated at all times to the indebtedness owed to BIDCO hereunder. 8.9 Create any subsidiary or any other class of capital stock other than the currently existing classes of Common Stock or change its fiscal year. 8.10 Enter into any partnership or joint venture which shall be related to the activities of Borrower. 8.11 Allow Home Retail Holdings, Inc. to sell, transfer or otherwise dispose of any of their shares of Common Stock of The Cookstore, Inc. or The Cookstore Worthington, Inc., to any other person or entity. 8.12 Purchase or redeem any shares of any class of its capital stock, except upon the exercise by BIDCO of the Put of the Warrant. 9. EVENTS OF DEFAULT/ACCELERATION: There shall be a default of the $1,300,000 Note and this Agreement, and the $1,300,000 Note and this Agreement and all other liabilities of Borrower to BIDCO shall immediately mature and be due and payable, without notice or demand, unless BIDCO otherwise elects, upon the occurrence of any of the following events: 9.1 Default in the payment of the $1,300,000 Note or any other obligation owing to BIDCO or any other creditor, other than unsecured debt incurred during the ordinary course of business, and such default continues for a period of ten (10) days without cure. 9.2 Default in the performance of any term or condition of this Agreement or in any document given as security for the $1,300,000 Note, or in any other agreement between Borrower and any creditor, and such default continues without cure for a period of ten (10) days. 9.3 Any warranty, representation, or statement made or furnished to BIDCO by Borrower hereunder or otherwise is or becomes untrue in any material respect. 9.4 If any "reportable event" as defined in ERISA occurs. 9.5 The dissolution, termination of existence, suspension of business (including failure to open for business for more than five (5) consecutive days), or insolvency of Borrower; or the appointment of a receiver for any part of the property of Borrower; or the making of an assignment for the benefit of creditors by Borrower; or the commencement of bankruptcy or insolvency proceedings by Borrower; or the commencement of bankruptcy or insolvency proceedings against Borrower which are not dismissed within thirty (30) days; or the inability of Borrower generally to pay its debts as they mature; or death of the President of Borrower (unless a reasonable replacement is substituted within thirty (30) days). 9.6 The material loss, theft, damage or destruction, without insurance, or the encumbrance to or of any material part or all of the Collateral other than as permitted in Section 8.5. 9.7 The entry, placement or issuance of any judgment, levy, lien, writ of attachment, writ of garnishment, writ of execution or similar process, against Borrower or any of Borrower's property unless they do not have a material adverse impact on Borrower's financial condition. 9.8 The sale of a material part of Borrower's assets or business, outside the ordinary course of business, without BIDCO's written consent which shall not be unreasonably withheld. 9.9 BIDCO shall deem itself insecure in good faith believing that the prospect of payment of liabilities or performance under the $1,300,000 Note is materially impaired. 9.10 Any event which results in the acceleration of the maturity of any material indebtedness of Borrower to BIDCO or to others under any notice, indenture, agreement or undertaking. 9.11 So long as BIDCO holds the Warrant; failure to observe and perform any of the material terms and conditions of the Warrant, of even date, entered into by Borrower and BIDCO. 10. REMEDIES ON DEFAULT: If the $1,300,000 Note is not paid at maturity, whether by acceleration or otherwise, BIDCO shall have all of the rights and remedies provided by any applicable law or agreement. Further, and without extending the maturity date thereof, or otherwise limiting the scope or nature of remedies of BIDCO in the event of a default hereunder, BIDCO shall have the right, but not the obligation, upon notice to Borrower, to deem that any or all said due and unpaid interest payments are to be converted to and included as unpaid principal under the $1,300,000 Note, and payment of principal and interest thereon shall become due and payable from the due date according to the terms of such $1,300,000 Note. Any requirement of reasonable notice shall be met if BIDCO sends the notice to Borrower at least ten (10) days prior to the date of sale, disposition or other event giving rise to the required notice. BIDCO is authorized to cause all or any part of the Collateral to be transferred to or registered in its name or in the name of any other person, firm or corporation, with or without designation of the capacity of the nominee. Borrower shall be liable for any deficiency remaining after disposition of any Collateral. 11. AROPI, INC. - SUBORDINATED DEBT - FIRST RIGHT OF REFUSAL: 11.1 Home Retail Holdings, Inc. has entered into a written agreement with Aropi, Incorporated (the "Stock Agreement"), whereby Home Retail Holdings, Inc. shall purchase the outstanding capital stock of Aropi, Incorporated. Borrower hereby agrees and confirms that Borrower shall use its best efforts to consummate the transaction upon the terms currently in effect, that the terms of the Stock Purchase Agreement with Aropi, Incorporated will not be changed without the prior consent of BIDCO, and that Borrower shall not consummate the Stock Purchase Agreement with Aropi, Incorporated through any person or entity other than Borrower without BIDCO's prior written consent. BIDCO shall have a first right of refusal, in BIDCO's sole discretion, to extend a subordinated loan to Borrower upon terms to be mutually agreed, in order to partially finance the Aropi, Incorporate stock acquisition by Borrower. 11.2 If at any time during the three (3) year period commencing upon the earlier of (i) the date the $1,300,000 Note is repaid in full, or (ii) January 31, 1999, the Borrower or any one or more of the Borrowers desires to obtain financing by and through a subordinated indebtedness note, debenture or other such instrument from a third party creditor, then and in that event BIDCO shall have a first right of refusal, in BIDCO's sole discretion, to extend such a subordinated loan to Borrower upon terms to be mutually agreed. Commencing upon the earlier of (x) the prepayment of the $1,300,000 Note or (y) January 31, 1999, Borrower shall pay a facility fee equal to two percent (2%) of the average unused portion of BIDCO's approved lending limit for such subordinated debt facility less any advances to Borrower thereunder (measured as of the end of each anniversary period therefor) unless BIDCO declines to extend such a subordinated loan. 12. MISCELLANEOUS: 12.1 No delay on the part of BIDCO in the exercise of any right or remedy shall operate as a waiver. No single or partial exercise by BIDCO of any right or remedy shall preclude any other future exercise of it or the exercise of any other right or remedy. No waiver or indulgence by BIDCO of any default shall be effective unless in writing and signed by BIDCO, nor shall a waiver on one occasion be construed as a bar to or waiver of any such right on any future occasion. Any election to waive its right of acceleration shall not be construed as a bar to or waiver of any right to elect acceleration on a future occasion. An election by BIDCO to convert any unpaid interest payment to principal shall not require BIDCO to make a similar election in respect of subsequent unpaid interest payments hereunder. 12.2 Any reference to BIDCO shall include any holder of the $1,300,000 Note. The $1,300,000 Note is assignable and transferrable individually or collectively upon written notice to and consent of Borrower (such consent not to be unreasonably withheld). 12.3 The $1,300,000 Note, and this Agreement are governed by Ohio law. This Agreement is valid and binding upon the parties, their respective successors, assigns, heirs and personal representatives. This Agreement may only be amended in a writing signed by all of the parties hereto. 12.4 Within thirty (30) days of Closing, Borrower shall obtain a Landlord Waiver on terms reasonably acceptable to BIDCO with respect to each current and future leased facility, store, warehouse and/or office space. 12.5 Borrower shall pay a facility fee of $53,000 upon the funding hereof of the Exit Financing. Borrower is liable to BIDCO for all reasonable costs and expenses, of every kind, incurred in the making or collection of the $1,300,000 Note, including, without limitation, actual attorney fees and court costs. These costs and expenses shall include, without limitation, any costs or expenses incurred by BIDCO in any bankruptcy, reorganization, insolvency or other similar proceeding. 12.6 All notices required or permitted under the $1,300,000 Note, or this Agreement shall be in writing and personally delivered, sent by certified mail, return receipt requested or by a reliable overnight delivery service, to the respective address above, or to any other address required by the respective party, or by facsimile transmission with confirmation of receipt, and notice shall be deemed given on the earlier of: a) two (2) business days after notice is mailed as set forth above; or b) upon actual receipt. 12.7 The parties agree to perform any further acts and to execute and deliver any additional documents which may be reasonably necessary to carry out the intent and provisions of this Agreement. 12.8 WAIVER OF JURY TRIAL. BORROWER AND BIDCO EACH WAIVES ANY RIGHT TO HAVE A JURY PARTICIPATE IN RESOLVING ANY DISPUTE, WHETHER SOUNDING IN CONTRACT, TORT OR OTHERWISE, BETWEEN BIDCO AND BORROWER ARISING OUT OF, IN CONNECTION WITH, RELATED TO, OR INCIDENTAL TO THE RELATIONSHIP ESTABLISHED BETWEEN THEM IN CONNECTION WITH THIS AGREEMENT OR ANY OTHER INSTRUMENT, DOCUMENT OR AGREEMENT EXECUTED OR DELIVERED IN CONNECTION HEREWITH OR THE TRANSACTION RELATED HERETO. This waiver shall not in any way affect, waive, limit, amend or modify BIDCO's ability to pursue remedies pursuant to any confession of judgment or cognovit provision contained in the $1,300,000 Note, or any other instrument, document or agreement between BIDCO and Borrower. 12.9 If any provision of this agreement is invalid, it shall be ineffective only to the extent of its invalidity, and the remaining provisions shall be valid and effective. 12.10 Borrower expressly waives presentment, demand, notice (other than notice of an event of default if otherwise required by this Agreement), protest, and all other demands and notices in connection with the delivery, acceptance, performance, default or enforcement of the $1,300,000 Note, or this Agreement. 12.11 At no time shall the interest payable hereunder be deemed to exceed the maximum interest rate permitted to be paid by Borrower or received by BIDCO with respect to the indebtedness represented by the $1,300,000 Note, or this Agreement under applicable law (the "Legal Rate"). In the event any interest is charged or received by BIDCO in excess of the Legal Rate, Borrower acknowledges that any such excess interest shall be the result of an accidental and bona fide error, and such excess shall first be applied to reduce the principal then unpaid hereunder (in inverse order of their maturities if principal amounts are due in installments); second, applied to reduce any obligation for other indebtedness of Borrower to BIDCO; and third, any remaining excess returned to Borrower. 12.12 The headings herein are for convenience only, and shall not be used for interpreting this Agreement. Wherever the context requires, the singular shall include the plural, and the masculine shall include the feminine and neuter. 12.13 This Agreement may be signed in multiple counterparts, and by facsimile transmission, all of which, taken together, shall constitute an original Agreement. IN WITNESS WHEREOF, the parties hereto have set their hands as of the day and year first set forth above. WITNESS: HOME RETAIL HOLDINGS, INC., a Delaware Corporation By: /s/ GREG DUKOFF - ------------------------------ ------------------------------- Greg Dukoff, Secretary THE COOKSTORE, INC., an Ohio Corporation, By: /s/ GREG DUKOFF - ------------------------------ ------------------------------- Greg Dukoff, Secretary THE COOKSTORE WORTHINGTON, INC., an Ohio Corporation By: /s/ GREG DUKOFF - ------------------------------ ------------------------------- Greg Dukoff, Secretary LIBERTY BIDCO INVESTMENT CORPORATION By: /s/ PEARL M. HOLFORTY - ------------------------------ ------------------------------- Pearl M. Holforty, President EX-10.3 10 FIRST AMENDMENT TO LOAN AGREEMENT FIRST AMENDMENT TO LOAN AGREEMENT THIS FIRST AMENDMENT TO LOAN AGREEMENT (the "First Amendment") is made this 20th day of August, by and among LIBERTY BIDCO INVESTMENT CORPORATION, whose principal office is located at 30833 Northwestern Highway, Suite 211, Farmington Hills, Michigan 48334-2582 ("BIDCO") and HOME RETAIL HOLDINGS, INC. (formerly known as Gaylord Companies, Inc., and the surviving entity of a merger between Gaylord Companies, Inc. and Home Retail Acquisition Corp.), a Delaware Corporation ("HRH"), THE COOKSTORE, INC, an Ohio Corporation ("TCI"), and THE COOKSTORE WORTHINGTON, INC., an Ohio Corporation ("TCWI"), and AROPI, INCORPORATED, an Iowa Corporation ("AROPI")(HRH, TCI, TCWI and AROPI hereinafter collectively referred to as the "Borrower", and each a "Borrower", unless the context otherwise requires). RECITALS A. HRH, TCI, TCWI and BIDCO entered into a Business Loan Agreement with Covenants dated as of August 12, 1998 (the "Initial Agreement"), pursuant to which BIDCO agreed to make available to HRH, TCI and TCWI a loan of up to $1,300,000.00. Capitalized terms used herein and not otherwise defined shall have the meanings assigned to them in the Initial Agreement. B. HRH has entered into a Stock Purchase Agreement (the "Stock Agreement") with AROPI and the shareholders of AROPI for the purchase of all the outstanding capital stock of AROPI; C. HRH, TCI and TCWI have requested certain amendments to the Initial Agreement, and have requested that BIDCO advance an additional Seven Hundred Thousand Dollars ($700,000.00) to partially fund the purchase of the AROPI stock and to provide working capital for the combined operations of HRH, TCI, TCWI and AROPI. D. In order that BIDCO may further secure the repayment of the amended loan herein contemplated, HRH is willing to grant to BIDCO a security interest in the stock of AROPI pursuant to a Stock Pledge Agreement. E. As a material inducement to BIDCO to make the loan herein contemplated, AROPI, for good and valuable consideration, is willing to become a co-borrower hereunder, jointly and severally, and to pledge a security interest in all of AROPI's assets to secure all obligations to BIDCO. F. BIDCO is willing to make the loan herein described, upon the terms, covenants and conditions herein set forth, and in reliance upon the representations and warranties of Borrower herein contained. NOW, THEREFORE, in consideration of the foregoing Recitals, the terms, covenants and conditions hereinafter set forth, and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties agree as follows: 1. Amendments 1.1 The Initial Agreement is hereby amended to provide that BIDCO shall lend or otherwise make available to Borrower, upon the satisfaction of the terms and conditions set forth herein and in the Initial Agreement, and Borrower may borrow from BIDCO, an additional principal sum of Seven Hundred Thousand Dollars ($700,000.00) (the "Acquisition Financing") together with interest thereon calculated on the basis of a 360 day year, counting the actual number of days elapsed, at Note Rate. After maturity of the Acquisition Financing, the interest rate on all principal or interest outstanding, whether by acceleration or otherwise, shall be eleven (11) percentage points above such "prime" rate. Such Acquisition Financing shall be used for the partial funding of the acquisition by HRH of the outstanding capital stock or substantially all of the assets of AROPI, and for working capital for the combined operations of the combined Borrowers. Any and all advances for the Acquisition Financing shall be evidenced by the $1,300,000 Note, as modified and amended by First Modification and Amendment To Promissory Note of even date herewith, modifying and amending the $1,300,000 Note. The $1,300,000 Note shall hereafter be known as the "$2,000,000 Note". 1.2 At no time shall the aggregate outstanding principal, of the Acquisition Financing and the Exit Financing, exceed the sum of Two Million Dollars ($2,000,000.00). 1.3 The Initial Agreement is hereby modified and amended by replacing the language "$130,000,000 Note" with the words "$2,000,000 Note" in each and every place it appears therein. 1.4 The Borrower shall be jointly and severally liable for all obligations arising pursuant to the $2,000,000 Note, the Initial Agreement, this First Amendment, and any documents delivered with respect thereto. All funds advanced by BIDCO to or for the benefit of the Borrower, whether pursuant to the Initial Agreement or this First Amendmcnt, shall be repaid to BIDCO by Borrower in the same manner as set forth in Section 3. the Initial Agreement. 