-----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, T9K8qvICNrSHhxIrOxdNGFgPsrm2Gsa+yksO9Mzd2X5bzTE7AR1ehU/BA5k/xVPd WWABIRHPUqAiYcy8kAS4+w== 0000950116-98-002362.txt : 19981208 0000950116-98-002362.hdr.sgml : 19981208 ACCESSION NUMBER: 0000950116-98-002362 CONFORMED SUBMISSION TYPE: SB-2/A PUBLIC DOCUMENT COUNT: 8 FILED AS OF DATE: 19981207 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/A SEC ACT: SEC FILE NUMBER: 333-63527 FILM NUMBER: 98764551 BUSINESS ADDRESS: STREET 1: 4264 WINTERS CHAPEL RD STREET 2: BLDG B CITY: ATLANTA STATE: GA ZIP: 30360 BUSINESS PHONE: 7704572600 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/A 1 SB-2/A As filed with the Securities and Exchange Commission on December 4, 1998 Registration No. 333-63527 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- U.S. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 --------------------- AMENDMENT NO. 3 TO FORM SB-2 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ROLLING PIN KITCHEN EMPORIUM, INC. (Name of Small Business Issuer in Its Charter) Delaware 5719 31-1421571 (State or other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer Incorporation or Organization) Classification Code Number) Identification No.)
John D. Critser President and Chief Executive Officer Rolling Pin Kitchen Emporium, Inc. 4264 Winters Chapel Road, Building B 4264 Winters Chapel Road, Building B Atlanta, Georgia 30360 Atlanta, Georgia 30360 (770) 457-2600 (770) 457-2600 (Address and Telephone Number of Principal Executive (Name, Address and Telephone Number of Agent for Offices and Principal Place of Business) Service of Process)
Copies To: William E. Sudow, Esq. Jay M. Kaplowitz, Esq. John K. Hughes, Esq. Arthur S. Marcus, Esq. Brown & Wood LLP Gersten, Savage, Kaplowitz & Fredericks, LLP 815 Connecticut Avenue, N.W. 101 East 52nd Street, 9th Floor Washington, D.C. 20006 New York, NY 10022 (202) 973-0600 (212) 752-9700 (202) 223-0485 (212) 980-5192 Approximate Date of Commencement of Proposed Sale to the Public: As soon as practicable after the date this Registration Statement becomes effective. If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / If this Form is a post-effective amendment filed pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / If delivery of the Prospectus is expected to be made pursuant to Rule 434, please check the following box. / / THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- CALCULATION OF REGISTRATION FEE
- ------------------------------------------------------------------------------------------------------------------------------ Proposed Proposed Number of Maximum Maximum Amount of Shares to be Offering Price Aggregate Registration Title of Each Class of Securities to be Registered Registered Per Share Offering Price(1) Fee Class A Common Stock, $0.01 par value ............... 1,500,000 $ 7.00 $ 10,500,000 $ 3,098 Underwriters' Warrants(2) ........................... 150,000 $ 0.01 $ 1,500 $ 0(3) Class A Common Stock, $0.01 par value(4) ............ 150,000 $ 11.55 $ 1,732,500 $ 511 Class A Common Stock, $0.01 par value(5) ............ 225,000 $ 7.00 $ 1,575,000 $ 465 Total ............................................... 2,025,000 $ 13,809,000 $ 4,074(6) - ------------------------------------------------------------------------------------------------------------------------------
(1) Estimated solely for purposes of calculating the registration fee, pursuant to Rule 457(a) under the Securities Act of 1933, as amended. (2) Represents warrants sold to the Representative of the Underwriters. (3) None pursuant to Rule 457(g). (4) Represents shares issuable upon exercise of the warrants to be issued to the Representative of the Underwriters, which warrants have an exercise price of $11.55 per share. See "Description of Securities -- Warrants." (5) Represents shares issuable upon the exercise of the Underwriters' option to cover over-allotments, if any. (6) This amount was previously paid. The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer of sale is not permitted. SUBJECT TO COMPLETION, DATED DECEMBER 4, 1998 PROSPECTUS [GRAPHIC OMITTED] 1,500,000 shares of common stock $6.00 to $8.00 per share This prospectus relates to the offering of up to 1,500,000 shares of Class A common stock, par value $.01 per share. Shares of the predecessor company, Gaylord Companies, Inc., were traded on the Nasdaq's SmallCap Market and OTC Bulletin Board under the symbol "GJCO." Prior to filing for bankruptcy, shares of the predecessor company ceased trading on Nasdaq's SmallCap Market. Effective August 12, 1998, the predecessor company emerged from bankruptcy and ceased trading on the OTC Bulletin Board. Application has been made to list the Class A common stock of the Company on the Nasdaq SmallCap Market under the symbol "RPKE." THIS INVESTMENT INVOLVES A HIGH DEGREE OF RISK. PLEASE REFER TO "RISK FACTORS" BEGINNING ON PAGE 7. NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED THESE SECURITIES, OR DETERMINED IF THIS PROSPECTUS IS TRUTHFUL AND COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. - -------------------------------------------------------------------------------- Underwriting Price to Discounts and Proceeds to Public Commissions(1) Company(2) Price per share ......... $ $ $ Total(3) ................ $ $ $ - -------------------------------------------------------------------------------- (1) See "Underwriting" for information concerning indemnification of the underwriters and other matters. (2) Before deducting expenses payable by the company, estimated at $_______. (3) The company has granted the underwriters a 30-day option to purchase up to 225,000 additional shares of common stock solely to cover over-allotments, if any. If the underwriters exercise the option in full, the price to the public will total $____, the underwriting discount will total $____ and the proceeds to the company will total $_____. See "Underwriting." The shares are being offered by the underwriters when, as and if received and accepted by them, subject to prior sale, to withdrawal of the offer without notice, to the approval of counsel and to certain other conditions. NUTMEG SECURITIES, LTD. December , 1998 [Map depicting store locations] CERTAIN PERSONS WHO PARTICIPATE IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE SHARES, INCLUDING PURCHASES OF SHARES TO MAINTAIN THEIR MARKET PRICE OR PURCHASES TO COVER SOME OR ALL OF THE UNDERWRITERS' SHORT POSITION IN THE SHARES. [Photographs of various store locations] Table of Contents
Page ----- Summary .................................................................................. 3 About Our Company ....................................................................... 3 Recent Bankruptcy of our Predecessor .................................................... 3 The Offering ............................................................................ 3 Common Stock ............................................................................ 3 Warrants Held by the Underwriter ........................................................ 3 Other Warrants .......................................................................... 3 Our Predecessor Entity Failed to Make Certain Required Securities Filings ............... 4 Where You Can Find More Information ..................................................... 4 Key Facts ................................................................................ 5 Summary Financial Information ............................................................ 6 RISK FACTORS ............................................................................. 7 Recent Bankruptcy of our Predecessor .................................................... 7 Our History of Losses and Recent Operating Losses ....................................... 7 Seasonal Variations in the Quality Cookware Industry Will Affect Our Revenues ........... 7 Risks Related to Our Acquistion Strategy; Unspecified Acquisitions ...................... 7 Need for Additional Capital for Acquisitions ............................................ 8 Difficulties Related to Integration of Acquired Companies ............................... 8 Competition in the Quality Cookware Industry May Affect Our Revenues and Market Position 8 Risks Associated with Our Cookware Store Franchises ..................................... 8 Lack of Written Contracts with Suppliers ................................................ 8 Dependence on Existing Leased Locations in Shopping Malls ............................... 9 Inability to Retain and Attract Key Executives .......................................... 9 Control by Current Officers and Directors; Relationship of Principal Stockholders ....... 9 Immediate and Substantial Dilution in the Value of Your Shares .......................... 9 Effects on Our Business If We Fail to be Year 2000 Compliant............................. 9 Our Broad Discretion in Application of Proceeds ......................................... 9 Certain Anti-Takeover Provisions in Our Charter and Bylaws; Possible Future Issuances of Preferred Stock ........................................... 10 Our Predecessor Entity Failed to Make Certain Required Securities Filings ............... 10 Risks Associated with the Franchise Regulation of Our Cookware Store Franchises ......... 10 Negotiated Public Offering Price of the Common Stock .................................... 10 No Liquid Trading Market for Your Common Stock .......................................... 10 Potential Effects of Failure to List Common Stock on The Nasdaq SmallCap Market; Risks of Penny Stock ........................................................................ 11 The Price of Our Stock May Fluctuate Which May Affect the Value of Your Shares .......... 11 Lack of Independent Director Approval of Certain Related Party Transactions ............. 11 Future Sales of Our Common Stock May Affect the Value of Your Shares .................... 11 Risks Associated with Forward-Looking Statements ........................................ 12 THE COMPANY .............................................................................. 13 USE OF PROCEEDS .......................................................................... 14 DIVIDEND POLICY .......................................................................... 14 CAPITALIZATION ........................................................................... 15 DILUTION ................................................................................. 16 PRICE RANGE OF COMMON STOCK .............................................................. 17 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ............................................................... 18 Historical .............................................................................. 18 Overview ................................................................................ 18 Business and Operational Model of the Company ........................................... 18 Expansion ............................................................................... 19 Acquisition of Aropi .................................................................... 20
i
Page ----- Franchise Operations .................................................................... 20 The Company ............................................................................ 20 Aropi, Inc. ............................................................................ 21 Liquidity and Capital Resources ........................................................ 22 Year 2000 Compliance ................................................................... 24 Treatment of Cost of Goods Sold ........................................................ 25 Seasonality ............................................................................ 25 BUSINESS ................................................................................. 26 The Company ............................................................................. 26 Industry Background ..................................................................... 26 Competition ............................................................................. 26 Strategy ................................................................................ 27 Reorganization of Predecessor ........................................................... 28 Acquisition of Aropi .................................................................... 29 Discontinued Operations ................................................................. 29 Properties .............................................................................. 30 Franchise Regulation .................................................................... 30 Trademarks .............................................................................. 30 Employees ............................................................................... 30 Legal Proceedings ....................................................................... 30 MANAGEMENT ............................................................................... 31 Executive Officers, Directors and Key Employees ......................................... 31 Board of Directors ...................................................................... 32 Executive Compensation .................................................................. 32 Summary Compensation Table .............................................................. 32 Stock Option Grants ..................................................................... 33 1998 Equity Incentive Plan .............................................................. 33 Employment Agreements ................................................................... 35 Indemnification of Officers and Directors ............................................... 35 CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS ..................................... 36 The Home Retail Acquisition Corp. Junior Participation; The Merger ...................... 36 The Reorganization ...................................................................... 36 Other Transactions ...................................................................... 36 Control by Certain Directors ............................................................ 37 Advisory Agreement ...................................................................... 37 PRINCIPAL STOCKHOLDERS ................................................................... 38 DESCRIPTION OF SECURITIES ................................................................ 39 Common Equity Securities ................................................................ 39 Preferred Stock ......................................................................... 40 Registration Rights ..................................................................... 40 Warrants ................................................................................ 40 Transfer Agent and Registrar ............................................................ 42 SHARES ELIGIBLE FOR FUTURE SALE .......................................................... 42 UNDERWRITING ............................................................................. 43 LEGAL MATTERS ............................................................................ 44 EXPERTS .................................................................................. 44 ADDITIONAL INFORMATION ................................................................... 44 INDEX TO FINANCIAL STATEMENTS ............................................................ F-1
ii SUMMARY This summary highlights selected information from this document and may not contain all of the information that is important to you. To understand the specific terms of the common stock we are offering, you should carefully read this document. It describes the company, its finances, and products. Federal and state securities laws require that we include in this prospectus all the important information that investors will need to make an investment decision. We have not authorized anyone to provide you with information that is different from what is contained in this prospectus. About Our Company We operate a chain of specialty retail stores for quality cookware and serving equipment, cooking accessories and certain select food products as well as cookbooks and food-related publications. We operate 19 company-owned stores and 21 franchised locations under the trademarks The Cookstore and Rolling Pin Kitchen Emporium, which are located primarily throughout the Midwest and Southeast regions of the United States. Our business is comprised of the cookware business of (i) our predecessor entity that was organized in the State of Delaware on July 19, 1994, and operates four retail cookware stores in Ohio, and (ii) Aropi, Incorporated, which operates 15 company-owned stores in eight states and 21 franchised stores in nine states. We acquired Aropi, Incorporated on August 21, 1998. See "Business." Recent Bankruptcy of Our Predecessor Our predecessor entity, Gaylord Companies, Inc., filed for a chapter 11 reorganization in bankruptcy on November 13, 1997 and emerged from bankruptcy on August 12, 1998. During the reorganization, we sold our bookstore operations, closed two of our cookware stores and brought in certain of the current management. We incurred substantial losses in 1996 and 1997 and while in bankruptcy during 1998. Since emerging from bankruptcy, we have continued to incur losses. We cannot be certain that our future operations will be profitable. We may, in fact, continue to incur losses for the foreseeable future. The Offering We are selling shares of our common stock to raise capital in order to open additional cookware stores, acquire existing cookware chains and for general working capital. Common Stock Holders of the company's common stock are entitled to receive dividends declared by the board of directors. Currently, we do not pay dividends and we do not expect to pay dividends in the foreseeable future. Each holder of common stock is entitled to one vote per share and has no preemptive or cumulative voting rights. Prior to the offering, we had 1,522,041 shares of common stock outstanding. After giving effect to the offering, there will be 3,022,041 shares of common stock outstanding. Warrants Held by the Underwriter We have issued warrants to purchase 150,000 shares of common stock to Nutmeg Securities, Ltd., the lead underwriter of this offering. The exercise price of the warrants is equal to 165% of the public offering price. The warrants may be exercised at any time during a four year period that begins one year from the effective date of this prospectus. These warrants include demand and piggyback registration rights as well as anti-dilution provisions that provide for adjustment to the exercise price and number of shares subject to the warrants if certain events occur. Other Warrants We also have issued warrants to warrant holders of our predecessor entity as required under the plan of reorganization. In addition, we have issued warrants to our creditors in order to induce them to enter into financing arrangements with us. In the aggregate, we have issued warrants to purchase up to 518,754 shares of common stock. 3 Our Predecessor Entity Failed to Make Certain Required Securities Filings Prior to filing for bankruptcy, our predecessor entity failed to make certain regular disclosure filings that such entity was required to make under the Securities Exchange Act of 1934. Although we will resume compliance with the Securities Exchange Act of 1934 once we are subject to this law, we may be subject to various sanctions, disabilities and damages as a result of our previous non-compliance. Where You Can Find More Information We will file annual, quarterly and special reports, proxy statements and other information with the Securities and Exchange Commission. You may read and copy any document we file at the Securities and Exchange Commission's public ref-erence rooms in Washington, DC, New York, New York, and Chicago, Illinois. Please call the Securities and Exchange Commission at 1-800-SEC-0330 for further information on the public reference rooms. Our filings are also available to the public at the Securities and Exchange Commission's web site at http://www.sec.gov. Our principal executive offices are located at 4264 Winters Chapel Road, Building B, Atlanta, Georgia 30360, and our telephone number is (770) 457-2600. 4 KEY FACTS Class A Common Stock Offered To The Public .............. 1,500,000 shares Total Shares Outstanding After Offering ................... 3,022,041(1) Use Of Proceeds .............. Acquisition of cookware store chains; opening new stores; capital investment; refinance debt; working capital; and general corporate purposes. Nasdaq SmallCap Market Symbol ..................... RPKE
- ------------- (1) Excludes options, warrants, Class B common stock and 180,000 shares of common stock reserved under the 1998 Equity Incentive Plan. See "Description of Securities." 5 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:
Rolling Pin Kitchen Pro forma(2) Emporium, Inc. -------------------------------- --------------------- Period From Nine Months August 12, 1998 The Gaylord Companies, Inc. ended Year Ended through ------------------------------- Years ended December 31, September 30, December 31, September 30, ------------------------------- 1998 1997 1998 1997 1996 --------------- -------------- --------------------- --------------- ------------- Net revenues .............. $ 5,433,345 $ 10,122,079 $ 728,767 $ 3,724,157 $3,497,940 Cost of goods sold ........ 3,125,657 6,740,176 436,628 3,508,874 2,899,932 Gross profit (loss) ....... 2,307,688 3,381,903 292,139 215,283 598,008 Operating expenses ........ 3,896,609 4,718,050 1,123,642 1,414,976 458,457 Other income (expenses) .............. (1,516,861) (1,208,517) (383,873) (191,687) (177,394) Loss from continuing operations .............. (3,105,782) (2,945,313) (1,215,376) (1,792,029) (37,843) Loss per share ............ (1.85) (1.77) (.72)
Aropi, Incorporated Years ended June 30, ----------------------------- 1998 1997 ------------- ------------- Net revenues .......................... $6,310,362 $6,572,905 Cost of goods sold .................... 3,134,668 3,407,466 Gross profit (loss) ................... 3,175,694 3,165,439 Operating expenses .................... 3,100,287 3,188,113 Other income (expenses) ............... (90,126) 65,968 Income (loss) from operations ......... (14,719) 43,294 Balance Sheet Data:
September 30, 1998 --------------------------------------- Actual As Adjusted(1)(2)(3) ---------------- -------------------- Working Capital (Deficit) .............. $ (2,335,490) $ 4,183,260 Total Assets ........................... 5,277,982 11,026,732 Total Liabilities ...................... 6,156,588 4,669,088 Stockholders' Equity (Deficit) ......... (878,606) 6,357,644
- ------------- (1) Adjusted for the sale of the 1,500,000 shares of Class A common stock offered hereby (less underwriting discount and estimated offering expenses) and the application of the net proceeds therefrom. (2) Adjusted to reflect the acquisition of Aropi and the adoption of fresh start accounting as if both had occurred on January 1, 1997. Adjustments include amortization of the goodwill arising in the acquisition, the amortization of the reorganization value in excess of amounts allocable to identifiable assets which was recorded upon the adoption of fresh start accounting, the interest expense on the additional debt arising from the acquisition and the amortization of debt discount and financing costs. (3) Adjusted to reflect the payment of $350,000 for removal of puts on warrants recorded at $550,000, and an associated gain of $200,000. 6 RISK FACTORS The shares of common stock offered by this prospectus are speculative and involve a high degree of risk of loss. In addition to the other information in this prospectus, the following factors should be considered carefully in evaluating an investment in the common stock offered hereby. This prospectus contains forward-looking statements that involve risks and uncertainties. The company's actual results may differ materially from the results discussed in the forward-looking statements. The factors that may cause such a difference include, but are not limited to, those discussed below in "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business." Prior to making an investment, you should carefully read this entire prospectus and consider the following risk and speculative factors. Recent Bankruptcy of Our Predecessor Our predecessor entity, The Gaylord Companies, Inc., filed for a chapter 11 reorganization in bankruptcy on November 13, 1997 and emerged from bankruptcy on August 12, 1998. During the reorganization, we sold our bookstore operations, closed two of our cookware stores and brought in certain of the current management. We incurred substantial losses in 1996 and 1997 and while in bankruptcy during 1998. Since emerging from bankruptcy, we have continued to incur losses. We cannot be certain that our future operations will be profitable. We may, in fact, continue to incur losses for the foreseeable future. Our History of Losses and Recent Operating Losses The company had a net working capital deficiency of $2,335,490 and an operating loss of $1,215,376 as of September 30, 1998. The company had an accumulated deficit of $999,218 and $4,274,492 for the years ended December 31, 1996 and 1997, respectively. As of September 30, 1998, the company had a stockholders' deficit of $878,606 and a negative cash flow from operations of $332,597. For the year ended December 31, 1997, the company had negative working capital of $1,650,154 and a negative capital deficit of $1,291,704. The company has continued to generate losses since emerging from bankruptcy. The company is likely to continue to generate losses until such time as it achieves higher sales levels. There can be no assurances that we will achieve profitability in the near future or, if so, the timing or amount thereof. See "Management's Discussion and Analysis of Financial Condition and Results of Operation." Seasonal Variations in the Quality Cookware Industry Will Affect Our Revenues Our business is subject to seasonal variations. Historically, a significant portion of our net sales and net earnings have been realized during the period from October through December, and levels of net sales and net earnings have generally been significantly lower during the period from January through September. This is the general pattern associated with similar retail industries, including those companies in our industry segment. If for any reason our sales were to be substantially below seasonal norms during the October through December period, our annual results of operations could be materially and adversely affected. Unfavorable economic conditions affecting retailers generally during the Christmas selling season in any year could materially and adversely affect our results of operations for the year. We must also make decisions regarding how much inventory to purchase well in advance of the season in which it will be sold, especially for the Christmas season. Significant deviations in actual demand from the projected demand for products can have an adverse affect on our sales and profitability. Risks Related to Our Acquisition Strategy; Unspecified Acquisitions We plan to acquire retail cookware businesses, such as the recent acquisition of Aropi, Incorporated, and other companies complementary to our core business. The success of any such acquisitions will depend on many factors, including our ability to identify suitable acquisition candidates and investigate their business prospects; negotiate the appropriate price to be paid for acquired companies; the ability to obtain financing on acceptable terms; and our ability to effectively integrate the acquired businesses into our operations. Although we plan to make acquisitions, we may not complete any future acquisitions. Presently, we do not have any agreements with any acquisition candidates although we have had preliminary discussions with representatives of various potential acquisition candidates. Our stockholders do not have the right to approve future acquisitions and will not 7 have the opportunity to review the financial statements of potential acquisition candidates prior to the consummation of any acquisition. No assurances can be given that we will be able to operate acquired businesses profitably or otherwise successfully implement our expansion strategy. No assurance can be made that the profits expected from any of the companies acquired in the future will justify our investment in them. Need for Additional Capital for Acquisitions We expect to finance future acquisitions and planned internal growth through financing arrangements or the issuance of equity securities. We have no commitment for any debt or equity financing, and we may not be able to obtain sufficient credit on favorable terms. If we do not obtain additional financing when required, we may be required to modify, delay, or abandon some or all of our development and expansion plans, which may have a material adverse effect on our business and negatively impact the value of our outstanding securities. We plan to use $1,000,000, or 13.55%, of the proceeds from the offering for the acquisition of existing retail cookware businesses. See "Use of Proceeds." Further, the issuance of additional equity securities could have a significant dilutive effect on the value of the shares held by the Company's stockholders, including stockholders that acquired their shares in the offering. Such acquisitions may result in increased costs, significant goodwill, increases in depreciation and amortization expenses, and could also result in write downs of purchased assets. All of these factors could adversely affect our operating results in future periods. In the event that our plans for expansion are not successful, our business will be materially adversely affected. Difficulties Related to Integration of Acquired Companies We will attempt to (i) hire, train, and integrate qualified employees, and (ii) adapt our management information and other operational systems to the extent necessary to grow in a profitable manner. Integrating diverse operations of different companies may result in delays and complications and may be costly. Although we believe our systems to be adequate for our current purposes, the acquisition of new companies will require modification, improvement or replacement of our current computer networks, accounting and other operational systems. No assurance can be made that we will be able to successfully integrate new companies into our company. Competition in the Quality Cookware Industry May Affect Our Revenues and Market Position We face significant competition from companies that are similarly specialized and also from companies that are involved in more generalized retailing. We also face competition from other companies, such as catalogue companies, which have added or may add cookware to existing or future product lines. Many of our existing and potential competitors are larger and have significantly greater financial, marketing, technological, and other resources than we possess. We may not be able to compete effectively. See "Business--Competition." Risks Associated with Our Cookware Store Franchises Our ability to operate our existing stores on a profitable basis is dependent to some degree on the continued success of our franchised cookware stores. If the franchisees do not provide the service required pursuant to their franchise agreements with the company or experience an unfavorable change in public perception, we may be materially adversely effected. Further, a decline in the operations or profitability of the franchise cookware stores could adversely affect our revenues since we derive a portion of our revenues from certain minimum franchise fees and fees based upon a percentage of the revenues of franchise cookware stores. See "Business--Strategy;" "Management's Discussion and Analysis of Financial Condition and Results of Operations-- Franchise Operations." Lack of Written Contracts with Suppliers We currently purchase products from over 300 suppliers. We do not have any written contracts with our suppliers. If we cannot maintain our existing relationships with these suppliers on terms similar to those currently available, or if we experience any delay or difficulty in obtaining alternative suppliers on comparable terms, then there could be an adverse affect on our business. 