1.5 The funding of the Acquisition Financing is expressly subject to the following criteria being met to the sole satisfaction of BIDCO: favorable findings upon completion of due diligence by BIDCO; subordination of officer and shareholder debt to the obligations owed to BIDCO; and the execution and delivery of a valid and binding definitive acquisition agreement between HRH, AROPI and the shareholders of AROPI upon terms acceptable to BIDCO. 1.6 Concurrently herewith, HRH shall execute and deliver a Stock Pledge Agreement to BIDCO, upon terms and conditions acceptable to BIDCO, granting a security interest to BIDCO in all outstanding capital stock of AROPI. 1.7 Concurrently herewith, HRH shall execute and deliver an Amendment to Common Stock Purchase Warrant to BIDCO, upon terms and conditions acceptable to BIDCO, granting a put option to BIDCO witb respect to the August 12, 1998 Warrant. 1.8 Concurrently herewith. HRH shall execute, issue and deliver a Common Stock Purchase Agreement Warrant evidencing the right to purchase two percent (2.0%) fully paid and nonassessable shares of Class A Common Stock of HRH subject to a put option by HRH, all upon terms and conditions acceptable to BIDCO. 1.8.0.0.0.0.0.1 Concurrently herewith, AROPI shall execute and deliver a Security Agreement to BIDCO, upon terms and conditions acceptable to BIDCO, granting a security interest to BIDCO in all outstanding assets of AROPI. 1.9 The last sentence of the paragraph entitled "PAYMENT UPON PUBLIC OFFERING OR PRIVATE PLACEMENT" in Section 3 of the Initial Agreement is hereby amended to read in its entirety as follows; All obligations owed by Borrower to BIDCO, as evidenced by the Initial Agreement and the $2,000,000 Note, shall be paid in full with the proceeds of the public offering or private placement offering, whichever occurs first. 1.10 The paragraph entitled "MATURITY" in Section 3 of the Initial Agreement is hereby amended to read in its entirety as follows: MATURITY: In all events, payment in full of the obligations hereunder shall be due January 31, 1999 (the "Maturity Date"), at which time the entire balance of principal of the obligations owed by Borrower to BIDCO, as evidenced by the Initial Agreement, the $2,000,000 Note, together with all accrued but unpaid interest, shall be due and immediately payable. 1.11 Section 4. of the Initial Agreement is hereby amended to read in its entirety as follows: 4. PREPAYMENT: The $2,000,000 Note, may be prepaid without penalty at any time. Notwithstanding any prepayment of the $2,000,000 Note, the Warrant, executed and delivered by Borrower on even date herewith, shall remain in full force and effect in accordance with the terms thereof. 1.12 Section 5. of the Initial Agreement is hereby amended to indicate that the security interests granted therein, and the Collateral identified therein, shall secure the $2,000,000 Note, the Initial Agreement and this First Amendment, together with any other present or future liability of Borrower to BIDCO, whether several, joint, or joint and several. Moreover, HRH hereby grants to BIDCO a security interest in the stock of AROPI, Inc., and AROPI, Inc. hereby grants to BIDCO a security interest in all the accounts, chattel paper, instruments and general intangibles, machinery and equipment, inventory and supplies, all furniture and fixtures and interest in joint ventures or other entities of AROPI, all of which shall be included within, and be added to, the definition of "Collateral" as that term is defined in the Initial Agreement. The security interest in the Collateral may be subordinated in an amount not greater than $2,000,000 only to a senior commercial lender which finances the acquisition of AROPI. 1.13 The Borrower hereby reaffirms and represents that each of the Representations and Warranties set forth in Section 6 of the Initial Agreement are true as of the date hereof, and are applicable to the $2,000,000 Note, as if such amended and modified Note was originally executed and delivered at the time of the Initial Agreement. In addition, the following new Section 6.14 is added to Section 6: 6.14 AROPI is a corporation duly organized and validly existing under the laws of the State of Iowa, in good standing, and duly licensed or qualified as a foreign corporation in all states wherein the nature of its property owned or business transacted by it makes such licensing or qualification necessary. 1.14 Section 7. of the Initial Agreement is hereby amended to indicate that the Borrower shall observe and maintain the Affirmative Covenants set forth therein so long as the $2,000,000 Note, remains outstanding. 1.15 The last sentence of Subsection 7.10 of the Initial Agreement is hereby amended to read in its entirety as follows: The proceeds sought from such public and/or private financing will be sufficient to pay in full all obligations owed by Borrower to BIDCO, and the actual proceeds (after payment of the expenses of such offering) shall be first used to pay in full the $2,000,000 Note, together with any accrued but unpaid interest. 1.16 Section 8. of the Initial Agreement is hereby amended to indicate that the Borrower shall observe and maintain the Negative Covenants set forth therein so long as the $2,000,000 Note, remains outstanding. 1.17 Subsection 8.2 of the Initial Agreement is hereby amended to read in its entirety as follows: Permit its net worth at any time to be less than: Time Period Not Worth August 20, 1998 through September 30, 1998 ($150,000) October 1, 1998 through November 30, 1998 $100,000 December 1, 1998 and thereafter $500,000 The above net worth measurement shall be computed on a basis consistent with financial statements previously submitted to BIDCO and in conformance with GAAP. For the purpose of this calculation, net worth shall be reduced by loans to stockholders and related party receivables. 1.18 The definition of "Permitted Debt" in Subsection 8.4 of the Initial Agreement is hereby amended to include senior commercial financing in an amount not to exceed $2,000,000 to fund the acquisition by HRH of the capital stock of AROPI and working capital of the Borrowers. 1.19 Subsection 8.5 of the Initial Agreement is hereby amended to permit a security interest and lien to be granted to a senior commercial financing in an amount not to exceed $2,000,000 to fund the acquisition by HRH of AROPI and working capital of the Borrowers. 1.20 Subsection 8.6 of the Initial Agreement is hereby amended to permit AROPI to be mergcd into its new parent, HRH. 1.21 Subsection 8.8 of the Initial Agreement is hereby amended to permit HRH to acquire the outstanding capital stock of AROPI pursuant to the terms of the Stock Agreement. 1.22 Subsection 8.8 of the Initial Agreement is hereby amended to read as follows in its entirety: 8.11 Allow HRH to sell, transfer or otherwise dispose of any shares of the common stock of TCI, TCWI, or AROPI, to any other person or entity. 1.23 Section 9. of the Initial Ageement is hereby amended to indicate that there shall be a default of the $2,000,000 Note, the Initial Agreement, and the First Amendment, and the $2,000,000 Note, the Initial Agreement and the First Amendment, and all other liabilities of Borrower to BIDCO shall immediately mature and be due and payable, without notice or demand, unless BIDCO otherwise elects, upon the occurrence of any of the events set forth in Section 9 of the Initial Agreement. 2. Borrower's Representations. Warranties and Events of Default. 2.1 Except as amended hereby, the terms, provisions, conditions and agreements of the Initial Agreement are hereby ratified and confirmed and shall remain in full force and effect. Borrower expressly acknowledges that this First Amendment shall not constitute a novation, a waiver, or an accord and satisfaction. Each and every representation and warranty of the Borrower set forth in the Initial Agreement is hereby confirmed and ratified in all material respects and such representations and Warranties shall be deemed to have been made and undertaken as of the date of this First Amendment as well as at the time they were made and undertaken. 2.2 The Borrower further represents and warrants that: 2.2.0.1 No Event of Default now exists or will exist immediately following the execution bereof or after giving effect to the transctions contemplated hereby. 2.2.0.2 All necessary corporate or shareholder actions on the part of the Borrower to authorize the execution, delivery and performance of this First Amendment, the First Modification and Amendment to Promissory Note, the Stock Pledge Agreement, the Amendment to Common Stock Purchase Warrant, the New Warrant and Put, and the Aropi Security Agreement (the "Amendment Documents") and all other documents or instruments required pursuant hereto or thereto have been taken; the Amendment Documents and each such other document or instrument have been duly and validly executed and delivered and are legally binding and binding upon the parties thereto and enforceable in accordance with their respective terms, except to the extent that the enforceability thereof may be limited by bankruptcy, insolvency or like laws or by general equitable principals. 2.2.0.3 The execution, delivery and performance of Amendment Documents and all other documents or instruments required pursuant hereto or thereto, and all actions and transactions contemplated hereby and thereby will not (A) violate, be in conflict with, result in a breach of or constitute (with due notice or lapse of time or both) a default under (1) any provision of the Articles of Incorporation, Code of Regulations or Bylaws of the Borrower, (2) any arbitration award or any order of any court or of any other governmental agency or authority, (3) any license, permit or authorization granted to the Borrower or under which the Borrower operates, or (4) any applicable law, rule, order or regulation, indenture, agreement or other instrument to which the Borrower is a party or by which the Borrower or any of its properties is bound and which has not here waived or consented to, or (B) result in the creation or imposition of any lien, charge or encumbrance of any nature whatsoever, except as expressly permitted in the Initial Agreement, upon any of the properties of the Borrower. 2.2.0.4 No consent, approval or authorization of, or filing, registration or qualification with, any governmental authority or any other person or entity is required to be obtained by the Borrower in connection with the execution, delivery or performance of the Amendment Documents or any document or instrument required in connection herewith or therewith which has not already been obtained or completed. 3. Affirmation and Agreement of the Borrower. The Borrower has executed this First Amendment to consent to the amendments to the Initial Agreement made pursuant hereto and to acknowledge that the security interests and liens granted by the Borrower to BIDCO pursuant to the Security Agreement and other Amendment Documents shall secure all Obligations, as increased pursuant to the terms hereof. 4. Fees and expenses. As required under the Initial Agreement, the Borrower shall reimburse the BIDCO upon demand for all out-of-pocket costs, charges and expenses of the BIDCO (including reasonable fees and disbursements of legal counsel to BIDCO in connection with the preparation, negotiation, execution and delivery of this First Amendment and the other agreements or documents relating hereto or required hereby. Furthermore, the Borrower shall pay an additional facility fee of $7,000 upon the funding of the Acquisition Financing. 5. Reference to Initial Agreement. Except as amended hereby, the Initial Agreement shall remain in full force and effect and is hereby ratified and confirmed in all respects. On and after the effectiveness of this First Amendment, each reference in the Initial Agreement to "this Agreement", "hereunder", "hereof", "herein" or words of like import, and each reference to the Initial Agreement in any Note or other Loan Document, or other agreement, document or instrument executed and delivered pursuant to the Initial Agrement, shall be deemed a reference to the Initial Agreement as amended hereby. 6. Counterparts. This First Amendment may be executed in as many counterparts as may be convenient, and via facsimile transmission, each of which when so executed shall be deemed to be an original for all purposes, and shall become binding when the Borrower and BIDCO have executed at least one counterpart. 7. Further Acts. The parties agree to perform any further acts and to execute and deliver any additional documents which may be reasonably necessary to carry out the intent and provisions of this First Amendment. 8. Binding Effect; Governing Law. This First Amendment shall be binding upon and shall inure to the benefit of the Borrower and BIDCO, and their respective heirs, personal representatives, successors and assigns. This First Amendment shall be governed by Ohio law. IN WITNESS WHEREOF, the parties have signed this First Amendment to Loan Agreement, intending to be legally bound thereby as of the Effective Date. BORROWER WITNESS: HOME RETAIL HOLDINGS, INC., a Delaware Corporation /s/ PHILLIP J. KARDIS By: /s/ GREG DUKOFF - -------------------------- ------------------------ Greg Dukoff, Secretary THE COOKSTORE, INC., an Ohio Corporation, /s/ PHILLIP J. KARDIS By: /s/ GREG DUKOFF - -------------------------- ------------------------ Greg Dukoff, Secretary THE COOKSTORE WORTHINGTON, INC., an Ohio Corporation /s/ PHILLIP J. KARDIS By: /s/ GREG DUKOFF - -------------------------- ------------------------ Greg Dukoff, Secretary AROPI, INCORPORATED, an Iowa Corporation By: /S/ GLEN KAAS -------------------------------------- Its: President BIDCO Signed in the presence of: LIBERTY BIDCO INVESTMENT CORPORATION (as to all signatures) By: /s/ JAMES C. ZABRISKIE - ------------------------------ ---------------------------------- James C. Zabriskie, Vice President - ------------------------------ EX-10.4 11 EXHIBIT 10.4 LOAN AND SECURITY AGREEMENT (dated as of August 20, 1998) GREENFIELD COMMERCIAL CREDIT, L.L.C. ("Lender") Gentlemen: This Agreement, including all amendments thereto (the "Agreement"), effective as of the date accepted by you, sets forth the terms and conditions upon which you will make loans and advances and extend other financial accommodations (the "Loans") (as set forth herein and in riders attached hereto) to the undersigned (as "Borrower") for the benefit of Borrower and the other parties signing this Agreement as Guarantors, collectively referred to herein as "we," "us" or "our"): 1. DEFINITIONS. As used herein: (A) "Advances" means loans to Borrower under this Agreement and the Revolving Credit Loan Rider and evidenced by the Revolving Credit Note. (B) "Bankruptcy Cases" means the bankruptcy cases of Borrower, The Cookstore, Inc. and The Cookstore Worthington, Inc. under Chapter 11 of the United States Bankruptcy Code (the "Bankruptcy Code"), Case Nos. 97-60560, 97-60565 and 97-60566, pending in the United States Bankruptcy Court for the Southern District of Ohio, Eastern Division. (C) "Collateral" means all of our presently owned and hereafter acquired or arising: (i) accounts (whether or not earned by performance), proceeds of any letter of credit naming us as a beneficiary, chattel paper, contracts, contract rights, instruments and documents (individually and collectively referred to as "Accounts"); (ii) general intangibles (including, without limitation, tax refunds, tax refund claims, trade names, goodwill, trademarks, copyrights, processes, patents, patent rights, patent applications, licenses, inventories, royalties, and/or commission and permits, choses-in-action) (individually and collectively referred to as "Intangibles"); (iii) goods, merchandise and other personal property, wherever located, to be furnished under any contract of service or held for sale or lease, all raw materials, work in process, finished goods and materials and supplies of any kind, nature or description which are or might be used or consumed in our business or used in connection with the manufacture, packing, shipping, advertising, selling or finishing of such goods, merchandise and other personal property including without limitation such goods which give rise to any Accounts or Intangibles and which goods have been returned to or repossessed or stopped in transit by us ("Inventory"); (iv) tangible goods (other than Inventory), equipment and fixtures, including, without limitation, office machines, computer equipment and accessories, tools, dies, furniture, and vehicles together with all accessions, parts and appurtenances thereto appertaining or attached or kept or used or intended for use in connection therewith, and all substitutions, renewals, improvements and replacements of and additions thereto (sometimes hereinafter individually and collectively referred to as "Equipment"); (v) all other property now or at any time hereafter in your possession (including monies, deposit accounts, claims and credit balances); and (vi) all interests in any lease of real property or personal property, whether as a lessor or lessee, including all options to purchase any leased property, and all leasehold improvements; (vii) all stock owned by Borrower in each Guarantor; (viii) books, blueprints, drawings and records related to any of the foregoing as described in subsection (i) through (v) above; (ix) all recoveries of cash or proceeds of property in the Bankruptcy Cases, or in any superseding or any other bankruptcy case, of any of the foregoing Persons, under any or all of Section 544 through and including Section 553 of the Bankruptcy Code. and all proceeds (including proceeds of any insurance policies) and products of and accessions to all the foregoing described property in which we may have any right, title or interest. (D) "Default" shall have the meaning set forth in Section 14 of this Agreement. (E) "Guarantor" means each of the Persons executing this Agreement as so identified on the signature pages below and any Person executing this Agreement at any time hereafter in such capacity. (F) "Indebtedness" means all of our present and future obligations, liabilities, debts, claims and indebtedness, contingent, fixed or otherwise, however evidenced, created, incurred acquired, owing or arising, whether under written or oral agreement, operation of law, or otherwise, and includes, without limiting the foregoing, (i) the Obligations, (ii) obligations and liabilities of any Person secured by a lien, claim, encumbrance, or security interest upon property owned by us, even though we have not assumed or become liable therefor, (iii) obligations and liabilities created or arising under any lease (including capitalized leases) or conditional sales contract or other title retention agreement with respect to property used or acquired by us, even though the rights and remedies of the lessor, seller or lender are limited to repossession, (iv) all unfunded pension fund obligations and liabilities, and (v) deferred taxes. (G) "Loan Account" means the account established and maintained by Lender on its books and records for each of the Loans. (H) "Loan Documents" means this Agreement, the Notes and all other documents and instruments executed pursuant to or in connection with this Agreement and the Loans. (I) "Notes" means the Revolving Credit Note and the Bulge Loan Note. (J) "Obligations" means all present and future loans, advances, debts, liabilities, obligations, covenants, duties and Indebtedness owing by us to you, whether evidenced by any note, or other instrument or document, whether arising from an extension of credit, opening of a letter of credit, loan, guaranty (including the Guaranteed Obligations as defined in Section 4 below), indemnification or otherwise, whether direct or indirect (including, without limitation, those acquired by assignment and any participation by you in our -2- debts owing to others), absolute or contingent, due or to become due, including, without limitation, all interest, charges, expenses, fees, attorneys' fees and any other sums chargeable to us hereunder or under any other agreement with you, including, without limitation, the Notes. (K) "Obligor" means Borrower or any Guarantor of the Obligations, individually or collectively. (L) "Offering" means any public or private placement offering of capital stock of Borrower completed by Borrower. (M) "Person" means any individual, sole proprietorship, partnership, joint venture, trust, unincorporated organization, association, corporation, government, or any agency or political division thereof, or any other entity. (N) "Prime Rate" means the interest rate published from day to day in the WALL STREET JOURNAL in its "Money Rates" column as the "Prime Rate." Should such publication not continue to publish the Prime Rate or a substitute rate, then Lender will select a comparable announced rate. The Prime Rate will change at any time the "Prime Rate" changes. (O) "Term Sheet" means any document attached to this Agreement or to any Rider which contains other terms and conditions of this transaction. (P) Any accounting terms used in this Agreement, unless otherwise indicated, shall have the meanings customarily given to them in accordance with generally accepted accounting principles. (Q) All other terms contained in this Agreement, unless otherwise indicated, shall have the meanings provided by the Uniform Commercial Code of the state set forth in Section 18.(B) ("Code") to the extent the same are defined therein. 2. LOANS. (A) Revolving Credit Loan; Loan Advances, Revolving Credit Note. You will establish a revolving credit loan facility (the "Revolving Credit Loan") and, subject to the terms of this Agreement, you may, in your sole discretion and upon our request, make Advances to us from time to time, pursuant to the Revolving Credit Loan Rider attached hereto and made a part hereof (the "Rider"). You may, in your sole discretion and without notice to us, disburse any or all of the proceeds of any or all of the Advances made by you to such person or persons as you deem necessary to insure that the security interest in or lien upon the Collateral shall at all times have the priority represented by us in this Agreement. You may, in your sole discretion, at any time reduce the Percentage Advance Rate or the Advance amounts set forth in any Rider. You may, from time to time, reimburse yourself for any loan, interest due, fees or expenses, or any third party for any of our Obligations by charging our Loan Account with you. You may deduct from the Advances under this Agreement reserves for accrued interest and such other reserves as you deem proper and necessary. Our obligation to repay Advances made pursuant to the Revolving Credit Loan shall be evidenced by a Revolving Credit Note in form acceptable to Lender executed simultaneously herewith, the terms of which are incorporated herein by this reference. (B) Bulge Loan. You will establish a nonrevolving bulge loan facility in the aggregate principal sum of $500,000.00 (the "Bulge Loan"), under which you will advance to us at closing the sum of $260,000.00. At such time as we have received the Equity Injection (as defined in Section 10.(U) below), you will make advances to us upon our request of up to an additional aggregate sum of $240,000.00. Our obligation to repay the Bulge Loan shall be evidenced by a Bulge Loan Note in form acceptable to Lender executed simultaneously herewith, the terms of which are incorporated herein by this reference. As of and after October 15, 1998, the outstanding principal balance of the Bulge Loan shall constitute an Advance under the Revolving Credit Loan. -3- (C) Interest and Other Charges. We shall pay you interest on the daily outstanding balance of the Notes at a rate determined by reference to the Prime Rate set forth in the Rider and the Notes. In no event whatsoever shall the interest rate and other charges charged hereunder exceed the highest rate permissible under any law which a court of competent jurisdiction shall, in the final determination, deem applicable hereto. In the event that a court determines that you have received interest or other charges hereunder in excess of the highest rate applicable hereto, you shall promptly, in your sole discretion, either apply such amount to the Obligations or refund such amount to us and the provisions herein shall be deemed amended to provide for such permissible rate. (D) Maturity. If demand is not sooner made, the Loans shall be payable in full from the proceeds of the first Offering to be consummated after the date hereof or in all other events no later than January 29, 1999 (the "Maturity Date"). (E) Monthly Accounting. You will provide us, monthly, with an account of advances, charges and payments made pursuant to this Agreement. Such account shall be deemed correct, accurate and binding upon us and an account stated (except for reverses and reapplications of payments made as provided in Section 18.(G) hereof, and corrections or errors discovered by you), unless we notify you in writing to the contrary within thirty (30) days after each account is rendered. 3. COLLATERAL. (A) Grant of Security Interest. As security for the Obligations, Borrower and each Guarantor hereby grant you a continuing first priority perfected security interest in the Collateral. We acknowledge that nothing contained in this Agreement or in any Rider shall be (i) construed as your agreement to resort or look to a particular type of Collateral as security for any loan to us, or limit in any way your right to resort to any or all of the Collateral as security for any of the Obligations, or (ii) deemed to limit or reduce any security interest in or lien upon any portion of the Collateral for the Obligations. (B) Perfection of Security Interest; Protection of Security Interest. We shall, at our expense, perform all steps reasonably requested by you at any time to perfect, maintain, protect, and enforce your security interest in the Collateral, including, without limitation, executing and filing financing or continuation statements, and amendments thereof, in form and substance satisfactory to you, delivering Uniform Commercial Code search reports before and after closing, placing notations on our books of account to disclose your security interest therein, and taking such other steps as are reasonably deemed necessary by you to maintain your control of and security interest in the Collateral, and delivering to you all letters of credit on which we are named beneficiary. You may file, without our signature, one or more financing statements disclosing your security interest under this Agreement. We agree that a carbon, photographic, photostatic, or other reproduction of this Agreement or of a financing statement is sufficient as a financing statement. If any Collateral is at any time in the possession or control of any warehouseman, bailee or any of our agents or processors, we shall notify such person of your security interest in such Collateral and, upon your request, instruct them to hold all such Collateral for your account subject to your instructions. From time to time, we shall, upon your request, execute and deliver confirmatory written instruments pledging to you the Collateral, but our failure to do so shall not affect or limit your security interest or other rights in and to the Collateral. Until all Obligations have been fully satisfied, your security interest in the Collateral shall continue in full force and effect. (C) Attorney-in-Fact. We hereby appoint you and any designee of yours as our attorney-in-fact and authorize you or such designee, at our sole expense, to exercise at any times in your or such designee's discretion all or any of the following powers, which powers of attorney, being coupled with an interest, shall be irrevocable until all Obligations have been paid in full: (a) receive, take, endorse, assign, deliver, accept and deposit, in your name or our name, any and all cash, checks, commercial paper, drafts, remittances and other instruments and documents relating to the Collateral or the proceeds thereof, (b) transmit to account debtors, other obligors or any bailees notice of your interest in the Collateral or request from account debtors or such other obligors or bailees at any time, in our name or your name or any designee, information concerning the Collateral and any amounts owing with respect thereto, (c) notify account debtors or other obligors to make payment directly to you, or notify bailees as to the disposition of Collateral, (d) take or -4- bring, in your name or our name, all steps, actions, suits or proceedings deemed by you necessary or desirable to effect collection of or other realization upon the accounts and other Collateral, (e) after a Default, change the address for delivery of mail to us and to receive and open mail addressed to us, (f) after a Default, extend the time of payment of, compromise or settle for cash, credit, return of merchandise, and upon any terms or conditions, any and all accounts or other Collateral which includes a monetary obligation and discharge or release the account debtor or other obligator, without affecting any of the Obligations, and (g) execute in our name and file against us in your favor financing statements or amendments with respect to the Collateral. 4. GUARANTIES. As an inducement to Lender to enter into the transactions contemplated by this Agreement, each Guarantor agrees with Lender as follows: (A) Guarantee of Obligations. (i) Each Guarantor hereby (x) guarantees, as principal obligor and not as surety only, to Lender the prompt payment of the principal of and any and all accrued and unpaid interest (including interest which otherwise may cease to accrue by operation of any insolvency law, rule, regulation or interpretation thereof) on the Advances and all other Obligations, including the Notes, of Borrower to Lender under this Agreement when due, whether by scheduled maturity, acceleration or otherwise, all in accordance with the terms of this Agreement and the Notes, including, without limitation, default interest, indemnification payments and all reasonable costs and expenses incurred by Lender in connection with enforcing the Obligations of Borrower hereunder, including without limitation the reasonable fees and disbursements of counsel, (y) guarantees the prompt and punctual performance and observance of each and every term, covenant or agreement contained in this Agreement and the Notes to be performed or observed on the part of Borrower and (z) agrees to make prompt payment, on demand, of any and all reasonable costs and expenses incurred by Lender in connection with enforcing the obligations of the Guarantors hereunder, including, without limitation, the reasonable fees and disbursements of counsel (all of the foregoing being collectively referred to as the "Guaranteed Obligations.") (ii) If for any reason any duty, agreement or obligation of Borrower contained in this Agreement shall not be performed or observed by Borrower as provided therein, or if any amount payable under or in connection with this Agreement shall not be paid in full when the same becomes due and payable, each Guarantor undertakes to perform or cause to be performed promptly each of such duties, agreements and obligations and to pay forthwith each such amount to Lender regardless of any defense or setoff or counterclaim which Borrower may have or assert, and regardless of any other condition or contingency. (B) Nature of Guaranty. The obligations of each Guarantor hereunder constitute an absolute and unconditional and irrevocable guaranty of payment and not a guaranty of collection and are wholly independent of and in addition to other rights and remedies of Lender and are not contingent upon the pursuit by Lender of any such rights and remedies, such pursuit being hereby waived by each Guarantor. (C) Waivers and Other Apreements. Each Guarantor hereby unconditionally (i) waives any requirement that Lender, upon the occurrence of a Default first make demand upon, or seek to enforce remedies against, Borrower or any other Guarantor before demanding payment under or seeking to enforce the obligations of any Guarantor hereunder, (ii) covenants that the obligations of the Guarantors hereunder will not be discharged except by complete performance of all obligations of Borrower contained in this Agreement and the Notes, (iii) agrees that the obligations of the Guarantors hereunder shall remain in full force and effect without regard to, and shall not be affected or impaired, without limitation, by any invalidity, irregularity or unenforceability in whole or in part of this Agreement, the Notes or any security agreement ("Security Document"), or any limitation on the liability of Borrower thereunder, or any limitation on the method or terms of payment thereunder which may or hereafter be caused or imposed in any manner whatsoever (including, without limitation, usury laws), (iv) waives diligence, presentment and protest with respect to, and -5- any notice of default or dishonor in the payment of any amount at any time payable by Borrower under or in connection with this Agreement or the Notes, and further waives any requirement of notice of acceptance of, or other formality relating to, the obligations of the Guarantors hereunder and (v) agrees that the Guaranteed Obligations shall include any amounts paid by Borrower to Lender which may be required to be returned to Borrower or any Guarantor or to any representative, trustee, custodian or receiver for Borrower or any such Guarantor. (D) Obligations Absolute. The obligations, covenants, agreements and duties of the Guarantors under this Agreement shall not be released, affected or impaired by any of the following whether or not undertaken with notice to or consent of any Guarantor: (i) an assignment or transfer, in whole or in part, of the Advances made to Borrower or of this Agreement or any Note although made without notice to or consent of the Guarantors, or (ii) any waiver by Lender or by any other person, of the performance or observance by Borrower of any of the agreements, covenants, terms or conditions contained in this Agreement, any Note or any Security Document, or (iii) any indulgence in or the extension of the time for payment by Borrower of any amounts payable under or in connection with this Agreement or any Note, or of the time for performance by Borrower of any other obligations under or arising out of this Agreement or any Note, or the extension or renewal thereof, or (iv) the modification, amendment or waiver (whether material or otherwise) of any duty, agreement or obligation of Borrower set forth in the Loan Documents (the modification, amendment or waiver from time to time of the Loan Documents being expressly authorized without further notice to or consent of any Guarantors), or (v) the voluntary or involuntary liquidation, sale or other disposition of all or substantially all of the assets of Borrower or any receivership, insolvency, bankruptcy, reorganization, or other similar proceedings, affecting Borrower or any of its assets, or (vi) the merger or consolidation of Borrower or any Guarantor with any other person, or (vii) the release or discharge, by operation of law, of Borrower or any Guarantor from the performance or observance of any agreement, covenant, term or condition contained in the Loan Documents, or (viii) any other cause whether similar or dissimilar to the foregoing which would release, affect or impair the obligations, covenants, agreements or duties of the Guarantors hereunder. (E) No Investigation by Lender. Each Guarantor hereby waives unconditionally any obligation which, in the absence of such provision, Lender might otherwise have to investigate or to assure that there has been compliance with the law of any jurisdiction with respect to the Guaranteed Obligations recognizing that, to save both time and expense, each Guarantor has requested that Lender not undertake such investigation. Each Guarantor hereby expressly confirms that the obligations of such Guarantor hereunder shall remain in full force and effect without regard to compliance or noncompliance with any such law and irrespective of any investigation or knowledge of Lender of any such law. (F) Indemnity. As a separate, additional and continuing obligation, each Guarantor unconditionally and irrevocably undertakes and agrees with Lender that, should the Guaranteed Obligations not be recoverable from the Guarantors under Section 4.