8 Dependence on Existing Leased Locations in Shopping Malls We currently lease all of our properties. We may not be able to comply with the provisions of the current leases or renegotiate favorable lease terms as they expire. Once the current leases expire, if we cannot renew the existing leases, we may not be able to find favorable store sites for expansion or negotiate leases on satisfactory terms and conditions for new sites. See "Business--Properties." Inability to Retain and Attract Key Executives Our success depends upon the contributions of our senior management. We believe that our future success will depend upon our ability to attract, motivate, and retain highly skilled managerial, and marketing personnel. The loss of our key executives or the inability to hire and retain qualified personnel could have an adverse effect upon the company's business. The company intends to carry key man life insurance on its chief executive officer, but no other executive officers or technical personnel will be covered under such a policy. See "Management--Executive Officers, Directors and Key Employees." Control by Current Officers and Directors; Relationship of Principal Stockholders Certain related persons currently own an aggregate of approximately 40% of our common stock, 20% after this offering, and all but two of our directors are or have been affiliated. As a result, Messrs. Danovitch, Lucaci, Dukoff and Czarnecki will be in a position to exercise significant influence over the company and the election of our directors and otherwise essentially control the outcome of all matters requiring stockholder approval. Global Strategic Holdings, Inc. also owns an aggregate of approximately 40% of our common stock prior to this offering and 20% after this offering. Thomas Tuttle, a director of the company, is the investment advisor to Global Strategic Holdings, Ltd. Additionally, we have entered into an advisory agreement with DDG Management Services Corp., that will give it a significant advisory role with respect to certain aspects of our business. David Danovitch and George Lucaci, directors of the company, are also directors of DDG Management Services Corp. In 1998, Mr. Lucaci and Donald Jackson, one of the founders of the company, entered into a consent agreement with NASD Regulation, Inc. in which they consented to a finding that they violated certain regulatory guidelines and rules in connection with a transaction unrelated to the company or this offering. See "Management -- Executive Officers, Directors and Key Employees" and "Certain Relationships and Related Party Transactions." Immediate and Substantial Dilution in the Value of Your Shares After giving effect to the sale of the 1,500,000 shares of common stock under this offering at a price of $6.00 per share and the application of the net proceeds therefrom, there will be a total of 3,022,041 shares of common stock outstanding with a net tangible book value of $1.73 per share. This would represent an immediate increase in net tangible book value of $3.05 to existing shareholders and an immediate dilution of $4.27, or 71.2%, per share to new investors. In addition, the price paid by existing shareholders was $1.11 per share compared to the price paid by the new investors of $6.00 per share. See "Dilution." Effects on Our Business If We Fail to be Year 2000 Compliant While we believe that our core operating and computer systems are fully year 2000 compliant, there can be no assurance until such time that all systems will then function adequately. Additionally, we believe that if certain other non-computer systems (such as time clocks, alarm systems and facsimile machines) are not year 2000 compliant by the end of 1999, that it will not have a material adverse effect on our operations. There can be no assurance until such time, however, that any such noncompliance will not have a material adverse effect on such operations. We believe that if some of our systems fail because of year 2000 problems, we may experience significant delays in our ability to perform certain functions that may have a material adverse effect on our operations. We will continue to review and assess these risks and develop appropriate contingency plans and procedures to minimize the effects of such scenarios. See "Year 2000 Compliance -- Management's Discussion and Analysis of Results of Operations." Our Broad Discretion in Application of Proceeds Approximately 19% of the net proceeds of the offering will be applied to working capital and general corporate purposes. Accordingly, we will have broad discretion over the use of the proceeds. Although we may utilize a portion of the net proceeds for potential acquisitions of complementary businesses, as of the date hereof, the company has not identified any particular acquisition targets. See "Use of Proceeds." Certain Anti-Takeover Provisions in Our Charter and Bylaws; Possible Future Issuances of Preferred Stock Our amended and restated certificate of incorporation and bylaws and Delaware General Corporation Law contain certain provisions that may have the effect of inhibiting a non-negotiated merger or other business combination involving the company. Such provisions are intended to encourage any person interested in acquiring us to negotiate with and obtain the approval of the board of directors in connection with any such transaction. These provisions include a staggered board of directors, undesignated preferred stock, super-majority voting provisions and the application of the Delaware General 9 Corporation Law. Certain of these provisions may discourage a future acquisition of our company that is not approved by the board of directors in which stockholders might receive a premium over the market value for their shares. As a result, stockholders who might desire to participate in such a transaction may not have the opportunity to do so. The board of directors has the power to designate the issuance of up to 1,000,000 shares of undesignated preferred stock. The rights and preferences for any series or class may be set by the board of directors at its sole discretion and without the approval of the holders of common stock. The rights and preferences of any such preferred stock may be superior to those of the common stock, thus adversely affecting the rights of the holders of common stock. The company currently has 320 shares of preferred stock outstanding which resulted from the conversion of debt instruments that were privately placed while we were in bankruptcy. While we have no present intention to issue any additional shares of preferred stock, any such issuance could be used to discourage, delay, or make more difficult a change in control of the company. In addition, such preferred stock may have other rights, including economic rights, senior to the common stock. As a result, the issuance of additional shares of preferred stock could decrease the market value of the common stock. See "Description of Securities--Preferred Stock." Our Predecessor Entity Failed to Make Certain Required Securities Filings Prior to filing for bankruptcy, our predecessor entity failed to make certain regular disclosure filings that such entity was required to make under the Securities Exchange Act of 1934. Although we will resume compliance with the Securities Exchange Act of 1934 once we are subject to this law, we may be subject to various sanctions, disabilities and damages as a result of our previous non-compliance. Risks Associated with the Franchise Regulation of Our Cookware Store Franchises As a franchisor, we are subject to federal and state regulation in the states in which we offer franchises or where franchised stores are currently operating. Federal regulations require that we provide each prospective franchisee with a disclosure document that provides information regarding the company and the relevant provisions of the franchise agreement and other ancillary contracts. In addition, certain state regulations require that we be registered or be exempt from the applicable registration requirements. Federal and state franchising laws prohibit certain deceptive trade practices and, in some cases, impose fairness and anti-discrimination standards on the company. We believe that the company is currently in compliance with all such federal and state franchise regulations. If at any time we are found not to be in compliance with such regulations, we may be subject to sanctions, disabilities and damages that may have a material adverse effect on our business. See "Business--Franchise Regulation." Arbitrary Detemination of Public Offering Price of the Common Stock The public offering price of the common stock has been arbitrarily determined through negotiations between the company and the underwriter. The public offering price bears no relationship to earnings, asset values, book value or any other recognized criteria of value. See "Underwriting." No Liquid Trading Market for Your Common Stock Our common stock currently has no liquid public trading market and we cannot be certain that a regular public trading market for our common stock will develop or, if developed, be sustained. As a result, you may not be able to resell any shares of our common stock that you purchase in the offering. Potential Effects of Failure to List Common Stock on The Nasdaq SmallCap Market; Risks of Penny Stock In the event that we are unable in the future to satisfy the Nasdaq SmallCap Market listing requirements, trading would be conducted in the pink sheets or on the OTC Bulletin Board. In the absence of the common stock being quoted on the Nasdaq SmallCap Market, trading of the common stock would be covered by Rule 15g-9 promulgated under the Securities Exchange Act of 1934 for non-Nasdaq and non-exchange listed securities. Under this rule, broker-dealers that recommend such securities to persons other than established customers and accredited investors must make a special written suitability determination for the purchaser and receive the 10 purchaser's written agreement to a transaction prior to sale. Securities are exempt from this rule if the market price is at least $5.00 per share. If the common stock were subject to the regulations applicable to penny stocks, the market liquidity for the securities would likely be reduced by limiting the ability of broker-dealers to sell the securities and the ability of stockholders to sell their securities in the secondary market. There is no assurance that trading in our common stock will not be subject to these or other regulations that would adversely affect the market for such securities. The Price of Our Common Stock May Fluctuate Which May Affect the Value of Your Shares From time to time, there may be significant volatility in the market price of our common stock. Our quarterly operating results, changes in earnings estimated by analysts, if any, changes in the general conditions of the quality cookware industry, the economy or financial markets, or other developments affecting our business could cause the market price of our common stock to fluctuate substantially. In addition, in recent years the stock market has experienced significant price and volume fluctuations. This volatility has had a significant effect on the market prices of securities issued by many companies for reasons unrelated to their operating performance. Lack of Independent Director Approval of Certain Related Party Transactions Upon emerging from bankruptcy, there were no independent directors represented on our board of directors when the company entered into an advisory agreement with DDG Management Services Corp. or a management agreement with Deltennium Consulting, Inc. Messrs. Danovitch and Lucaci, directors of the company, are also directors of DDG Management Services Corp. and Mr. Czarnecki, the chairman of our board of directors, is also the chairman of the board of directors of Deltennium Consulting, Inc. See "Certain Relationships and Related Party Transactions." Future Sales of Our Common Stock May Affect the Value of Your Shares Our sale of substantial amounts of common stock in the public market following this offering could lower the market price of our common stock. Of the 3,022,041 shares of common stock to be outstanding after this offering (assuming no exercise of outstanding options, warrants, conversion of the Class B common stock or the over-allotment option), 1,500,000 shares will be freely tradeable without restriction. Upon expiration of lock-up agreements entered into by our officers, directors, and stockholders prior to the offering, an additional 1,383,691 shares will become eligible for sale 13 months after the closing of this offering, subject to the provisions of Rule 144. In addition, the 138,350 shares of common stock held by certain stockholders that acquired their shares as creditors of our predecessor entity pursuant to the plan of reorganization are subject to certain registration rights as provided by the plan of reorganization. See "Shares Eligible for Future Sale." In addition, we intend to file a registration statement on Form S-8 with respect to our common stock issuable upon exercise of options under the 1998 Equity Incentive Plan. The 1998 Equity Incentive Plan authorizes the issuance of options for up to 180,000 shares of common stock. Currently, no options have been issued under the 1998 Equity Incentive Plan. See "Management--1998 Equity Incentive Plan." Upon filing of such registration statement, the holders of such options may, subject to vesting requirements including certain performance targets, exercise and sell their shares immediately without restriction, except affiliates who are subject to certain volume limitations and manner of sale requirements of Rule 144. See "Shares Eligible for Future Sale." Holders of warrants to purchase 466,181 shares of our common stock are entitled to registration rights with respect to such shares. Upon registration, such shares may be sold in the market without limitation. In addition, pursuant to the plan of reorganization the Company's predecessor has granted warrants to purchase 52,573 shares of common stock, exercisable at a price of $11.57 per share, to the holders of all of the then outstanding warrants of such predecessor entity. These warrants do not contain registration rights. See "Description of Securities--Registration Rights." Sales of such shares of our common stock may decrease the market price for the common stock. See "Underwriting." Risks Associated with Forward-Looking Statements This prospectus contains certain statements that are considered "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange 11 Act of 1934. Those statements include, among other things, the discussions of our business strategy and expectations concerning developments in the quality cookware industry, our market position, future operations, ability to grow through making acquisitions, margins and profitability, and liquidity and capital resources. Investors are cautioned that reliance on any forward-looking statement involves risks and uncertainties, and that although we believe that the assumptions on which the forward-looking statements contained herein are reasonable, any of those assumptions could prove to be inaccurate, and as a result, the forward-looking statements based on those assumptions also could be incorrect. The uncertainties in this regard include, but are not limited to, those identified in the risk factors discussed herein. In light of these and other uncertainties, the inclusion of a forward-looking statement herein should not be regarded as a representation by us that our plans and objectives will be achieved. 12 THE COMPANY Rolling Pin Kitchen Emporium, Inc. (together with its wholly owned subsidiaries, the "Company") operates a chain of specialty retail stores for quality cookware and serving equipment, cooking accessories and certain select food products as well as cookbooks and food-related publications. The Company operates 19 Company-owned stores and 21 franchised locations under the trademarks The Cookstore and Rolling Pin Kitchen Emporium, which are located primarily throughout the Midwest and Southeast regions of the United States. The Company's business is comprised of the cookware business of (i) its predecessor entity, which was organized under the name The Gaylord Companies, Inc. in Delaware on July 19, 1994 (the "Predecessor Entity"), and was reorganized and renamed Home Retail Holdings, Inc. during the bankruptcy reorganization pursuant to Chapter 11 of the United States Bankruptcy Code (the "Bankruptcy Code") that was completed on August 12, 1998 (the "Reorganization") and which operates four retail cookware stores in Ohio, and (ii) Aropi, Incorporated, an Iowa corporation ("Aropi"), which operates 15 Company-owned stores in eight states and 21 franchised stores in nine states. The Company acquired Aropi on August 21, 1998. On September 15, 1998, the Company changed its name from Home Retail Holdings, Inc. to Rolling Pin Kitchen Emporium, Inc. See "Business." The Company's goal is to build a consolidated enterprise with national market reach through the acquisition and integration of independent quality cookware businesses, the opening of new cookware stores in large markets, and developing franchised cookware stores in targeted markets throughout the United States. Although the Company has had preliminary discussions with representatives of certain potential acquisition candidates, it currently does not have any agreement with any other company with regard to any acquisitions. The Company's stores range in size from approximately 1,600 square feet to 3,300 square feet and operate in regional retail malls. Each store offers a wide range of products, from over 300 vendors in 12 distinct categories including accessories, bakeware, books, cookware, cutlery, electronics, food, furniture, gadgets, gifts, tableware and textiles. The Company intends to use its existing stores as the basic store design prototype for most of its anticipated expansion through Company-owned and franchised locations. The Company has four stores currently operating under The Cookstore trademark in Ohio and recently acquired Aropi which has 15 Company-owned stores operating under the Rolling Pin Kitchen Emporium trademark in Alabama, Florida, Georgia, Kentucky, Louisiana, South Carolina, Tennessee, and Virginia and 21 franchised stores operating under the Rolling Pin Kitchen Emporium trademark in Arkansas, Florida, Georgia, Illinois, Iowa, Kentucky, North Carolina, South Carolina, and Tennessee. The Company expects to convert the four Company-owned stores in Ohio currently operating under The Cookstore trademark to the Rolling Pin Kitchen Emporium trademark in the near future. The Company's principal executive offices are located at 4264 Winters Chapel Road, Building B, Atlanta, Georgia 30360. 13 USE OF PROCEEDS If all 1,500,000 shares (the "Shares") of the Company's Class A Common Stock (the "Common Stock") offered pursuant to this prospectus (the "Prospectus") are sold (the "Offering"), the Company will receive gross proceeds of approximately $9,000,000 (assuming the public offering price is $6.00, and assuming the over-allotment option is not exercised). If the underwriters ("Underwriters") exercise the over-allotment option, the Company will receive an additional $1,575,000. The estimated net proceeds of $7,380,000 were determined after deduction of all commissions, discounts and expenses paid to the Underwriters (estimated to be $1,170,000) and after all expenses of the Offering (estimated to be $450,000). Pending the uses listed below, the net proceeds will be invested in short-term, interest-bearing, investment grade securities. The Company intends, in the following order of priority, to use the net proceeds from this Offering approximately as follows:
Amount Percentage ------------- ----------- Expansion of Business Operations Opening of New Stores(1) ..................................... $2,250,000 30.49% Acquisition of Existing Chains ............................... 1,000,000 13.55% Expenses Associated with Selling New Franchises .............. 250,000 3.39% Expand Alternative Distribution Channels ..................... 600,000 8.13% ---------- ------ Total -- Expansion of Business Operations ..................... $4,100,000 55.56% Repayment of a portion of Existing Indebtedness(2) Repayment of Interim Financing ............................... $ 562,500 7.62% Paydown of Amounts Owed to Greenfield ........................ 593,750 8.05% ---------- ------ Total -- Repayment of Existing Indebtedness ................... $1,156,250 15.67% ---------- ------ Working capital and general corporate purposes ................ 1,430,000 19.38% ---------- ------ Redemption of Convertible Series A Preferred Stock(3) ......... $ 343,750 4.65% Termination of Redemption Provisions of Certain Warrants(4)................................................... $ 350,000 4.74% TOTAL ......................................................... $7,380,000 100.00% ========== ======
- ------------ (1) Assumes that 9 stores are opened over the next 18 months at an average cost of $250,000 per store (including costs to stock inventory). (2) The proceeds will be used to repay a portion of existing indebtedness with Greenfield Commercial Credit, L.L.C. ("Greenfield") which bears interest at three percentage points over the Prime Rate as published in the Wall Street Journal and the aggregate amounts of $562,500 due to Gabledon, Ltd. and Barajay, Inc., which includes principal of $500,000 plus accrued interest of $62,500 during the term of the note. The $562,500 represents the entire balance due to Gabledon, Ltd. and Baraja, Inc. Amounts due to Liberty Bidco Investment Corporation ("Bidco") under that certain Business Loan Agreement With Covenants, dated as of August 12, 1998, by and between the Company and Bidco, as such agreement has been amended by that certain First Amendment, dated August 20, 1998, by and between such parties (the "First Amendment"), and as further amended by the Second Amendment, dated November 1, 1998, by and between such parties (as so amended the "Loan Agreement") are expected to be refinanced subsequent to the completion of this Offering. The outstanding balance due Greenfield after the application of the $593,750 is expected to be refinanced. The existing indebtedness with Greenfield and Bidco was obtained to finance the acquisition of Aropi in August 1998. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." (3) The Company will redeem 275 shares of Convertible Series A Preferred Stock held by the Delacroix Foundation, Ltd. at the time of the Offering for a redemption premium of 25% over the $1,000 par value of such shares. (4) Upon the consummation of the Offering, Bidco will receive $250,000 and Greenfield will receive $100,000 as consideration for the termination of redemption provisions in their warrants. DIVIDEND POLICY Holders of the Common Stock are entitled to dividends only, as and if, declared by the Company's Board of Directors, out of funds legally available therefor. The Company has not yet paid any dividends and does not expect to do so in the foreseeable future. The Company intends to use all retained earnings for working capital and to finance the anticipated growth and expansion of its business. 14 CAPITALIZATION The following table sets forth the capitalization of the Company as of September 30, 1998: (i) on an actual basis; and (ii) on an adjusted basis, giving effect to the proceeds and use of proceeds from the sale of the Common Stock the Company offered pursuant to this Prospectus after deducting underwriting discounts and commissions and estimated offering expenses:
September 30, 1998 --------------------------------- Actual As Adjusted --------------- --------------- Long term debt less current portion(1) ................ $ 0 $ 0 Put option on Warrants ................................ 550,000 0 ------------ ------------ Stockholders' equity: Cumulative Preferred Stock, 1,000,000 shares authorized 320 issued and outstanding (actual) and 45,000 shares (as adjusted); redeemable, convertible and bearing a liquidation preference of $1,000 per share(2)......... 240,000 45,000 Class A Common Stock, par value $.01 per share, 20,000,000 shares authorized; 1,522,041 shares issued and outstanding actual; 3,022,041 shares issued and outstanding as adjusted(3)(4) ........................ 15,220 30,220 Class B Common Stock, par value $.01 per share, 154,951 shares issued and outstanding actual pro forma and pro forma as adjusted(4) ......................... 1,550 1,550 Additional Paid-in Capital ............................ 80,000 7,445,000 Accumulated deficit (5) ............................... (1,215,376) (1,164,126) ------------ ------------ Total stockholders equity (deficit) ................... (878,606) 6,357,644 ------------ ------------ Total capitalization .................................. $ (38,606) $ 6,357,644 ============ ============
- ------------ (1) As of September 30, 1998, the current portion of obligations under long term debt was approximately $4,020,000 (net of discount of $550,000). (2) Includes a discount of $80,000 (Actual), which is written off as a preferred stock dividend (As Adjusted) with the preferred stock's initial convertibility due to the Offering and reflects the redemption of 275 shares of Convertible Series A Preferred Stock for $343,750 with proceeds from the Offering with the $68,750 excess of consideration paid over the face amount redeemed charged as a preferred stock dividend. (3) Excludes (i) 92,595 shares of the Common Stock subject to warrants granted to Bidco, exercisable at $0.01 per share (the "Bidco Warrants"), 40,602 shares of Common Stock subject to warrants granted to Bidco, exercisable at 165% of the public offering price (the "New Bidco Warrants"), 40,602 shares of Common Stock subject to warrants granted to Greenfield, exercisable at 165% of the public offering price (the "Greenfield Warrants"), 52,573 shares of the Common Stock subject to warrants granted to all of the holders of the outstanding warrants of the Predecessor Entity pursuant to the Plan of Reorganization, exercisable at $11.57 per share (the "New Warrants"), 29,261 shares of the Common Stock subject to warrants granted to the holders of all of a certain class of securities of the Predecessor Entity, exercisable at 80% of the public offering price (the "Individual Warrants"), 8,875 shares of the Common Stock subject to warrants granted to DLM Asset Management, Inc. and Spinnernet Financial Systems, Ltd. exercisable at 165% of the public offering price (the "Financing Warrants"), and 104,246 shares of the Common Stock subject to warrants granted to JRP Consulting Corp. and Laux, Holmes & Company exercisable at 165% of the public offering price (the "Other Financing Warrants"); (ii) 180,000 shares of the Common Stock reserved for issuance pursuant to the 1998 Equity Incentive Plan; (iii) the exercise of the Underwriters' over-allotment option; (iv) 154,551 shares of the Common Stock issuable upon contingent conversion of the outstanding Class B Common Stock; and (v) 150,000 shares of the Common Stock subject to warrants granted to the Underwriters, exercisable at 165% of the public offering price (the "Underwriters' Warrants"). See "Description of Securities." (4) The Class B Common Stock automatically converts into shares of Common Stock upon the occurrence of certain events. See "Description of Securities." (5) Adjusted to reflect the payment of $350,000 for removal of puts on warrants recorded at $550,000, and an associated gain of $200,000. 15 DILUTION As of September 30, 1998, there were 1,522,041 shares of Common Stock outstanding, having a negative net tangible book value per share of approximately $(1.32). Net tangible book value per share represents the amount of the Company's total tangible assets less its total liabilities, divided by the number of shares of the Company's Common Stock outstanding. After giving effect to the sale of the 1,500,000 shares of Common Stock under this Offering at a price of $6.00 per share and the application of the net proceeds therefrom (but assuming none of the options, warrants or shares of Class B Common Stock are exercised), there would be a total of 3,022,041 shares of Common Stock outstanding with a net tangible book value of approximately $1.73 per share. This would represent an immediate increase in net tangible book value of $3.05 per share to existing stockholders and an immediate dilution of $4.27 per share to new investors. Dilution is determined by subtracting net tangible book value per share after the Offering from the amount paid by new investors per share of Common Stock. The following table illustrates the per share dilution: Public offering price per share ............................... $ 6.00 Net tangible book value per share -- 09/30/98 actual ......... (1.32) Increase attributable to new investors ....................... 3.05 ------ Net tangible book value per share after Offering .............. 1.73 ------ Dilution to new investors ..................................... $ 4.27 ======
The following table summarizes, on a pro forma basis, as of September 30, 1998, the difference between the existing stockholders and the new investors with respect to the number of shares of Common Stock purchased from the Company, the total consideration paid and the average price per share: Shares Purchased
Total Average Price Number Percent Consideration Per Share ----------- ----------- --------------- -------------- Existing stockholders ......... 1,522,041 50.4% $ 1,695,500 $ 1.11 New investors ................. 1,500,000 49.6% 9,000,000 6.00 --------- ----- ----------- ------ Total ......................... 3,022,041 100.00% $10,695,500 ========= ====== ===========
The foregoing table assumes: (i) no exercise of the Underwriters' over-allotment option; (ii) no exercise of the Underwriters' Warrants to purchase 150,000 shares of Common Stock, exercisable at 165% of the public offering price; (iii) no exercise of the Bidco Warrants to purchase 92,595 shares of Common Stock, exercisable at $0.01 per share, (a) New Bidco Warrants to purchase 40,602 shares of Common Stock, exercisable at 165% of the public offering price, (b) Greenfield Warrants to purchase 40,602 shares of Common Stock, exercisable at 165% of the public offering price, (c) New Warrants to purchase 52,573 shares of Common Stock, exercisable at $11.57 per share, (d) Individual Warrants to purchase 29,261 shares of Common Stock, exercisable at 80% of the public offering price, (e) Financing Warrants to purchase 8,875 shares of Common Stock, exercisable at 165% of the public offering price, or (f) Other Financing Warrants to purchase 104,246 shares of Common Stock, exercisable at 165% of the public offering price; (iv) no conversion of the Class B Common Stock; and (v) no exercise of stock options outstanding after September 30, 1998. As of September 30, 1998, there were 180,000 shares of Common Stock reserved for issuance under the Incentive Plan. To the extent that any shares of Common Stock are issued on exercise of any of these warrants or conversion of the Class B Common Stock, or, possibly, options granted after September 30, 1998, there will be further dilution to new investors. See "Description of Securities." 16 PRICE RANGE OF COMMON STOCK Shares of the Predecessor Entity's common stock and redeemable warrants were traded on the Nasdaq's SmallCap Market and OTC Bulletin Board under the trading symbols "GJCO" and "GJCOW," respectively, and on the Boston Stock Exchange under the symbols "GJC" and "GJCW," respectively. No other class of the Predecessor Entity's common stock was publicly traded. The following table sets forth the high and low sales prices for shares of the Predecessor Entity's common stock on the Nasdaq's SmallCap Market and OTC Bulletin Board for the periods indicated: High Low Sale Sale ---------- ---------- Fiscal year ended December 31, 1996 First quarter ................................... $ 5.00 $ 1.50 Second quarter .................................. 3.31 0.87 Third quarter ................................... 2.00 0.87 Fourth quarter .................................. 1.53 0.84 Fiscal year ended December 31, 1997 First quarter ................................... $ 1.44 $ 1.00 Second quarter .................................. 1.31 0.75 Third quarter ................................... 1.22 0.38 Fourth quarter .................................. 0.69 0.02 Fiscal year ended December 31, 1998 First quarter ................................... $ 0.28 $ 0.09 Second quarter .................................. 0.32 0.14 Third quarter (through August 12, 1998) ......... 0.23 0.13 On August 7, 1998, the last sale price for shares of the Predecessor Entity's common stock as reported by the Nasdaq's OTC Bulletin Board was $0.17 per share. Since August 12, 1998, there has been no established public trading market for the Predecessor Entity's common stock because the common stock was exchanged for the Company's Common Stock. There is currently no trading market for the Company's Common Stock. At November 25, 1998, there were approximately 343 holders of record of shares of Common Stock. See "Shares Eligible for Future Sale." 17 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis should be read in conjunction with the Financial Statements and related Notes contained elsewhere in this Prospectus. This Prospectus contains forward-looking statements that involve risks and uncertainties. The Company's actual results may differ significantly from the results discussed in the forward-looking statements. Factors that might cause such a difference include, but are not limited to, those discussed in "Risk Factors." Historical The Company is the successor entity to the Predecessor Entity, which filed for bankruptcy on November 13, 1997 and operated under bankruptcy protection during the first half of 1998. The Predecessor Entity began as a family business operating a chain of bookstores and eventually expanded the franchise to include cookware stores as well. The various operations were consolidated in a corporate entity under the name Gaylord Companies, Inc. in July 1994. In October 1995, the Predecessor Entity effected a public offering of its common stock. Although the Predecessor Entity had expected to raise approximately $4 million to $5 million in that offering to finance the expansion of its operations, net proceeds to the Predecessor Entity totaled approximately $2 million. Management believes that the failure to secure an appropriate level of capital, along with competitive pressures from larger bookstore competitors and increased operating expenses as a result of the additional expenses of operating as a public company, resulted in the bankruptcy. In July 1998, the chain of bookstores previously operated by the Company was sold in connection with a separate plan of reorganization. As a result, the Company did not recognize a gain on the transfer of the bookstores in the bankruptcy. Additionally, while the Predecessor Entity was in bankruptcy it closed two stores with minimal costs since it occurred as part of the reorganization process. In the future the Company expects that it will incur significantly greater costs if it decides to close stores or discontinue operations out of bankruptcy. Overview Notwithstanding the difficulties encountered by the Predecessor Entity, management believes that the quality cookware industry has substantial growth potential and that the cookware store business is an attractive business model that is capable of generating consistent levels of sales and profitability. Management believes that the potential market for the type of products found in the Company's stores consists of nearly every home in the country. According to estimates by the National Housewares Manufacturers Association, annual retail sales of housewares are approximately $54 billion annually. The higher-end segment (which the Company defines as its primary target market and which includes such items as kitchen gadgets, tools, and accessories) captures in excess of $1.8 billion in annual sales. Management believes that this industry niche is an attractive opportunity for several reasons: o Historically this market provides for higher gross profit margins and higher average ticket sales than the broader-based housewares market, which includes many more highly competitive, lower-end products. o There are presently a limited number of companies of significant size that appear to have targeted this market in a similar manner and approach to the market as the Company anticipates doing. o There appears to be a growing segment of the general population that has a keen interest in cooking. The Company's stores intend to cater to the high-end niche of the industry. Business and Operational Model of the Company The Company's business plan is based on the premise that retail success today is a function of the traditional tenants of location, price, and promotion combined with a disciplined operational and logistical infrastructure. The Company recognizes that same-store sales growth is essential to the success of any retail enterprise and the Company will continue to build a marketing organization that is responsive to retail trends in general, and to local retail demand in particular. The Company's ability to tailor each stores offerings to meet the 18 demands of a local market is essential to the continued success of the stores. Traditional merchandising techniques are complemented by a constant use of creative marketing efforts that focus on making the consumer's visit to the store as much an entertainment experience as a shopping task. The Company's commitment to operational focus means that its success is dependent in large part on its ability to manage information systems, inventory levels, distribution logistics, controlling shrinkage of inventory, purchasing efficiencies and effective customer service at the store level. In order to achieve its goal, the Company expects to focus on operating efficiencies and synergies by combining administrative functions. The Company plans to manage costs through an expense control system that will require an analysis of the cost benefits of each expenditure and thorough analysis of the decision process for selecting new sites. The Company is in the early stages of enhancing its operational and control systems. The Company has recently begun implementing certain augmented reporting and internal audit procedures necessary to assure the adequate flow of information throughout the current organization and which will be capable of serving the Company's needs as it grows. The Company plans to use a portion of the proceeds of this Offering to improve its computer and point-of-sale systems in order to more effectively implement these enhanced systems. The Company believes that it will take approximately six months and cost approximately $250,000 to fully establish and implement the planned operational and informational systems. The Company believes that once implemented, the new computer and reporting systems should serve its needs through its anticipated growth during the next 12-18 months. The Company believes its operating strategy will enable it to service its anticipated debt levels after the Offering as well as enable the Company to generate consistent levels of earnings in the future. In particular, the Company intends to maintain tight expense controls, particularly at the corporate level. Moreover, to improve operating margins, the Company plans to rely on sources of revenue from franchise fees, revenues derived from Internet sales, and revenues derived from enhanced catalogue operations. The Company currently believes that the maintenance of a ratio of franchised stores to Company-owned stores of 2:1 is an optimal ratio to cover corporate overhead while expanding Company locations. Additionally, the Company intends to optimize the number of product offerings or SKUs per store. The Company believes that by reducing the number of SKUs per store, it will reduce the level of capital necessary to maintain inventory, thereby increasing cash and ultimately profitability. Management believes that as the Company's profitability improves, the increased internally generated funds will enable it to pay down a portion of existing debt to a level that will ultimately be refinanced or paid off with the proceeds of an additional equity offering in the future. No assurances can be given that the Company will be able to successfully implement its operating strategy. Expansion The Company plans to engage in an expansion program involving the opening of new stores in both existing and new markets and the expansion or replacement of existing stores with larger stores in certain locations. The Company anticipates that as a result of this program, the total number of Company-owned stores will increase from 19 stores at current, to approximately 28 stores by November 1999, with total square footage of store space increasing from approximately 42,000 square feet at present, to approximately 72,000 square feet by November 1999. No assurance can be made that the Company will be able to successfully implement its expansion plans. The average cost to open a new store is approximately $250,000 (including costs to stock inventory). The Company believes that the anticipated growth of the Company is dependent, in large part, on the success of its store expansion program. As part of its expansion program, the Company expects to open new stores which will be patterned after the larger "Cookstore" format. It also intends to experiment with a larger format store in certain markets, which would, if implemented, be approximately 5,000 square feet in size. In determining whether to open new stores (including larger format stores) in a particular market, the Company expects to evaluate a number of factors, including the availability of prime real estate and demographic information (such as data relating to income and education levels, age and occupation). The Company believes that because it does not rely heavily on a central distribution center and since it does not rely on paid advertising to any significant extent, it has the flexibility to enter a new market with only a single store. The Company will consider opening additional stores in that market, once the initial store has proven successful. The Company has already begun to evaluate sites for additional stores in markets proximate to existing locations. 