(A) for any reason whatsoever (including, without limitation, by reason of any provision of this Agreement or the Notes or any other agreement or instrument executed in connection herewith being or becoming void, unenforceable, or otherwise invalid under any applicable law) then, notwithstanding any knowledge thereof by Lender at any time, each Guarantor as sole, original and independent obligor, upon demand by Lender, will make payment to Lender of the Guaranteed Obligations by way of a full indemnity in such currency and otherwise in such manner as is provided in this Agreement and the Notes. (G) Subordination, Subrogation, Etc. Each Guarantor agrees that any present or future indebtedness, obligations or liabilities of (i) Borrower to any Guarantor, or (ii) any Guarantor to any other Guarantor, shall be fully subordinate and junior in right and priority of payment to any present or future indebtedness, obligations or liabilities of Borrower to Lender. Each Guarantor waives any right of subrogation to the rights of Lender against Borrower or any other person obligated for payment of the Guaranteed Obligations and any right of reimbursement or indemnity whatsoever arising or accruing out of any payment which any Guarantor may make pursuant to this Agreement and the Notes, and any right of recourse to security for the debts and obligations of Borrower, unless and until the entire principal balance of and interest on the Guaranteed Obligations shall have been paid in full. -6- (H) Waiver. To the extent that it lawfully may, each Guarantor agrees that it will not at any time insist upon or plead, or in any manner whatsoever claim or take any benefit or advantage of any applicable present or future stay, extension or moratorium law, which may affect observance or performance of the provisions of the Loan Documents; nor will it claim, take or insist upon any benefit or advantage of any present of future law providing for the evaluation or appraisal of any security for its obligations hereunder or those of Borrower under this Agreement and under the Notes prior to any sale or sales thereof which may be made under or by virtue of any instrument governing the same; nor will it, after any such sale or sales claim or exercise any right, under any applicable law, to redeem any portion of such security so sold. 5. CHARGES AND INSURANCE. (A) Charges. You may, in your discretion, at any time discharge any lien or encumbrance on or against any of the Collateral, or bond the same, pay any insurance, maintain guards, pay any service bureau, or obtain any record and charge the cost thereof to our loan account. (B) Insurance. We shall insure the Collateral in your name against loss or damage by fire, theft, burglary, pilferage, loss in transit and such other hazards as you shall specify in amounts, under policies and by insurers acceptable to you. Each policy shall include a provision for thirty (30) days prior written notice to you of any cancellation or substantial modification and shall show you as mortgagee/secured party and loss payee in a manner acceptable to you. All premiums shall be paid by us and the policies shall be delivered to you. If we fail to do so, you may (but shall not be required to) procure such insurance at our expense. 6. EXAMINATION OF RECORDS; REPORTING. (A) Examination of Records. You may at all reasonable times have access to, examine, audit, make extracts from and inspect our records, files, books of account and the Collateral. We will deliver to you any instrument necessary for you to obtain records from any service bureau maintaining records for us. All instruments and certificates prepared by us showing the value of any of the Collateral shall be accompanied, upon request, by copies of related purchase orders and invoices. You may, at any time after default, remove from our premises our books and records or require us to deliver them to you and you may, without expense to you, use such of our personnel, supplies and premises as may be reasonably necessary for maintaining or enforcing your security interest. (B) Reporting. We shall furnish you, upon request, information and statements showing our business affairs, financial condition and the results of our operations, including, but not limited to, the following Reports "): (i) a consolidated financial statement for Borrower and the Guarantors, containing an income statement and balance sheet, and accounts receivable and accounts payable agings, by the fifteenth (15th) day of each month for the immediately preceding month, together with a certification signed by an officer of Borrower in form acceptable to Lender; (ii) weekly updated perpetual inventory certifications with a computer disk; (iii) copies of all tax returns, including payroll withholding, unemployment, sales and income, as and when filed. (iv) Copies of Borrower's Form 10-Q, 10-K and all other filings with the Securities Exchange Commission ("SEC") and (v) Such other documents and information relating to the business and financial condition of Borrower and Guarantors as Lender may reasonably require from time to time. -7- 7. OTHER LIENS. We represent and warrant that all Collateral is and will continue to be owned by us free and clear of all liens, claims and encumbrances whatsoever, whether prior or subordinate to the liens we have granted you, except the subordinate security interests in favor of Liberty Bidco Investment Corporation ("Liberty Bidco "), and that we will not, without your prior written approval, which may be withheld in your sole discretion, sell, encumber or dispose of or permit the sale, encumbrance or disposal of any Collateral, except for sales of Inventory in the ordinary course of business. 8. GENERAL WARRANTIES AND REPRESENTATIONS. We warrant and represent that: (A) We are each duly organized and existing in good standing under the laws of our respective states of incorporation set forth on Schedule 8(A), are qualified to do business and are in good standing in all states in which qualification and good standing are necessary in order for us to conduct our business and own our property and have all requisite power and authority to conduct our business, to own our property and to execute, deliver and perform all of our Obligations; (B) We have not, during the preceding five (5) years, been known by or used any other Assumed Names or Trade Names other than as set forth on Schedule 8(B); (C) The execution, delivery and performance by us of this Agreement will not constitute a violation of any applicable law or of our Articles or Certificate of Incorporation, By-Laws or Code of Regulations, or any agreement or document to which we are a party or bound; (D) We possess adequate assets, licenses, patents, patent applications, copyrights, trademarks, trademark applications, and tradenarnes for the conduct of our business; (E) Except as heretofore disclosed to you in writing or herein, we have (i) no pending or threatened litigation, actions or proceedings which would materially and adversely affect our business assets, operations or condition, financial or otherwise, or the Collateral and (ii) no Indebtedness, other than the Obligations and Indebtedness to Liberty Bidco; (F) We have good, indefeasible, and merchantable title to the Collateral, and there is no lien or encumbrance thereon other than the security interests granted to you and Liberty Bidco, except as set forth on Schedule 8(F) attached; (G) We are not a party to any contract, or subject to any charge, corporate restriction, judgment, decree or order materially and adversely affecting our business, assets, operations or condition, financial or otherwise, and are not subject to any labor dispute; and, no labor contract is scheduled to expire during the term of this Agreement, except as heretofore disclosed to you in writing; (H) We are not in violation of any applicable statute, regulation or ordinance, in any respect materially and adversely affecting the Collateral or our business, assets, operations or condition, financial or otherwise, except for the reports required to be filed with the SEC as set forth on Schedule 8(H) (the "SEC Reports"); (I) We are not in default beyond any applicable grace period with respect to any note, indenture, loan agreement, mortgage, lease, deed or other agreement to which we are a party or bound; (J) The financial statements delivered to you fairly present our financial condition and results of operations and those of such other Persons described therein as of the date thereof; and there has been no material and adverse change in such financial condition or operations since the date of the statements; -8- (K) We have received no notice that we are not in full compliance with any of the requirements of the Employee Retirement Income Security Act of 1974, as amended, ("ERISA") and its regulations and, to the best of our knowledge, there exists no event described in Section 4043 of ERISA, excluding subsections 4043(b)(2) and 4043(b)(3) thereof, with respect to us; (L) We have filed all tax returns and other reports we are required by law to file and have paid all taxes and similar charges that are due and payable; (M) Our Chief Executive Offices, Principal Places of Business and the Locations of Collateral Records are as set forth on Schedule 8(M); (N) We have not received any notice alleging and are not aware of any facts indicating noncompliance with any State or Federal law governing the use, generation, storage or release of any hazardous waste or substance; (O) We have no Subsidiaries or Affiliates other than as set forth on Schedule 8(A). For each subsidiary or affiliate shown on Schedule 8(A), the Location of Collateral and chief executive officer of each such subsidiary or affiliate are as set forth on Schedule 8(O); (P) All properties on which Collateral is located are leased properties, except as set forth on Schedule 8(O); (Q) All Collateral which is tangible personal property is kept only at the locations set forth on Schedule 8(O); (R) Schedule 8(A) hereto correctly sets forth the corporate name and jurisdiction of incorporation of Borrower and each Guarantor ("Subsidiary"). Each such Subsidiary and each corporation becoming a Subsidiary of Borrower or any Guarantor after the date hereof is and will be a corporation duly organized, validly existing and in good standing under the laws of its jurisdiction of incorporation and is and will be duly qualified to do business in each additional jurisdiction where such qualification is or may be necessary under applicable law. Each Subsidiary of Borrower and each Guarantor has and will have all requisite corporate power to own or lease the properties used in its business and to carry on its business as now being conducted and as proposed to be conducted. All outstanding shares of capital stock of each class of each Subsidiary of Borrower and each Guarantor have been and will be validly issued and are and will be fully paid and nonassessable and are and will be owned, beneficially and of record, by Borrower or such Guarantor, or another Subsidiary of Borrower or such Guarantor, free and clear of any Liens; (S) Borrower and Guarantors will use the proceeds of the Loans for their general corporate purposes, to purchase the stock of Aropi, Inc., and to repay in full at closing all certain Indebtedness. Neither Borrower nor any Guarantor nor any of their respective Subsidiaries extends or maintains, in the ordinary course of business, credit for the purpose, whether immediate, incidental, or ultimate, of buying or carrying margin stock (within the meaning of Regulation U of the Board of Governors of the Federal Reserve System), and no part of the proceeds of any Advance will be used for the purpose, whether immediate, incidental, or ultimate, of buying or carrying any such margin stock or maintaining or extending credit to others for such purpose. After applying the proceeds of each Advance, such margin stock will not constitute more than 25% of the value of the assets (either of Borrower or any Guarantor alone or of Borrower and the Guarantors and their respective Subsidiaries on a consolidated basis) that are subject to any provisions of this Agreement or any security document (as defined in Section 9(A)(v) below) that may cause the Advances to be deemed secured, directly or indirectly, by margin stock; -9- (T) No report or other information furnished in writing by or on behalf of Borrower or any Guarantor to Lender in connection with the negotiation or administration of this Agreement contains any material misstatement of fact or, when considered together with Borrower's filings with the SEC and all other information so furnished to Lender, omits to state any material fact or any fact necessary to make the statements contained therein not misleading in light of the circumstances in which they were made. Neither this Agreement, the Notes, the Security Documents nor any other document, certificate, or report or statement or other information furnished to Lender by or on behalf of Borrower or any Guarantor in connection with the transactions contemplated hereby contains any untrue statement of a material fact or, when considered together with Borrower's filings with the SEC and all other information so furnished to Lender, omits to state a material fact necessary in order to make the statements contained herein and therein not misleading in light of the circumstances in which they were made. There is no fact known to Borrower or any Guarantor which materially and adversely affects, or which in the future may (so far as Borrower or any Guarantor can now foresee) materially and adversely affect, the business, properties, operations or condition, financial or otherwise, of Borrower, any Guarantor or any of their respective Subsidiaries, which has not been set forth in this Agreement or in the other documents, certificates, statements, reports and other information furnished in writing, including Borrower's 1997 Form 10-K filing with the SEC, to Lender by or on behalf of Borrower or the Guarantors in connection with the transactions contemplated hereby; (U) Borrower and the Guarantors are engaged as an integrated group in the sale of cookware through various retail stores located in shopping malls in the states set forth on Schedule 8(O). The integrated operation requires financing on such a basis that credit supplied can be made available from time to time to Borrower and the Guarantors, as required for the continued successful operation of Borrower and the Guarantors and the integrated operation as a whole, and Borrower and the Guarantors have requested Lender to make credit available to Borrower primarily for the purpose of financing the integrated operation of Borrower and Guarantors, with each of Borrower and Guarantors expecting to derive benefit, directly or indirectly, from the credit extended by Lender, both in its separate capacity and as a member of the integrated group, inasmuch as the successful operation and condition of each of Borrower and the Guarantors is dependent upon the continued successful performance of the functions of the integrated group as a whole; (V) Each of Borrower and the Guarantors is solvent, able to pay its Indebtedness as it matures, and has capital sufficient to carry on its business and all businesses in which it is about to engage, and the present fair saleable value of the assets of each of Borrower and each such Guarantor is greater than the amount of Borrower's or such Guarantor's, as the case may be, Indebtedness. Borrower and the Guarantors on a consolidated basis are solvent, able to pay their Indebtedness as it matures, and have capital sufficient to carry on their business and all businesses in which they are about to engage, and the present fair saleable value of their assets on a consolidated basis is greater than the amount of their Indebtedness on a consolidated basis; and (W) We have no Indebtedness other than as set forth on Schedule 11(E). (X) We have no contracts or agreements with Cambridge Holdings, L.L.C. ("Cambridge"), other than as set forth on Schedule 8(X) (the "Contracts"). (Y) The proceeds of the $1,300,000 loan disbursed by Liberty Bidco Investment Corporation ("Liberty Bidco") to us (except Aropi, Incorporated) on August 12, 1998, were expended by us as set forth on Schedule 8(Y). (Z) All representations and warranties of Aropi Incorporated and Glenn Kaas as set forth in the Stock Purchase Agreement of even date (as identified below) are incorporated herein by this reference as representations and warranties of Borrower and Guarantor Aropi, Incorporated. 9. CONDITIONS TO OBLIGATIONS OF LENDER. (A) Conditions for Closing. The obligation of Lender to close the Loans hereunder is subject to receipt by Lender of the following documents, fully executed, and completion of the following matters, in form and substance satisfactory to Lender: (i) Charter Documents. Certificates of recent date of the appropriate authority or official of Borrower and each Guarantor's respective state of incorporation (listing all charter documents of Borrower and each Guarantor, respectively, on file in that office if such listing is available) certifying as to the good standing and corporate existence of Borrower and each -10- Guarantor, respectively, together with copies of such charter documents of Borrower and each Guarantor, certified as of a recent date by such authority or official and certified as true and correct as of the date hereof by a duly authorized officer of Borrower and each such Guarantor, respectively; (ii) By-Laws and Corporate Authorizations. Copies of the by-laws or comparable governing document of Borrower and each Guarantor together with all authorizing resolutions and evidence of other corporate action taken by Borrower and each Guarantor to authorize the execution, delivery and performance by Borrower and each Guarantor of the Loan Documents to which Borrower and such Guarantor, respectively, is a party and the consummation by Borrower and such Guarantor, respectively, of the transactions contemplated hereby, certified as true and correct as of the date hereof by a duly authorized officer of Borrower and each Guarantor, respectively; (iii) Incumbency Certificates. Certificates of incumbency of Borrower and each Guarantor containing, and attesting to the genuineness of, the signatures of those officers authorized to act on behalf of Borrower and such Guarantor in connection with the Loan Documents to which Borrower or such Guarantor is a party and the consummation by Borrower and such Guarantor of the transactions contemplated hereby, certified as true and correct as of the date hereof by a duly authorized officer of Borrower and each such Guarantor, respectively; (iv) Notes. The Revolving Credit Note and Bulge Loan Note duly executed on behalf of Borrower; (v) Security Documents. This Loan and Security Agreement duly executed on behalf of Borrower and each Guarantor granting to Lender, as collateral security for the Indebtedness, the Collateral intended to be provided pursuant to Section 3, together with the following in fully executed form (collectively referred to herein, together with any other document executed in connection with this Agreement granting to Lender a security interest in or lien on any property of Borrower or any Guarantor, as the "Security Documents"): a. Recording, Filing, Etc. Evidence of the recordation, filing and other action (including payment of any applicable taxes or fees) in such jurisdictions as Lender may deem necessary or appropriate with respect to any Security Interest, including the filing of financing statements and similar documents which Lender may deem necessary or appropriate to create, preserve or perfect the liens, security interests and other rights intended to be granted to Lender thereunder, together with Uniform Commercial Code record searches in such offices as Lender may request; b. Landlord's Agreements. A Landlord's Agreement executed by each landlord of real property leased by Borrower or Guarantor where any Inventory is located, in the form of Exhibit A attached hereto or as acceptable to Lender, provided that each such Landlord's Agreement may be provided to Lender not later than 30 days after the date hereof; c. Patent, Trademark, Copyright and License Mortgage. A Patent, Trademark, Copyright and License Mortgage in form acceptable to Lender. d. Assignments of Trademarks. Assignments of all United States registered trademarks in a form which will be accepted for filing with the United States Patent and Trademark Office. -11- e. Casualty and Other Insurance. Evidence that the casualty and other insurance required pursuant to Section 5 of this Agreement is in full force and effect; (vi) Closing Certificate. A closing certificate for Borrower and each Guarantor in form acceptable to Lender duly executed by an officer of Borrower and each Guarantor; (vii) Legal Opinions. The favorable written opinion of counsel for Borrower and each Guarantor with respect to such matters as Lender may reasonably request; (viii) Consents, Approvals, Etc. Copies of all governmental and nongovernmental consents, approvals, authorizations, declarations, registrations or filings, if any, required on the part of Borrower or any Guarantor in connection with the execution, delivery and performance of the Loan Documents or the transactions contemplated hereby or as a condition to the legality, validity or enforceability of the Loan Documents, certified as true and correct and in full force and effect as of the date hereof by a duly authorized officer of Borrower, or, if none is required, a certificate of such officer to that effect; (ix) Loan Origination Fee; Costs and Expenses. Pay to Lender a Loan Origination Fee in the amount of One Hundred Ten Thousand and 00/100 Dollars ($110,000.00) together with all costs and expenses payable to Lender as provided herein. Any unused amount of the Due Diligence Investigation Fees of Twenty Thousand and 00/100 Dollars ($20,000.00) paid to Lender to date shall be credited against amounts due hereunder. The Loan Origination Fee shall be deemed fully earned when paid. (x) Payoff Letters and Lien Terminations. Payoff letters from all Persons to whom Borrower or any Guarantor is indebted on any Indebtedness, except Permitted Indebtedness (as defined in Section 11.(E) below), in form and substance acceptable to Lender, together with UCC financing statement terminations and other documents and instruments necessary or reasonably desired by Lender to effect and evidence payment in full as of the date hereof of all Indebtedness other than Permitted Indebtedness and the Obligations and the release and discharge of all liens and security interests in their favor with respect to property of Borrower and the Guarantors. (xi) Subordination Agreements. Subordination Agreements executed by Liberty Bidco and Glenn Kaas (each a "Creditor"), Borrower, Guarantors and Lender subordinating all Indebtedness of Borrower to each of said Creditors, and all security interests and liens granted as security for such Indebtedness, to the Loans and Security Documents, together with UCC Financing Statements evidencing such subordination, in all respects in form acceptable to Lender; and such other subordination agreements as Lender shall require in form acceptable to Lender. (xii) Consummation of Stock Purchase Transaction. Execution simultaneously herewith on an irrevocable basis of a Stock Purchase Agreement providing for the purchase by Borrower of one hundred percent (100%) of the issued and outstanding capital stock of Aropi Incorporated and delivery to Lender within fifteen (15) days of the date hereof of a complete copy of the Stock Purchase Agreement and all documents executed in connection therewith. (xiii) Warrants. The Warrants (as defined in Section 12). (xiv) Other Matters. Such other documents, and completion of such other matters, as Lender may reasonably request. (B) Further Conditions for Disbursement. The obligation of Lender to make any Advance (including the first Advance) is further subject to the satisfaction of the following conditions precedent: -12- (i) The representations and warranties contained in Section 8 hereof and in any of the Loan Documents shall be true and correct on and as of the date such Advance is made (both before and after such Advance is made) as if such representations and warranties were made on and as of such date; (ii) No Default shall exist or shall have occurred and be continuing on the date such Advance is made (whether before or after such Advance is made); and (iii) In the case of any Advance under the Revolving Credit Loan, Lender shall have received, when due, all Reports required pursuant to Section 6.(B) as of the close of business on the last business day of the week next preceding the date such Advance is made. Borrower shall be deemed to have made a representation and warranty to Lender at the time of the making of, and the continuation or conversion of, each Advance to the effects set forth in clauses (A) and (B) of this Section 9. For purposes of this Section 9.(B), the representations and warranties contained in Section 8 hereof shall be deemed made with respect to both the financial statements referred to therein and the most recent financial statements delivered pursuant to Section 6. (C) Post-Closing Conditions. The following shall be satisfied after closing: (i) UCC Searches. By September 30, 1998, Lender shall have verified to its satisfaction that all security interests and liens on the Collateral, except those in favor of Lender and Liberty Bidco, or as permitted herein, have been discharged and terminated of record; and that all liens and security instruments in favor of Lender are filed of record. (ii) Evidence of Use of Loan Proceeds. By September 30, 1998, Lender shall have received such evidence as it shall deem sufficient as to the disbursement of the proceeds of the Loans and the loan by Liberty Bidco to Borrower and Guarantors of even date. (iv) Completion of Lender's Due Diligence. Borrower and Guarantor Aropi shall permit Lender, upon reasonable advance notice, full access to Aropi's books and records and personnel for the purpose of allowing Lender to complete its due diligence investigation relating primarily to inventory and such other matters as Lender shall determine based on such investigation during the period from the date hereof through September 18, 1998. Borrower shall permit to Lender promptly upon Lender's written request payment for Lender's fees and expenses for Lender's due diligence investigation of Borrower as of the date hereof and through September 18, 1998 less deposits made. (v) Cash Flow Projection. Borrower shall deliver to Lender by not later than September 11, 1998, a consolidated (Borrower and Guarantors) monthly cash flow projection for the calendar years 1999, 2000 and 2001 prepared on a basis consistent with the consolidated financial projections (Borrower and Guarantors) prepared as of and prior to the date hereof and upon the following assumptions: (i) Borrower does not complete an Offering at any time during such period, (ii) Borrower and Guarantors continue to own and operate their business in a consistent manner and with the same number of owned retail stores and (iii) taking account of such additional knowledge and information relating to the business operations of the Guarantors as Borrower shall acquire after the date hereof (the "Post-Closing Projection"). 10. AFFIRMATIVE COVENANTS. We covenant that, so long as any Obligations remain outstanding and this Agreement is in effect, we shall: (A) Pay to you on demand all reasonable fees and expenses which you incur in connection with (i) the forwarding of loan proceeds, (ii) the processing of loan advances, (iii) the establishment and maintenance of the lock box and of all other accounts created in connection with the transaction contemplated hereby, and (iv) examination of the Collateral; -13- (B) Promptly file all tax returns and other reports which we are required to file and promptly pay all taxes, assessments and other charges, except as are contested in good faith and for which adequate reserves are established and maintained; (C) Promptly notify you in writing of any litigation affecting us, whether or not the claim is covered by insurance, and of any suit or administrative proceeding which may materially and adversely affect the Collateral or our business, assets, operations or condition, financial or otherwise; (D) Notify you in writing (i) promptly upon the occurrence of any event described in Section 4043 of ERISA, other than a termination, partial termination or merger of a "Plan" (as defined in ERISA) or a transfer of a Plan's assets, and (ii) prior to any termination, partial termination or merger of a Plan or a transfer of a Plan's assets; (E) Give you thirty (30) days prior written notice of our opening or closing any place of business; (F) Maintain our corporate existence and our qualification and good standing in all states necessary to conduct our business and own our property and maintain adequate assets, licenses, patents, copyrights, trademarks and tradenames to conduct our business; (G) Promptly notify you in writing of any labor dispute to which we are or may become subject and the expiration of any labor contract to which we are a party or bound; (H) Promptly notify you in writing of any violation of any law, statute, regulation or ordinance of any governmental entity, or of any agency thereof, applicable to us which may materially and adversely affect the Collateral or our business, assets, operations or condition, financial or otherwise; (I) Notify you in writing within five (5) business days of our default beyond any applicable cure period under any note, indenture, loan agreement, mortgage, lease, or other agreement to which we are a party or bound; (J) Promptly notify you in writing of any default beyond any applicable cure period under any Indebtedness or indebtedness owing to us; (K) Promptly notify you in writing of the making of any capital expenditures materially affecting our business, assets, operations or conditions, financial or otherwise; (L) Execute and deliver to you, upon request, such documents and agreements as you may, from time to time, reasonably request to carry out the terms and conditions of this Agreement; (M) Promptly, and in any event within five (5) days of the receipt thereof, deliver any communication in any way concerning any act or omission on our part regarding the use, generation, storage or release of a hazardous waste or substance. We agree to indemnify and hold you harmless from any and all loss, damage, cost, liability or expense (including reasonable attorney fees) arising out of our use, generation, storage or release of any hazardous waste or substance; (N) Promptly, and in any event within five (5) days of the receipt thereof, deliver to you a copy of any communication from the Federal Department of Labor concerning any alleged wrongful act or omission on our part in connection with the payment of minimum and/or overtime wages to an employee; -14- (O) Promptly, and in any event within five (5) days of the receipt thereof, deliver to you a copy of any communication concerning any violation of a state or Federal law which could result in the forfeiture of the Collateral; (P) Maintain the liens and security interests granted to you as first, prior and only liens upon the Collateral, except as permitted under Section 11.