19 Acquisition of Aropi On August 21, 1998, the Company acquired Aropi for approximately $2.6 million, consisting of approximately $2.1 million in cash, two convertible promissory notes for $250,000 each. The convertible promissory notes bear interest at the rate of 8% and are mandatorily convertible into Common Stock having a fair market value of $500,000 as of the conversion date. Such shares shall not represent less than 2% of all of the issued and outstanding Common Stock on a fully diluted basis. The convertible promissory notes are mandatorily convertible if the Company completes an offering of its Common Stock prior to August 20, 1999 in which it receives proceeds of at least $5,000,000 and the Company has a specified capital structure as of the conversion date. The Company financed the acquisition of Aropi by entering into the First Amendment with Bidco and the Loan and Security Agreement with Greenfield. The estimated goodwill calculated on the Aropi acquisition was approximately $1,004,877. Franchise Operations The Company operates 21 franchised stores under the Rolling Pin Kitchen Emporium trademark in nine states including Arkansas, Florida, Georgia, Illinois, Iowa, Kentucky, North Carolina, South Carolina and Tennessee. The franchise agreements have an initial term of five to ten years and will be automatically renewed for a five-year term with an additional option to renew for two five-year terms upon certain conditions and terms. A few of the franchise agreements are in the first renewal period, but most are in their initial terms. Each existing franchise agreement grants to the franchisee the right and license to operate a franchised store in a specified territory. The franchise agreements require that the franchisee construct or remodel, at its own expense, and operate the franchised store in accordance with certain requirements, standards and specifications prescribed by the Company, including that the franchisee purchase certain initial equipment, fixtures and supplies designated by the Company and promote and sell only products specified by the Company. The Company, in turn, is obligated to provide the franchisee with, among other things, advisory assistance in the operation of the franchised store and assistance in connection with advertising and promotional programs. In addition, in the event any franchisee wishes to accept an offer from a third party to purchase an interest in the franchise that would have the effect of transferring a controlling interest in the franchise, each franchise agreement grants the Company a right of first refusal to purchase the interest in such franchise. For the year ended June 30, 1998, Aropi's revenues from its franchisees totaled $466,519. Aropi historically attributed a significant portion of its corporate overhead as being attributable to franchise-related expenses, which resulted in the income from franchise operations being less than the expense from such operations. The Company plans to re-evaluate this practice and anticipates an allocation that tracks actual expenditures with respect to franchise development and maintenance. The reallocation of such expenses will result in an increase in the Company's operating expenses related to Company-owned stores and a decrease in franchise-related expenses. This change in accounting procedures does not result in increased expenses and does not affect the gross margin. The Company Results of Operations -- The Company The Company operates a chain of specialty retail stores for quality cookware and serving equipment. The Company's revenue is derived primarily from the sale of cookware and serving equipment. Fresh Start Reporting From August 12, 1998 To September 30, 1998 -- The Company The information presented below is presented on a fresh-start basis as of August 12, 1998. Net Revenues. From August 12 to September 30, net revenues were $728,767. Cost of Goods Sold. For the period from August 12 to September 30, cost of goods sold were $436,628, representing approximately 60% of sales. 20 Selling, General and Administrative Expenses. For the period from August 12 to September 30, selling, general and administrative expenses were $1,076,415, which includes approximately $271,000 of professional fees. Period Ended August 12, 1988 Compared To the Period Ended September 30, 1997 -- The Company Net Revenues. For the period ended August 12, 1998, net revenues decreased $1,021,618, or 41.3%, from $2,475,892 for the period ended September 30, 1997 to $1,454,274 for the period ended August 12, 1998, of which $445,661, or 18%, was attributable to the difference in the length of the periods and $575,957, or 23.3%, was due to decreases in comparable store volumes caused by lower than normal store inventory levels. Lower inventory levels were the result of "cash in advance" policies for the Company and the limited cash resources of the Company during this period. Selling, General and Administrative Expenses. For the period ended August 12, 1998, selling, general and administrative expenses decreased $296,663, or 28.8%, from $1,029,935 for the period ended September 30, 1997 to $733,272 for the period ended August 12, 1998, of which $185,388, or 18%, was attributable to the difference in the length of the periods and $111,275, or 10.8%, was due to decreases in general corporate overhead. Results For 1997 Compared To 1996 -- The Company Net Revenues. Net revenues increased $200,000, or 6%, from $3.5 million in 1996 to $3.7 million in 1997, primarily due to the opening of two new Cookstores on December 1, 1996. Operating Expenses. Operating expenses increased approximately $957,000, or 209%, from $458,000 in 1996 to $1.42 million in 1997. As a percentage of net revenues, operating expenses increased from 13.1% in 1996 to 38% in 1997, primarily due to increased costs associated with the newest Cookstores (which were opened on December 1, 1996) and the increased costs of borrowing associated with a refinancing of its debt. General and Administrative Expenses. General and administrative expenses increased $448,000, or 115%, from $390,000 in 1996 to $838,000 in 1997. As a percentage of net revenues, general and administrative expenses increased from 11.1% in 1996 to 22.5% in 1997. This increase as a percentage of net revenues was primarily due to an increase in professional, consulting and financing fees. Liquidity and Capital Resources -- The Company The Company used $332,597 in net cash from operating activities from August 12 to September 30. Net cash used in investing activities was approximately $2,125,000 during such period for the acquisition of Aropi. Net cash provided by financing activities was $2,460,000 representing financing for the Aropi acquisition. At September 30, 1998, the Company had a working capital deficit of $2,335,490, with all debt being classified as current. See "Description of Securities." Aropi, Incorporated Results Of Operations -- Aropi Aropi operates a chain of specialty retail stores for quality cookware and serving equipment. Aropi's revenue is derived primarily from the sale of cookware and serving equipment. Aropi's fiscal year ended on June 30. Results For Fiscal Year ended June 30, 1998 Compared To Fiscal Year ended June 30, 1997 -- Aropi Net Revenues. Net revenues decreased $262,543, or 4%, from $6.57 million in 1997 to $6.31 million in 1998. Of this decrease $228,142, or 3.4% was due to the closing of one store in February 1997, the balance of $34,401, or .5%, was due to changes in comparable store volumes. Cost of Sales. Cost of sales decreased approximately $272,798, or 8.0%, from $3.41 million in 1997 to $3.14 million in 1998. Approximately $115,000 of the decrease is attributable to decreased sales. The balance of the decrease resulted from greater discounts from vendors and a one-time accounting change that resulted in a $69,000 decrease to freight-in charges, a component of cost of goods sold. As a percentage of net revenues the 21 cost of sales decreased from 51.84% in 1997 to 49.68% in 1998 primarily due to a change in accounting procedure which required capitalization of inventory freight charges as an asset which will be amortized with the fluctuation of inventory and resulted in a one time decrease in Aropi's cost of sales. Operating Expenses. Operating expenses decreased approximately $87,826, or 2.75%, from $3.19 million in 1997 to $3.10 million in 1998. As a percentage of net revenues, operating expenses increased from 48.50% to 49.13%, primarily due to increases occuring in the ordinary course of business. General and Administrative Expenses. General and administrative expenses decreased $85,445, or 5.31%, from $1.61 million in 1997 to $1.52 million in 1998. As a percentage of net revenues, general and administrative expenses decreased from 24.46% in 1997 to 24.13% in 1998. This decrease as a percentage of net revenues was due to a decrease in overall rent expense. Results For Fiscal Year ended June 30, 1997 Compared To Fiscal Year ended June 30, 1996 -- Aropi Net Revenues. Net revenues decreased $260,019, or 3.81%, from $6.83 million in 1996 to $6.57 million in 1997, primarily resulting from changes in comparable store sales volumes resulting from increased competition in certain markets. Operating Expenses. Operating expenses decreased approximately $44,081, or 1.36%, from $3.23 million in 1996 to $3.19 million in 1997. As a percentage of net revenues, operating expenses increased from 47.30% in 1996 to 48.50% in 1997, primarily due to lower sales and the fact that overhead in the store which had closed decreased at a slower rate than sales. General and Administrative Expenses. General and administrative expenses decreased $74,224, or 4.41%, from $1.68 million in 1996 to $1.61 million in 1997. As a percentage of net revenues, general and administrative expenses decreased from 24.62% in 1996 to 24.46% in 1997. This decrease as a percentage of net revenues was due to changes in the normal course of business. Liquidity and Capital Resources -- Aropi Aropi provided $438,499 in net cash from operating activities in 1997. For the year ended June 30, 1998, $186,218 of cash was provided by operating activities. Net cash used in investing activities was approximately $14,417 in 1997 and $16,659 in 1998, principally for the purchase of fixed assets. Net cash used by financing activities was $434,976 in 1997, primarily to repay debt. For the year June 30, 1998, net cash used in financing activities was $176,703. At June 30, 1998, Aropi had a working capital surplus of $958,754, and had $670,502 of long-term debt outstanding net of current maturities of $176,313. Liquidity and Capital Resources When the Company emerged from Bankruptcy on August 12, 1998, it had a working capital deficit of $(55,044). At September 30, 1998, the Company had a working capital deficit of $(2,335,490). The decrease in working capital of $2,280,446 is primarily attributable to cash used by operations of $332,597, and the addition of long-term assets in the Aropi acquisition (fixed assets -- $352,891; goodwill -- $1,004,877) which was financed by short-term debt. Since emerging from bankruptcy, the Company has utilized $332,597 in operations, which was funded primarily by debt borrowing in excess of what was needed to fund the Aropi acquisition. For the foreseeable future, the Company intends to retain all earnings for use in the operation and expansion of its business. The Company has not entered into any material commitments for capital expenditures at this time. The Company's expansion program is likely to require the Company to make capital expenditures for furniture and fixtures and leasehold improvements on an ongoing basis of approximately $250,000 per new store (including the costs of inventory). The Company had deferred tax assets totaling $1,735,000, with $1,635,000 representing the tax effects of net operating loss carryforwards, and the effect of book depreciation in excess of tax depreciation of approximately $100,000 as of August 12, 1998 upon its emergence from bankruptcy. The Company has a full valuation 22 allowance as a reserve against such deferred tax assets. The net operating loss carryforwards totaling approximately $4,087,000, expire in the years 2009 through 2013. Annual utilization of the net operating loss carryforwards will be restricted due to the ownership change in the plan of reorganization. The Company would need to average annual taxable income of at least $272,000 over the carryover period to fully utilize such deferred tax assets. Bidco Loan Agreement In August 1998, the Company entered into the Loan Agreement with Bidco. The Loan Agreement provided financing in the amount of $1,300,000 as contemplated by the terms of the Plan of Reorganization. The First Amendment provided for an additional $700,000 in financing that was used to fund the Aropi acquisition and that is available for working capital purposes. Borrowings under the Loan Agreement were used to repay the outstanding balance owed by the Company under the Loan and Security Agreement, dated April 23, 1998, between the Company and Fremont Financial Corporation, a California corporation ("Fremont"), as well as for working capital needs and general corporate purposes. The Loan Agreement and First Amendment include restrictions on, among other things, additional debt, capital expenditures, investments, dividends and other distributions, mergers and acquisitions, and contains covenants requiring the Company to meet a specified minimum current assets to current liabilities ratio, and a minimum net worth test. As of the date hereof, the Company is in compliance with all such financial covenants. The Loan Agreement and First Amendment established a first security interest in the current assets of the Company and a second security interest in the current assets of Aropi, including, among other items, instruments, furniture, accounts receivable and inventory. In addition, the First Amendment provided Bidco with a second security interest in the stock of Aropi. Pursuant to the Loan Agreement, the Company executed a Promissory Note that bears interest, which is payable monthly, at the rate of three percentage points over the Prime Rate as published in the Wall Street Journal on the first of every month. The Promissory Note was amended pursuant to the First Amendment to reflect the current amount of the loan which was $2,000,000. Pursuant to the Loan Agreement, the Company issued the Bidco Warrants to purchase 92,595 shares of Common Stock, exercisable at a price of $0.01 per share. Pursuant to the First Amendment, the Company executed the New Bidco Warrants for the right to purchase 40,602 shares of Common Stock, exercisable at 165% of the public offering price. Each of the Bidco Warrants and the New Bidco Warrants contain registration rights for the shares received by the Bidco pursuant to such warrants. The Bidco Warrants and the New Bidco Warrants have been amended to terminate redemption provisions in those warrants. Upon the consummation of the Offering, Bidco will receive $250,000 as consideration for such termination. Under the terms of the Loan Agreement, Bidco has a right of first refusal on any mezzanine financing for a three-year period and the Company is required to pay a prepayment penalty of 20% on any amount prepaid unless the entire balance is prepaid from the proceeds of the Offering or a private placement by the Company. The Loan Agreement and the First Amendment expire on January 31, 1999 and are required to be paid in full by that time. Although no assurances can be given, the Company currently anticipates that upon completion of the Offering, Bidco will refinance the existing indebtedness for a term of three to five years and on terms and conditions substantially similar to the current agreement. See "Description of Securities -- Warrants." As of December 1, 1998, there was an outstanding balance of $2,000,000 on the Bidco loan. Greenfield Loan Agreement In August 1998, the Company entered into a Loan and Security Agreement (the "Loan and Security Agreement") with Greenfield, that provided acquisition financing in the amount of $2 million, of which $500,000 is pursuant to a non-revolving bulge loan facility ("Bulge Loan") and $1.5 million is pursuant to a revolving credit loan facility ("Term Facility"). Borrowings under the Loan and Security Agreement were used to finance the acquisition of Aropi, to repay certain outstanding indebtedness and for working capital purposes. The Loan and Security Agreement includes restrictions on, among other things, additional debt, dividends and other distributions, and mergers and acquisitions. As of the date hereof, the Company is in compliance with all such financial covenants. 23 The Loan and Security Agreement granted Greenfield a continuing priority after Bidco's subordinated security interest in the current assets of the Company and its subsidiaries, including, among other items, accounts receivable, general intangibles, inventory, instruments, furniture, and other property. In addition, Greenfield has a first security interest in the assets and stock of Aropi. Pursuant to the Loan and Security Agreement, the Company executed a Revolving Credit Note that bears interest at the rate of interest which is three percentage points above the Prime Rate as published in the Wall Street Journal and a Bulge Loan Note that bears interest at a fixed 15% per annum rate. The interest on each note is computed upon the basis of a 360 day year for the actual number of days elapsed in a month. Pursuant to the Loan and Security Agreement, the Company also executed the Greenfield Warrants granting Greenfield the right to purchase 40,602 shares of Common Stock, exercisable at a price per share equal to 165% of the public offering price. The Greenfield Warrants contain registration rights for the shares received by the Greenfield pursuant to such warrants. The Greenfield Warrants have been amended to terminate the redemption provision. Upon the consummation of the Offering, Greenfield will receive $100,000 as consideration for such termination. See "Description of Securities -- Warrants." As of December 1, 1998, there was an outstanding balance of $500,000 under the Bulge Loan and a balance of approximately $1.5 million under the Term Facility. The outstanding balance on the Term Facility is to be repaid in full no later than January 29, 1999. The outstanding balance on the Bulge Loan is due December 31, 1998. The Company currently anticipates replacing the Term Facility with a new secured facility proximate to or shortly after completion of the Offering. The Bulge Loan as well as a portion of the Term Facility will be repaid with a portion of the proceeds from the Offering. See "Use of Proceeds." Year 2000 Compliance The Year 2000 ("Y2K") issue is the result of computer programs using two numbers to define the year, with the assumption that the first two numbers of the year are "19." Therefore, any of the Company's computer programs that have time-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. Left uncorrected, this could result in both information technology ("IT") and non-IT system failures or miscalculations causing disruptions of operations, including among other things, a temporary inability to process sales transactions, update databases, produce management reports or engage in normal business activities. The Company operates certain accounting software at the corporate level as well as inventory control and point-of-sale systems at the store and corporate levels. See "Business and Operational Model of the Company." In the normal course of operations, the Company has recently upgraded its computer hardware and software systems with systems that are certified as Y2K compliant. Therefore, the Company believes that its internal IT systems are fully Y2K compliant. The Company will begin to individually test its non-IT systems for Y2K compliance in early 1999 and intends to complete the testing by the end of the third quarter of the fiscal year 1999. Given the type of non-IT systems used by the Company such as time clocks, alarm systems and facsimile machines, it believes that even if its non-IT systems are not Y2K compliant, such noncompliance will not materially effect its operations. The Company will continue to review and evaluate its IT and non-IT systems for potential Y2K issues. Additionally, the Company expects to upgrade its existing accounting software during 1999 and will only effect such an upgrade with a system that has been rated Y2K compliant. Management does not currently expect that the costs related to Y2K remediation or compliance to be material to the Company's financial condition or results of operations. To date, the Company has not expended any funds for Y2K remediation or compliance. In total, the Company estimates it will spend less than $20,000 on Y2K remediation or compliance. Funds for Y2K remediation and compliance will be drawn from normal operating capital. The Company will be dependent on its vendors and suppliers to ensure that they are Y2K compliant. The Company believes the Y2K risk with its suppliers is low because no supplier accounts for a significant percentage of the Company's purchases. The Company, however, is developing contingency plans to identify alternative suppliers. Also, for suppliers that the Company subsequently determines are materially significant, the Company intends to require such suppliers to confirm Y2K compliance in any agreements with the Company. No assurance, however, can be made that such suppliers will agree to that requirement. 24 While the Company can not accurately predict a "reasonable worst case scenario" with regard to its Y2K issues, the Company believes that if some of its systems fail because of Y2K problems, the Company may experience significant delays in its ability to perform certain functions which may have a materially adverse effect on the Company's operations. The Company will continue to review and assess these risks and develop appropriate contingency plans and procedures to minimize the effects of such scenarios. Treatment of Cost of Goods Sold The financial statements for the Company include store occupancy and delivery expenses in the cost of goods sold. Aropi's financial statements do not include these items in the cost of goods sold. Following the Offering the Company's financial statements will include store occupancy and delivery expenses. Seasonality Historically, a significant portion of our net sales and net earnings have been realized during the period from October through December, and levels of net sales and net earnings have generally been significantly lower during the period from January through September. This is the general pattern associated with similar retail industries. If for any reason our sales were to be substantially below seasonal norms during the October through December period, our annual results could be materially and adversely affected. The Company expects to use a portion of the net proceeds of this Offering for its acquisition and expansion program, and for working capital and general corporate purposes. A portion of the proceeds may also be used for acquisitions of complementary businesses; however, at this time the Company has no definitive acquisition targets. The Company expects the proceeds from this Offering will satisfy its operational and acquisition needs for the next 18-24 months. See "Use of Proceeds." 25 BUSINESS The Company The Company operates a chain of specialty retail stores for quality cookware and serving equipment, cooking accessories and certain select food products as well as cookbooks and food-related publications. It operates 19 Company-owned stores and 21 franchised locations under the trademarks The Cookstore and Rolling Pin Kitchen Emporium, which are situated primarily throughout the Midwest and Southeast regions of the United States. The Company's goal is to build a consolidated enterprise with national market reach through the acquisition and integration of independent quality cookware businesses, the opening of new cookware stores in large markets, and developing franchised cookware stores in targeted markets throughout the United States. Although the Company has had preliminary discussions with representatives of various potential acquisition candidates, the Company currently has no agreement with any company with regard to any acquisitions. The Company's cookware stores range in size from approximately 1,600 square feet to 3,300 square feet and operate in regional retail malls. Each store offers a wide range of products, purchased from over 300 vendors in 12 distinct categories including accessories, bakeware, books, cookware, cutlery, electronics, food, furniture, gadgets, gifts, tableware and textiles. The Company intends to use its existing stores as the basic store design prototype for most of its anticipated expansion through Company-owned and franchised locations. The Company has four stores currently operating under The Cookstore trademark in Ohio and recently acquired Aropi that has 15 Company-owned stores operating under the Rolling Pin Kitchen Emporium trademark in Alabama, Florida, Georgia, Kentucky, Louisiana, South Carolina, Tennessee, and Virginia and 21 franchised stores operating under the Rolling Pin Kitchen Emporium trademark in Arkansas, Florida, Georgia, Illinois, Iowa, Kentucky, North Carolina, South Carolina, and Tennessee. The Company expects to convert the four Company-owned stores in Ohio currently operating under The Cookstore trademark to the Rolling Pin Kitchen Emporium trademark in the near future. Industry Background The Company believes numerous factors exist which create a favorable environment for a consolidation within the quality cookware industry. As businesses have become nationwide in scope, the need and demand for a nationwide vendor supplying uniformly high-quality products and services has increased. Similarly, as brand consciousness among end users has increased in certain industries, national brands have realized significant advantages in the marketplace, such as the ability to differentiate their products and services, allowing premium pricing and enhanced customer loyalty. Larger businesses formed through mergers or acquisitions continue to achieve competitive advantages by creating operating synergies through, among other things, the elimination of redundant corporate functions and the use of information technology to decrease cost and increase revenue. Furthermore, manufacturers have developed an increased interest in dealing with large distributors, which has enabled manufacturers to generate efficiency gains due to streamlined production, distribution, and marketing operations. The Company believes that its standard store format (between 1,600 - 3,300 square feet) works especially well in regional malls and strip shopping centers and other select sites that can be classified as middle to upper income shopping destinations because upper income consumers tend to have more disposable income, which can be used to purchase more expensive cookware. The Company's target areas for acquisition and expansion include regional shopping malls located in suburban and urban core revitalization areas, smaller specialty malls, and select, upper end in-line shopping centers. The Company believes that due to the industry's highly fragmented nature, and the relatively small number of companies, such as Williams-Sonoma, Inc., Bed Bath & Beyond Inc. and Linens 'N Things, Inc., there are hundreds of prime locations available for future store openings or acquisitions. Competition The specialty retail business is fragmented and highly competitive. The Company's specialty retail stores compete with other retail stores, including other specialty stores, so-called super stores, department stores, and 26 mail order catalogs. Such competitors include: (i) upscale department stores, which often carry many of the same product lines as the Company but do not typically have the same depth or breadth of product selection or service; (ii) specialty stores (such as specialty linens or housewares retailers), which often have a depth of product selection but typically carry only a limited portion of the product lines carried by the Company; and (iii) discount and mass merchandise stores. In addition, the Company competes with many different types of retail stores that sell many of the products sold by the Company. The Company competes to a more limited extent with factory outlet stores that typically offer limited quantities or limited lines of high quality merchandise at discount prices. Certain of the Company's competitors have greater financial, distribution and marketing resources than the Company. The recent substantial sales growth in the mail order catalog industry has encouraged the entry of many new competitors and an increase in competition from established companies. The Company competes on the basis of merchandise quality and customer service. Strategy The Company's goal is to become a leading national retailer of quality cooking and serving equipment. In addition to opening new locations and sales of franchises, the Company intends to acquire established local or regional cookware operations and combine and integrate them into the existing organization. In order to achieve its goal, the Company will focus on: (i) identifying acquisition candidates that meet the Company's consolidation criteria; (ii) opening new locations; (iii) selling new franchises to augment the store brand in smaller markets; and (iv) achieving operating efficiencies and synergies by combining administrative functions, eliminating redundant facilities, implementing system and technology improvements in acquired entities, and purchasing products in large volumes for both Company-owned and franchise stores. Identify and Pursue Strategic Consolidation Opportunities. The Company plans to acquire companies with established sales presences in certain markets and/or local brand names. The Company believes that the smaller-store, high-end quality cookware industry is highly fragmented and often characterized by family-owned smaller-store owner/operators who desire liquidity and may be unable to gain the scale necessary to access the capital markets effectively or to expand beyond a local or regional base. The Company plans to acquire such operations with a combination of cash from the proceeds of this Offering and Common Stock. Currently, the Company has no specific acquisition targets identified. See "Use of Proceeds." The Company plans to pursue acquisition opportunities in markets of at least 250,000 population with fragmented competition that will benefit from economies of scale. Within such markets, the Company intends to focus on the acquisition of stores or chains having some or all of the following characteristics: (i) stable cash flows and recurring revenue streams from long-term operations or market presence; (ii) the ability to improve sales, operations, and profitability through superior management techniques, access to larger financial resources, and improved purchasing terms; (iii) long-term growth prospects for products offered given the market demographics; (iv) a strong "franchise" or presence in the communities served by the acquisition candidate; (v) an ability to retain, promote, and motivate management teams; (vi) favorable demographic trends within the local regions serviced; and (vii) an under-penetrated market for products provided by the acquisition candidate. Open new locations. The Company plans to open new stores in its current Midwest and Southeast market areas. The Company will select locations for new stores based on market and site demographics, the nature of local competition, and the logistics of shipping and store operations. The approximate cost to open a new store (including the costs of inventory) is $250,000. The Company's strategy is to present the merchandise in an upscale and fashionable setting. The full range of the stores' products are displayed and stocked on the retail floor. The merchandise is arranged by category for shopping convenience. Feature displays are arranged throughout the store emphasizing seasonal products or particular themes. Selling new franchises. The Company believes that franchising offers the opportunity to deploy the cookware store model, and hence the Company's "brand," with no significant capital requirements. This franchise expansion will allow brand expansion into markets that the Company determines would not support a larger Company-owned store. The Company believes that in smaller markets, the local franchisee is better positioned 27 to commit the effort it takes to make a smaller store successful. The Company will continue to use business brokers as a primary vehicle for franchise development, but the Company will also augment its in-house commitment to finding new markets and prospects. The Company expects franchise locations to grow at about double the pace as the internally developed stores. Rolling Pin Kitchen Emporium franchises are available in all states, except for California, Hawaii, Indiana, Maryland, Minnesota, North Dakota, Rhode Island, South Dakota, Washington, New York, Texas, and Wisconsin. The Company does not know when or if it will ever make available franchises in these states. Alternative Channels -- The Internet and Catalogs. The Company plans to expand its existing catalog operation. The expanded catalog will be used in selected direct mailing campaigns so as to develop a customer base that complements the Company's existing market locations and develops brand recognition in markets the Company does not currently have retail cookware stores. The Company has an existing web site which generates a modest volume of transactions. The Company expects that this electronic commerce vehicle will be significantly expanded to capture that segment of the growing market that is comfortable with, or prefers, purchasing products on the internet. The Company will use a variety of marketing strategies designed to increase brand recognition and awareness of the web site. This effort is an important component of the brand identity strategy. Operating efficiencies. The Company believes that it can achieve greater operating efficiencies as it expands and acquires cookware chains, new stores, and franchised locations. Such operating efficiencies include: o Combining Administrative Functions. The Company plans to institute a Company-wide management information system and to combine administrative functions, such as financial reporting and finance, insurance, employee benefits, and legal support, at the corporate level. o Implementing System and Technology Improvements. The Company believes it will be able to increase the operating margin of existing stores and acquired companies by using computerized inventory management and order processing systems, computerized quotation and job costing systems and computerized logistics and distribution systems. The Company believes the implementation of such systems may significantly increase the speed and accuracy of order processing at acquired companies, while increasing inventory turns and providing measurement and analysis tools that facilitate efficient operation. o Using Volume Purchasing. The Company believes that if it is successful in expanding its operations and acquiring more stores, then the Company can achieve operating efficiencies through volume purchasing and should benefit from favorable prices and rebates accruing as the result of higher volume purchases. The Company plans to negotiate improved arrangements with wholesalers and manufacturers to reduce inventory levels of certain acquired companies, thereby allowing more efficient operations by decreasing inventory holding costs and increasing operating margins. Reorganization of Predecessor The Company is the successor entity to the Predecessor Entity, which filed for bankruptcy on November 13, 1997 and operated under bankruptcy protection during the first half of 1998. The Predecessor Entity began as a family business operating a chain of bookstores and eventually cookware stores as well. The various operations were consolidated in a corporate entity under the name Gaylord Companies, Inc. in July 1994. In October 1995, the Predecessor Entity effected a public offering of its common stock. Although the Predecessor Entity had expected to raise approximately $4 million to $5 million in that offering to finance the expansion of its operations, net proceeds to the Predecessor Entity totaled approximately $2 million. Management believes that the failure to secure an appropriate level of capital, along with competitive pressures from larger bookstore competitors and increased operating expenses, resulted in the bankruptcy. The Company formerly operated under the name The Gaylord Companies, Inc., which was reorganized in a Chapter 11 bankruptcy which was completed on August 12, 1998 (the "Effective Date"). In the Reorganization, the Company sold its bookstore operations, closed two cookware stores, and brought in its current management and was renamed Home Retail Holdings, Inc. On September 15, 1998, the Company changed its name from Home Retail Holdings, Inc. to Rolling Pin Kitchen Emporium, Inc. 28 Acquisition of Aropi In August 1998, the Company acquired Aropi from Mr. Glenn Kaas for approximately $2.6 million, consisting of approximately $2.1 million in cash and two notes each for $250,000 that are convertible into Common Stock. Under the purchase agreement, the Company agreed to secure one of the $250,000 convertible promissory notes pursuant to a letter of credit in the amount of $250,000. The letter of credit was not delivered. Pursuant to a letter agreement between the Company and Mr. Kaas, the Company agreed that instead of providing the letter of credit, Mr. Kaas will receive an aggregate of $100,000 payable over a 12-month period (the "Letter Agreement"). The entire amount remaining under the Letter Agreement will be accelerated and become due and payable upon the consummation of the Offering. The Company has also agreed to make a good faith effort to deliver to Mr. Kaas a letter of credit in the amount of $150,000 to secure a convertible promissory note in the amount of $250,000. See "Certain Relationships and Related Party Transactions." Aropi was founded in 1978 as Rolling Pin Kitchen Emporium, a sole proprietorship, by members of Mr. Kaas' family. In 1981, Rolling Pin Kitchen Emporium incorporated in the State of Iowa under the name "Aropi, Incorporated." Aropi owned and operated 15 cookware stores in eight states and 21 franchised stores in nine states. Aropi's stores offer on average 4,000 stock-keeping-units ("SKUs"), which are marketed to consumers with a keen interest in cooking and feature categories that include cookware, cutlery, bakeware, books, food, and associated accessories and gadgets. Aropi distinguishes itself from competition by broader and deeper product offerings and a product mix that it believes is continuously revised and revitalized. Aropi's stores, doing business under the trademark Rolling Pin Kitchen Emporium, occupy primary locations in mid- and upper-scale malls enjoying the status as a destination center as well as sales to convenience and impulse buyers throughout the year, particularly during the fourth quarter in correlation with the holiday season. At the time Aropi was acquired, the Company appointed Mr. Kaas as President, Chief Executive Officer and a director of the Company. On August 20, 1998, Mr. Kaas entered into an employment agreement (the "Employment Agreement") with the Company which provided for an annual base salary of $105,000 for the first 12 month period and a signing bonus of $125,000 payable in twelve equal monthly installments. On November 4, 1998, the Company's stockholders removed Mr. Kaas from the Board of Directors of the Company, and the Board of Directors terminated his employment as President and Chief Executive Officer of the Company. Mr. Kaas was terminated without Cause (as defined in the Employment Agreement), and under the terms of Employment Agreement, he was entitled to receive within 30 days of such termination, a lump sum equal to his base salary for 12 months plus all amounts owed to him by the Company with respect to his signing bonus. The Company has has paid Mr. Kaas amounts specified under the Employment Agreement. Following the Offering, Mr. Kaas, assuming conversion of the two promissory notes, will own approximately 2% of the Common Stock and will have an option to acquire an additional 5,000 shares of Common Stock received in connection with the acquisition of Aropi. Discontinued Operations In the Reorganization, the Company sold six bookstores and closed two cookware stores which were unprofitable and could not be restructured through the reorganization process to become cost effective. 