(K); (Q) Provide to you true and accurate copies, and evidence of the filing, of the SEC Reports by not later than September 30, 1998; (R) Provide you not less than thirty (30) days in advance of the acquisition and delivery of any Inventory to any location other than as set forth on Schedule 8(O) (each such location referred to as a "New Location") with the address of the New Location, including the county, and not less than fifteen (15) days prior to such acquisition and delivery, with such duly executed UCC Financing Statements as Lender shall require; (S) Provide to you, upon filing with the SEC, copies of each registration statement, and upon issuance, each offering statement or prospectus, with respect to any proposed public or private offering of securities of Borrower (each an "Offering"); and (T) Comply in all respects with the Order Approving Disclosure Statement and Confirming Amended Plan of Reorganization of Gaylord Companies, Inc., The Cookstore, Inc., and The Cookstore Worthington, Inc., executed in the United States Bankruptcy Court for the Southern District of Ohio, Eastern Division on July 10, 1998, as amended (the "Order"), and provide to you such evidence thereof as you may from time to time reasonably request. (U) Use our best efforts to obtain an additional aggregate cash equity investment in Borrower of $500,000 by not later than October 15, 1998 (the "Equity Injection"). 11. NEGATIVE COVENANTS. Without your prior written consent, we covenant that, so long as any Obligations remain outstanding and this Agreement is in effect, we shall not: (A) Merge or consolidate with or acquire any other Person; (B) Declare or pay cash dividends upon any of our stock or distribute any of our property or make (except in the ordinary course of business) any loans or extensions of credit, or investments in, any Person, or redeem, retire, purchase or acquire, directly or indirectly any of our stock, or make any material change in our capital structure or in our business or operations which might adversely affect the repayment of the Obligations; (C) Enter into any transaction which materially and adversely affects the Collateral or our ability to repay the Obligations; (D) Become liable for the indebtedness of any Person, except by endorsement of instruments for deposit; (E) Incur Indebtedness, other than trade payables arising in the ordinary course of our business, the Obligations, and Permitted Indebtedness as set forth on Schedule 11(E); (F) Make a sale to any customer on a bill-and-hold, guaranteed sale, sale and return, sale on approval, consignment, or any other repurchase or return basis, except for retail sales to customers in the ordinary course; -15- (G) Remove the Collateral which is tangible personal property from the Collateral Locations set forth on Schedule 8(O) unless we give you thirty (30) days prior written notice and the same is removed to a location within the continental United States of America; (H) Use any other corporate or fictitious name; (I) Pay any Indebtedness, other than the Obligations and trade payables, or as otherwise permitted hereunder; (J) Pay any Indebtedness to any of the persons named on Schedule 11(K), except as set forth thereon; (K) Create, assume or otherwise suffer to exist any mortgage, lien or other encumbrance of any kind against the Collateral, without Lender's prior written approval, except for miscellaneous liens which arise in the ordinary course of business, such as landlord liens, liens for taxes not due and payable and similar miscellaneous liens, provided that the related obligation is paid when due and the related lien is thereupon discharged; (L) (As to Borrower only) At any time own less than 100% of the outstanding capital stock of each Guarantor ("Subsidiary Shares"), or pledge or assign or agree to pledge or assign to any Person any Subsidiary Shares; or (M) Pay any amounts to Cambridge in excess of the amounts payable under the Contracts. 12. WARRANTS.Borrower shall issue to you on the date hereof one or more warrants (the "Warrants") for the purchase of a total of two percent (2.0%) of the Common Stock and Class B Common Stock of Borrower (the "Borrower's Stock") on a fully diluted basis as of August 20, 1998, upon such terms and conditions and at an exercise price and with registration and put rights, all as are acceptable to you. 13. TERMINATION. Either party shall have the right to terminate this Agreement at the end of the Term of this Agreement or at any time thereafter by giving the other party written notice by registered or certified mail, which termination shall be effective upon receipt. Upon the effective date of termination, all Obligations shall become immediately due and payable. This Agreement shall also terminate upon payment in full of all Obligations at any time, which payment may be made without premium or penalty at any time. 14. DEFAULT. Any one or more of the following events shall constitute a default ("Default") under this Agreement: (a) we shall fail to pay when due, or breach, any Obligations, or (b) Obligor shall (i) become insolvent, (ii) generally not pay its respective debts as they become due, (iii) make an assignment for the benefit of creditors, (iv) attempt to enter into a composition of debts, or (v) make any material misrepresentation to you or fail to observe or perform in any material respect any covenants or conditions in connection with this Agreement, any Rider or any other instrument related to the Loan hereto, or (c) there shall be filed by or against any Obligor a petition in bankruptcy for liquidation or for reorganization, or a custodian, receiver or agent is appointed or authorized to take charge of its properties, and such proceeding or case shall continue undismissed, or an order, judgment or decree approving or ordering any of the foregoing shall be entered and continued unstayed and in effect, for a period of sixty (60) or more days; or any Obligor authorizes any such action; or (d) there hereafter occurs any material and adverse change in the business, assets, operations and condition, financial or otherwise, of any Obligor, or (e) any Obligor shall be in default beyond any applicable cure period under any agreement to which it is a party, or (f) any guaranty of the Obligations shall be terminated or revoked. Obligor acknowledges that while there are events of default set forth, the Indebtedness is due upon demand, and if demand is not made, then upon the Maturity Date. Demand may occur with or without there being an event of default. -16- 14.A. CASH COLLECTIONS ON DEFAULT. Upon the occurrence of a Default, at your request, a lockbox collection system shall be established and we shall execute such documents as you shall require to establish procedures for the delivery to you immediately following receipt by us of all cash proceeds of the sale of the Collateral and the direct payment to us of all amounts due us from third parties as proceeds of sale of the Collateral, for direct application to the Loans, and we agree to perform such other acts as you shall require, all to assure the immediate delivery to you for application to the Loans of all proceeds of the Collateral, all upon such terms and conditions as are acceptable to you. 15. YOUR RIGHTS AND REMEDIES. (A) If a Default occurs under this Agreement, or any Rider or any other document or instrument executed by the undersigned or any Guarantor, you may, at your election, without notice of your election and without demand, do any one or more of the following: (a) declare our Obligations, whether evidenced by a revolving credit note, a term note or otherwise, to be immediately due and payable; (b) stop advancing money or extending credit to or for our benefit under the Agreement or any Rider; (c) exercise any and all of the rights accruing to a secured party under the Code and any other applicable law; (d) take possession of the Collateral and keep it on our premises, at no cost to you, or remove any part of it to such other place(s) as you may desire or we shall, upon your demand, at our cost, assemble the Collateral and make it available to you at a place reasonably convenient to you. (B) You may sell and deliver any Collateral at public or private sales, for cash, upon credit or otherwise, at such prices and upon such terms as you deem commercially reasonable, at your discretion, and may, if you deem it reasonable, postpone or adjourn any sale of the Collateral by an announcement at the time and place of sale of such postponed or adjourned sale without giving a new notice of sale. We agree that you have no obligation to preserve rights to the Collateral or marshall any Collateral for the benefit of any Person. You are hereby granted a license or other right to use, without charge, our labels, patents, copyrights, name, trade secrets, trade names, trademarks and advertising matter, or any similar property, in completing production, advertising or selling any Collateral and our rights under all licenses and all franchise agreements shall inure to your benefit. Any requirement of reasonable notice shall be met if such notice is mailed postage prepaid to us at our address set forth below at least five (5) business days before sale or other disposition. The proceeds of sale shall be applied first to all expenses of sale, including attorneys' fees, and second to (in whatever order you elect) all Obligations. You will return any excess to us and we shall remain liable for any deficiency. (C) IN THE EVENT OF A DEFAULT HEREUNDER, WE HEREBY WAIVE ALL RIGHTS TO NOTICE AND HEARING PRIOR TO THE EXERCISE BY YOU OF YOUR RIGHTS TO REPOSSESS THE COLLATERAL WITHOUT JUDICIAL PROCESS OR TO REPLEVY, ATTACH OR LEVY UPON SUCH COLLATERAL WITHOUT NOTICE OR HEARING AND ALL RIGHTS OF SET-OFF AND COUNTERCLAIM AGAINST YOU. 16. BANKRUPTCY PROVISIONS. In consideration of the agreements of Lender hereunder and under the Loan Documents, Borrower and Guarantors each agree that, in the event any one or more of them (as a "Debtor" or "Debtors") files for relief under Title 11 of the United States Code ("Bankruptcy Code") or is otherwise subject to an order for relief under the Bankruptcy Code. (A) Relief From Stay. Lender shall be entitled to relief from the automatic stay imposed by Bankruptcy Code Section 362 on or against the exercise of any and all rights and remedies otherwise available to Lender under this Agreement, the Loan Documents or applicable law, if Debtor fails to file a Plan of Reorganization within 120 days or fails to obtain confirmation of a Plan of Reorganization within 180 days, after entry of the order for relief. Borrower specifically acknowledges that "cause" exists for such relief within the meaning of Section 362(d) of the Bankruptcy Code. (B) Cash Collateral. Any attempt by Debtor to use "Cash Collateral" (as defined in Section 363 of the Bankruptcy Code) shall be subject to the prior entry of an order pursuant to Section 363 of the Bankruptcy Code ("Cash Collateral Order") specifically incorporating the principal terms set forth on Schedule 16(B) attached hereto and Borrower shall under no circumstances seek to use Cash Collateral other than on the terms provided in this Agreement. Any such -17- Cash Collateral Order shall permit the use of Cash Collateral only until the earliest to occur of: (i) a Default under any of the provisions of this Agreement or the Loan Documents (other than a Default occasioned solely by the bankruptcy of Debtor), (ii) the appointment of a Chapter 11 trustee or examiner in Debtor's case, (iii) the dismissal of Debtor's case or its conversion to a case under Chapter 7 of the Bankruptcy Code, or (iv) the entry of an order modifying or terminating the automatic stay or prohibiting the further use of cash collateral. Upon the occurrence of any of the events described in (i) through (iv) of the preceding sentence, Debtor's ability to use Cash Collateral shall terminate immediately and automatically; such termination shall not, however, affect or impair the rights, interests or liens granted to Lender under this Agreement or the other Loan Documents. All existing and future revenue and cash shall constitute Cash Collateral, subject to Lender's choate, fully perfected and presently enforceable liens and security interests, and, to the extent they are used and consumed by Debtor after filing of the petition or entry of the order for relief, Debtor specifically agrees that they are collateral for Lender's secured claims under Section 506 of the Bankruptcy Code in the amount so used. To the extent it is determined that Section 552(a) of the Bankruptcy Code applies to limit Lender's interest under the Loan Documents and this Agreement Lender shall be deemed to have, as adequate protection for the use of Cash Collateral, a continuing perfected protection for the use of Cash Collateral, a continuing perfected post-bankruptcy lien and security interest in all Collateral, and all revenue and cash, whether derived from operations prior to or subsequent to or the filing of a voluntary of involuntary petition for relief with respect to Debtor. As further adequate protection for Debtor's use of Cash Collateral, Debtor shall maintain at all times an adequate and appropriate amount and type of coverage of insurance, including endorsements issued therewith covering the Collateral in amounts not less than that required under the Loan Documents. To the extent that the collateral securing Lender's claims in Debtor's bankruptcy case is deemed or proves to be insufficient to pay Lender's claims in full, Lender's secured claims shall be deemed to have been inadequately protected by the provisions of the Cash Collateral Order, and they shall therefore have administrative expenses of the kind specified in Sections 503(b) and 507(b) of the Bankruptcy Code, which superpriority shall be equal to the priority provided under the provisions of Section 364(c)(1) of the Bankruptcy Code over all other costs and administrative expenses incurred in the case of the kind specified in, or ordered pursuant to, Sections 105, 326, 327, 330, 331, 503(b), 506(c), 507(a), 507(b) or 726 of the Bankruptcy Code and shall at all times be senior to the rights of Debtor or any successor trustee in the resulting bankruptcy proceeding or any subsequent proceeding under the Bankruptcy Code. During the pendency of Debtor's bankruptcy, if it is determined that any of the rights granted hereunder or by any of the Loan Documents are security interests or liens, they shall be deemed perfected without the necessity of the filing of any documents or commencement of proceedings otherwise required under non-bankruptcy law for the perfection of security interests, with such perfection being binding upon any subsequently appointed trustee, either in Chapter 11 or under any other Chapter of the Bankruptcy Code, and upon other creditors of Borrower who have or may hereafter extend secured or unsecured credit to Debtor. (C) Surcharge Waiver. Debtor and/or any other representative of Debtor's bankruptcy estate waives any right to seek a surcharge of Lender's collateral under 11 U.S.C. section 506(c) or any other provision of applicable law. (D) Other Waivers. Borrower waives any right to seek an order under 11 U.S.C. sections 363, 364, 1129 or any other provision of the Bankruptcy Code, imposing liens or security interests of senior or equal priority with the liens and security interests of Lender in the Collateral or the Cash Collateral. -18- (E) Other Actions Not Prohibited. Nothing contained in this Section 16 shall be deemed to limit or restrict Lender's rights to seek in the bankruptcy court any relief that Lender and the applicable Agent under the applicable Loan may deem appropriate in the event of a bankruptcy commenced by or against Borrower or any Guarantor, and in particular, Lender shall be free to seek the dismissal or conversion of any case filed by Borrower or any Guarantor, the appointment of a trustee or examiner, and relief from the automatic stay. 17. WAIVER; AMENDMENTS; SUCCESSORS AND ASSIGNS. Your failure to exercise any right, remedy or option under this Agreement or any Rider or other agreement between you and us or delay by you in exercising the same will not operate as a waiver. No waiver by you will be effective unless in writing and then only to the extent stated. No waiver by you shall affect your right to require strict performance of this Agreement. Your rights and remedies will be cumulative and not exclusive. This Agreement cannot be changed or terminated orally. All terms, conditions, promises, covenants, provisions and warranties shall inure to the benefit of and bind your and our respective representatives, successors and assigns. 