29 Properties The Company-owned stores are all in leased facilities. The Company does not currently own any of the facilities where its stores are located. The Company-owned stores (which do not include any franchise stores) are located in the following markets: Riverchase Galleria, Birmingham, Alabama Aventura Mall, Aventura, Florida Gulf View Square, Port Richey, Florida Cumberland Mall, Atlanta, Georgia Northlake Mall, Atlanta, Georgia Phipps Plaza, Atlanta, Georgia Gwinnett Place Mall, Duluth, Georgia Town Center at Cobb, Kennesaw, Georgia Fayette Mall, Lexington, Kentucky The Mall at Cortana, Baton Rouge, Louisiana Lakeside Shopping Center, Metairie, Louisiana Lane Avenue Shopping Center, Columbus, Ohio Summit Mall Shopping Center, Akron, Ohio Worthington Mall, Worthington, Ohio The Mall at Fairfield Commons, Beavercreek, Ohio Haywood Mall, Greenville, South Carolina 2100 Hamilton Place Blvd., Chattanooga, Tennessee Cool Springs Galleria, Franklin, Tennessee Regency Square Mall, Richmond, Virginia The Company's corporate headquarters is located at 4264 Winters Chapel Road, Building B, Atlanta, Georgia 30360. The Company's leases tend to be in locations that are considered mid- to upper-end shopping malls and would also be characterized as both destination and convenience driven. A majority of the Company's leases have a term of 10 years. The Company believes that its current corporate facilities are adequate for the foreseeable future and that alternate facilities are readily available. Franchise Regulation The Company as a franchisor is also subject to federal and state regulation in the states in which it offers franchises or where franchised stores are currently operating. Federal regulations require that the Company provide each prospective franchisee with a disclosure document that provides information regarding the Company and the relevant provisions of the franchise agreement and other ancillary contracts. In addition, certain state regulations require that the franchisor be registered or be exempt from the applicable registration requirements. Federal and state franchising laws prohibit certain deceptive trade practices and, in some cases, impose fairness and anti-discrimination standards on the Company. Trademarks The Company has been granted registered trademarks for each of "The Cookstore" and "Rolling Pin Kitchen Emporium" with the United States Patent and Trademark Office. Employees As of November 25, 1998, the Company had approximately 188 part-time employees and approximately 34 full-time employees, of whom 34 were in managerial positions and 188 were in sales positions. The Company believes that the success of its business will depend, in part, on its ability to attract and retain qualified personnel. The Company's employees are not covered by a collective bargaining agreement, and the Company considers its relations with its employees to be good. Legal Proceedings The Company is involved in various legal actions arising in the ordinary course of business. The Company believes that none of these actions will have a material adverse effect on its business, financial condition or results of operations. The Predecessor Entity emerged from bankruptcy on August 12, 1998. 30 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 - ---------------------------------- ----- -------------------------------------------- ------ John D. Critser .................. 43 President, Chief Executive Officer 1998 and Director Gerald M. Czarnecki(1) ........... 58 Chairman of the Board of Directors 1998 Greg E. Dukoff ................... 34 Secretary, Interim Chief Financial Officer 1998 and Director David E. Danovitch(2) ............ 36 Director 1998 George P. Lucaci ................. 47 Director 1998 Thomas L. Tuttle (2) ............. 31 Director 1998 Daniel T. Guilfoile (2) .......... 39 Director 1998
- ------------ (1) Member of Compensation Committee. (2) Member of Audit Committee. John D. Critser was appointed President, Chief Executive Officer and director of the Company on November 4, 1998. Prior to that he had been the Vice President of Operations of the Company since September 1998. Between July 1994 and August 1998, Mr. Critser was a director, President and Chief Operating Officer of the Gaylord Companies, Inc. and was President and Chief Operating Officer of each of the Gaylord subsidiaries since November 1993. Prior to joining Gaylord in July 1993, Mr. Critser held various positions including Vice President of Store Operations with Eckerd Vision Group, a division of the Eckerd Corporation. Gerald M. Czarnecki has been Chairman of the Board of Directors of the Company since August 1998. Since December 1995, Mr. Czarnecki has been the Chairman and Chief Executive Officer of the Deltennium Group, Inc., a private investment and management company. From September 1994 to November 1995, Mr. Czarnecki was President and Chief Operating Officer of UNC Incorporated, an aviation manufacturing and services company. From April 1993 to May 1994, he was Senior Vice President of International Business Machines Corporation. From 1988 to April 1993, Mr. Czarnecki was part of an investor group headed by former Treasury Secretary William E. Simon, with specific responsibility for overseeing the affairs of HonFed Savings Bank, a bank located in Hawaii. Greg E. Dukoff has been the Secretary and interim Chief Financial Officer of the Company since May 1998. Since May 1998, he has also been the Administrator of the Predecessor Entity, The Cookstore, Inc., and The Cookstore Worthington, Inc. From 1996 to 1997, Mr. Dukoff was Vice President and Head of Managed Funds with ABN AMRO Bank N.V., an investment bank. From 1994 to 1996, Mr. Dukoff was a First Vice President and Director of Managed Funds with Prudential Securities Incorporated, an investment bank. Mr. Dukoff was an officer of Home Retail Acquisition Corp. from its inception until it was merged into the Predecessor Entity. David E. Danovitch has been a director of the Company since May 1998. Since June 1998, Mr. Danovitch has been a Managing Director of DDG Management Services Corp. an investment firm. From October 1997 to October 1998, Mr. Danovitch was a Managing Director of Cambridge Holdings, L.L.C. From 1994 to 1997, he was a principal of Snowden Capital, Inc., a New York City-based investment banking and direct investment firm. From 1993 to 1994, he served as the chief of staff to the Senior Vice President at International Business Machines Corporation. Between 1990 and 1993, Mr. Danovitch was an attorney with the law firm of Jones, Day, Reavis & Pogue. George P. Lucaci has been a director of the Company since August 1998. Mr. Lucaci has been a Managing Director of DDG Management Services Corp. since June 1998. From June 1997 to October 1998, Mr. Lucaci was the Vice Chairman of Cambridge Holdings, L.L.C. responsible for all capital market transactions. From June 1995 to June 1997, he was the Chief Executive Officer of RiverBank Securities, a small broker-dealer firm. From October 1992 to June 1995, he was the Managing Director of Normandy Asset Management, a private international investor group. Mr. Lucaci spent most of his career in domestic and international capital markets. 31 Thomas L. Tuttle has been a director of the Company since August 1998. Since 1995, he has been the President of GEM Investment Advisors, Inc., an investment advisory firm. Prior to 1995, Mr. Tuttle held various positions with Morgan Stanley & Co., an investment banking firm, and McKinsey & Co., a management consulting firm. Daniel T. Guilfoile has been a director nominee and the director designee of Nutmeg Securities, Ltd. since November 1998. Since January 1997, Mr. Guilfoile has been the Director of Investment Banking, in the Capital Markets Group of Nutmeg Securities, Ltd. From 1992 to December 1996, Mr. Guilfoile served as Vice President of Syndicate and Corporate Finance. Mr. Guilfoile has been employed with Nutmeg Securities, Ltd. since 1990. From 1988 to 1990 Mr. Guilfoile was President of Access Systems, Inc., a communication company. From August of 1982 to September of 1987 Mr. Guilfoile was trader and floor supervisor on the floor of the New York Futures Exchange for Walter N. Frank & Co., a New York Stock Exchange specialist firm. Following the Offering, the Company intends to retain a Chief Financial Officer with public company experience. The Company is actively seeking to fill the position. On August 4, 1998, NASD Regulation, Inc. ("NASD") accepted a Letter of Acceptance, Waiver and Consent submitted by Donald Jackson and George Lucaci, in which Messrs. Jackson and Lucaci consented to a finding by NASD that they had solicited and sold securities prior to the time that a company that they controlled (which company ultimately became a NASD member), and which was involved in the sale of the securities involved in that transaction, was approved for NASD membership, and received investor checks for delivery to the issuer of the securities in a manner that did not comply with regulatory guidelines. Messrs. Jackson and Lucaci agreed to pay a fine of $101,775 in the aggregate to NASD in connection with this matter. The violations were identified during a routine audit subsequent to the company's admission to membership by NASD. Board of Directors Upon consummation of the Offering, directors who are not employees of the Company will receive $1,000 per year for services rendered as a director and $500 for attending each meeting of the Board of Directors or one of its Committees. Directors who provide active, continuous support for the Company's goals and objectives in addition to serving as directors will also be compensated with stock options. In addition, directors may be reimbursed for certain expenses incurred in connection with attendance at any meeting of the Board of Directors or Committees. Other than reimbursement of expenses, directors who are employees of the Company receive no additional compensation for service as a director. The Company's Board of Directors is staggered so that following the consummation of the Offering Messrs. Critser and Guilfoile serve until the first annual meeting, Messrs. Dukoff and Lucaci serve until the second annual meeting and Messrs. Danovitch, Czarnecki and Tuttle serve until the third annual meeting. Officers are elected by the Board of Directors and serve until their successors are appointed by the Board of Directors. Executive Compensation The following table sets forth total compensation for the Chief Executive Officer of the Company for each of the last three fiscal years. John D. Critser was appointed Chief Executive Officer on November 4, 1998, and will receive a salary of $105,000. SUMMARY COMPENSATION TABLE
Annual Compensation Long-Term Compensation ----------------------------------------- ----------------------------- Awards Name and Other Securities All Other Principal Annual Underlying Compensation Position Year Salary($) Bonus($) Compensation Options (#) ($) - --------------------- ------ ----------- ---------- -------------- ------------- ------------- John D. Critser, 1997 134,623 -- -- -- -- President and Chief 1996 125,000 -- -- -- -- Executive Officer 1995 102,885 -- -- -- --
- ------------ (1) Reflects compensation paid by the Predecessor Entity. 32 Stock Option Grants The following table sets forth information concerning the grant of stock options made during 1998 to the former Chief Executive Officer:
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 options are exercisable immediately. 1998 Equity Incentive Plan The Company adopted the Incentive Plan on July 10, 1998, in connection with the Reorganization. The Incentive Plan is designed to advance the interests of the Company by enhancing its ability to attract and retain employees and others in a position to make significant contributions to the success of the Company through ownership of Common Stock. The Incentive Plan provides for the grant of incentive stock options ("ISOs"), non-qualified stock options ("NQSOs"), stock appreciation rights ("SARs"), restricted stock, unrestricted stock, deferred stock grants, and performance awards, loans to participants in connection with awards, supplemental grants and combinations of the above. A total of 180,000 shares of Common Stock are reserved for issuance under the Incentive Plan. The maximum number of shares as to which options or SARs may be granted to any participant in any one calendar year is 80,000. The shares of Common Stock issuable under the Incentive Plan are subject to adjustment for stock dividends and similar events. Awards under the Incentive Plan may also include provision for payment of dividend equivalents with respect to the shares subject to the award. The Incentive Plan is administered by the Option Committee of the Board of Directors (the "Option Committee"). The Option Committee shall consist of at least two directors. If the Common Stock is registered under the Exchange Act, all members of the Option Committee shall be "outside directors" as defined. Each employee of the Company or any of its subsidiaries and other persons or entities (including non-employee directors of the Company or any of its subsidiaries) who, in the opinion of the Option Committee, are in a position to make a significant contribution to the success of the Company or any of its subsidiaries are eligible to participate in the Incentive Plan. No determination has been made (i) as to which individuals may in the future receive options or rights under the Incentive Plan, (ii) as to the number of shares to be covered by any such options or rights granted to any single individual, or (iii) as to the number of individuals to whom such options or rights will be granted. The proceeds received by the Company from the sale of stock pursuant to the Incentive Plan will be used for its general purposes, or in the case of the receipt of payment in shares of Common Stock, as the Board of Directors may determine, including redelivery of the shares received upon exercise of options. Stock Options. The exercise price of an ISO granted under the Incentive Plan may not be less than 100% (110% in the case of an ISO granted to a 10% stockholder) of the fair market value of the Common Stock at the time of grant. The term of each option may be set by the Option Committee but cannot exceed ten years from the date of grant (five years from the date of grant in the case of an ISO granted to a 10% shareholder), and each option will be exercisable at such time or times as the Option Committee specifies. Stock Appreciation Rights. SARs may be granted in tandem with, or independently of, stock options. Each SAR entitles the participant, in general, to receive upon exercise the excess of the fair market value of the shares in cash or Common Stock at the date of exercise over the fair market value of the shares on the date the SAR was granted. The Option Committee may grant SARs which provide that following a change in control of the Company, as determined by the Option Committee, the holder of such right will be entitled to receive an amount measured by specified values or averages of values prior to the change in control. If an SAR is granted in tandem with an option, the SAR will be exercisable only to the extent the option is exercisable. To the extent the 33 option or the SAR is exercised, the accompanying option or SAR, as the case may be, will cease to be exercisable. An SAR granted in tandem with an ISO may be exercised only when the market price of Common Stock subject to the option exceeds the exercise price of such option. SARs not granted in tandem shall be exercisable at such time, and on such conditions, as the Option Committee may specify. Restricted Stock. The Incentive Plan provides for awards of nontransferable shares of restricted Common Stock subject to forfeiture. Awards may provide for acquisition of restricted and unrestricted Common Stock for a purchase price specified by the Option Committee, but in no event less than par value. Restricted Common Stock is subject to repurchase at the original purchase price, or to forfeiture if no cash was paid by the participant, if the participant ceases to be an employee of the Company before the restrictions lapse. Restricted securities shall become freely transferable upon the passage of any applicable period of time and satisfaction of any conditions to vesting. The Option Committee, in its sole discretion, may waive all or part of the restrictions and conditions at any time. The Incentive Plan also provides for deferred grants entitling the recipient to receive shares of Common Stock in the future at such times, and on such conditions, as the Option Committee may specify. Performance awards entitling the recipient to receive cash or Common Stock following the attainment of performance goals determined by the Option Committee may also be granted. Performance conditions and provisions for deferred stock may also be attached to other awards under the Incentive Plan. A loan may be made under the Incentive Plan either in connection with the purchase of Common Stock under an award or with the payment of any federal, state and local tax with respect to income recognized as a result of an award. The Option Committee will determine the terms of any loan, including the interest rate (which may be zero). No loan may have a term exceeding ten years in duration. In connection with any award, the Option Committee may also provide for and grant a cash award to offset federal, state and local income taxes or to make a participant whole for certain taxes. Except as otherwise provided by the Option Committee, if a participant dies, options and SARs held by such participant immediately prior to death, to the extent then exercisable, may be exercised by the participant's executor, administrator or transferee for a period of one year following such death (or for the remainder of their original term, if less). Except as otherwise determined by the Option Committee, options and SARs not exercisable at a participant's death terminate at death. Outstanding awards of restricted Common Stock must be transferred to the Company upon a participant's death and, similarly, deferred Common Stock grants, performance awards and supplemental awards to which a participant was not irrevocably entitled prior to death will be forfeited, except as otherwise determined by the Option Committee. In the case of termination of a participant's association with the Company for reasons other than death, the following will apply: (i) options and SARs remain exercisable, to the extent they were exercisable immediately prior to termination, for three months (or for the remainder of their original term, if less); (ii) shares of restricted Common Stock must be resold to the Company; and (iii) other awards to which the participant was not irrevocably entitled prior to termination will be forfeited, unless otherwise determined by the Option Committee. If any such association is terminated due to the participant's discharge for cause which, in the opinion of the Option Committee, casts such discredit on the participant as to justify immediate termination of any award under the Incentive Plan, such participant's options and SARs may be terminated immediately. In the event of a consolidation or merger in which the Company is not the surviving corporation or which results in the acquisition of substantially all of the Company's outstanding Common Stock by a single person or entity or by a group of persons and/or entities acting in concert or in the event of the sale or transfer of substantially all of the Company's assets, the Option Committee may determine that (i) each outstanding option and SAR will become immediately exercisable unless otherwise provided at the time of grant, (ii) each outstanding share of restricted Common Stock will immediately become free of all restrictions and conditions, (iii) all conditions on deferred grants, performance awards and supplemental grants which relate only to the passage of time and continued employment will be removed, and (iv) all loans under the Incentive Plan will be forgiven. The Option Committee may also arrange to have the surviving or acquiring corporation or affiliate assume any award held by a participant or grant a replacement award. If the optionee is terminated after a change in control without cause, or in the case of certain officers designated from time to time by the Option Committee resigns under 34 certain circumstances, within two years following the change in control, all unvested options will immediately become fully vested, all options will be exercisable for the shorter of four years or their original duration, and all other awards will immediately become fully vested. If the Option Committee makes no such determination, outstanding awards to the extent not fully vested will be forfeited. Employment Agreements Mr. Critser, the President and Chief Executive Officer of the Company, has entered into a one year employment agreement with the Company. Mr. Critser receives an annual salary of $105,000 a year and a $700 monthly car allowance. Mr. Kaas, the former Chief Executive Officer of the Company, had entered into the Employment Agreement. The Board of Directors terminated Mr. Kaas' position with the Company effective November 4, 1998. Mr. Kaas was terminated without Cause (as defined in the Employment Agreement), and under the terms of the Employment Agreement, he is entitled to receive within 30 days of such termination, a lump sum equal to his base salary for 12 months plus all amounts owed to him by the Company with respect to a $125,000 signing bonus which was part of the Employment Agreement. The Company has paid Mr. Kaas the amounts specified under the Employment Agreement. Indemnification of Officers and Directors The Company, to the fullest extent permitted by the provisions of Section 145 of the General Corporation Law of the State of Delaware, indemnifies, and advances expenses to, any and all persons who is or was a party or is threatened to be made a party to any threatened, pending or completed action, suit, proceeding or claim, whether civil, criminal, administrative or investigative, by reason of the fact that such person is or was or has agreed to be a director or officer of the Company or while a director or officer is or was serving at the request of the Company as a director, officer, partner, trustee, employee or agent of any corporation, partnership, joint venture, trust or other enterprise, including service with respect to employee benefit plans, from and against any and all of the expenses, liabilities, or other matters referred to in or covered by said section (including without limitation attorneys fees and expenses). The indemnification provided by the Company is not exclusive of any other rights to which those indemnified may be entitled under any bylaw, agreement, vote of stockholders or disinterested directors or otherwise, both as to action in their official capacity and as to action in another capacity while holding such office, and shall continue as to a person who has ceased to be a director, officer, employee, or agent and shall inure to the benefit of the heirs, executors, and administrators of such a person. Any person seeking indemnification by the Company is deemed to have met the standard of conduct required for such indemnification unless the contrary shall be established by a court of competent jurisdiction. If the Delaware General Corporation Law is amended to authorize action further eliminating or limiting the personal liability of directors, then the liability of our directors will be eliminated or limited to the fullest extent permitted by such statutes, as so amended. Any amendment, repeal or modification of such provision shall be prospective only and shall not adversely affect any right or protection of any of our directors existing at the time of such amendment, repeal or modification. Additionally, it is the position of the Commission that indemnification of directors and officers for liabilities arising under the Securities Act of 1933, as amended (the "Securities Act") is against public policy and unenforceable pursuant to Section 14 of the Securities Act. 35 CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS The Company believes that the transactions set forth below were made on terms no less favorable to it than could have been obtained from unaffiliated third parties. All future transactions, including any loans between the Company and any of its officers, directors, principal stockholders and their affiliates will be approved by a majority of the Board of Directors, including a majority of the disinterested outside directors, and will continue to be on terms no less favorable to the Company than could be obtained from unaffiliated third parties. The Home Retail Acquisition Corp. Junior Participation; The Merger In March 1998, the Company and Cambridge Holdings, L.L.C. ("Cambridge") entered into a Term Sheet that provided for the sale of the Company and its subsidiaries as going concerns to Cambridge or its designee. Greenfield had provided financing to the Company during the reorganization and the Term Sheet originally envisioned that Greenfield would remain a lender to the Company through the Effective Date and that Cambridge or its designee would provide advisory services to the Company pursuant to an Advisory Agreement. However, it became apparent to the Company and to Cambridge that it was in the best interests of the Company for Greenfield to be paid out of its loan facility with respect to the Company prior to the Effective Date and for Home Retail Acquisition Corp. ("HRAC"), the designee of Cambridge, to assume a more active advisory role in the business and perform in place of Cambridge under the advisory agreement. As a result, HRAC arranged for Fremont to provide a loan facility, the proceeds of which were used to repay Greenfield. The Advisory Agreement was amended pursuant to a Stipulation and Order entered by the Court on April 27, 1998. In order to ensure that the Fremont financing was sufficient in amount to (i) repay Greenfield in full, and (ii) provide the Company with sufficient working capital, the Court authorized HRAC to purchase participation interests in the Fremont financing. As a result, HRAC purchased the HRAC Junior Tranche, in the amount of $310,000. Pursuant to the Plan of Reorganization, on the Effective Date, HRAC merged with and into the Predecessor Entity with the Predecessor Entity being the surviving corporation and simultaneously changing its name to Home Retail Holdings, Inc. In consideration for the contribution of HRAC and the merger of HRAC with the Company, and in complete satisfaction of the HRAC Junior Tranche, and any amounts owed to HRAC prior to the confirmation date under the HRAC Advisory Agreement, on the Effective Date the stockholders of HRAC received 1,383,691 shares of Common Stock. In addition, the Company assumed all of the liabilities of HRAC. The Reorganization Pursuant to the Plan of Reorganization, the Company issued: (i) 1,522,041 shares of Common Stock, of which 1,383,691 shares were issued to the shareholders of HRAC and 138,350 were issued to creditors with unsecured claims against the Predecessor Entity; (ii) 85,777 shares of Class B Common Stock to the holders of the Predecessor Entity's common stock; (iii) 69,174 shares of Class B Common Stock to the holders of the Predecessor Entity's preferred stock; (iv) 52,573 New Warrants; (v) 92,595 Bidco Warrants; and (vi) 29,261 Individual Warrants. These shares and warrants were issued pursuant to Section 1145(a) of the Bankruptcy Code which exempts the offer and sale of securities under a plan of reorganization from registration under the Securities Act and state laws if: (i) the securities are offered and sold under a plan of reorganization; (ii) the securities offered are these of the debtor or an affiliate of the debtor participating in a joint plan or of a successor to the debtor under the plan; and (iii) the recipients of the securities must hold a prepetition or administrative expense claim against the debtor or an interest in the debtor, or principally in such exchange and partly for cash or property. The Company believes that it satisfied all of the requirements of Section 1145(a) and as a result the securities and warrants issued pursuant to the Plan of Reorganization were exempt from registration under the Securities Act and state securities laws. Other Transactions Greg E. Dukoff is currently the Secretary, interim Chief Financial Officer and a director of the Company. Mr. Dukoff is being compensated at a rate of $8,333 per month for financial and administrative services rendered as an independent consultant. Mr. Dukoff was President and a director of HRAC. 36 In connection with the acquisition of Aropi, the Company granted Mr. Kaas an option to purchase 5,000 shares of Common Stock at the price per share equal to the public offering price. This option vested immediately. As a signing bonus, Mr. Kaas was entitled to receive $125,000 paid in equal monthly payments of approximately $10,417 per month for a period of 12 months commencing 60 days after the closing of the acquisition. In addition, pursuant to a letter agreement between the Company and Mr. Kaas, the Company agreed to pay Mr. Kaas the aggregate amount of $100,000 on a monthly basis over a period of 12 months commencing 60 days after the closing of the acquisition. The entire amount remaining under the letter agreement will be accelerated and become due and payable upon the consummation of the Offering. The Company also agreed to make a good faith effort to deliver to Mr. Kaas a letter of credit in the amount of $150,000 to secure a convertible promissory note in the amount of $250,000. In August 1998, the Company entered into an agreement to lease its executive offices from Glenn Kaas, formerly the President, Chief Executive Officer and director of the Company. The annual rental to be paid by the Company will equal $65,000 per year for the first 18 months of the lease, at which time the base rent will be adjusted by calculating the change in the Revised Consumer Price Index for All Urban Consumers published by the Bureau of Labor Statistics of the United States Department of Labor for the United States City Average, All Items ("CPI"), from the commencement date of the lease and as of the twelfth month of the lease and adding that percentage to the percentage arrived at by calculating the change in the CPI from the thirteenth month and as of the eighteenth month of the lease. The base rent for the remaining term of the lease will be adjusted by the sum of these two percentages. The lease commences on September 1, 1998 and terminates two and one half years from the commencement date. Pursuant to a demand note, Amelar Investments, L.L.C., TJQL Investments, LLC, Deltennium Group, Inc., and Sina Kinay, collectively, loaned $30,000 to the HRAC on June 12, 1998 with an annual interest rate of 10.5%. This demand note was later amended to be held by Tri-Family Investment Co., LLC. on behalf of the aforementioned parties. Control by Certain Directors Certain related persons currently own an aggregate of approximately 40% of the Common Stock, 20% after this Offering, and all but two of the Company's directors are affiliated. As a result, Messrs. Danovitch, Lucaci, Dukoff and Czarnecki will be in a position to exercise significant influence over the Company and the election of its directors and otherwise essentially control the outcome of all matters requiring stockholder approval. In August 1998, the Company entered into a management agreement with Deltennium Consulting, Inc., a Delaware corporation ("Deltennium Consulting"), to provide services in connection with the operations of the Company for the lesser of three years from the Effective Date or until the Company has sustained a market capitalization of at least $150 million for at least three months. Under the management agreement Deltennium Consulting receives $60,000 per year for such services. Gerald Czarnecki, the Chairman of the Board of Directors of the Company, is also the Chairman and Chief Executive Officer of Deltennium Consulting. Global Strategic Holdings, Ltd. currently owns an aggregate of approximately 40% of the Common Stock, 20% after this Offering. Thomas Tuttle, a director of the Company, is the investment advisor to Global Strategic Holdings, Ltd. and as such will be in a position to exercise significant influence over the Company and the election of its directors and otherwise essentially control the outcome of all matters requiring stockholder approval. Advisory Agreement Pursuant to the Plan of Reorganization, HRAC entered into an advisory agreement with the Company which terminated on the Effective Date of the Reorganization. DDG Management Services Corp. currently has an advisory agreement with the Company to provide advisory and related services for the lesser of three years from the Effective Date or until the Company has sustained a market capitalization of at least $150 million for at least three months. Under the advisory agreement, DDG Management Services Corp. receives $20,000 per month, with payments to accrue until such time as the Company raises $4 million in a public or private equity offering, after which all amounts that have accrued including any interest thereon shall be paid and future payments shall be made monthly. See "The Reorganization." 37 PRINCIPAL STOCKHOLDERS As of November 25, 1998, the Company has outstanding 1,522,041 shares of Common Stock held by 343 holders of record. The following table sets forth certain information regarding the beneficial ownership of shares of Common Stock as of November 25, 1998, by (i) each of the Company's directors and executive officers, (ii) each person who beneficially owns more than 5% of the outstanding shares of Common Stock, and (iii) all of the Company's directors and executive officers as a group.