18. MISCELLANEOUS. (A) If any provision of this Agreement shall be prohibited or invalid, under applicable law, it shall be ineffective only to such extent, without invalidating the remainder of this Agreement. (B) This Agreement shall be interpreted in accordance with the Governing Law of the State Michigan. (C) All of our representations and warranties contained in this Agreement shall survive the execution, delivery and acceptance thereof by the parties. (D) No termination of this Agreement or of any guaranty of the Obligations shall affect or impair the powers, obligations, duties, rights, warranties, representations or liabilities of the parties hereto and all shall survive such termination. (E) Each Obligation may, in your discretion, be evidenced by notes or other instruments issued or made by us to you. If not so evidenced, such Obligation shall be evidenced solely by entries upon your books and records. (F) All Obligations shall constitute one loan secured by the Collateral. You may, in your sole discretion: (i) exchange, enforce, waive or release any of the Collateral or (ii) apply Collateral and direct the order or manner without affecting your right to take any other action with respect to any other Collateral. (G) You shall have the continuing and exclusive right to apply or reverse and re-apply any and all payments to any portion of the Obligations. To the extent that we make a payment or you receive any payment or proceeds of the Collateral for our benefit, which are subsequently invalidated, declared to be fraudulent or preferential, set aside or required to be repaid to a trustee, debtor in possession, receiver or any other party under any bankruptcy law, common law or equitable cause, then, to such extent, the Obligations or part thereof intended to be satisfied shall be revived and continue as if such payment or proceeds had not been received by you. (H) We shall reimburse you for all expenses incurred or to be incurred by you in connection with (a) the negotiation, preparation and closing of this Agreement (to be paid at closing); (b) the protection, perfection or preservation of your security interest in or lien upon the Collateral; (c) your inspection or verification of the Collateral and the filing of UCC Financing Statements; (d) any court or bankruptcy proceeding relating to the Agreement or any claim or action by any Person against you which would not have been asserted were it not for your relationship with us hereunder or otherwise; (e) actions taken with respect to the Collateral and your security interest or lien therein; and (f) enforcement of any of your rights and remedies with respect to the Obligations or Collateral. The foregoing expenses shall include, without limitation: (i) reasonable fees, costs and expenses of your attorneys and paralegals; (ii) interest on the foregoing at the highest applicable interest rate provided under the Rider, which shall be part of the Obligations, payable on demand and secured by the Collateral. In addition, we shall pay to you a fee -19- of Seven Hundred Fifty and 00/100 Dollars ($750.00) per day plus expenses for each inspection and verification of the Collateral, which shall occur not less frequently than every ninety (90) days. In recognition of your right to have all your expenses incurred or to be incurred in connection with this Agreement and the fees due you secured by the Collateral, you shall not be required to record any discharge of your lien or termination of your security interest unless and until we deliver to you a general release acceptable to you. (I) We agree to give you written notice of any action or omission by you or your agents in connection with this Agreement that may be actionable against you or that may be a defense to payment of the Obligations for any reasons. We further agree that unless such a notice specifically describing the action or omission is given by us within thirty (30) days after we have knowledge or with the exercise of reasonable diligence should have had knowledge of the occurrence of said action or omission we shall not assert, and we shall be deemed to have waived, any claim or defense arising therefrom. (J) If you shall breach your obligation under this Agreement to make an advance under the terms of this Agreement, notwithstanding our conformance with the provisions thereof, we agree that our sole remedy on account thereof shall be to recover liquidated damages on account of such breach, computed as hereinafter provided, in recognition of the fact that the damages which we might incur are uncertain and speculative. Liquidated damages to which we shall be entitled shall be equal to sixty (60) times the interest payable for one day on the loans outstanding as of the day that you are deemed to have failed to fund. In any event, you shall never be liable to us for special, indirect and consequential damages, whatever the nature of your breach hereunder. (K) We authorize and direct you to disburse, for our account, the proceeds of loans made by you to us to such Person as any of our chairman and chief executive officer or president shall direct, whether in writing or orally. (L) Any notice required hereunder shall be in writing, and addressed to the party to be notified as follows: If to Greenfield: Mr. Donald G. Barr, Jr., President Greenfield Commercial Credit, L.L.C. 1301 West Long Lake Road, Suite 190 Troy, Michigan 48098 with a copy to: Robert D. Mollhagen, Esq. Howard & Howard Attorneys, P.C. The Phoenix Building, Suite 500 222 Washington Square, North Lansing, Michigan 48933-1817 If to Borrower and/or Mr. David E. Danovitch any Guarantor: Home Retail Holdings, Inc. 535 Madison Avenue, 19th Floor New York, New York 10022 and Mr. Glenn Kaas, Chief Operating Officer Home Retail Holdings, Inc. 4264 Winters Chapel Road, Building B Atlanta, Georgia 30360 with a copy to: William E. Sudow, Esq. Brown & Wood, LLP 815 Connecticut Avenue NW Washington, D.D. 20006-4004 or to such other address as each party may designate for itself by like notice. -20- (M) We represent and warrant to you that, with respect to the financing transaction herein contemplated, no Person is entitled to any brokerage fee or other commission, except that Laux & Company and J.R.P.Consulting Corp. have earned fees payable at closing, and we agree to indemnify and hold you harmless against any and all such claims. (N) The Section titles contained in this Agreement are without substantive meaning and are not part of the Agreement. 19. WAIVER OF JURY TRIAL. Our legal counsel has advised us that (i) there may be a constitutional right to a jury trial in connection with any claim, dispute or lawsuit arising out of this Agreement or any Rider and (ii) such constitutional right may be waived. After consultation with our counsel (which has included our counsel's review of this Agreement), we believe that it is in our best interest in this commercial transaction to waive such right. Accordingly, we hereby waive our right to a jury trial, and further agree that the best forum for hearing any claim, dispute or lawsuit, if any, arising in connection with this Agreement or any Rider or our relationship with you, shall be a court of competent jurisdiction sitting without a jury. 20. NO ORAL AGREEMENTS. We acknowledge that this Agreement and each Rider represents the final agreement between you and us and the terms of such documents may not be contradicted by evidence of prior, contemporaneous, or subsequent oral agreements that may have or will be exchanged between you (including your officers, employees and agents) and us. Very truly yours, BORROWER: GUARANTORS: HOME RETAIL HOLDINGS, INC., THE COOKSTORE, INC., a Delaware corporation an Ohio corporation By: /s/ GREG DUKOFF By: /s/ GREG DUKOFF ------------------------------- -------------------------- Greg Dukoff Greg Dukoff Its: Secretary Its: Secretary Accepted at: New York, New York THE COOKSTORE WORTHINGTON, INC., on August 20, 1998 an Ohio corporation GREENFIELD COMMERCIAL CREDIT, L.L.C. By: /s/ GREG DUKOFF -------------------------- Greg Dukoff Its: Secretary By: /s/ DONALD G. BARR ------------------------------- Donald G. Barr, Jr. Its: President -21- AROPI, INCORPORATED, an Iowa corporation By: /s/ GLENN KAAS -------------------------- Glenn Kaas Its: President -22- EX-10 12 EXHIBIT 10.5 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT ("Agreement") is entered into as of August 20 1998 between HOME RETAIL HOLDINGS, INC., a Delaware corporation (the "Company"), and GLENN KAAS, a resident of the State of Georgia ("Employee"). WHEREAS, the Company desires to employ Employee as the Chief Executive Officer ("CEO") and President of the Company, and Employee desires to be employed by the Company; and WHEREAS, Company and Employee desire to set out in writing the terms of Employee's employment with the Company. NOW, THEREFORE, in consideration of the employment of Employee by the Company, and the premises and mutual covenants and agreements herein contained, the parties hereto agree as follows: Definitions. "Affiliate" shall mean an individual, any spouse, parent, sibling, or child of such individual, or a corporation, any corporation controlling such corporation, any corporation controlled by such corporation, or any shareholder or shareholders, individually or collectively, in control of such corporation. "Aropi" means Aropi, Incorporated, an Iowa corporation. "Base Salary" is defined in Section 3(a). "Board" means the Board of Directors of the Company. "Cause" means during the Term of Employee's employment pursuant to this Agreement one of the following has occurred: (i) Employee has committed a felony not involving the use of a motor vehicle or has been imprisoned following conviction of a felony involving the use of a motor vehicle, (ii) defalcation of fraudulent conduct by Employee, (iii) Employee has committed or engaged in willful misconduct or gross negligence in the performance of his duties to the Company, (iv) failure by Employee to devote his full business time and attention to his duties hereunder (other than any such failure resulting from Employee's incapacity due to Disability), or (v) willful breach of one or more material express obligations under this Agreement by Employee, provided that any such act results in a material injury to the Company. For purposes of this paragraph, no act, or failure to act, on Employee's part shall be considered "willful" if it was done, or omitted to be done, in good faith and with reasonable belief that such act or omission was in, or not opposed to, the best interest of the Company. The Cause shall be stated specifically in the notice of termination given pursuant to Paragraph 8(a). "Change of Control" means the date on which the Stockholders (as defined in the Tag-Along Agreement) as of the date hereof have collectively transferred 50% or more of the Shares of the Company to persons other than their Affiliates. "Termination Date" shall mean the date that the Employee ceases to be employed by the Company regardless of whether or not the Employee's employment is terminated without Cause or for Good Reason pursuant to Paragraph 6(1) below. "Disability" shall exist if because of ill health, physical, or mental disability, or any other reason beyond his control, and notwithstanding reasonable accommodations made by the Company, the Employee shall have been unable, unwilling or shall have failed to perform his duties under this Agreement, as determined in good faith by the Company's Board of Directors, for a period of 120 consecutive days, or if, in any 12-month period, the Employee shall have been unable or unwilling or shall have failed to perform his duties for a period of 180 days, irrespective of whether or not such days are consecutive. "Good Reason" means (i) any instruction or directive of the Board of Directors of the Corporation which does not result from facts or circumstances which would allow the termination of Employee for Cause and which has the effect of substantially eliminating the duties, responsibilities and authority of Employee or scope of the position, but only, however, to the extent that (a) the Employee has notified the Company in writing of the substantial elimination, specifying in reasonable detail the nature of the substantial elimination and stating that the substantial elimination is grounds for Good Reason, and (b) the Company has failed to cure the substantial elimination within 60 days after the notice is sent or given under this Agreement, or (ii) the occurrence of a Change of Control. "Offering" is defined in the Stock Purchase Agreement. "Offering Price" is defined in the Stock Purchase Agreement "Option Term" means for a period of three years from the date hereof, if the Offering occurs within six months from the date hereof. If the Offering occurs after six months from the date hereof, then the Option Term shall mean a period of three years from the date of the Offering. "Shares" means any and all common and/or preferred shares of stock of the Company issued and outstanding (including any options or warrants in regard thereto). "Stock Purchase Agreement" means that certain Stock Purchase Agreement dated the date hereof by and among the Company, the Employee and Aropi, Incorporated, an Iowa corporation. "Tag-Along Agreement" means the Tag-along Agreement dated as of the date hereof among the Company and certain Stockholders, including without limitation, Employee. Term And Duties. For a period of three years from the date from the date of this Agreement (the "Term"), Employee shall serve the Company as CEO and President, and shall have such duties as set forth in the Bylaws of the Company, and as may be assigned to Employee from time to time by the Board. Employee shall perform his duties hereunder, and shall report directly to the Board. For so long as Employee is employed by the Company, Employee agrees (i) to devote substantially all of his time, energy, and skill necessary or appropriate with respect to the performance of the duties of his employment (vacations allowable under this Agreement and absences due to illness excepted), and (ii) not to engage directly or indirectly in any other active employment (other than pursuant to this Agreement) without the prior written consent of the Board. Compensation And Benefits. During the Term and subject to the terms and conditions of this Agreement: Employee shall receive a base salary of (i) $105,000 for the first 12 months, (ii) $115,500 for the second 12 months, and (iii) $127,050 for the third 12 months (pro rated for periods of less than 12 months) paid in arrears in accordance with the Company's normal payroll and withholding procedures (collectively, "Base Salary"). Employee's Base Salary shall be subject to review and adjustment by the Board on each yearly anniversary date of this Agreement during the Term; provided, however, that during the Term, Employee's Base Salary may be increased (but not decreased) from the amounts set forth above at the discretion of the Board. Employee shall be eligible for a bonus each year during the Term as may be determined by the Board in its sole discretion as of the end of the Company's fiscal year, based on an evaluation of the Company's performance during the past twelve months and Employee's contribution to that performance. Employee shall be entitled to all State of Georgia, federal and Company-established holidays and 30 business days of vacation per calendar year. Employee and members of his immediate family shall be entitled to participate, at the Company's expense, in the hospitalization, health and accident, and major medical coverage plan adopted by the Company. Employee shall also be entitled to any and all other benefit packages and plans as are made generally available to other employees, officers or directors of the Company, on terms not less favorable than the terms available to other employees, except as may be limited by applicable law or regulation, and such benefits shall be proportionate to salary to the extent such allocation method applies among other employees, including but not limited to any officer and/or directors liability insurance the Company may purchase. In addition to Employee's Base Salary, Employee shall receive, $700.00 per month for an automobile allowance ("Car Allowance"). Any mileage incurred for the benefit of the Company will also be reimbursed by the Company to the Employee at the mileage allowance equal to that set forth in the Internal Revenue Code of 1986, as amended (or any successor Code) ("Mileage Allowance"). The Car Allowance shall be paid with the Employee's Base Salary. The Mileage Allowance shall be repaid the same as any other Company Expense incurred and as provided for in Paragraph 4 below. If the Offering (as defined in the Stock Purchase Agreement) has occurred, then within 180 days of the Conversion Date, the Company will develop a stock option plan which will grant to the Employee options to purchase additional shares of the Company's stock of not less than 5% of the issued and outstanding shares of the Company as of the Conversion Date on a fully diluted basis. The terms and conditions of the options shall be on terms and conditions customary for Chief Executive Officers similarly employed as Employee and predicated either (i) on reasonable financial pre-tax earnings and/or net operating income before tax or (ii) a business plan the Company is to attain during each of the three years of the Employee's employment. The stock option plan shall be developed in consultation with an independent third party specializing in the development of stock option incentive programs for executives of publicly traded companies. Signing Bonus. In addition to the compensation set forth in Section 3 above, the Employee shall be: (a) paid the amount of $125,000 in twelve (12) consecutive equal monthly payments of $10,416.66, commencing 60 days from the date hereof in accordance with the normal payroll practice of the Company (the "Signing Bonus Compensation"). (b) granted during the Option Term an option by the Company to purchase an aggregate of five thousand (5000) shares of the voting