Percentage Owned ---------------------- Name and Address Before After of Beneficial Owner(1) Shares Offering Offering - ----------------------------------------------- ------------ ---------- --------- Gerald M. Czarnecki(2) ........................ 124,679 8.2% 4.1% Greg E. Dukoff(3) ............................. 73,813 4.8% 2.4% John D. Critser ............................... 8,937 * * David E. Danovitch(4) ......................... 124,679 8.2% 4.1% George P. Lucaci(5) ........................... 211,159 13.8% 7.0% Thomas L. Tuttle(6) ........................... 605,362 39.7% 20.0% Daniel T. Guilfoile ........................... 0 * * Global Strategic Holdings, Ltd.(6)............. 605,362 39.7% 20.0% Amelar Investments, LLC (4).................... 124,679 8.2% 4.1% Alemer Productions, LLC (5).................... 211,159 13.8% 7.0% TJQL Investments, LLC(7) ...................... 211,159 13.8% 7.0% Deltennium Group, Inc.(2)...................... 124,679 8.2% 4.1% Jamberry Lake Partners (3)..................... 73,813 4.8% 2.4% All Directors and Executive Officers as a Group (7 Persons) .................................. 1,148,629 74.7% 37.6%
- ------------ * Less than one percent. (1) Unless indicated otherwise, the address of the beneficial owners is, Rolling Pin Kitchen Emporium, Inc., 4264 Winters Chapel Road, Building B, Atlanta, Georgia 30360. (2) Includes 124,679 shares held by Deltennium Group, Inc. Mr. Czarnecki is the Chairman and Chief Executive Officer of Deltennium Group, Inc. (3) Includes 72,063 shares held by Jamberry Lake Partners and 1,750 shares which may be acquired upon the exercise of warrants. Mr. Dukoff is a managing partner of Jamberry Lake Partners. (4) Includes 124,679 shares held by Amelar Investments, LLC. Mr. Danovitch is a manager of Amelar Investments, LLC. (5) Includes 211,159 shares held by Alemer Productions, LLC. Mr. Lucaci is a member of Alemer Productions, LLC. (6) Includes 605,362 shares held by Global Strategic Holdings, Ltd. Thomas Tuttle is the investment advisor to Global Strategic Holdings, Ltd. Mr. Tuttle's address is 712 5th Avenue, 7th Floor, New York, New York 10019. (7) Mr. Donald Jackson is a manager of TJQL Investments, LLC. Mr. Jackson was a director of the Company until he resigned in November 1998. 38 DESCRIPTION OF SECURITIES The authorized capital stock of the Company consists of 20,000,000 shares of Class A Common Stock, par value $0.01 per share (referred to as "Common Stock"), 154,951 shares of Class B Restricted Common Stock, par value $0.01 per share (the "Class B Common Stock"), and 1,000,000 shares of Preferred Stock, par value $0.01 per share ("Preferred Stock"). The following summary of certain terms of Company's capital stock describes material provisions of, but does not purport to be complete and is subject to and qualified in its entirety by, our Restated and Amended Certificate of Incorporation, Bylaws and the Delaware General Corporation Law. Common Equity Securities The Common Stock and Class B Common Stock have the same rights, privileges and preferences except that the Class B Common Stock (i) has no dividend or liquidation rights except as required under the Delaware General Corporation Law, and (ii) may not be transferable except by operation of law in the event of the death, bankruptcy, or liquidation of the holder thereof. Subject to prior dividend rights and sinking fund or redemption or purchase rights which may be applicable to any outstanding preferred stock, the holders of Common Stock are entitled to share ratably in such dividends, if any, as may be declared from time to time by the Board of Directors in its discretion out of funds legally available therefor. The holders of Common Stock are entitled to share ratably in any assets remaining after satisfaction of all prior claims upon liquidation of Company, including prior claims of any outstanding preferred stock. Each share of Class B Common Stock shall be automatically converted into one share of Common Stock (the "Conversion Rate") if any one of the following events occurs (each, a "Trigger Event"): (i) the closing sale price of the Common Stock for twenty (20) consecutive trading days as quoted on the Nasdaq SmallCap Market or, if such shares are not trading on the Nasdaq SmallCap Market, then on the principal market on which such shares shall then be trading for twenty (20) consecutive trading days exceeds $11.57 per share of Common Stock (the "Trigger Price"); or (ii) of a sale of all or substantially all the assets of Company, a sale of all the equity interests of Company or a merger or consolidation of Company with or into another entity in which Company is not the surviving entity pursuant to which the holders of Common Stock would receive, on a fully diluted basis after giving effect to the conversion of the Class B Common Stock and any other convertible securities, consideration which exceeds the Trigger Price, in each case subject to adjustment in the event of any stock splits or other similar events. As soon as practicable after a Trigger Event, Company shall give or cause notice to be given to each holder of Class B Common Stock that the Class B Common Stock has been converted into Common Stock, and such conversion shall be deemed to have occurred on the sooner of the date of such notice and the date of such a merger or consolidation, if any, constituting a Trigger Event. Each holder of shares of Class B Common Stock outstanding immediately prior to the date of the Trigger Event, upon surrender of the certificate or certificates representing such shares to Company, shall receive in exchange therefor a certificate or certificates representing the number of whole shares of Common Stock which such holder shall be entitled to receive as provided herein. After the Trigger Event, each certificate which represented outstanding shares of Class B Common Stock, prior to such date, shall be deemed for all corporate purposes to evidence the ownership of the shares of Common Stock as provided herein. No dividend or other distribution payable with respect to the Common Stock shall be paid to any holder of any certificate representing shares of Class B Common Stock issued and outstanding immediately prior to such date until such holder surrenders such certificate for exchange. All shares of Common Stock for and into which shares of Class B Common Stock shall have been exchanged and converted shall be deemed to have been issued in full satisfaction of all rights pertaining to such exchanged and converted shares. Except for such rights, the holder of certificate(s) representing shares of Class B Common Stock issued and outstanding immediately prior to such date shall have no rights with respect to such shares after such date other than to surrender such certificate for conversion. The Company shall at all times reserve a sufficient number of shares of authorized but unissued Common Stock for issuance upon conversion of the Class B Common Stock. No share of Class B Common Stock may be issued after a Trigger Event. There are 1,522,041 shares of Common Stock and 154,951 shares of Class B Common Stock issued and outstanding. 39 The holders of Common Stock and Class B Common Stock are entitled to one vote per share on all matters to be submitted to a vote of the stock and are not entitled to cumulative voting in the election of directors, which means that the holders of the majority of the shares voting for the election of directors can elect all of the directors then standing for election by the holders of Common Stock. The holders of Common Stock and Class B Common Stock have no preemptive or other subscription rights, and shares of Common Stock and Class B Common Stock are not redeemable at the option of the holders, do not have any conversion rights, and are not subject to call. The rights, preferences and privileges of holders of Common Stock and Class B Common Stock are subject to, and may be adversely affected by, the rights of holders of shares of any series of preferred stock that the Company may designate and issue in the future or which is currently outstanding. Preferred Stock The authorized but undesignated Preferred Stock may be issued from time to time in one or more designated series or classes. The Board of Directors, without approval of the stockholders, is authorized to establish the voting, dividend, redemption, conversion, liquidation and other relevant provisions that may be provided with respect to a particular series or class. The issuance of Preferred Stock, while providing flexibility in connection with possible acquisitions and other corporate purposes, could, among other things, adversely affect the voting power of the holders of Common Stock and Class B Common Stock and, under certain circumstances, make it more difficult for a third party to acquire, or discourage a third party from acquiring, a majority of the outstanding voting stock of the Company. There are 320 shares of Convertible Series A Preferred Stock issued and outstanding. The holders of the Convertible Series A Preferred Stock have the right to receive dividends of 6% per annum, payable in stock or cash at the Company's discretion at the time of conversion. The holders have the right to convert each share of Preferred Stock into Shares of Common Stock (based on $1,000 per share of Preferred Stock) equal to the lesser of (a) 80% of the five day average closing bid price for the Common Stock for the five trading days immediately preceding the shares are converted, or (b) 150% of the five day average closing bid price, as reported by Bloomberg, LP, for the Company's Common Stock for the five trading day period following the Company's completion of a secondary offering. The holders of the Convertible Series A Preferred Stock have demand registration rights. As a result, the Company will exercise its redemption rights and redeem 275 shares of Convertible Series A Preferred Stock held by the Delacroix Foundation, Ltd. at the time of the Offering for a redemption premium of 25% over the $1,000 par value of such shares. Registration Rights Registration rights were granted in connection with the issuance of the Preferred Stock, Individual Warrants, Other Financing Warrants, Greenfield Warrants, New Bidco Warrants and Bidco Warrants. The holders of the Individual Warrants, Other Financing Warrants, Greenfield Warrants, New Bidco Warrants and Bidco Warrants, or the shares of Common Stock issued on conversion of the such warrants, have the right to unlimited incidental registrations for a period of three years from the commencement of this Offering. Warrants New Warrants. Pursuant to the Plan of Reorganization, the Company granted the New Warrants for the purchase of 52,573 shares of Common Stock, exercisable at a price of $11.57 per share, to the holders of all of the outstanding warrants of the Predecessor Entity. The New Warrants are exercisable for a period of 14 months, commencing August 12, 1998 and terminating on October 30, 1999. The New Warrants contain anti-dilution provisions providing for adjustments of the exercise price and the number of shares underlying the New Warrants upon the occurrence of certain events, including any recapitalization, reclassification, stock dividend, stock split, stock combination or similar transactions. Commencing on February 1999, the Company may redeem all of the New Warrants at $0.05 per warrant, provided, that before the Company can call for redemption of the New Warrants the closing sale price of the Common Stock as quoted on the Nasdaq SmallCap Market, or if such shares are not quoted on the Nasdaq SmallCap Market, on the principal market on which such shares shall then be trading, shall have, for each of the twenty (20) consecutive trading days ending on the tenth (10th) day prior to the date on which the notice is given, equaled or exceeded $12.00 per share. 40 Individual Warrants. Pursuant to the Plan of Reorganization, the Company granted the Individual Warrants for the purchase of 29,261 shares of Common Stock, exercisable at a price of 80% of the public offering price, to the holders of all of the individual junior tranche of the Predecessor Entity. The Individual Warrants are exercisable for a period of five-years, commencing on August 20, 1998 and terminating on June 30, 2003. The Individual Warrants contain anti-dilution provisions providing for adjustments of the exercise price and the number of shares underlying the Individual Warrants upon the occurrence of certain events, including any recapitalization, reclassification, stock dividend, stock split, stock combination or similar transactions. For a period of three years from the commencement of this Offering, the Individual Warrants grant to the holder thereof certain registration rights with respect to the Common Stock issuable upon the exercise of the Individual Warrants. Bidco Warrants. The Company has granted warrants to Bidco for the purchase 92,595 shares of Common Stock. The Bidco Warrants are exercisable at a price of $0.01 per share for a five-year period, commencing on August 12, 1998 and terminating on August 12, 2003. New Bidco Warrants. The Company has granted warrants to Bidco for the purchase 40,602 shares of Common Stock. The New Bidco Warrants are exercisable at a price per share equal to 165% of the public offering price for a five-year period, commencing on the effective date of this Offering and terminating on June 30, 2003. The New Bidco Warrants contain anti-dilution provisions providing for adjustments of the exercise price and the number of shares underlying the New Bidco Warrants upon the occurrence of certain events, including any recapitalization, reclassification, stock dividend, stock split, stock combination or similar transactions. For a period of three years from the commencement of this Offering, the New Bidco Warrants grant to the holder thereof certain registration rights with respect to the Common Stock issuable upon the exercise of the New Bidco Warrants. Greenfield Warrants. The Company has granted warrants to Greenfield for the purchase 40,602 shares of Common Stock. The Greenfield Warrants are exercisable at a price per share equal to 165% of the public offering price for a five-year period, commencing on the effective date of this Offering and terminating on June 30, 2003. The Greenfield Warrants contain anti-dilution provisions providing for adjustments of the exercise price and the number of shares underlying the Greenfield Warrants upon the occurrence of certain events, including any recapitalization, reclassification, stock dividend, stock split, stock combination or similar transactions. For a period of three years from the commencement of this Offering, the Greenfield Warrants grant to the holder thereof certain incidental registration rights with respect to the Common Stock issuable upon the exercise of the Greenfield Warrants. Underwriters' Warrants. The Company granted warrants to the Underwriters to purchase 150,000 shares of Common Stock. The Underwriters' Warrants are exercisable at a price per share equal to 165% of the public offering price for a four-year period, commencing one year from the effective date of this Offering. The Underwriters' Warrants contain anti-dilution provisions providing for adjustments of the exercise price and the number of shares underlying the Underwriters' Warrants upon the occurrence of certain events, including any recapitalization, reclassification, stock dividend, stock split, stock combination or similar transaction. The Underwriters' Warrants grant to the holders thereof certain demand and "piggyback" registration rights with respect to the Common Stock issuable upon the exercise of the Underwriters' Warrants. See "Underwriting." Other Financing Warrants. The Company has granted two warrants to JRP Consulting Corp. and two warrants to Laux, Holmes & Company for the purchase of 104,246 shares of Common Stock in the aggregate. The Other Financing Warrants are exercisable at a price per share of 165% of the public offering price. Certain of the Other Financing Warrants representing warrants to purchase 98,246 shares of Common Stock are exercisable for a period of five years, commencing on August 20, 1998 and the remaining Other Financing Warrants to purchase 6,000 shares of Common Stock become exercisable on November 25, 1999 and the aggregate of such warrants terminate on August 31, 2003. The Other Financing Warrants contain anti-dilution provisions providing for adjustments of the exercise price and the number of shares underlying the Other Financing Warrants upon the occurrence of certain events, including any recapitalization, reclassification, stock dividend, stock split, stock combination or similar transactions. For a period of three years from the commencement of this Offering, the Other Financing Warrants grant to the holder thereof certain registration rights with respect to the Common Stock issuable upon the exercise of the Other Financing Warrants. Financing Warrants. The Company has granted warrants to DLM Asset Management and Spinnernet Financial Services, Ltd. for the purchase of 8,875 shares of Common Stock in the aggregate. The Financing 41 Warrants are exercisable at a price per share of 165% of the public offering price. The Financing Warrants are exercisable for a period of three years, commencing on the effective date of the Offering and terminating on August 31, 2003. The Financing Warrants contain anti-dilution provisions providing for adjustments of the exercise price and the number of shares underlying the Financing Warrants upon the occurrence of certain events, including any recapitalization, reclassification, stock dividend, stock split, stock combination or similar transactions. For a period of three years from the commencement of this Offering, the Financing Warrants grant to the holder thereof certain registration rights with respect to the Common Stock issuable upon the exercise of the Financing Warrants. Transfer Agent and Registrar Continental Stock Transfer and Trust Company is acting as transfer agent and registrar for the Company's Common Stock. SHARES ELIGIBLE FOR FUTURE SALE Upon completion of this Offering, the Company will have 3,022,041 outstanding shares of Common Stock (assuming no exercise of outstanding options, warrants or Underwriters' over-allotment option). Of these shares, the 1,500,000 shares sold to the public in this Offering will be freely tradable without restrictions or further registration under the Securities Act, except for any shares purchased by "affiliates" within the meaning of the Securities Act, which will be subject to the resale limitations of Rule 144. The remaining 1,394,378 shares held by certain existing stockholders were issued by the Company in private transactions in reliance upon one or more exemptions under the Securities Act, are "restricted securities" as that term is defined in Rule 144 promulgated under the Securities Act. Such restricted securities may be sold in compliance with such Rule, pursuant to registration under the Securities Act or pursuant to an exemption therefrom. Generally, under Rule 144, each person holding restricted securities for a period of one year may, every three months after such one year holding period, sell in ordinary brokerage transactions or to market makers an amount of shares equal to the greater of one percent of the Company's then outstanding Common Stock or the average weekly trading volume during the four weeks prior to the proposed sale. In addition, sales under Rule 144 may be made only through unsolicited "broker's transactions" or to a "market maker" and are subject to various other conditions. The limitation on the number of shares which may be sold under Rule 144 and the "broker's transaction" requirement do not apply to restricted securities sold for the account of a person who is not and has not been an "affiliate" (as that term is defined in the Securities Act) of the Company during the three months prior to the proposed sale and who has beneficially owned the securities for at least two years. Prior to the Offering, there has been no market for the Common Stock, and no predictions can be made as to the effect, if any, that sales of shares under Rule 144 or the availability of shares for sale will have on the market prices prevailing from time to time. Sales of substantial amounts of Common Stock in the public market following this Offering could lower the market price of the Common Stock. Of the 3,022,041 shares of Common Stock to be outstanding after this Offering (assuming no exercise of outstanding options, warrants or the over-allotment option), 1,500,000 shares will be freely tradable without restriction. Upon expiration of the lock-up agreements entered into by the officers, directors and certain existing stockholders of the Company, an additional 1,394,378 shares will become eligible for sale 13 months from the close of this Offering, subject to the provisions of Rule 144. In addition, 138,350 shares of Common Stock are held by stockholders that acquired the shares as creditors pursuant to the Plan of Reorganization. These stockholders have certain registration rights as provided by the Plan of Reorganization. In addition, the Company intends to file a registration statement on Form S-8 with respect to the shares of Common Stock issuable upon exercise of options under the Incentive Plan. The Incentive Plan authorizes the issuance of options relating to up to 180,000 shares of Common Stock. Currently, no options have been issued under the Incentive Plan. See "Management--1998 Equity Incentive Plan." Upon filing of such registration statement, the holders of such options may, subject to vesting requirements, exercise and sell their shares immediately without restriction, except affiliates who are subject to certain volume limitations and manner of sale requirements of Rule 144. Holders of warrants to purchase 466,181 shares of Common Stock are entitled to certain registration rights with respect to such shares. Upon registration, such shares may be sold in the market 42 without limitation. See "Description of Securities--Registration Rights." Sales of such shares may decrease the recapitalization, reclassification, stock dividend, stock split, stock combination or similar transaction. The Underwriters' Warrants grant to the holders thereof certain demand and "piggyback" registration rights with respect to the Common Stock issuable upon the exercise of the Underwriters' Warrants. See "Underwriting." UNDERWRITING Subject to the terms and conditions set forth in the underwriting agreement (the "Underwriting Agreement"), the Company has agreed to sell to each of the underwriters named below (the "Underwriters"), and each of the Underwriters, for whom Nutmeg Securities, Ltd. is acting as representative (the "Representative"), has agreed to purchase, the number of shares of Common Stock set forth opposite its name below. Under certain circumstances, the commitments of nondefaulting Underwriters may be increased as set forth in the Agreement Among Underwriters. Underwriter Number of Shares - ------------------------- ----------------- Nutmeg Securities, Ltd. ---------- TOTAL ========== The Underwriting Agreement provides that the obligations of the Underwriters thereunder are subject to approval of certain legal matters by counsel and to various other conditions. The nature of the Underwriters' obligations are such that they are committed to purchase and pay for all of the above shares of Common Stock if any are purchased. The Underwriters propose to offer the shares of Common Stock directly to the public at the public offering price set forth on the cover page of this Prospectus. The Company has granted the Underwriters a 30-day over-allotment option to purchase up to 225,000 additional shares of Common Stock at the public offering price less the underwriting discount. The Underwriters may exercise such option only to cover over-allotments made in connection with the sale of the shares of Common Stock offered hereby. The Company has also agreed to sell to the Underwriters, for nominal consideration, warrants to purchase the number of shares of Common Stock equal to 10% of the total number of shares of Common Stock sold in this Offering at a price per share equal to 165% of the public offering price. The Underwriters' Warrants will be exercisable for a period of four years commencing one year from the effective date of this Offering and will contain certain demand and "piggyback" registration rights with respect to the Common Stock issuable upon the exercise of the Underwriters' Warrants. The Underwriters' Warrants are not transferable (except to members of the syndicate and their affiliates). The exercise price and the number of shares issuable upon exercise may, under certain circumstances, be subject to adjustment pursuant to antidilution provisions. The Company has agreed to allow the Underwriters a commission of ten percent (10%) of the public offering price of the shares of Common Stock. Additionally, the Company will be paying the Underwriters, following the closing of this Offering, a nonaccountable expense allowance equal to three percent (3%) of the aggregate public offering price of the shares of Common Stock, less any applicable deposits. The Company has further agreed to indemnify the Underwriters against certain liabilities, losses and expenses, including liabilities under the Securities Act, or to contribute to payments that the Underwriters may be required to make in respect thereof. The Company also has agreed to reimburse the Underwriters for certain out-of-pocket expenses incurred in connection with the Offering. The Underwriters have advised the Company that they do not intend to make sales to discretionary accounts. The Company's officers, directors and certain existing stockholders have agreed not to, directly or indirectly, sell, offer, contract to sell, make any short sale, pledge or otherwise dispose of any of the Company's equity securities for a period of 13 months after the date of the closing of this Offering. In connection with this Offering certain underwriters may engage in passive market making transactions in the shares in accordance with Rule 103 of Regulation M. Further, the Underwriters' selling group members and 43 their respective affiliates may engage in transactions that stabilize, maintain or otherwise affect the market price of the Shares. These transactions may include stabilization transactions permitted by Rule 104 of Regulation M, under which persons may bid for or purchase shares to stabilize the market price. The Underwriters may also create a "short position" for their own account by selling more shares in the Offering than they are committed to purchase, and in that case they may purchase shares in the open market after this Offering is completed to cover all or a part of their short position. The Representative may also cover all or a portion of their short position, up to 225,000 shares, by exercising their over-allotment option described above and on the cover of this Prospectus. Prior to the Offering, there has not been an active trading market for the Common Stock. Consequently, the public offering price of the Common Stock and the terms of the Underwriters' Warrants (including the exercise price) have been determined by negotiation between the Company and the Representative. Among the factors considered in such negotiations were the history of, and the prospect for, the Company's business, and assessment of the Company's management, its past and present operations, the Company's development and the general condition of the securities market at the time of the Offering. The public offering price does not necessarily bear any relationship to the Company's assets, book value, earnings or other established criteria of value. Such price is subject to change as a result of market conditions and other factors, and no assurance can be given that a public market for the Common Stock will develop after the close of the Offering, or if a public market in fact develops, that such public market will be sustained, or that the Common Stock can be resold at any time at the offering or any other price. LEGAL MATTERS The validity of the issuance of the shares of Common Stock offered by this Prospectus will be passed upon by Brown & Wood LLP, Washington, D.C. Certain legal matters in connection with the Offering will be passed upon for the Underwriters by Gersten, Savage, Kaplowitz & Fredericks, LLP, New York, New York. EXPERTS The audited consolidated financial statements included elsewhere in this Prospectus and in the Registration Statement have been audited by Feldman Sherb Ehrlich & Co., P.C., certified public accountants, and Smith & Radigan, certified public accountants, as indicated in their reports with respect thereto, and are included herein in reliance upon the authority of said firms as experts in giving said reports. ADDITIONAL INFORMATION The Company will be subject to the information requirements of the Exchange Act, and, in accordance therewith files reports, proxy statements and other information with the Commission. Such reports, proxy statements and other information can be inspected and copied at the public reference facilities maintained by the Commission at Judiciary Plaza Building, 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549 and its regional offices located at 7 World Trade Center, 13th Floor, New York, New York 10048 and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511. Copies of such materials can be obtained from the Commission at Judiciary Plaza, 450 Fifth Street, N.W. Washington, D.C. 20549, at prescribed rates. The Commission maintains an Internet web site that contains reports, proxy and information statements and other information regarding issuers that file electronically with the Commission. The address of that site is http://www.sec.gov. The Company intends to furnish to its stockholders annual reports containing financial statements audited and reported upon by its independent public accountants. 44 ROLLING PIN KITCHEN EMPORIUM, INC. INDEX TO FINANCIAL STATEMENTS
Page Rolling Pin Kitchen Emporium, Inc.: ----- Independent Auditors' Report ............................................................. F-2 Consolidated Balance Sheet at August 12, 1998 ............................................ F-3 Notes to Consolidated Financial Statements ............................................... F-4 Gaylord Companies, Inc.: Independent Auditors' Report ............................................................. F-9 Consolidated Balance Sheet at December 31, 1997 .......................................... F-10 Consolidated Statement of Operations for the years ended December 31, 1997 and 1996 ...... F-11 Consolidated Statement of Stockholders' Equity for the years ended December 31, 1997 and 1996 ................................................................................... F-12 Consolidated Statement of Cash Flows for the years ended December 31, 1997 and 1996 ...... F-13 Notes to Consolidated Financial Statements ............................................... F-14 (Unaudited) Interim Financial Statements: Consolidated Balance Sheet at September 30, 1998 (Unaudited) ............................. F-19 Consolidated Statements of Operations (Unaudited) of Rolling Pin Kitchen Emporium, Inc. for the period August 12, 1998 to September 30, 1998 and of Gaylord Companies, Inc. for the period January 1, 1998 to August 12, 1998 and the nine months ended September 30, 1997 .................................................................... F-20 Consolidated Statements of Cash Flows (Unaudited) of Rolling Pin Kitchen Emporium, Inc. for the period August 12, 1998 to September 30, 1998 and of Gaylord Companies, Inc. for the period January 1, 1998 to August 12, 1998 and the nine months ended September 30, 1997 .................................................................... F-21 Notes to Unaudited Financial Statements .................................................. F-22 Aropi Incorporated: Independent Auditors' Report ............................................................. F-23 Balance Sheet at June 30, 1998 and 1997 .................................................. F-24 Statement of Income for the years ended June 30, 1998 and 1997 ........................... F-26 Statement of Stockholders' Equity for the years ended June 30, 1998 and 1997 ............. F-27 Statement of Cash Flows for the years ended June 30, 1998 and 1997 ....................... F-28 Notes to Financial Statements ............................................................ F-29 (Unaudited) Pro-forma Financial Statements: Description of (Unaudited) Pro-forma Financial Statements ................................ F-33 (Unaudited) Pro-forma Condensed Consolidated Statement of Operations for the nine months ended September 30, 1998 .............................................................. F-34 (Unaudited) Pro-forma Condensed Consolidated Statement of Operations for the year ended December 31, 1997 ..................................................................... F-35 Notes to (Unaudited) Pro-forma Financial Statements ...................................... F-36
F-1 INDEPENDENT AUDITORS' REPORT To the Shareholders and Board of Directors Rolling Pin Kitchen Emporium, Inc. Atlanta, Georgia We have audited the accompanying consolidated balance sheet of Rolling Pin Kitchen Emporium, Inc. and subsidiaries as of August 12, 1998. This financial statement is the responsibility of the Company's management. Our responsibility is to express an opinion on this financial statement based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statement is free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statement referred to above presents fairly, in all material respects, the financial position of Rolling Pin Kitchen Emporium, Inc. as of August 12, 1998 in conformity with generally accepted accounting principles. Feldman Sherb Ehrlich & Co., P.C. Certified Public Accountants New York, New York October 30, 1998 F-2 ROLLING PIN KITCHEN EMPORIUM, INC. CONSOLIDATED BALANCE SHEET AUGUST 12, 1998 ASSETS CURRENT ASSETS: Cash ................................................ $ 144,006 Accounts receivable - trade ......................... 5,183 Inventories ......................................... 777,991 Prepaid expenses and other current assets ........... 15,427 ----------- TOTAL CURRENT ASSETS ............................. 942,607 PROPERTY AND EQUIPMENT ............................... 299,323 REORGANIZATION VALUE IN EXCESS OF AMOUNTS ALLOCABLE TO IDENTIFIABLE ASSETS ................................. 148,388 OTHER ASSETS ......................................... 174,103 ----------- $ 1,564,421 =========== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable and accrued expenses ................................... $ 247,651 Note payable ............................................................ 750,000 ----------- TOTAL CURRENT LIABILITIES ............................................ 997,651 PUT OPTION ON WARRANTS ................................................... 550,000 STOCKHOLDERS' EQUITY: Preferred stock, $.01 par, 1,000,000 shares authorized, none issued...... -- Common stock, $.01 par, authorized: Class A-20,000,000, Class B-155,000; issued and outstanding : Class A-1,522,041, Class B-154,951 .................................... 16,770 ----------- TOTAL STOCKHOLDERS' EQUITY ............................................ 16,770 ----------- $ 1,564,421 ===========
See notes to consolidated financial statements. F-3 ROLLING PIN KITCHEN EMPORIUM, INC. NOTES TO CONSOLIDATED BALANCE SHEET AUGUST 12, 1998 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (a) Basis of Presentation The financial statements of Rolling Pin Kitchen Emporium, Inc. (the "Company") include the accounts of the Company and its subsidiaries. All significant intercompany balances and transactions have been eliminated in the consolidated financial statements. The Company is a specialty retailer of quality cookware and serving equipment, with operations in Ohio, Indiana and Kentucky. (b) Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that effect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. (c) Inventories Inventories are stated at the lower of cost or market. Cost is determined using the retail method and the FIFO method. (d) Property and Equipment Property and equipment are stated at cost. Property and equipment held under capital leases are stated at the lower of the present value of minimum lease payments at the beginning of the lease term or fair value at the inception of the lease. Depreciation of property and equipment is calculated using the straight-line method over the estimated useful lives of the assets. Property and equipment held under capital leases and leasehold improvements are amortized using the straight-line method over the shorter of the lease term or estimated useful life of the asset. (e) Net Earnings (Loss) Per Share The Company follows the provisions of Statement of Financial Accounting Standards No. 128, "Earnings Per Share," which became effective for financial statements with fiscal years ending after December 15, 1997. Basic earnings (loss) per share is computed based on the weighted average number of common shares outstanding after giving effect to preferred stock dividends. (f) Fair Value of Financial Instruments The carrying amounts reported in the balance sheet for cash, receivables, accounts payable and accrued expenses approximate fair value based on the short-term maturity of these instruments. (g) Stock Based Compensation The Company accounts for stock transactions in accordance with APB Opinion No. 25, "Accounting For Stock Issued To Employees." In accordance with Statement of Financial Accounting Standards No. 123, "Accounting For Stock-Based Compensation," the Company has adopted the pro forma disclosure requirements of Statement No. 123 in fiscal 1996.' (h) Revenue Recognition Revenue is recorded at the point of sale. Returns are estimated and accrued. (i) Cash Equivalents The Company considers all highly liquid temporary cash investments with an original maturity of three months or less to be cash equivalents. F-4 (j) Recently Issued Accounting Pronouncements Upon its emergence from bankruptcy, the Company has or will adopt the provisions of recently issued accounting pronouncements, which consist of the following: Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income", which requires separate reporting for items of other comprehensive income, which are not normally reported in the statement of operations, but rather as a direct adjustment to equity. This statement is effective for fiscal years beginning after December 15, 1997. The Company does presently have any which are characterized as other comprehensive income and it is not presently expected that adoption of this standard will have a material impact on the Company's financial statements. Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information", which requires disclosure about reportable operating segments. This statement is effective for fiscal years beginning after December 15, 1997. The Company does not presently have any reportable operating segments, as defined under this standard, and it is not expected that adoption of this standard will have a material impact on the Company's financial statements. Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities", which establishes reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities. This statement is effective for fiscal years beginning after June 15, 1999. The Company expect that adoption of this standard will have a material impact on the Company's financial statements. 2. REORGANIZATION On November 14, 1997, the Company filed a voluntary petition under Chapter 11 of the United States Bankruptcy code. At the outset, the bankruptcy petition was organized to consolidate the cases of the entities that comprised the bookstore operations in distinction from those that comprised the cookstore operations. The bookstore operations were disposed of under their own separate plan of reorganization on July 1, 1998 and were accounted for as discontinued operations. On June 24, 1998, the entities comprising the cookstores filed a plan of reorganization, which was confirmed by the Bankruptcy Court on July 10, 1998 and declared effective on August 12, 1998. Under the plan, Home Retail Acquisition Corp. ("HRAC") (which is a secured creditor of the cookstores by virtue of the its purchase of a junior participation in the Company's debt from Fremont Financial), was merged into the Company. On the effective date, all previous equity interests were extinguished and the reorganized company issued a total of 1,522,041 shares of Class A common stock, 154,951 shares of Class B common stock and a total of 174,429 warrants. HRAC received a total of 1,383,691 of the newly issued Class A shares, thereby controlling the reorganized entity. Unsecured creditors of the predecessor entity were issued 138,350 Class A common shares. Holders of the predecessor's common stock were issued 85,777 shares of Class B common stock and holders of the predecessor entity's preferred stock were issued 69,174 shares of Class B common stock. In accordance with the American Institute of Certified Public Accountants' Statement of Position 90-7, Financial Reporting by Entities in Reorganization Under the Bankruptcy Code, the Company was required to adopt fresh-start accounting as of August 12, 1998, after all material conditions required by the Plan were satisfied. The Company was required to adopt fresh-start reporting because the holders of the existing voting shares immediately prior to filing and confirmation of the Plan received less than 50% of the voting shares of the emerging entity, and its reorganization value was less than the total of its post-petition liabilities and allowed claims. Under fresh-start accounting, all assets and liabilities are restated to reflect their reorganization value, which approximates fair value at the date of reorganization. The liabilities of the reorganized Company consist F-5 of post-petition current liabilities, notes payable to Liberty-Bidco in the amount of $1,300,000, reduced by a discount of $400,000 and a put option of $400,000 related to 92,595 warrants issued to Liberty-Bidco. In accordance with fresh-start accounting, the gain on forgiveness of debt resulting from the bankruptcy proceedings was reflected on the predecessor Company's statement of operations for the period January 1, 1998 to August 12, 1998. In addition, the accumulated deficit of the predecessor Company at August 12, 1998 totaling $3,114,406 was eliminated, and at August 12, 1998, the reorganized Company's financial statements reflect no beginning retained earnings or deficit. Liabilities discharged in bankruptcy totaled $1,472,215. This amount was recorded as an extraordinary gain on debt forgiveness on the predecessor company's final statement of operations for the period January 1, 1998 to August 12, 1998. The reorganization value of the reorganized Company was determined in consideration of several factors. Management believes the estimated fair value of the emerging entity before considering liabilities approximates the amount a willing buyer would pay for the assets of the entity immediately after the restructuring. The Company determined that the fair value of the assets at August 12, 1998 approximated carrying value. The excess of post-emergence liabilities over the fair value of the assets, which totaled $148,388, is recorded as "Reorganization Value in Excess of Amounts Allocable to Identifiable Assets," which will be amortized as a charge to income over its estimated life of 3 years. F-6 The effect of the reorganization on the Company's consolidated balance sheet at August 12, 1998, is as follows:
Pre-Confirmation Reorganized Balance Sheet Balance Sheet August 12, 1998 Adjustments August 12, 1998 ------------------ --------------- ---------------- Cash ............................................... $ 144,006 $ 144,006 Accounts receivable ................................ 5,183 5,183 Inventory .......................................... 777,991 777,991 Prepaids ........................................... 15,427 15,427 Fixed assets ....................................... 299,323 299,323 Reorganization value in excess of amounts .......... 148,888 148,388 Other assets ....................................... 174,103 174,103 ------------ ----------- Total Assets ....................................... $ 1,416,033 $ 1,564,421 ============ =========== Accounts payable and accrued expenses .............. $ 247,651 $ 247,651 Line of credit ..................................... 900,000 900,000 Put option on warrants ............................. 400,000 400,000 ------------ ----------- Total Liabilities .................................. 1,547,651 1,547,651 Stockholders' Equity: Preferred stock .................................... 300,000 (300,000) 0 Common stock ....................................... 40,950 (40,950) 0 Common stock - Class A ............................. 0 15,220 15,220 Common stock - Class B ............................. 0 1,550 1,550 Paid in capital .................................... 2,641,838 (2,641,838) 0 Retained earnings .................................. (3,114,406) 3,114,406 0 ------------ ----------- Total Stockholders' Equity ......................... (131,618) 16,770 ------------ ----------- Total Liabilities and Stockholders' Equity ......... $ 1,416,033 $ 1,564,421 ============ ===========
3. PROPERTY AND EQUIPMENT The following is a summary of property and equipment at August 12, 1998: Depreciable Life ------------- Computers and equipment ......... 5 years $ 88,722 Leasehold improvements .......... (A) 103,023 Furniture and fixtures .......... 7 years 107,578 --------- $ 299,323 ========= (A) The lessor of useful life (on average 10 years) or over the lease term. 4. LOAN AGREEMENT In April 1998, the Company obtained debtor-in-possession financing from Fremont Financial Corporation which was repaid on August 12, 1998 with a refinancing from Liberty-Bidco. The Liberty-Bidco financing totaled $1,300,000, of which amount $1,053,000 was used to pay off Fremont, $160,000 was used to pay financing costs and attorney fees and the $87,000 balance went to the Company. The maturity date of the loan is January 1, 1999, and the loan bears interest at three percent over prime. The loan contains a prepayment penalty of 20%, and is secured by substantially all the assets of the Company. The loan contains a number of negative covenants of which the principal financial covenants are to maintain a ratio of current assets to current liabilities (as defined by agreement) of 1.25 to 1.00, and minimum net worth (as defined by agreement) of negative $150,000 through September 30, 1998, positive $100,000 through November 30, 1998 and positive $500,000 by December 1, 1998 and beyond. F-7 In connection with the loan agreement, Liberty-Bidco received warrants to purchase 92,595 shares of the Company's common stock for $.01 per share through August 12, 2003. The warrants contain a put option which can require the Company to repurchase the warrants, or the stock obtained on exercise, for the greater of $400,000 or the market value of the stock. The Company has recorded $400,000 as a liability for the put option and a corresponding discount to the note payable. The put option is not exercisable until January 31, 2000. The note discount is being amortized over the term of the debt using the effective interest method and the financing costs are being amortized straight-line over the debt term. 5. COMMITMENTS Leases In connection with the Bankruptcy Court's approval of the Company's plans of reorganization, all previous future lease commitments were voided by the court, and the Company selectively entered into new lease commitments for the cookstore operations. Future minimum lease payments under such noncancelable operating leases are as follows: Operating Year ending December 31, leases - ------------------------------------------ ---------- 1998 .............................. $174,670 1999 .............................. 386,926 2000 .............................. 389,988 2001 .............................. 393,881 2002 .............................. 402,073 Later years, through 2006 ......... 617,042 6. INCOME TAXES The Company accounts for income taxes under Statement of Financial Accounting Standards No. 109. The Company had deferred tax assets total $1,735,000, with $1,635,000 representing the tax effects of net operating loss carryforwards and the effect of book depreciation in excess of tax depreciation of approximately $100,000 at August 12, 1998. The Company has a full valuation allowance as a reserve against such deferred tax assets. The net operating loss carryforwards totaling approximately $4,087,000, expire in the years 2009 through 2013. Annual utilization of the net operating loss carryforwards is restricted due to the ownership change in the plan of reorganization. 7. WARRANTS On August 20, 1998, the Company granted the following warrants: (i) Bidco received a five year warrant to purchase 92,595 shares of the Common Stock, exercisable at $0.01 per share, in connection with the Loan Agreement: (ii) Bidco also received a five year warrant to purchase 40,602 shares of Common Stock, exercisable at 165% of the public offering price, in connection with the First Amendment to the Loan Agreement: (iii) Greenfield received a five year warrant to purchase 40,602 shares of Common Stock, exercisable at 165% of the public offering price; (iv) DLM Asset Management, Inc. and Spinnernet Financial Systems, Ltd. received three year warrants to purchase in the aggregate 8,875 shares of Common Stock each exercisable at 165% of the public offering price; and (v) JRP Consulting Corp. and Laux, Holmes & Company received five year warrants to purchase in the aggregate 98,246 shares of Common Stock each exercisable at 165% of the public offering price. The warrants were issued as part of the financing agreements with Bidco and Greenfield. Pursuant to the Plan of Reorganization, 52,573 warrants were issued to previous warrant holders, exercisable for $11.57 until January 1, 1999 and $14.40 until October 30, 1999. Also, 29,261 five year warrants were granted to Junior Tranche participants, exercisable at 80% of the public offering price. F-8 8. ACQUISITION OF AROPI On August 21, 1998, the Company acquired Aropi, Incorporated, an Atlanta, Georgia based chain retailer of kitchen products. The purchase price was $2,651,725, of which $1,290,317 went to the seller, composed of $790,317 in cash and two convertible promissory notes of $250,000 each. The remaining $1,361,408 was used to pay off certain indebtedness of the seller. Acquisition costs were approximately $75,000. The convertible promissory notes bear interest at the rate of 8% and are mandatorily convertible into Common Stock having a fair market value of $500,000 as of the conversion date. Such shares shall not represent less than 2% of all of the issued and outstanding Common Stock on a fully diluted basis. The convertible promissory notes are mandatorily convertible if the Company completes an offering of its Common Stock prior to August 20, 1999 in which it receives proceeds of at least $5,000,000 and the Company has a specified capital structure as of the conversion date. The fair value of assets and liabilities acquired approximated book value. Goodwill recorded on the acquisition was $1,004,877, and is computed as follows: Fair Value of Assets Acquired: Cash ....................................... $ 101,487 Accounts receivable ........................ 48,932 Inventory .................................. 1,897,451 Fixed assets ............................... 352,891 ----------- 2,400,761 Fair Value of Liabilities Assumed: Accounts payable and accrued expenses ...... 678,913 ----------- Net Assets Acquired .......................... 1,721,848 Purchase Price, including acquisition costs and repayment of seller's indebtedness ........... 2,726,725 ----------- Goodwill ................................... $ 1,004,877 =========== The goodwill will be amortized over its estimated useful life of ten years. Upon the acquisition, the selling shareholder entered into an employment agreement to serve as chief executive officer of the combined company. The employment agreement is for a period of three years for base annual salary of $105,000, $115,500 and $127,050. The selling shareholder will also receive a bonus totalling $125,000, payable at the rate of $10,417 over the first twelve months and has received 5,000 options to purchase common stock for $6.00 per share expiring in August 2000. Additionally, the Company entered into a two-and-a-half year lease for the rental of administrative offices from the seller for base annual rent of $65,000. Upon consummation of the acquisition, the administrative offices of the combined company were moved to this location. The acquisition was financed with a second financing from Liberty-Bidco in the amount of $700,000, under an amendment to the original $1,300,000 note, and the balance under a new $2,000,000 loan facility with Greenfield Commercial Credit, L.L.C., $500,000 of which is due on December 31, 1998 and $1,500,000 due on January 29, 1999. The Liberty-Bidco debt matures on January 1, 1999. The interest rate on all the above debt is three percent over prime, except for the $500,000 due on December 31, 1998, which bears interest at the rate of 15% per annum. 9. STOCK OPTION PLAN On July 10, 1998, in connection with the Plan of Reorganization, the Company adopted the 1998 Equity Incentive Plan, to issue up to 180,000 options or stock appreciation rights ("SAR's") to participants. No options or SARs have been issued as of August 12, 1998. F-9 INDEPENDENT AUDITORS' REPORT To the Shareholders and Board of Directors Gaylord Companies, Inc. (Debtor-in-possession) We have audited the accompanying consolidated balance sheet of Gaylord Companies, Inc. and subsidiaries (Debtor-in-possession) as of December 31, 1997, and the related consolidated statements of operations, stockholders' equity, and cash flows for the years ended December 31, 1997 and 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Gaylord Companies, Inc. (Debtor-in-possession) as of December 31, 1997, and the results of its operations and its cash flows for the years ended December 31, 1997 and 1996 in conformity with generally accepted accounting principles. As discussed in Note 2, the Company and all of its subsidiaries filed for reorganization under Chapter 11 of the United States Bankruptcy Code on November 14, 1997 emerging from bankruptcy and adopting "fresh start" reporting on August 12, 1998. The accompanying consolidated financial statements do not purport to reflect or provide for the consequences of the bankruptcy proceedings. In particular, such financial statements do not purport to show (a) as to assets, their realizable value on a liquidation basis or their availability to satisfy liabilities; (b) as to liabilities subject to compromise, the amounts that may be allowed for claims or contingencies, or the status and priority thereof; (c) as to stockholder accounts, the effect of any changes that may be made in the capitalization of the Company; or (d) as to operations, the effect of any changes that may be made in its business. Feldman Sherb Ehrlich & Co., P.C. Certified Public Accountants New York, New York August 12, 1998 F-10 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 .................................................................... 1,297,547 Notes payable ..................................................................... 348,675 ------------ 3,023,755 Net liabilities of discontinued operations .......................................... 658,697 ------------ Total current liabilities ........................................................... 3,682,452 STOCKHOLDERS' DEFICIT: Cumulative preferred stock, par value $.01 per share; 1,500,000 shares authorized, 60,000 shares issued and outstanding ................................................ 300,000 Common stock, par value $.01 per share; 10,000,000 shares authorized, 4,095,000 shares issued and outstanding .............................................................. 40,950 Additional paid-in-capital ........................................................... 2,641,838 Accumulated deficit .................................................................. (4,274,492) ------------ TOTAL STOCKHOLDERS' DEFICIT ....................................................... (1,291,704) ------------ $ 2,390,748 ============
See notes to consolidated financial statements. F-11 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 ..................... 838,081 390,123 Non-cash imputed stock compensation ..................... 469,255 -- Depreciation and amortization ........................... 107,640 68,334 --------- ------------ 1,414,976 458,457 --------- ------------ OPERATING INCOME (LOSS) .................................. (1,199,693) 139,551 ---------- ------------ OTHER INCOME (EXPENSE): Interest expense, net ................................... (79,710) (64,817) Amortization of debt issue costs and discounts .......... (74,000) (149,986) Other - net ............................................. (37,977) 37,409 ---------- ------------ (191,687) (177,394) ---------- ------------ INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES ............................................. (1,391,380) (37,843) PROVISION FOR INCOME TAXES ............................... (400,649) -- ---------- ------------ LOSS FROM CONTINUING OPERATIONS .......................... (1,792,029) (37,843) REORGANIZATION - PROFESSIONAL FEES ....................... (234,625) -- ---------- ------------ LOSS BEFORE DISCONTINUED OPERATIONS ...................... (2,026,654) (37,843) LOSS FROM DISCONTINUED OPERATIONS ........................ (1,224,845) (949,966) ---------- ------------ NET LOSS ................................................. (3,251,499) (987,809) Preferred stock dividends ............................... (23,789) (36,000) ---------- ------------ NET LOSS TO COMMON SHAREHOLDERS .......................... $ (3,275,288) $ (1,023,809) ============ ============ BASIC LOSS PER COMMON SHARE: Continuing .............................................. $ (0.53) $ (0.02) Discontinued ............................................ (0.32) (0.31) ------------ ------------ $ (0.85) $ (0.33) ============ ============ WEIGHTED AVERAGE COMMON SHARES USED ...................... 3,870,000 3,103,957 ============ ============
See notes to consolidated financial statements. F-12 GAYLORD COMPANIES, INC. (DEBTOR-IN-POSSESSION) STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
Preferred Stock Common Stock --------------------- ----------------------- Shares Amount Shares Amount -------- ----------- ----------- ---------- BALANCE -- DECEMBER 31, 1995.... 60,000 $300,000 2,750,000 $27,500 Sale of stock to consultant -- -- 300,000 3,000 Shares issued with note payable ....................... -- -- 180,000 1,800 Shares issued for services . -- -- 170,000 1,700 Conversion of notes, net of deferred debt issue costs -- -- 235,000 2,350 Dividends on preferred stock ......................... -- -- -- -- Amortization of unearned stock compensation ............ -- -- -- -- Net loss ....................... -- -- -- -- ------ -------- --------- ------- BALANCE -- DECEMBER 31, 1996 .... 60,000 300,000 3,635,000 36,350 Sale of stock to consultant -- -- 160,000 1,600 Stock issuance to consultant .................... -- -- 300,000 3,000 Amortization and write off of unearned stock compensation .................. -- -- -- -- Dividends on preferred stock ......................... -- -- -- -- Write off of stock receivable .................... -- -- -- -- Net loss ....................... -- -- -- -- ------ -------- --------- ------- BALANCE -- DECEMBER 31, 1997 .... 60,000 $300,000 4,095,000 $40,950 ====== ======== ========= =======
Unearned Retained Additional Stock Receivable Earnings Paid-in Capital Compensation for Stock (deficit) Totals ----------------- -------------- -------------- --------------- --------------- BALANCE -- DECEMBER 31, 1995 .... $1,600,817 $ -- $ -- $ 24,591 $ 1,952,908 Sale of stock to consultant 297,000 -- (168,571) -- 131,429 Shares issued with note payable ....................... 94,200 -- -- -- 96,000 Shares issued for services . 112,050 (110,000) -- -- 3,750 Conversion of notes, net of deferred debt issue costs 234,871 -- -- -- 237,221 Dividends on preferred stock ......................... -- -- -- (36,000) (36,000) Amortization of unearned stock compensation ............ -- 13,333 -- -- 13,333 Net loss ....................... -- -- -- (987,809) (987,809) ---------- ---------- ---------- ------------ ------------ BALANCE -- DECEMBER 31, 1996 .... 2,338,938 (96,667) (168,571) (999,218) 1,410,832 Sale of stock to consultant 155,900 (143,750) -- -- 13,750 Stock issuance to consultant .................... 147,000 -- -- -- 150,000 Amortization and write off of unearned stock compensation .................. -- 240,417 -- -- 240,417 Dividends on preferred stock ......................... -- -- -- (23,775) (23,775) Write off of stock receivable .................... -- -- 168,571 -- 168,571 Net loss ....................... -- -- -- (3,251,499) (3,251,499) ---------- ---------- ---------- ------------ ------------ BALANCE -- DECEMBER 31, 1997 .... $2,641,838 $ -- $ -- $ (4,274,492) $ (1,291,704) ========== ========== ========== ============ ============
See notes to consolidated financial statements. F-13 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 income (loss) ....................................................... $ (3,251,499) $ (987,809) Adjustments to reconcile net income (loss) to net cash provided (used) by operating activities: Loss from discontinued operations ..................................... 1,224,845 949,966 Reorganization items .................................................. 234,625 -- Depreciation and amortization ......................................... 107,640 193,208 Non cash imputed compensation expense ................................. 469,255 57,012 Amortization of discount on notes payable ............................. 74,000 10,667 Write off of goodwill ................................................. 114,933 -- Write off of investment ............................................... 125,000 -- Changes in assets and liabilities: Decrease (increase) in accounts receivable ........................... 65,211 (38,232) Decrease (increase) in other receivables ............................. 177,217 16,490 Decrease (increase) in inventory ..................................... 1,320,244 (399,788) Decrease (increase) in prepaid expenses and other assets ............. 153,858 (96,668) Decrease (increase) in other assets .................................. 18,277 11,136 Decrease (increase) in deferred income taxes ......................... 398,196 -- Increase (decrease) in accounts payable .............................. (1,008,331) 551,627 Increase (decrease) in sales and other taxes payable ................. (101,117) 11,171 Increase in net liabilities of discontinued operations ............... 489,776 -- ------------ ----------- Net cash provided (used) by continuing operations .................. 612,130 278,780 Cash used for reorganization items .................................... (234,625) -- Net cash provided by discontinued operations .......................... (668,377) (949,966) ------------ ----------- NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES (290,872) (671,186) ------------ ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property and equipment ...................................... (34,915) (204,551) Proceeds from sale of property and equipment ............................ -- 3,785 ------------ ----------- NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES (34,915) (200,766) ------------ ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of common stock .................................. -- 69,721 Dividends paid .......................................................... (23,789) (36,000) Proceeds (repayments) from notes payable ................................ (300,986) 204,000 Proceeds from bank debt ................................................. 1,297,547 395,000 Repayments of bank debt ................................................. (395,000) (463,770) Proceeds from issuance of convertible notes ............................. -- 622,500 (Increase) decrease in restricted cash .................................. -- 250,000 ------------ ----------- NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES 577,772 1,041,451 ------------ ----------- NET INCREASE (DECREASE) IN CASH .......................................... 251,985 169,499 CASH AT BEGINNING OF YEAR ................................................ 818,518 649,019 ------------ ----------- CASH AT END OF YEAR ...................................................... $ 1,070,503 $ 818,518 ============ =========== SUPPLEMENTAL CASH FLOW DISCLOSURES: Cash paid during the year for: Interest .............................................................. $ 434,170 $ 318,612 ============ =========== Income taxes .......................................................... $ -- $ -- ============ =========== Non cash financing and investing activity: Conversion of notes payable to common stock .......................... $ -- $ 352,500 ============ =========== Common stock issued for future services .............................. $ -- $ 112,500 ============ =========== Receivable for common stock .......................................... $ -- $ 168,571 ============ ===========
See notes to consolidated financial statements. F-14 GAYLORD COMPANIES, INC. AND SUBSIDIARIES (DEBTOR-IN-POSSESSION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1997 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (a) Basis of Presentation The financial statements of Gaylord Companies, Inc. (the "Company") include the accounts of the Company and its subsidiaries. All significant intercompany balances and transactions have been eliminated in the consolidated financial statements. The Company is a specialty retailer of quality cookware and serving equipment, with operations in Ohio, Indiana and Kentucky. (b) Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that effect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. (c) Inventories Inventories are stated at the lower of cost or market. Cost is determined using the retail method and the FIFO method. (d) Property and Equipment Property and equipment are stated at cost. Property and equipment held under capital leases are stated at the lower of the present value of minimum lease payments at the beginning of the lease term or fair value at the inception of the lease. Depreciation of property and equipment is calculated using the straight-line method over the estimated useful lives of the assets. Property and equipment held under capital leases and leasehold improvements are amortized using the straight-line method over the shorter of the lease term or estimated useful life of the asset. (e) Net Earnings (Loss) Per Share The Company follows the provisions of Statement of Financial Accounting Standards No. 128, "Earnings Per Share," which became effective for financial statements with fiscal years ending after December 15, 1997. Basic earnings (loss) per share is computed based on the weighted average number of common shares outstanding after giving effect to preferred stock dividends. (f) Fair Value of Financial Instruments The carrying amounts reported in the balance sheet for cash, receivables, accounts payable and accrued expenses approximate fair value based on the short-term maturity of these instruments. (g) Stock Based Compensation The Company accounts for stock transactions in accordance with APB Opinion No. 25, "Accounting For Stock Issued To Employees." In accordance with Statement of Financial Accounting Standards No. 123, "Accounting For Stock-Based Compensation," the Company has adopted the pro forma disclosure requirements of Statement No. 123 in fiscal 1996. (h) Revenue Recognition Revenue is recorded at the point of sale. Returns are estimated and accrued. (i) Cash Equivalents The Company considers all highly liquid, temporary cash investments with an original maturity of three months or less to be cash equivalents. F-15 2. PLAN OF REORGANIZATION On November 14, 1997, the Company filed a voluntary petition under Chapter 11 of the United States Bankruptcy code. At the outset, the bankruptcy petition was organized to consolidate the cases of the entities that comprised the bookstore operations in distinction from those that comprised the cookstore operations. The bookstore operations were disposed of under their own separate plan of reorganization on July 1, 1998 and are being accounted for as discontinued operations. On June 24, 1998, the entities comprising the cookstores filed a plan of reorganization, which was confirmed by the Bankruptcy Court on July 10, 1998 and the Company emerged from bankruptcy on August 12, 1998. Under the plan, Home Retail Acquisition Corp. ("HRAC") (which is a secured creditor of the cookstores by virtue of the its purchase of a junior participation in the Company's debt from Fremont Financial), will be merged into the Company. On the effective date, all previous equity interests were extinguished and the reorganized company issued a total of 1,522,041 shares of Class A common stock, 154,951 shares of Class B common stock and a total of 174,429 warrants. HRAC will receive a total of 1,383,691 of the newly issued Class A shares, thereby controlling the reorganized entity. 3. DISCONTINUED OPERATIONS Shortly after its November 1997 bankruptcy filing, in connection with its plans to return to financial viability, the Company reached a decision to dispose of its bookstore operations. In February 1998, certain principal managing shareholders proposed a plan of reorganization for the bookstores whereby they would assume the bookstore business, and proposed a formula for settlement of the liabilities. In April 1998, United Magazine Corporation ("Unimag") a major creditor of the bookstores put forth a competing plan, which was ultimately accepted by the creditors and the Bankruptcy Court. The plan was finalized on July 1, 1998, with all assets and liabilities of the bookstore business assumed by Unimag. Under the terms of the plan, certain unimpaired claims, totaling approximately $800,000 were paid by Unimag, impaired claims, totaling approximately $1,700,000, were settled for a pro rata allocation of $110,000, and approximately $187,000 which was due to Unimag, was waived by Unimag. Upon sale to Unimag, the Company realized a gain on disposal of $556,473 representing an excess of liabilities over assets assumed of $1,216,893 (with includes the assumption of the $387,547 balance on the Greenfield term loan) and losses through to the disposal date of $660,420. The following table presents the composition of the net liabilities of the discontinued business at December 31, 1997. Cash .............................................. $ 11,123 Accounts Receivable -- trade ...................... 48,787 Other Receivables ................................. 208,932 Inventories ....................................... 795,055 Prepaid expenses and other current assets ......... 414,762 Net property and equipment ........................ 220,573 Investment ........................................ 125,000 Goodwill .......................................... 114,933 Other ............................................. 3,801 ----------- Total Assets ......................................... 1,942,966 ----------- Liabilities not subject to compromise: Accounts payable and accrued expenses .......... 117,369 Liabilities subject to compromise Accounts payable and accrued expenses .......... 2,484,294 ----------- Total Payables ..................... ......... 2,601,663 ----------- Net liabilities of discontinued business ............. $ (658,697) =========== F-16 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 (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 are as follows: Operating Year ending December 31, leases - ---------------------------------------------- ------------ 1998 ....................................... $ 174,670 1999 ....................................... 386,926 2000 ....................................... 389,988 2001 ....................................... 393,881 2002 ....................................... 402,073 Later years, through 2006 .................. 617,042 Total rental expense for operating leases was $703,231 and $487,640 in 1997 and 1996, respectively. F-17 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:
Years ended December 31, ----------------------------------- 1997 1996 ----------------- --------------- Tax benefit computed at statutory rate ......... $ (1,138,000) $ (346,000) Change in valuation allowance .................. 398,196 -- Effect of permanent differences ................ 175,000 29,000 Other, net ..................................... 2,453 3,000 Tax benefit not recognized ..................... 963,000 314,000 ------------- ----------- $ 400,649 $ -- ============= ===========
The Company had deferred tax assets total $1,610,000, with $1,510,000 representing the tax effects of net operating loss carryforwards and the effect of, book depreciation in excess of tax depreciation of approximately $100,000 as of December 31, 1997. The Company has a full valuation allowance as a reserve against such deferred tax assets. The net operating loss carryforwards totaling approximately $3,774,000, expire in the years 2009 through 2013. Annual utilization of the net operating loss carryforwards will be restricted due to the ownership change in the plan of reorganization. 8. STOCKHOLDERS' EQUITY The Company completed an Initial Public Offering in November 1995, selling a total of 750,000 shares of common stock for $3.00 per share, and 1,725,000 warrants at $0.10 per warrant. Net proceeds to the Company after underwriter discounts and other expenses were approximately $1.4 million. In April 1996, a consultant was issued options to purchase 300,000 shares for $1.00 per share. These were subsequently exercised for cash of $89,000, services valued at $42,429 and a non-interest bearing receivable totaling $168,571. Such receivable has been written off as an expense during 1997, as management deemed such amount to be uncollectible after many attempts to collect. In November 1996, a consultant was issued 100,000 shares in exchange for a fifteen month service agreement. Such shares were valued at $1.00 per share (the fair market value), with the resulting charge being amortized over the fifteen month term of the agreement, and the balance written off during 1997. During 1996, an aggregate of 70,000 other shares were issued for services to various parties, which were valued at their aggregate fair value of $15,000. In February 1997, 150,000 shares were issued to a consultant, which were valued at $1.00 per share, with the resulting charge expensed during 1997. In March 1997, a consultant was issued 10,000 options exercisable at $.01 per share, which resulted in a $10,000 expense charge. In September 1997, the Company issued 300,000 shares of common stock to a consultant. The Company recorded a charge of $150,000 for the fair value of the stock. 9. INITIAL PUBLIC OFFERING The Company completed an Initial Public Offering in November 1995, selling a total of 750,000 shares of common stock for $3.00 per share, and 1,725,000 warrants at $0.10 per warrant. The warrants initially entitled the holder to purchase one share of Company common stock at $3.00 per share through October 30, 2000. At December 31, 1996, the total number of shares issuable upon the exercise of such warrants has been increased to 2,756,917 and the exercise price has been adjusted to $2.53 per share pursuant to anti-dilution provisions. The warrants are redeemable by the Company at $0.05 per warrant, generally, upon the common stock achieving F-18 certain price levels. Net proceeds to the Company after underwriter discounts and other expenses were approximately $1.4 million. In connection with the public offering, the underwriter received warrants which allow for the purchase of (after adjustment for anti-dilution provisions) an aggregate 269,103 shares at $3.01 per share at December 31, 1997. 10. CONVERTIBLE NOTES In June 1996, the Company issued six month, unsecured, convertible notes with an aggregate face of amount of $622,500, which bear interest at the rate of 5% per annum, and are convertible into common stock at the rate of $1.50 per share. Through December 31, 1996, $352,500 in principal was converted into 235,000 shares of common stock. Another $150,000 in principal was repaid in January 1997, $60,000 was extended through June 1997 at an interest rate of 17.5% and $60,000 was presented for payment in March 1997 and became in default upon not being repaid by the Company on March 27, 1997. Costs associated with this financing, consisting of professional fees, aggregated approximately $252,000. Such costs were amortized to expense over the original term, with a pro rata amount of unamortized costs charged to paid in capital upon conversions to stock. 11. NOTE PAYABLE In November 1996, the Company borrowed $300,000 under an 18 month note payable bearing interest at 8% per annum. The note is secured by the personal guarantees of certain of the Companies principal shareholders, and will be secured by all the assets of the Company upon the satisfaction of the Company's bank debt and release of the associated security interest. In connection with this borrowing, the Company issued 180,000 shares of common stock to the lender. In accordance with Accounting Principles Board Opinion No. 14, the proceeds were allocated between the debt and equity securities based on their relative fair value, resulting in a note discount of $96,000, which is being amortized to expense over the term of the note. The unamortized balance of the discount is $21,325 at December 31, 1997. F-19 ROLLING PIN KITCHEN EMPORIUM, INC. SEPTEMBER 30, 1998 CONSOLIDATED BALANCE SHEET (UNAUDITED) ASSETS CURRENT ASSETS: Cash ............................................................................. $ 146,171 Accounts receivable -- trade ..................................................... 70,854 Inventories ...................................................................... 3,008,646 Prepaid expenses and other current assets ........................................ 45,427 ------------ TOTAL CURRENT ASSETS ........................................................... 3,271,098 PROPERTY AND EQUIPMENT .............................................................. 623,900 REORGANIZATION VALUE IN EXCESS OF AMOUNTS ALLOCABLE TO IDEN- TIFIABLE ASSETS .................................................................... 145,721 GOODWILL ............................................................................ 988,129 OTHER ASSETS ........................................................................ 249,134 ------------ $ 5,277,982 ============ LIABILITIES AND STOCKHOLDERS' DEFICIT CURRENT LIABILITIES: Accounts payable and accrued expenses ............................................ $ 1,586,588 Notes payable .................................................................... 4,020,000 ------------ TOTAL CURRENT LIABILITIES ..................................................... 5,606,588 PUT OPTION ON WARRANTS .............................................................. 550,000 STOCKHOLDERS' DEFICIT: Cumulative preferred stock, par value $.01 per share; 1,000,000 shares authorized, 320 shares redeemable, convertible and bearing a liquidation preference of $1,000 per share (net of discount of $80,000).................................... 240,000 Common stock, par value $.01 per share, authorized: Class A-20,000,000 shares, Class B-155,000; issued and outstanding: Class A-1,522,041, Class B-154,951 .............................................. 16,770 Additional paid-in-capital ....................................................... 80,000 Accumulated earnings (deficit) ................................................... (1,215,376) ------------ TOTAL STOCKHOLDERS' DEFICIT .................................................... (878,606) ------------ $ 5,277,982 ============
See notes to consolidated financial statements. F-20
ROLLING PIN KITCHEN EMPORIUM, INC. GAYLORD COMPANIES, INC. (DEBTOR-IN-POSSESSION) CONSOLIDATED STATEMENT OF OPERATIONS CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED) (UNAUDITED) For the Period For the Period For the Nine August 12, 1998 through January 1, 1998 through Months ended September 30, 1998 August 12, 1998 September 30, 1997 ------------------------- ------------------------- ------------------- NET SALES .................................... $ 728,767 $ 1,454,274 $ 2,475,892 COST OF GOODS SOLD, including store occupancy and delivery costs .......................... 436,628 1,191,423 2,228,303 ------------- ----------- ------------- GROSS PROFIT ................................. 292,139 262,851 247,589 ------------- ----------- ------------- OPERATING EXPENSES: Selling, general and administrative ......... 1,076,415 733,272 1,029,935 Depreciation and amortization ............... 47,227 47,382 80,730 ------------- ----------- ------------- 1,123,642 780,654 1,110,665 ------------- ----------- ------------- OPERATING INCOME (LOSS) ...................... (831,503) (517,803) (863,076) ------------- ----------- ------------- OTHER INCOME (EXPENSE): Interest expense, net ....................... (184,842) (150,190) (115,534) ----------- ------------- Amortization of debt discount ............... (220,000) Franchise fees .............................. 20,969 ------------- (383,873) ------------- INCOME (LOSS) FROM CONTINUING OPERATIONS .................................. (1,215,376) (667,993) (978,610) REORGANIZATION ITEM - PROFESSIONAL FEES -- (200,609) -- ------------- ----------- ------------- LOSS BEFORE DISCONTINUED OPERATIONS .......... (1,215,376) (868,602) (978,610) LOSS FROM DISCONTINUED OPERATIONS ............ -- (660,420) (1,495,820) GAIN ON DISPOSAL OF DISCONTINUED OPERATIONS .................................. -- 1,216,893 -- ------------- ----------- ------------- INCOME (LOSS) BEFORE EXTRAORDINARY GAIN ........................................ (1,215,376) (312,129) (2,474,430) ------------- EXTRAORDINARY GAIN ON DEBT DISCHARGE . -- 1,472,215 -- ------------- ----------- ------------- NET INCOME (LOSS) ............................ (1,215,376) 1,160,086 (2,474,430) Preferred stock dividends ................... -- -- (27,000) ------------- ----------- ------------- NET INCOME (LOSS) TO COMMON SHARE- HOLDERS ..................................... $ (1,215,376) $ 1,160,086 $ (2,501,430) ============= =========== ============= BASIC LOSS PER COMMON SHARE: Continuing .................................. $ (0.72) $ (0.22) $ (0.26) Discontinued ................................ -- ( 0.14) ( 0.40) Extraordinary ............................... -- .38 -- $ (0.72) $ (0.30) $ (0.66) ============= =========== ============= WEIGHTED AVERAGE COMMON SHARES USED 1,676,992 3,870,000 3,735,000 ============= =========== =============
See notes to consolidated financial statements. F-21
ROLLING PIN KITCHEN EMPORIUM, INC. CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED) For the Period August 12, 1998 through September 30, 1998 ------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) ..................................... $ (1,215,376) Adjustments to reconcile net income (loss) to net cash provided (used) by operating activities, net of effects of acquisition: (Gain) loss from discontinued operations ............. -- Reorganization items ................................. -- Amortization of note discount ........................ 220,000 Extraordinary gain on debt discharge ................. -- Depreciation and amortization ........................ 47,227 Non cash imputed compensation expense ................ -- Preferred shares issued to settle payables ........... 320,000 Changes in assets and liabilities: Decrease (increase) in accounts receivable .......... (65,671) Decrease (increase) in other receivables ............ -- Decrease (increase) in inventory .................... (333,204) Decrease (increase) in prepaid expenses and other assets ...................................... (30,000) Decrease (increase) in other assets ................. (74,836) Decrease (increase) in deferred income taxes ........ -- Increase (decrease) in accounts payable ............. 799,263 Increase (decrease) in sales and other taxes pay- able .............................................. -- Increase (decrease) in other current liabilities .... -- ------------ Net cash provided (used) by continuing operations ....................................... (332,597) Cash used for reorganization items ................... -- Net cash provided by discontinued operations ......... -- ------------ NET CASH PROVIDED (USED) BY CONTINUING OPERATIONS ........................... (332,597) ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Cash used for acquisition, net of cash acquired ....... (2,125,238) Purchase of property and equipment .................... -- ------------ NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES ............................ (2,125,238) ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Dividends paid ........................................ -- Proceeds from notes payable ........................... 2,460,000 Repayments of bank debt ............................... -- ------------ NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES ............................ 2,460,000 ------------ NET INCREASE (DECREASE) IN CASH ........................ 2,165 CASH AT BEGINNING OF PERIOD ............................ 144,006 ------------ CASH AT END OF PERIOD .................................. $ 146,171 ============ GAYLORD COMPANIES, INC. (DEBTOR-IN-POSSESSION) CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED) For the Period For the Nine January 1, 1998 through Months ended August 12, 1998 September 30, 1997 ------------------------- ------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) ..................................... $ 1,160,086 $ (2,474,430) Adjustments to reconcile net income (loss) to net cash provided (used) by operating activities, net of effects of acquisition: (Gain) loss from discontinued operations ............. (556,473) 1,495,820 Reorganization items ................................. 200,609 -- Amortization of note discount ........................ -- -- Extraordinary gain on debt discharge ................. (1,472,215) -- Depreciation and amortization ........................ 80,730 141,967 Non cash imputed compensation expense ................ -- 82,724 Preferred shares issued to settle payables ........... -- -- Changes in assets and liabilities: Decrease (increase) in accounts receivable .......... 9,935 305 Decrease (increase) in other receivables ............ -- (27,851) Decrease (increase) in inventory .................... 112,005 163,347 Decrease (increase) in prepaid expenses and other assets ...................................... 41,254 (307,639) Decrease (increase) in other assets ................. (165,403) -- Decrease (increase) in deferred income taxes ........ -- 398,196 Increase (decrease) in accounts payable ............. (27,667) 628,865 Increase (decrease) in sales and other taxes pay- able .............................................. -- (106,480) Increase (decrease) in other current liabilities .... -- 246,274 ------------- ------------ Net cash provided (used) by continuing operations ....................................... (617,139) 241,098 Cash used for reorganization items ................... (200,609) -- Net cash provided by discontinued operations ......... (376,610) (1,495,820) ------------- ------------ NET CASH PROVIDED (USED) BY CONTINUING OPERATIONS ........................... (1,194,358) (1,254,722) ------------- ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Cash used for acquisition, net of cash acquired ....... -- -- Purchase of property and equipment .................... -- (15,225) ------------- ------------ NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES ............................ -- (15,225) ------------- ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Dividends paid ........................................ -- (27,000) Proceeds from notes payable ........................... 1,321,235 932,131 Repayments of bank debt ............................... (1,053,374) (434,994) ------------- ------------ NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES ............................ 267,861 470,137 ------------- ------------ NET INCREASE (DECREASE) IN CASH ........................ (926,497) (799,810) CASH AT BEGINNING OF PERIOD ............................ 1,070,503 818,518 ------------- ------------ CASH AT END OF PERIOD .................................. $ 144,006 $ 18,708 ============= ============
See notes to consolidated financial statements. F-22 ROLLING PIN KITCHEN EMPORIUM, INC. NOTES TO FINANCIAL STATEMENTS SEPTEMBER 30, 1998 (UNAUDITED) The accompanying financial statements are unaudited, but in the opinion of management include all adjustments, consisting of normal recurring adjustments necessary for a fair presentation of financial position and results of operations and cash flows. The results of operations for any interim period are not necessarily indicative of results to be achieved for a full fiscal year. 1. Preferred Stock: During the period August 12, 1998 through September 30, 1998, the Company issued 320 shares of preferred stock in exchange for certain liabilities aggregating $320,000. The preferred stock pays no dividends and is redeemable at the Company's option under certain conditions. The preferred stock is convertible into common stock at 80% of the market value of the common stock, but only upon the Company completing a public offering. The Company has recorded a discount totaling $80,000 in connection with this beneficial conversion feature. This discount will be charged as a dividend at the time that the preferred stock first becomes convertible. The holders of the Convertible Series A Preferred Stock have the right to receive dividends of 6% per annum, payable in stock or cash at the Company's discretion at the time of conversion. The holders have the right to convert each share of Preferred Stock into Shares of Common Stock (based on $1,000 per share of Preferred Stock) equal to the lesser of (a) 80% of the five day average closing bid price for the Common Stock for the five trading days immediately preceding the shares are converted, or (b) 150% of the five day average closing bid price, as reported by Bloomberg, LP, for the Company's Common Stock for the five trading day period following the Company's completion of a secondary offering. The holders of the Convertible Series A Preferred Stock have demand registration rights. The Corporation reserves the right, at its sole option, to call a mandatory redemption of any percentage of the balance on the Shares during the one hundred eighty (180) day period following August 14, 1998. In the event the Corporation exercises such right of redemption up to and including the one hundred twentieth (120th) day following August 14, 1998 it shall pay the stockholder, in U.S. currency, One Hundred Twenty-Five Percent (125%) of the face amount of the Shares being redeemed. In the event the Corporation exercises such right of redemption between the one hundred twenty-first (121st) day and the one hundred eightieth (180th) day following August 14, 1998 it shall pay the stockholder, in U.S. currency, One Hundred Thirty Percent (130%) of the face amount of the Shares being redeemed. F-23 INDEPENDENT AUDITORS' REPORT To the Board of Directors AROPI, Incorporated We have audited the balance sheets of AROPI, Incorporated (an S corporation) as of June 30, 1998 and 1997, and the related statements of income, stockholders equity and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of AROPI, Incorporated as of June 30, 1998 and 1997, and the results of its operations and its cash flows for the years then ended, in conformity with generally accepted accounting principles. /s/ Smith & Radigan - ------------------ Atlanta, Georgia August 24, 1998 F-24 AROPI, INCORPORATED BALANCE SHEETS 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-25 LIABILITIES AND STOCKHOLDERS EQUITY
June 30 ------------------------------- 1998 1997 -------------- -------------- CURRENT LIABILITIES Line of credit ...................................... $ 50,000 $ 50,000 Accounts payable .................................... 430,804 211,282 Accrued expenses .................................... 120,905 93,395 Current portion of long-term debt ................... 176,313 165,632 ---------- ---------- TOTAL CURRENT LIABILITIES ......................... 778,022 520,309 LONG-TERM DEBT Notes payable - bank ................................ 283,903 360,000 Notes payable - others .............................. 50,000 50,000 Notes payable - former stockholder .................. 512,912 568,518 ---------- ---------- 846,815 978,518 Less current maturities ............................. 176,313 165,632 ---------- ---------- 670,502 812,886 STOCKHOLDERS' EQUITY: Common stock - no par value ......................... 485,502 485,502 Authorized - 10,000 shares Issued and outstanding - 372 shares Preferred stock, non-voting - no par value: ......... 0 0 Authorized - 10,000 shares Issued and outstanding - -0- shares Additional paid-in capital .......................... 78,600 78,600 Retained earnings ................................... 578,970 638,689 ---------- ---------- 1,143,072 1,202,791 Less: Treasury stock ................................ (500,000) (500,000) ---------- ---------- 643,072 702,791 ---------- ---------- $2,091,596 $2,035,986 ========== ==========
See notes to financial statements. F-26 AROPI, INCORPORATED STATEMENTS OF INCOME
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-27 AROPI, INCORPORATED STATEMENTS OF STOCKHOLDER'S EQUITY
Common Paid-In Retained Treasury Stock Capital Earnings Stock Total ----------- --------- ------------ -------------- ----------- Stockholder's equity at June 30, 1996 ......... $485,502 $78,600 $ 598,347 $ (500,000) $ 662,449 Net income for the year ended June 30, 1997 ................................ -0- -0- 40,342 -0- 40,342 -------- ------- --------- ---------- --------- Stockholder's equity at June 30, 1997 ......... 485,502 78,600 638,689 (500,000) 702,791 Distributions ................................. -0- -0- (45,000) -0- (45,000) Net loss for the year ended June 30, 1998 ................................ -0- -0- (14,719) -0- (14,719) -------- ------- --------- ---------- --------- Stockholder's equity at June 30, 1998 ......... $485,502 $78,600 $ 578,970 $ (500,000) $ 643,072 ======== ======= ========= ========== =========
See notes to financial statements. F-28 AROPI, INCORPORATED STATEMENTS OF CASH FLOWS
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-29 AROPI, INCORPORATED NOTES TO FINANCIAL STATEMENTS June 30, 1998 Note A -- Organization and Summary of Significant Accounting Policies Organization AROPI, Incorporated ("the Company") was incorporated in Iowa in July, 1981. The Company operates thirteen retail stores in the eastern United States under the trade name of Rolling Pin Kitchen Emporium. These stores sell high quality kitchen utensils. There were also twenty-one franchised stores at June 30, 1998. Income Taxes Effective July 1, 1994, the Company elected, with the unanimous consent of its stockholders, to be taxed under the provisions of Subchapter S of the Internal Revenue Code. Under those provisions, the Company is not subject to federal and certain state corporate income taxes. Instead, the stockholder includes the Company's taxable income in his individual income tax return. Based on its financial position at July 1, 1994, the Company does not anticipate any significant liability for built-in-gains taxes. Income tax expense is recognized in the accompanying financial statements for taxes paid to states in which the Company conducts business that do not recognize S corporation status. Revenue Recognition and Deferred Franchise Fees Revenue from sales of individual franchises is recognized when substantially all significant services to be provided by the Company have been performed. Generally these services include assistance in site selection, financing, advertising, training of personnel and provision of certain inventory and equipment to provide a turnkey operation. Fees received in advance of these services are recorded as deferred franchise fees. In addition to the initial fees for the above services, the Company receives continuing franchise fees based on a percentage of the franchise's gross revenues. Inventories Inventories are stated at the lower of cost or market using the first-in, first-out (FIFO) method. Property and Equipment Property and equipment are stated at cost. Expenditures for new equipment and replacements or betterments are capitalized while expenditures for normal maintenance and repairs are charged to expense as incurred. When assets are retired or otherwise disposed of, the related cost and accumulated depreciation are removed from the accounts, and any gain or loss is credited or charged to income. Depreciation for leasehold improvements is computed using the straight-line method over a period of ten years. Depreciation for fixtures and equipment is computed using the straight-line method and accelerated methods over the useful lives of the assets which range from three to seven years. Depreciation expense was $155,354 and $206,039 for the years ended June 30, 1998 and 1997, respectively. Intangible Assets The Company is amortizing a non-competition agreement obtained from a former stockholder (Note B) over the ten-year term of the agreement using the straight-line method. Amortization expense was $9,500 for each of the years ended June 30, 1998 and 1997. The Company is amortizing loan acquisition costs over a seven-year term. Amortization expense was $2,682 for the year ended June 30, 1998 and $224 for the year ended June 30, 1997. F-30 AROPI, INCORPORATED NOTES TO FINANCIAL STATEMENTS -- (Continued) June 30, 1998 Note A -- Organization and Summary of Significant Accounting Policies -- (Continued) Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Note B -- Line of Credit and Long-Term Debt The Company has obtained a credit commitment from a bank in the amount of $250,000 to be used for working capital. At June 30, 1998, $50,000 had been drawn against the line of credit. The line of credit is secured by accounts receivable, fixed assets and inventory and guaranteed by the stockholder. Interest accrues on the working capital line at the prime rate plus one percent. The prime rate was eight and one-half percent at June 30, 1998. The line of credit is cross-collateralized with a note payable to the Small Business Administration, as described below. A summary of long-term debt is as follows:
June 30, ------------------------- 1998 1997 ----------- ----------- Notes Payable - Banks Note payable to the Small Business Administration through a bank as agent. The note is secured by accounts receivable and inventory and guaranteed by the stockholder. Principal and interest pay- ments of $7,430, including interest at 8.75%, are due monthly through May 2002. The note is cross-collateralized with the line of credit. ..................................................... $283,903 $360,000 -------- -------- Notes Payable - Others Note payable to an individual bearing interest at 8% and payable in 1998. ....................................................... 50,000 50,000 -------- -------- Notes Payable - Former Stockholders Note payable to a former stockholder, bearing interest at 9%, pay- able in monthly principal and interest installments of $6,334 through December 31, 2004. ..................................... 372,998 413,435 69,045 76,530 Noncompetition agreement obligation to a former stockholder, evi- denced by a note payable, bearing interest at 9%, payable in monthly principal and interest installments of $1,203 through December 31, 2004. ............................................. 70,869 78,553 -------- -------- Note payable to a former stockholder, bearing interest at 9%, pay- able in monthly principal and interest installments of $1,172 through December 31, 2004. ..................................... 512,912 568,518 -------- -------- 846,815 978,518 Less current portion ................................................ 176,313 165,632 -------- -------- $670,502 $812,886 ======== ========
F-31 AROPI, INCORPORATED NOTES TO FINANCIAL STATEMENTS -- (Continued) June 30, 1998 Note B -- Line of Credit and Long-Term Debt -- (Continued) Effective December 31, 1994, the Company repurchased one-hundred and seventy-four shares of its common stock, representing all holdings of the Company's stock by that individual, at a cost of $500,000. In connection therewith, the company executed a $500,000 note payable to the former stockholder and secured by the repurchased shares. Pursuant to the repurchase agreement, the repurchased shares will be held in escrow and will be released to the Company on a pro rata basis through December 2004 as payments are made on the note payable. Concurrent with the stock repurchase, the Company obtained the former stockholder's agreement not to compete with the Company for a period of ten years ending on December 31, 2004. In consideration for the former stockholder's noncompetition agreement, the Company executed a $95,000 note payable to the former stockholder. Also, concurrent with the stock repurchase, certain existing obligations payable to the former stockholder on or before June 30, 1998 were recast into a nine percent note payable in monthly installments through 2004. These obligations are also secured by the repurchased and escrowed shares. The Company incurred interest expense of $87,388 and $111,315 for the years ended June 30, 1998 and 1997, respectively, of which $48,908 and $49,661, respectively, was paid to the former stockholder. Future maturities of long-term debt are as follows: Year Ending Former June 30, Stockholder Others Total - -------------- ------------- ----------- ----------- 1999 $ 60,823 $115,490 $176,313 2000 66,526 71,456 137,982 2001 72,768 77,965 150,733 2002 79,595 68,992 148,587 2003 87,060 -0- 87,060 Thereafter 146,140 -0- 146,140 -------- -------- -------- $512,912 $333,903 $846,815 ======== ======== ======== Note C -- Commitments The Company has entered into lease agreements for retail mall space for all of its company owned stores and for three of its franchised stores. The leases for the franchised stores have been assigned or subleased to the franchisees. The Company also leases space for its main office from the stockholder of the Company on a month-to-month basis with the monthly rental varying based on the prime rate. All leases for retail spaces provide for annual base rent plus additional charges for selected services and percentage rent based upon annual sales. The rent expense for office space and Company owned stores was $1,064,075 for the year ended June 30, 1998 and $1,108,633 for the year ended June 30, 1997. Rent paid to the stockholder was $43,650 for the year ended June 30, 1998 and $36,500 for the year ended June 30, 1997. The Company's future lease obligations for base rent for its company owned stores is as follows: Year Ending June 30, Stores - ---------------------- ------------- 1999 $ 644,261 2000 612,129 2001 605,033 2002 567,220 2003 393,691 Thereafter 265,787 ---------- $3,088,121 ========== F-32 AROPI, INCORPORATED NOTES TO FINANCIAL STATEMENTS -- (Continued) June 30, 1998 Note D -- Employee Benefit Plans The Company sponsors a 401(k) plan which covers all eligible employees who work one thousand hours or more during the year. Under the plan, each participant has the right to defer up to fifteen percent of his or her compensation, not to exceed certain annual limits set by the Internal Revenue Service, by making a voluntary contribution to the plan. The Company's minimum required matching contribution is one-half of the first six percent of compensation deferred by the employee. Additional Company contributions are at the discretion of management. The Company made matching contributions of $16,687 and $19,894 and incurred additional plan expenses of $2,636 and $2,400 for the years ended June 30, 1998 and 1997, respectively. Note E -- Subsequent Events Subsequent to year-end, the stockholder of the Company sold all outstanding shares of stock to a public company. Concurrent with the sale of stock, all outstanding notes payable were repaid. F-33 ROLLING PIN KITCHEN EMPORIUM, INC. UNAUDITED PRO-FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS The following unaudited pro-forma condensed consolidated statements of operations present the pro-forma operating results of Rolling Pin Kitchen Emporium, Inc. (the "Company") and Aropi, Inc. "(Aropi") as if the acquisition of Aropi, which occurred on August 20, 1998 and is accounted for as a purchase business acquisition, had occurred on January 1, 1997. Additionally, the pro forma statements of operations include the operating results of the Company's predecessor, the Gaylord Companies, Inc. for the year ended December 31, 1997 and for the period from January 1, 1998 through to the date of its emergence from bankruptcy on August 12, 1998. Furthermore, the pro forma financial statements include adjustments to reflect the effects of fresh start accounting, which the Company adopted upon its emergence from bankruptcy, as if such accounting had been adopted on January 1, 1997. The financial statements of Aropi, which has a June 30 fiscal year end, have been recast for purposes of these pro formas to place them on common basis with those of the Company. The unaudited pro-forma condensed consolidated statements of operations do not necessarily represent actual results that would have been achieved had the companies been together from January 1, 1997 and fresh start accounting been adopted as of that date, nor may they be indicative of future operations. These unaudited pro-forma condensed consolidated financial statements should be read in conjunction with the historical financial statements and notes thereto of the respective companies. F-34 ROLLING PIN KITCHEN EMPORIUM, INC. UNAUDITED PRO-FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS NINE MONTHS ENDED SEPTEMBER 30, 1998
Rolling Pin The Gaylord Kitchen Emporium, Inc. Companies, Inc. (August 12, 1998 (January 1, 1998 to to September 30, 1998) August 12, 1998) ------------------------ ------------------ NET SALES .................................. $ 728,767 $ 1,454,274 COST OF GOODS SOLD ......................... 436,628 1,191,423 ------------ -------------- GROSS PROFIT ............................... 292,139 262,851 ------------ -------------- OPERATING EXPENSES: Selling, general and administrative ....... 1,076,415 733,272 Depreciation and amortization ............. 47,227 47,382 1,123,642 780,654 ------------ -------------- OPERATING INCOME (LOSS) .................... (831,503) (517,803) ------------ -------------- OTHER INCOME (EXPENSE): Interest expense, net ..................... (184,842) (150,190) Amortization of debt issue costs and discounts ................................ (220,000) -- Franchise fees ............................ 20,969 -- Franchise expenses ........................ -- -- ------------ -------------- (383,873) (150,190) ------------ -------------- LOSS FROM CONTINUING OPERATIONS ................................ (1,215,376) (667,993) REORGANIZATION -- PROFESSIONAL FEES ...................................... -- (200,609) ------------ -------------- LOSS BEFORE DISCONTINUED OPERATIONS ................................ $ (1,215,376) $ (868,602) ============ ============== NET LOSS PER SHARE ......................... $ (0.72) ============ WEIGHTED AVERAGE SHARES .................... 1,676,985 ============
Aropi, Inc. (January 1, 1998 Pro-Forma Adjustments to -------------------------- August 20, 1998) Dr. Cr. Total -------------------- ------------- ----------- --------------- NET SALES .................................. $ 3,250,304 $ $ $ 5,433,345 COST OF GOODS SOLD ......................... 1,497,606 3,125,657 -------------- ------------ GROSS PROFIT ............................... 1,752,698 2,307,688 -------------- ------------ OPERATING EXPENSES: Selling, general and administrative ....... 1,819,357 3,629,044 Depreciation and amortization ............. 66,956(1) 38,000 (2) 68,000 267,565 --------------- ------------ 1,886,313 3,896,609 -------------- ------------ OPERATING INCOME (LOSS) .................... (133,615) (1,588,921) -------------- ------------ OTHER INCOME (EXPENSE): Interest expense, net ..................... (41,133)(3) 195,000 (571,165) Amortization of debt issue costs and discounts ................................ -- (4) 330,000 (560,000) Franchise fees ............................ 203,979 224,948 Franchise expenses ........................ (610,644) (610,644) -------------- ------------ (447,798) (1,516,861) -------------- ------------ LOSS FROM CONTINUING OPERATIONS ................................ (581,413) (3,105,782) REORGANIZATION -- PROFESSIONAL FEES ...................................... -- (5) 200,609 -- -------------- ------------ LOSS BEFORE DISCONTINUED OPERATIONS ................................ $ (581,413) $ (3,105,782) ============== ============ NET LOSS PER SHARE ......................... $ (1.85) ============ WEIGHTED AVERAGE SHARES .................... 1,676,985 ============
See notes to pro-forma financial statements. F-35 ROLLING PIN KITCHEN EMPORIUM, INC. UNAUDITED PRO-FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS YEAR ENDED DECEMBER 31, 1997
The Gaylord Companies, Inc. Aropi, Inc. (historical) (historical) ----------------- ----------------- NET SALES .......................................... $ 3,724,157 $ 6,397,922 COST OF GOODS SOLD ................................. 3,508,874 3,231,302 ------------- ----------- GROSS PROFIT ....................................... 215,283 3,166,620 ------------- ----------- OPERATING EXPENSES: Selling, general and administrative ............... 838,081 3,153,074 Non-cash imputed stock compensation ............... 469,255 -- Depreciation and amortization ..................... 107,640 (1) --(2) ------------ 1,414,976 3,153,074 ------------- ------------ OPERATING INCOME (LOSS) ............................ (1,199,693) 13,546 ------------- ------------ OTHER INCOME (EXPENSE): Interest expense, net ............................. (79,710) --(3) Amortization of debt issue costs and discounts .... (74,000) --(4) Franchise fees .................................... -- 502,423 Franchise expenses ................................ -- (542,787) Other - net ....................................... (37,977) 45,534 ------------- ------------ (191,687) 5,170 ------------- ------------ INCOME (LOSS) BEFORE INCOME TAXES .................. (1,391,380) 18,716 PROVISION FOR INCOME TAXES ........................ (400,649) -- ------------- ------------ INCOME (LOSS) FROM CONTINUING OPERATIONS ....................................... (1,792,029) 18,716 REORGANIZATION - PROFESSIONAL FEES (234,625) -- ------------- ------------ INCOME (LOSS) BEFORE DISCONTINUED OPERATIONS ....................................... (2,026,654) 18,716 PREFERRED STOCK DIVIDENDS ......................... (23,789) -- ------------- ------------ INCOME (LOSS) FROM CONTINUING OPERATIONS TO TO COMMON SHARE- HOLDERS .................................. $ (2,050,443) $ 18,716 ============= ============ NET LOSS PER SHARE ................................ WEIGHTED AVERAGE SHARES ...........................
Pro-Forma Adjustments -------------------------- Dr. Cr. Total ------------- ----------- ----------------- NET SALES .......................................... $ $ $ 10,122,079 COST OF GOODS SOLD ................................. 6,740,176 ------------- GROSS PROFIT ....................................... 3,381,903 ------------- OPERATING EXPENSES: Selling, general and administrative ............... 3,991,155 Non-cash imputed stock compensation ............... 469,255 Depreciation and amortization ..................... 50,000 100,000 257,640 ------------- 4,718,050 ------------- OPERATING INCOME (LOSS) ............................ (1,336,147) ------------- OTHER INCOME (EXPENSE): Interest expense, net ............................. 312,000 (391,710) Amortization of debt issue costs and discounts .... 710,000 (784,000) Franchise fees .................................... 502,423 Franchise expenses ................................ (542,787) Other - net ....................................... 7,557 ------------- (1,208,517) ------------- INCOME (LOSS) BEFORE INCOME TAXES .................. (2,544,664) PROVISION FOR INCOME TAXES ........................ (400,649) ------------- INCOME (LOSS) FROM CONTINUING OPERATIONS ....................................... -- (2,945,313) REORGANIZATION - PROFESSIONAL FEES (5) 234,625 -- ------------- INCOME (LOSS) BEFORE DISCONTINUED OPERATIONS ....................................... (2,945,313) PREFERRED STOCK DIVIDENDS ......................... (23,789) ------------- INCOME (LOSS) FROM CONTINUING OPERATIONS TO TO COMMON SHARE- HOLDERS .................................. $ (2,969,102) ============= NET LOSS PER SHARE ................................ $ (1.77) WEIGHTED AVERAGE SHARES ........................... ============= WEIGHTED AVERAGE SHARES ........................... 1,676,985 =============
See notes to pro-forma financial statements. F-36 ROLLING PIN KITCHEN EMPORIUM, INC. NOTES TO UNAUDITED PRO-FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS On August 21, 1998, the Company acquired Aropi, Inc., an Atlanta, Georgia based chain retailer of kitchen products, in a purchase business acquisition. The purchase price was $2,651,725, of which $1,290,317 went to the seller, composed of $790,317 in cash and two convertible promissory notes of $250,000 each. The remaining $1,361,408 was used to pay off certain indebtedness of the seller. Acquisition costs were approximately $75,000. The fair value of assets acquired was approximately $2,400,000 and the fair value of liabilities assumed was approximately $679,000. Goodwill recorded on the acquisition was $1,004,877, and is amortized over ten years. The acquisition was financed with a second financing from Liberty-Bidco in the amount of $700,000, under an amendment to the original $1,300,000 note, and the balance under a new $2,000,000 loan facility with Greenfield Financial Corp., $500,000 of which is due on December 31, 1998 and $1,500,000 due on January 29, 1999. The Liberty-Bidco debt matures on January 1, 1999. All the above debt bears interest and three percentage points over prime. The following pro-forma adjustments are included in the accompanying unaudited pro-forma condensed consolidated statements of operations for the year ended December 31, 1997 and the nine months ended September 30, 1998: (1) To record amortization of the reorganization value in excess of amounts allocable to identifiable assets over a 3 year term for the respective periods. (2) To record amortization of the goodwill resulting from the Aropi acquisition over a 10 year term for the respective periods. (3) To record interest expense on the approximately $2,600,000 of additional debt arising from the acquisition for the respective periods. (4) To amortize the $550,000 debt discount and $160,000 in financing fees recorded on the initial Liberty-Bidco financing. (5) To eliminate reorganization related expenses. F-37 [Photographs of various store locations] - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- The Company has not authorized any dealer, salesperson or any other person to give any information or to represent anything not contained in this Prospectus. You must not rely on any unauthorized information. This Prospectus does not offer to sell or buy any shares in any jurisdiction where it is unlawful. The information in this Prospectus is current as of the date hereof. ----------------------------------- TABLE OF CONTENTS PROSPECTUS Page --------- Summary .................................. 3 Risk Factors ............................. 7 The Company .............................. 13 Use of Proceeds .......................... 14 Dividend Policy .......................... 14 Capitalization ........................... 15 Dilution ................................. 16 Price Range of Common Stock .............. 17 Management's Discussion and Analysis of Financial Condition and Results of Operations ............................ 18 Business ................................. 26 Management ............................... 31 Certain Relationships and Related Party Transactions .......................... 36 Principal Stockholders ................... 38 Description of Securities ................ 39 Shares Eligible for Future Sale .......... 42 Underwriting ............................. 43 Legal Matters ............................ 44 Experts .................................. 44 Additional Information ................... 44 Index to Financial Statements ............ F-1 ----------------------------------- Until ------------ , 1998, (25 days after the date of this Prospectus) all dealers that buy, sell or trade these securities, whether or not participating in this Offering, may be required to deliver a Prospectus. This is in addition to the dealers' obligation to deliver a Prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 1,500,000 Shares Rolling Pin Kitchen Emporium, Inc. [GRAPHIC OMITTED] Common Stock ---------------------------------------- PROSPECTUS ---------------------------------------- Nutmeg Securities, Ltd. 495 Post Road East Westport, CT 06880 Telephone: 203-226-1857 Fax: 203-226-5343 ----------------- , 1998 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PART II -- INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS. The Company, to the fullest extent permitted by the provisions of Section 145 of the General Corporation Law of the State of Delaware, indemnifies, and advances expenses to, any and all persons who is or was a party or is threatened to be made a party to any threatened, pending or completed action, suit, proceeding or claim, whether civil, criminal, administrative or investigative, by reason of the fact that such person is or was or has agreed to be a director or officer of the Company or while a director or officer is or was serving at the request of the Company as a director, officer, partner, trustee, employee or agent of any corporation, partnership, joint venture, trust or other enterprise, including service with respect to employee benefit plans, from and against any and all of the expenses, liabilities, or other matters referred to in or covered by said section (including without limitation attorneys fees and expenses). The indemnification provided by the Company is not exclusive of any other rights to which those indemnified may be entitled under any bylaw, agreement, vote of stockholders or disinterested directors or otherwise, both as to action in their official capacity and as to action in another capacity while holding such office, and shall continue as to a person who has ceased to be a director, officer, employee, or agent and shall inure to the benefit of the heirs, executors, and administrators of such a person. Any person seeking indemnification by the Company is deemed to have met the standard of conduct required for such indemnification unless the contrary shall be established by a court of competent jurisdiction. If the Delaware General Corporation Law is amended to authorize action further eliminating or limiting the personal liability of directors, then the liability of our directors will be eliminated or limited to the fullest extent permitted by such statutes, as so amended. Any amendment, repeal or modification of such provision shall be prospective only and shall not adversely affect any right or protection of any of our directors existing at the time of such amendment, repeal or modification. Subsection (a) of Section 145 of the General Corporation Law of the State of Delaware (the "DGCL") empowers a corporation to indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the corporation) by reason of the fact that he is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit or proceeding if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. Subsection (b) of Section 145 empowers a corporation to indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, or suit by or in the right of the corporation to procure a judgment in its favor by reason of the fact that such person acted in any of the capacities set forth above, against expenses (including attorneys' fees) actually and reasonably incurred by him in connection with the defense or settlement of such action or suit if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation, except that no indemnification may be made in respect of any claim, issue or matter as to which such person shall have been made to be liable to the corporation unless and only to the extent that the Court of Chancery or the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which the Court of Chancery or such other court shall deem proper. Section 145 further provides that to the extent a director or officer of a corporation has been successful on the merits or otherwise in the defense of any action, suit or proceeding referred to in subsections (a) and (b) of Section 145 in the defense of any claim, issue or matter therein, he shall be indemnified against expenses (including attorneys' fees) actually and reasonably incurred by him in connection therewith; that indemnification provided for by Section 145 shall not be deemed exclusive of any other rights to which the indemnified party may be entitled; that indemnification provided for by Section 145 shall, unless otherwise provided when authorized or ratified, continue as to a person who has ceased to be a director, officer, employee or agent and shall II-1 inure to the benefit of such person's heirs, executors and administrators; and empowers the corporation to purchase and maintain insurance on behalf of a director or officer of the corporation against any liability asserted against him and incurred by him in any such capacity, or arising out of his status as such whether or not the corporation would have the power to indemnify him against such liabilities under Section 145. Section 102(b)(7) of the DGCL provides that a certificate of incorporation may contain a provision eliminating or limiting the personal liability of a director to the corporation or its stockholders for monetary damages for breach of fiduciary duty as a director provided that such provision shall not eliminate or limit the liability of a director: (i) for any breach of the director's duty of loyalty to the corporation or its stockholders; (ii) for acts or omissions not in good faith or which involve international misconduct or a knowing violation of law; (iii) under Section 174 of the DGCL; or (iv) for any transaction from which the director derived an improper personal benefit. ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. The following table sets forth the expenses in connection with this Registration Statement. All of such expenses are estimates, other than the filing fees payable to the Securities and Exchange Commission. 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, on August 12, 1998 the Company issued: (i) 1,522,041 shares of Common Stock, of which 1,383,691 shares were issued to the shareholders of HRAC and 138,350 were issued to other creditors with unsecured claims against the Predecessor Entity; (ii) 85,777 shares of Class B Common Stock to the holders of the Predecessor Entity's common stock; (iii) 69,174 shares of Class B Common Stock to the holders of the Predecessor Entity's preferred stock; (iv) 52,573 New Warrants; (v) 92,595 Bidco Warrants; and (vi) 29,261 Individual Warrants. These shares and warrants were issued pursuant to Section 1145(a) of the Bankruptcy Code which exempts the offer and sale of securities under a plan of reorganization from registration under the Securities Act and state laws if: (i) the securities are offered and sold under a plan of reorganization; (ii) the securities offered are these of the debtor or an affiliate of the debtor participating in a joint plan or of a successor to the debtor under the plan; and (iii) the recipients of the securities must hold a prepetition or administrative expense claim against the debtor or an interest in the debtor, or principally in such exchange and partly for cash or property. The Company believes that it satisfied all of the requirements of Section 1145(a) and as a result the securities and warrants issued pursuant to the Plan of Reorganization were exempt from registration under the Securities Act and state securities laws. (ii) Private Placement. On August 14, 1998, certain debt instruments issued to Tom Pittarese and Christine Pittarese Guardians FBO Jennifer Pittarese under DTD June 18, 1998, Mark Quinn, Mike Snow and the Delacroix Foundation, Ltd. in a private placement while the Predecessor Entity was in bankruptcy were converted into 320 shares of Convertible Series A Preferred Stock of the Company that are immediately convertible into shares of Common Stock. Each share of the Convertible Series A Preferred Stock may be converted into shares of the Company's Common Stock (based on $1,000 per share of Preferred Stock) equal to the lessor of (a) 80% of the five day average closing bid price for the Common Stock for the five trading days immediately preceding the date the shares are converted, or (b) 150% of the five day average closing bid price, as reported by Bloomberg, LP, for the Company's Common Stock for the five trading day period following the Company's completion of a secondary offering. The Company did not receive compensation pursuant to the conversion of the debt instruments into the shares of Convertible Series A Preferred Stock. The holders of the Convertible Series A Preferred Stock have piggyback registration rights. As a result, the Company will redeem the 275 shares of Convertible Series A Preferred Stock held by the Delacroix Foundation, Ltd. at the time of the Offering for a redemption premium of 25% over the $1,000 par value of such shares. The offer and sale of the securities were exempt from registration under the Securities Act in reliance on Section 4(2) thereof because the offers and sales were made to sophisticated investors who had access to information about the Company and were able to bear the risk of loss of their investment. II-2 (iii) Warrants. In August, 1998, the Company granted the following warrants; (i) Bidco received a warrant to purchase 92,595 shares of Common Stock, exercisable at $0.01 per share, in connection with the Loan Agreement; (ii) Bidco also received a warrant to purchase 40,602 shares of Common Stock, exercisable at 165% of the public offering price, in connection with the First Amendment; (iii) Greenfield received a warrant to purchase 40,602 shares of Common Stock, exercisable at 165% of the public offering price in connection with the Loan and Security Agreement; (iv) JRP Consulting Corp. ("JRP") received a warrant to purchase 23,737 shares of Common Stock and a second warrant to purchase 25,386 shares of Common Stock each exercisable at 165% of the public offering price; (v) DLM Asset Management and Spinnernet Financial Services, Ltd. received warrants to purchase an aggregate of 8,875 shares of Common Stock, exercisable at 165% of the public offering price; and (vi) Laux, Holmes & Company ("Laux") received a warrant to purchase 23,737 shares of Common Stock and a second warrant to purchase 25,386 shares of Common Stock each exercisable at 165% of the public offering price. These warrants were issued as part of the financing arrangements with Bidco and Greenfield and, as such, did not involve additional compensation to the Company. In November 1998, the Company granted Laux and JRP warrants to purchase an aggregate of 6,000 shares of Common Stock, exercisable at 165% of the public offering price, as consideration for the termination of the redemption provisions in the warrants that each of those entities received in August 1998. The Company did not receive any compensation for such warrants. The offer and sale of the securities were exempt from registration under the Securities Act in reliance on Section 4(2) thereof because the offers and sales were made to sophisticated investors who had access to information about the Company and were able to bear the risk of loss of their investment. ITEM 27. EXHIBITS.