common stock of the Company at a purchase price per share equal to the Offering Price (the "Option"). The Employee may exercise this Option at any time during the Option Term by delivering written notice of the exercise to the Company, specifying the number of Shares to be purchased and the Purchase Price to be paid therefor and accompanied by payment in full. Such exercise shall be effective upon receipt by the Company of such written notice together with the required payment. The Employee may purchase less than the number of Shares subject to the Option, provided that no partial exercise of the Option may be for any fractional Share or for less than ten (10) whole Shares. The Option shall be in the form similar to the Company's Common Stock Purchase Warrant attached hereto as Exhibit A" and incorporated herein by reference. Reimbursement of Employee Expenses. The Company recognizes that Employee, in connection with the services to be performed by him for the Company, will be obliged to expend monies for travel, entertainment of customers, and similar business expenses. The Company agrees to reimburse Employee for all reasonable travel, entertainment, and miscellaneous expenses incurred in the conduct of the business of the Company. In order for Employee to receive reimbursement from the Company for the foregoing expenses he must submit receipts for said expenses to the Company not less often than monthly. In addition thereto, Employee must submit a written itemized statement as to the nature of the expenses or follow such other policy or procedures that the Company may adopt from time to time. Employee shall be reimbursed in accordance with such policy and practice following Employee's submission of bills to the Company. In addition, the Company may issue to Employee credit cards which employee shall use solely in furtherance of the business of the Company pursuant to this Agreement. The expenses shall be paid directly to the credit card companies by the Company. Employee shall submit to the Company a detailed written statement as to the nature of the charges and shall submit to the Company a detailed list of persons entertained and the company or companies such persons are associated with in connection with such entertainment expense. Should Employee fail to provide such documentation within a reasonable time following receipt of the credit card bill from the credit card issuer, the Company may deduct the amount of any undocumented charges from any amounts due Employee by the Company. Should the Board review and disapprove of any expenses incurred by the Employee, the Company may deduct the amounts of any disapproved expenses from any amounts due Employee by the Company. No expenses shall be disapproved if 1) such expenses were reasonable in nature and amount, 2) such expenses were incurred in compliance with any policies adopted by the Board, and 3) such expenses were documented as provided herein. Records; Non-Competition. All records, notes, correspondence, files, memoranda, reports, price lists, customer lists, drawings, plans, sketches, documents, equipment, data, apparatus, and like items, and all copies thereof, relating to the Company's Business, confidential information, or trade secrets that are prepared by Employee, are disclosed to Employee, or come into Employee's possession, shall be and remain the sole and exclusive property of the Company. Employee agrees, at the end of the Term, or at any other time upon the Company's request, to promptly deliver to the Company the originals and all copies of any of the foregoing that are in Employee's possession, custody, or control, and any other property belonging to the Company. Employee acknowledges that as the President of Aropi, the Employee has had access to a substantial portion of the proprietary and confidential information of the business of Aropi, including its trade secrets and business plans; the benefits to the Company's shareholders for their purchase of Aropi's stock would be denied if it were not for the protections set forth in this Paragraph 5; and during the course of his employment with the Company pursuant to this Agreement, the Employee will continue to receive and have access to the proprietary and confidential information of the Company, and he will also receive and have access to confidential financial information and proprietary information relating to the operations and business of the Company. Accordingly the Employee is willing to enter into the covenants described in Paragraph 5(c) below, in order to provide the Company with reasonable protection for those interests. The Employee hereby agrees that, from the date hereof to and until the first anniversary of the Termination Date, the Employee shall not, directly or indirectly: 1. As a stockholder of any corporation or partner of any partnership or as an owner, investor, principal or agent, or in any other manner, engage in any business which competes within ten miles of any Company store open at the Termination Date. 2. solicit, induce, influence or attempt to influence, or cause any business, firm, or corporation which directly competes with the Company to solicit, induce, influence or attempt to influence, the employment of any key employee(s) of the Company; 3. engage in, be employed by or participate, directly or indirectly, in the operation or management of any business which competes with the Company on the Termination Date; Notwithstanding anything contained herein to the contrary, the ownership, in the aggregate, of less than 5% of the outstanding shares of capital stock of any corporation with one or more classes of its capital stock listed on a national securities exchange or publicly traded on the over-the-counter market shall not constitute a violation of this Paragraph 5. This Paragraph 5 is not intended to, and shall not preclude Employee from working for any company that is not a specialty cookware store (such as a department store that may sell similar products, but is not solely a specialty cookware store), nor is this Paragraph 5 intended to or shall it preclude the Employee from working for any entity which, either directly or indirectly, owns or manages a specialty cookware store as long as Employee does not participate in any day-to-day activities or management of the company's subsidiaries, divisions, etc., as the case may be. The covenants contained in Paragraph 5(c), above, are intended to be separate and severable and enforceable as such. The Employee hereby agrees that in the event of any offer of employment or if any other proposal or arrangement for employment is made to the Employee by any third party or parties which could reasonably be anticipated to give rise to a breach of one or more of the covenants contained in Paragraph 5(c) above he will immediately inform the third party or parties of the existence of the covenants contained herein. The Employee hereby specifically acknowledges that the agreements contained in this Paragraph 5 are reasonable under the circumstances and in light of the reasons enumerated in Paragraph 5(b), above. Nevertheless, to the extent that any obligation to refrain from competing within a geographic area, for a period of time, or with respect to a particular scope of commerce, is held by a court of competent jurisdiction to be invalid or unenforceable, such obligation shall be deemed modified to the extent necessary to render it enforceable, and the obligations imposed by Paragraph 5 shall be fully enforced as so modified. Termination. Termination for Cause. The employment of Employee under this Agreement may be terminated prior to the end of the Term or any renewal term hereof immediately by the Company for Cause upon notice of termination served personally or in accordance with Paragraph 8(a) hereof, such Cause being specified in the notice. In the event that Employee is terminated by the Company for Cause, Employee shall only be entitled to salary accrued hereunder and unpaid as of the date of such termination. Termination for Disability. The employment of Employee under this Agreement may be terminated prior to the end of the Term by the Company in the event of Employee's Disability upon notice of termination served personally or in accordance with Paragraph 8 hereof, such Disability being specified in the notice. In the event that the Company delivers to Employee a notice of termination for Disability, such notice will be effective on the 15th day following delivery thereof. Upon the termination of this Agreement due to the Employee's Disability during the Term, the Company shall pay to the Employee a lump sum equal to 1 year of salary otherwise due hereunder reduced by the amount of income that the Employee is entitled to receive for such period pursuant to any Company sponsored disability income insurance contract. Termination Without Cause: Resignation for Good Reason. The Company may terminate Employee's employment without Cause subject to this Paragraph 6(c). At such time that a Change of Control has occurred, Employee shall have the right at any time within six (6) months after the occurrence of the Change of Control, to terminate and cancel this Agreement with no liability whatsoever for his termination of this Agreement, which termination shall constitute a Good Reason. If during the Term, (i) the Employee's employment is terminated by the Company without Cause and not for Disability, or (ii) the Employee voluntarily terminates his employment during the Employment Period for Good Reason, then the Company shall pay the Employee in one lump sum, a sum of money equal to the Base Salary he would have earned during the succeeding 12 months from the Termination Date (plus any and all payments due and owing in regard to the Signing Bonus Compensation) and shall reimburse the Employee for any expenses incurred pursuant to Paragraph 4 hereof before the Termination Date, within thirty (30) days of the date of termination. Survival of Obligations. The obligation of the Company to pay any amounts to Employee remaining unpaid at the Termination Date of this Agreement shall survive the termination of this Agreement under this Paragraph 6. Severability. If any part of this Agreement is for any reason found to be unenforceable, then all other parts of it nevertheless shall remain enforceable. Miscellaneous. Communications. Unless otherwise specified, whenever this Agreement requires or permits any consent, approval, notice, request, or demand from one party to another, that communication must be in writing (which may be by telecopy) to be effective and is deemed to have been given if by telecopy, when transmitted to the appropriate telecopy number (and all communications sent by telecopy must be promptly confirmed promptly by telephone; but any requirement in this parenthetical does not affect the date when the telecopy is deemed to have been delivered, if by certified or registered mail, on the third business day after it is enclosed in an envelope and properly addressed, stamped, sealed, and deposited in the appropriate official postal service with a return receipt requested, or if by any other means, when actually delivered. Until changed by notice pursuant to this Agreement, the address (and fax number) for the Company and Employee are: Employee: Mr. Glenn Kaas 4135 Station Mill Court Norcross, Georgia 30092 Telecopy: (770) 448-9758 with a copy to: Jack K. Holland, Esq. Arnall Golden & Gregory 2800 One Atlantic Center 1201 West Peachtree Street Atlanta, Georgia 30309-3450 Telecopy: (404) 873-8611 Company: Home Retail Holdings, Inc. 535 Madison Avenue, 19th Floor New York, NY 10022 Attn: David E. Danovitch, Esq. Telecopy: (212) 508-6501 with a copy to: William E. Sudow, Esq. Brown & Wood 815 Connecticut Avenue, N.W. Suite 701 Washington, D.C. 20006 Telecopy: (202) 223-0485 Relocation. Notwithstanding anything contained herein, Employee shall not be required to relocate his home or be employed outside of Metropolitan Atlanta. Entire Agreement; Counterparts. This Agreement constitutes the entire agreement between the parties hereto with respect to the subject matter hereof and supersedes all prior oral and written agreements between the parties. This Agreement may not be modified, amended, or otherwise changed in any manner except by a writing executed by the parties hereto. This Agreement may be executed in a number of identical counterparts (including counterparts or signature pages executed and transmitted by telecopy) with the same effect as if all signatories had signed the same document. All counterparts must be construed together to constitute one and the same instruments Binding Effect. This Agreement binds and inures to the benefit of the Company, Employee, and their respective heirs, devisees, personal representatives, permitted successors, and permitted assigns. Waiver. The waiver by one party of a breach of any provision of this Agreement by the other party shall not operate or be construed as a waiver of any subsequent breach of the same or any other provision by the other party. Either party hereto may waive the benefit of any provision or condition for its benefit contained in this Agreement. Time of Essence. TIME IS OF THE ESSENCE OF THIS AGREEMENT. Construction. Each party hereto hereby acknowledges that all parties hereto participated equally in the drafting of this Agreement and that, accordingly, no court construing this Agreement shall construe it more stringently against one party than the other. Governing Law. This Agreement shall be governed by, and construed under, the laws of the State of Georgia. Assignment. This Agreement, and the rights accruing hereunder, may not be assigned by either party without the prior written consent of the other party. Other References. Unless otherwise specified (a) where appropriate, the singular includes the plural and vice versa, and words of any gender include each other gender, (b) heading and caption references may not be construed in interpreting provisions, (c) monetary references are to currency of the United States of America, (d) paragraph and exhibit references are to paragraphs in and exhibits attached to this Agreement, (e) references to "telecopy," "facsimile," "fax," or similar terms are to facsimile or telecopy transmissions, (f) references to "including" mean including without limiting the generality of any description preceding that word, (g) the rule of construction that references to general items that follow references to specific items are limited to the same type or character of those specific items is not applicable in this Agreement, (h) references to any person include that person's heirs, personal representatives, successors, trustees, receivers, and permitted assigns, (i) references to any law include every amendment or supplement to it, rule and regulation adopted under it, and successor or replacement for it, and (j) references to any document include every renewal and extension of it, amendment and supplement to it, and replacement or substitution for it. EXECUTED as of the date first stated above. /s/ GLENN KAAS -------------- Glenn Kaas HOME RETAIL HOLDINGS, INC. By: /S/ DAVID DANOVITCH ----------------------- Name: ------------------ Title: ----------------- EX-21 13 LIST OF SUBSIDIARIES EXHIBIT 21 List of Subsidiaries Name of Subsidiary State of Incorporation - ------------------ ---------------------- The Cookstore, Inc. Ohio The Cookstore Worthington, Inc. Ohio Aropi, Incorporated Iowa EX-23.1 14 EXHIBIT 23.1 CONSENT OF INDEPENDENT AUDITORS We consent to the use in this Registration Statement on Form SB-2 of our report dated August 6, 1998, relating to the consolidated financial statements of Gaylord Companies, Inc. and the reference to our firm under the caption "Experts" in this Registration Statement. /s/ Feldman Sherb Ehrlich & Co., P.C. FELDMAN SHERB EHRLICH & CO., P.C. Certified Public Accountants New York, New York September 14, 1998 EX-23.2 15 EXHIBIT 23.2 INDEPENDENT AUDITORS CONSENT We hereby consent to the use in the Rolling Pin Kitchen Emporium, Inc. Registration Statement (Registration Statement) dated September 15, 1998 of our report dated August 24, 1998, relating to the financial statements of Aropi, Incorporated, which appears in the Registration Statement. We also consent to the reference to us under the heading Experts in such Registration Statement. /s/ Smith & Radigan, Certified Public Accountants, LLC Smith & Radigan, Certified Public Accountants, LLC Atlanta, Georgia September 15, 1998 EX-27.1 16 EXHIBIT 27.1
5 1 U.S. DOLLARS YEAR DEC-31-1997 JAN-01-1997 DEC-31-1997 1 1,070,503 0 15,118 0 889,996 2,032,298 684,369 334,619 2,390,748 2,636,208 0 0 300,000 40,950 (1,076,186) 2,390,748 3,724,157 3,724,157 3,508,874 3,508,874 0 0 79,710 (1,626,005) 400,649 (2,026,654) (668,377) 0 0 (2,695,031) (.70) (.70)
EX-27.2 17 FINANCIAL DATA SCHEDULE
5 1 U.S. DOLLARS 6-MOS DEC-31-1998 JAN-01-1998 JUN-30-1998 1 212,681 0 4,329 0 882,168 1,114,606 687,322 379,294 1,436,237 2,786,591 0 0 300,000 40,950 (1,691,304) 1,436,237 1,135,645 1,135,645 1,447,387 1,447,387 0 0 56,504 (765,119) 0 (765,119) 0 0 0 (765,119) (.20) (.20)
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