EXHIBIT ** 1.1 Form of Underwriting Agreement. *** 2.1 Stock Purchase Agreement, dated as of August 20, 1998, among Home Retail Holdings, Inc., Glenn Kaas and Aropi, Incorporated. ** 2.2 Amended Plan of Reorganization of Gaylord Companies, Inc., The Cookstore, Inc., and The Cookstore Worthington, Inc., dated June 24, 1998. ** 2.3 Disclosure Statement to the Amended Plan of Reorganization. *** 3.1 Amended and Restated Certificate of Incorporation of the Company. *** 3.2 Amended and Restated Bylaws of the Company. * 4.1 Specimen of Stock Certificate. ** 4.2 Form of Underwriters' Warrant. ** 4.3 Bidco Warrant, dated August 12, 1998. *** 4.4 New Bidco Warrant, dated August 20, 1998. *** 4.5 Greenfield Warrant dated August 20, 1998. * 4.6 Form of Redeemable Warrant Agreement, dated November __, 1998, by and between Rolling Pin Kitchen Emporium, Inc. and Continental Stock Transfer & Title. *** 4.7 Form of Individual Warrants. ** 4.8 Warrant, dated August 20, 1998, issued to JRP Consulting Corp. for the purchase of 23,737 shares of Common Stock. ** 4.9 Warrant, dated August 20, 1998, issued to JRP Consulting Corp. for the purchase of 25,386 shares of Common Stock. ** 4.10 Warrant, dated August 20, 1998, issued to Laux, Holmes & Company for the purchase of 23,737 shares of Common Stock. ** 4.11 Warrant, dated August 20, 1998, issued to Laux, Holmes & Company for the purchase of 25,386 shares of Common Stock. * 4.12 Amendment to Common Stock Warrant, dated August 20, 1998. * 4.13 Form of Second Amendment to Common Stock Purchase Warrant, dated as of November 25, 1998, between Home Retail Holdings, Inc. and Liberty Bidco Investment Corporation. * 4.14 Form of Amendment to Common Stock Purchase Warrant, dated as of November 25, 1998, between Home Retail Holdings, Inc. and JRP Consulting Corp. * 4.15 Form of Amendment to Common Stock Purchase Warrant, dated as of November 25, 1998, between Home Retail Holdings, Inc. and JRP Consulting Corp. * 4.16 Form of Amendment to Common Stock Purchase Warrant, dated as of November 25, 1998, between Home Retail Holdings, Inc. and Laux, Holmes & Company. * 4.17 Form of Amendment to Common Stock Purchase Warrant, dated as of November 25, 1998, between Home Retail Holdings, Inc. and Laux, Holmes & Company.
II-3
EXHIBIT * 4.18 Form of Amendment to Common Stock Purchase Warrant, dated as of November 25, 1998, between Home Retail Holdings, Inc. and Liberty Bidco Investment Corporation. * 4.19 Form of Amendment to Common Stock Warrant, dated as of November 25, 1998, between Home Retail Holdings, Inc. and Greenfield Commercial Credit, L.L.C. * 4.20 Form of Warrant to be issued to JRP Consulting Corp. for the purchase of 3,000 shares of Common Stock. * 4.21 Form of Warrant to be issued to Laux, Holmes & Company for the purchase of 3,000 shares of Common Stock. 4.22 Form of Warrant to be issued to DLM Asset Management for the purchase of 4,375 shares of Common Stock. 4.23 Form of Warrant to be issued to Spinnernet Financial Services, Ltd. for the purchase of 4,500 shares of Common Stock. * 5.1 Opinion of Brown & Wood LLP, as to the legality of the securities being registered. *** 10.1 Form of 1998 Equity Incentive Plan. *** 10.2 Business Loan Agreement With Covenants, dated August 12, 1998, among Home Retail Holdings, Inc., The Cookstore Worthington, Inc. and Liberty Bidco Investment Corporation. *** 10.3 First Amendment to Loan Agreement, dated August 20, 1998, among Liberty Bidco Investment Corporation, Home Retail Holdings, Inc., The Cookstore, Inc., The Cookstore Worthington, Inc., and Aropi, Incorporated. *** 10.4 Loan and Security Agreement, dated August 20, 1998, among Greenfield Commercial Credit, L.L.C., Home Retail Holdings, Inc., The Cookstore, Inc., The Cookstore Worthington, Inc., and Aropi, Incorporated. *** 10.5 Employment Agreement, entered into as of August 20, 1998, between Home Retail Holdings, Inc. and Glenn Kaas. * 10.6 Second Amendment to Business Loan Agreement with Covenants, dated November 1, 1998, by and among Home Retail Holdings, Inc., The Cookstore, Inc., The Cookstore Worthington, Inc. and Liberty Bidco Investment Corporation. and Glenn Kaas. * 10.7 Promissory Note, dated September 30, 1998 by Rolling Pin Kitchen Emporium, Inc. to Gabledon, Ltd. in the amount of $300,000. * 10.8 Promissory Note, dated September 30, 1998 by Rolling Pin Kitchen Emporium, Inc. to Baraja, Inc. in the amount of $200,000. 10.9 First Amendment to Loan and Security Agreement, dated as of November 25, 1998, by and among Rolling Pin Kitchen Emporium, Inc., Guarantors listed on the signature page and Greenfield Commercial Credit, L.L.C. *** 21 List of Subsidiaries. 23.1 Consent of Feldman Sherb Ehrlich & Co., P.C., as certified public accountants. 23.2 Consent of Smith & Radigan, as certified public accountants. * 23.3 Consent of Counsel (filed under Exhibit 5.1). *** 24 Power of Attorney (included in signature page). 27.1 Financial Data Schedule (December 31, 1997). 27.2 Financial Data Schedule (September 30, 1998).
- ------------ * Previously filed on December 1, 1998. ** Previously filed on November 4, 1998. *** Previously filed on September 16, 1998. ITEM 28. UNDERTAKINGS. (a) The undersigned registrant hereby undertakes: (1) To file, during any period in which it offers or sells securities, a post-effective amendment to this registration statement to: (i) Include any prospectus required by Section 10(a)(3) of the Securities Act. (ii) Reflect in the prospectus any facts or events which, individually or together, represent a fundamental change in the information in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than a 20 percent change in the maximum aggregate offering price set forth in the "Calculation of Registration Fee" table in the effective registration statement. (iii) Include any additional or changed material information on the plan of distribution. (2) That, for determining liability under the Securities Act, treat each post-effective amendment as a new registration statement of the securities offered, and the offering of the securities at that time to be the initial bona fide offering. II-4 (3) To file a post-effective amendment to remove from registration any of the securities that remain unsold at the end of the offering. (b) Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the small business issuer pursuant to the foregoing provisions, or otherwise, the small business issuer has been advised that in the opinion of the Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the small business issuer of expenses incurred or paid by a director, officer or controlling person of the small business issuer in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the small business issuer will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. (c) The undersigned registrant also hereby undertakes that, for determining any liability under the Securities Act, the small business issuer will treat the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the small business issuer under Rule 424(b)(1), or (4), or 497(h) under the Securities Act as part of this registration statement as of the time the Commission declared it effective. II-5 SIGNATURES In accordance with the requirements of the Securities Act of 1933, as amended, the registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form SB-2 and authorized this amendment to the registration statement to be signed on its behalf by the undersigned, in the City of Atlanta, State of Georgia, on December 4, 1998. ROLLING PIN KITCHEN EMPORIUM, INC. By: /s/ JOHN D. CRITSER ------------------------------------- President and Chief Executive Officer In accordance with the requirements of the Securities Act of 1933, this amendment to the registration statement has been signed by the following persons in the capacities and on the dates stated.
Name Title Date - --------------------------------------------- ---------------------------------------- ------------------ /s/ JOHN D. CRITSER President, Chief Executive Officer and December 4, 1998 - ------------------------------- Director John D. Critser /s/ GERALD M. CZARNECKI Chairman of the Board and Director December 4, 1998 - ------------------------------- Gerald M. Czarnecki /s/ GREG E. DUKOFF Secretary, Interim Chief Financial December 4, 1998 - ------------------------------- Officer and Director Greg E. Dukoff (Principal Accounting Officer) /s/ DAVID E. DANOVITCH Director December 4, 1998 - ------------------------------- David E. Danovitch /s/ DANIEL T. GUILFOILE Director December 4, 1998 - ------------------------------- Daniel T. Guilfoile /s/ GEORGE P. LUCACI Director December 4, 1998 - ------------------------------- George P. Lucaci /s/ THOMAS L. TUTTLE Director December 4, 1998 - ------------------------------- Thomas L. Tuttle
II-6 EXHIBIT INDEX
Exhibit Number Description - ---------- ---------------------------------------------------------------------------------------------------- ** 1.1 Form of Underwriting Agreement. *** 2.1 Stock Purchase Agreement, dated as of August 20, 1998, among Home Retail Holdings, Inc., Glenn Kaas and Aropi, Incorporated. ** 2.2 Amended Plan of Reorganization of Gaylord Companies, Inc., The Cookstore, Inc., and The Cookstore Worthington, Inc., dated June 24, 1998. ** 2.3 Disclosure Statement to the Amended Plan of Reorganization. *** 3.1 Amended and Restated Certificate of Incorporation of the Company. *** 3.2 Amended and Restated Bylaws of the Company. * 4.1 Specimen of Stock Certificate. ** 4.2 Form of Underwriters' Warrant. ** 4.3 Bidco Warrant, dated August 12, 1998. *** 4.4 New Bidco Warrant, dated August 20, 1998. *** 4.5 Greenfield Warrant dated August 20, 1998. * 4.6 Form of Redeemable Warrant Agreement, dated November __, 1998, by and between Rolling Pin Kitchen Emporium, Inc. and Continental Stock Transfer & Title. *** 4.7 Form of Individual Warrants. ** 4.8 Warrant, dated August 20, 1998, issued to JRP Consulting Corp. for the purchase of 23,737 shares of Common Stock. ** 4.9 Warrant, dated August 20, 1998, issued to JRP Consulting Corp. for the purchase of 25,386 shares of Common Stock. ** 4.10 Warrant, dated August 20, 1998, issued to Laux, Holmes & Company for the purchase of 23,737 shares of Common Stock. ** 4.11 Warrant, dated August 20, 1998, issued to Laux, Holmes & Company for the purchase of 25,386 shares of Common Stock. * 4.12 Amendment to Common Stock Warrant, dated August 20, 1998. * 4.13 Form of Second Amendment to Common Stock Purchase Warrant, dated as of November 25, 1998, between Home Retail Holdings, Inc. and Liberty Bidco Investment Corporation. * 4.14 Form of Amendment to Common Stock Purchase Warrant, dated as of November 25, 1998, between Home Retail Holdings, Inc. and JRP Consulting Corp. * 4.15 Form of Amendment to Common Stock Purchase Warrant, dated as of November 25, 1998, between Home Retail Holdings, Inc. and JRP Consulting Corp. * 4.16 Form of Amendment to Common Stock Purchase Warrant, dated as of November 25, 1998, between Home Retail Holdings, Inc. and Laux, Holmes & Company. * 4.17 Form of Amendment to Common Stock Purchase Warrant, dated as of November 25, 1998, between Home Retail Holdings, Inc. and Laux, Holmes & Company. * 4.18 Form of Amendment to Common Stock Purchase Warrant, dated as of November 25, 1998, between Home Retail Holdings, Inc. and Liberty Bidco Investment Corporation. * 4.19 Form of Amendment to Common Stock Warrant, dated as of November 25, 1998, between Home Retail Holdings, Inc. and Greenfield Commercial Credit, L.L.C. * 4.20 Form of Warrant to be issued to JRP Consulting Corp. for the purchase of 3,000 shares of Common Stock. * 4.21 Form of Warrant to be issued to Laux, Holmes & Company for the purchase of 3,000 shares of Common Stock. 4.22 Form of Warrant to be issued to DLM Asset Management for the purchase of 4,375 shares of Common Stock. 4.23 Form of Warrant to be issued to Spinnernet Financial Services, Ltd. for the purchase of 4,500 shares of Common Stock. * 5.1 Opinion of Brown & Wood LLP, as to the legality of the securities being registered. *** 10.1 Form of 1998 Equity Incentive Plan. *** 10.2 Business Loan Agreement With Covenants, dated August 12, 1998, among Home Retail Holdings, Inc., The Cookstore Worthington, Inc. and Liberty Bidco Investment Corporation. *** 10.3 First Amendment to Loan Agreement, dated August 20, 1998, among Liberty Bidco Investment Corporation, Home Retail Holdings, Inc., The Cookstore, Inc., The Cookstore Worthington, Inc., and Aropi, Incorporated. *** 10.4 Loan and Security Agreement, dated August 20, 1998, among Greenfield Commercial Credit, L.L.C., Home Retail Holdings, Inc., The Cookstore, Inc., The Cookstore Worthington, Inc., and Aropi, Incorporated. *** 10.5 Employment Agreement, entered into as of August 20, 1998, between Home Retail Holdings, Inc. and Glenn Kaas. * 10.6 Second Amendment to Business Loan Agreement with Covenants, dated November 1, 1998, by and among Home Retail Holdings, Inc., The Cookstore, Inc., The Cookstore Worthington, Inc. and Liberty Bidco Investment Corporation. and Glenn Kaas. * 10.7 Promissory Note, dated September 30, 1998 by Rolling Pin Kitchen Emporium, Inc. to Gabledon, Ltd. in the amount of $300,000. * 10.8 Promissory Note, dated September 30, 1998 by Rolling Pin Kitchen Emporium, Inc. to Baraja, Inc. in the amount of $200,000. 10.9 First Amendment to Loan and Security Agreement, dated as of November 25, 1998, by and among Rolling Pin Kitchen Emporium, Inc., Guarantors listed on the signature page and Greenfield Commercial Credit, L.L.C. *** 21 List of Subsidiaries. 23.1 Consent of Feldman Sherb Ehrlich & Co., P.C., as certified public accountants. 23.2 Consent of Smith & Radigan, as certified public accountants. *23.3 Consent of Counsel (filed under Exhibit 5.1). *** 24 Power of Attorney (included in signature page). 27.1 Financial Data Schedule (December 31, 1997). 27.2 Financial Data Schedule (September 30, 1998).
- ------------ * Previously filed on December 1, 1998. ** Previously filed on November 4, 1998. *** Previously filed on September 16, 1998. EX-4.22 2 COMMON STOCK PURCHASE WARRANT Void after August 31, 2003 This Warrant and any shares acquired upon the exercise of this Warrant have not been registered under the Securities Act of 1933. This Warrant and such shares may not be sold or transferred in the absence of such registration or an exemption therefrom under said Act and no transfer of this Warrant or such shares shall be valid or effective unless and until such conditions shall have been complied with. ROLLING PIN KITCHEN EMPORIUM, INC. COMMON STOCK PURCHASE WARRANT ROLLING PIN KITCHEN EMPORIUM, INC. (the "Company"), having its principal office at 4264 Winters Chapel Road, Building B, Atlanta, Georgia 30360 hereby certifies that, for value received, DLM Asset Management ("DLM") or assigns, is entitled, subject to the terms set forth below, to purchase from the Company at any time on or from time to time after the effective date of the Company's initial public offering and before 5:00 P.M., New York City time, on August 31, 2003 (the "Expiration Date") 4,375 fully paid and non-assessable shares of Common Stock of the Company, at the price per share of the Purchase Price. The number and character of such shares of Common Stock and the Purchase Price as hereinafter defined are subject to adjustment as provided herein. This Warrant is one of the Common Stock Purchase Warrants (the "Warrants") originally issued as of the Original Issue Date (as defined below) and evidencing the right to purchase an aggregate of 4,375 shares of Common Stock of the Company, subject to adjustment as provided herein. As used herein the following terms, unless the context otherwise requires, have the following respective meanings: (a) The term "Company" includes any corporation which shall succeed to or assume the obligations of the Company hereunder. (b) The term "Common Stock" means the Class A Common Stock, $.01 par value, of the Company and its successors. (c) The "Original Issue Date" is August 12, 1998, the date as of which the Warrant was first issued. (d) The term "Other Securities" refers to any stock (other than Common Stock) and other securities of the Company or any other person (corporate or otherwise) which the holder of the Warrant at any time shall be entitled to receive, or shall have received, upon the exercise of the Warrant, in lieu of or in addition to Common Stock, or which at any time shall be issuable or shall have been issued in exchange for or in replacement of Common Stock or Other Securities pursuant to Section 6 or otherwise. 1 (e) The term "Purchase Price" shall be 165% of the initial price to the public pursuant to which the Company first sells $1 million or more of Common Stock (taking into account gross proceeds, not net proceeds), as set forth on the cover page of the prospectus contained in the registration statement pertaining to such offering, as such price may be adjusted pursuant to the terms hereof. (f) The terms "registered" and "registration" refer to a registration effected by filing a registration statement in compliance with the Securities Act, to permit the disposition of Common Stock (or Other Securities) issued or issuable upon the exercise of Warrants, and any post-effective amendments and supplements filed or required to be filed to permit any such disposition. (g) The term "Registrable Securities" shall mean the shares of Common Stock or Other Securities issuable upon exercise of the Warrants, excluding Common Stock or other Securities that (a) have been registered under the Securities Act pursuant to an effective registration statement filed thereunder and disposed of in accordance with such registration statement or (b) are eligible for sale under Rule 144(k) under the Securities Act, or have been sold pursuant to Rule 144 under the Securities Act. (h) The term "Registration Period" shall mean the period commencing concurrently with the closing of the Company's first public offering of $1 million or more of securities registered under the Securities Act that takes place after the Original Issue Date and ending on the earlier of the second anniversary thereof and the Expiration Date. (i) The term "Securities Act" means the Securities Act of 1933 as the same shall be in effect at the time. 1. Registration Rights. 1.1. Incidental Registration. During the Registration Period, each holder of Registrable Securities will have a right to have its Registrable Securities included in registration statements filed by the Company on general registration forms under the Securities Act, except as otherwise provided herein. The Company will notify each such holder in writing (the "Company Notice") promptly after making the decision to file a registration statement under the Securities Act with respect to the proposed sale of the Company's equity securities (except with respect to registration statements filed on Forms S-4 or S-8 or such others in similar form then in effect under the Securities Act), specifying in the Company Notice the form of registration statement, the number of shares of securities the Company proposes to register, the name of the managing underwriter or underwriters (if any) and the general terms and 2 conditions of the proposed registration and sale. Subject to Section 1.6 and the remainder of this Section 1.1, if requested by any holder of Registrable Securities in a writing (the "Investor Notice"), delivered to the Company not later than 30 days after the Company gives the Company Notice, to include in such registration statement Registrable Securities (the "Requested Shares"), the Company will, unless prohibited by the Underwriter, include the Requested Shares in the registration statement, and, if the proposed sale is to be underwritten, to cause the underwriters of securities to be sold by the Company in such registration statement to purchase such Requested Shares. In the event that any registration pursuant to this Section 1.1 shall be an underwritten offering of securities of the Company, any request by such holders pursuant to this Section 1.1 to register the Requested Shares, may, but need not, specify that such shares are to be included in the underwriting on the same terms and conditions as the securities, if any, otherwise being sold through underwriters under such registration. In the event of an underwritten offering of securities of the Company, such notice shall also specify as to whether such holder of Registrable Securities desires that any of such Requested Shares to be included in any such registration statement be subject to any over-allotment option granted the underwriters of such offering. No holder shall be required to have its Requested Shares be part of any underwritten offering and/or subject to any over-allotment option granted any underwriter by the Company. Notwithstanding the foregoing, if the managing underwriter or underwriters shall inform the Company of its opinion, at least 15 days prior to the date that the registration statement becomes effective, that part or all of the Requested Shares be excluded from the registration statement on the ground that the inclusion of such Requested Shares will adversely affect the orderly sales and distribution of the Common Stock being sold, the Company shall include all securities to be sold by holders, including the Company, which have the right to require that their securities be included in the registration on a pro rata basis. If the underwriters agree to purchase any of the Requested Shares beneficially owned by any holder who has agreed that such Requested Shares shall be sold pursuant to the underwritten offering or pursuant to the exercise of any over-allotment option as described above, such holders will enter into a reasonably customary underwriting agreement with the underwriters and will sell such Requested Shares to the underwriters unless, and except to the extent that, upon written notice to the Company and the managing underwriter or underwriters at least two days prior to the effective date of the registration statement, any such holder withdraws any portion of such Requested Shares. If the underwriters elect to purchase less than all the Requested Shares beneficially owned by holders who have agreed that such Requested Shares shall be sold pursuant to the underwritten offering or pursuant to the exercise of any over-allotment option, the underwriters shall purchase such Requested Shares on a pro rata basis among the Requested Shares that were included in the timely requests from holders of Registrable Securities under this subsection and the Requested Shares requested to be included in the registration statement by other stockholders holding registration rights and who have requested that such shares be sold pursuant to the underwritten offering or pursuant to the exercise of an over-allotment option. Notwithstanding the foregoing, the Company may withdraw any registration statement referred to in this Section 1 without any liability to the holders of Registrable Securities. 1.2. Market Standoff. Each holder of Registrable Securities agrees that if the managing underwriter or underwriters of the offering contemplated by Section 1.1 so request, such holder shall not effect any public sale or 3 distribution of any Registrable Securities being registered thereunder or of any securities convertible into or exchangeable or exercisable for such Registrable Securities being registered thereunder for a period equal to the lesser of (x) the period management of the Company has agreed to lockup and (y) 90 days after the effective date of the registration statement filed in connection with the public offering. 1.3. Obligations of the Company. When required under Section 1.1 effect the registration of any Registrable Securities, the Company shall, as expeditiously as is reasonably possible: (a) Prepare and file with the SEC a registration statement with respect to such Registrable Securities and such amendments and supplements to such registration statement and the prospectus used in connection therewith as may be necessary to exercise the Company's best efforts to cause such registration statement to become effective at the earliest practicable date and to remain effective for a period of 90 days or until the holders and any underwriter purchasing such Registrable Securities have sold or otherwise disposed of the Registrable Securities registered in such registration statement, whichever is earlier. (b) Furnish to each holder selling Registrable Securities such number of copies of conformed copies of such registration statement and of each such amendment and supplement thereto (with all exhibits) and such number of copies of the prospectus, including a preliminary prospectus, in conformity with the requirements of the Securities Act, and such other documents as such holder may reasonably request in order to facilitate the disposition of Registrable Securities to be sold by such holder pursuant to such registration statement. (c) Exercise the Company's best efforts to register and qualify the Registrable Securities covered by such registration statement under other securities laws or State Securities Laws of such states or jurisdictions where a self-executing exemption is not available and as any seller of such Registrable Securities shall reasonably request; provided, however, that the Company shall not be required in connection therewith or as a condition thereto to qualify to do business or to file a general consent to service of process in any such states or jurisdictions. (d) Cause all securities covered by such registration statement to be registered with or approved by such other federal or state governmental agencies or authorities as may be necessary in the opinion of counsel to the Company and counsel to the seller or sellers of securities to enable the seller or sellers thereof to consummate the disposition of such securities. (e) Notify each seller of securities covered by such registration statement at any time when a prospectus relating thereto is required to be delivered under the Securities Act, upon discovery that, or upon the happening of any event as a result of which, the prospectus included in such registration statement, as then in effect, includes an untrue statement of a material fact or omits to state any material fact required to be stated therein or necessary to make the statements therein not misleading, in the light of the 4 circumstances under which they were made, and at the request of any such seller promptly prepare and furnish to it a reasonable number of copies of a supplement to or an amendment of such prospectus as may be necessary so that, as thereafter delivered to the purchasers of such securities, such prospectus shall not include an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statement therein not misleading in the light of the circumstances under which they were made. (f) Comply with all applicable rules and regulations of the SEC, make timely filing of all reports pursuant to the Securities Exchange Act of 1934, as amended ("Exchange Act") at such time as the Company's securities are registered under the Exchange Act, and make available to its securities holders, as soon as reasonably practicable, an earnings statement covering the period of at least twelve months, but not more than eighteen months, beginning with the first full calendar month after the effective date of such registration statement, which earnings statement shall satisfy the provisions of Section 11(a) of the Securities Act and Rule 158 promulgated thereunder, and promptly furnish to each such seller of securities a copy of such earnings statement. (g) Use its best efforts to list all securities covered by such registration statement on any national securities exchange on which securities of the same class and, if applicable, series, covered by such registration statement are then listed or on the Nasdaq Stock Market ("Nasdaq") if the securities are reported on Nasdaq. 1.4. Information to be Furnished. It shall be a condition precedent to the obligation of the Company to take any action pursuant to this Section 1 that the holders of Registrable Securities promptly furnish to the Company such information regarding them, the securities of the Company held by them and the intended method of disposition of such securities as the Company shall reasonably request and as shall be required in connection with the Company's obligations under this Section 1. 1.5. Underwritten Offerings. (a) Incidental Underwritten Offerings. If the Company proposes to register any of its securities under the Securities Act as contemplated by Section 1.1 and such securities are to be distributed by or through one or more underwriters, the Company will, if requested by any holder of Registrable Securities, use its best efforts to arrange for such underwriters to include all the securities to be offered and sold by such requesting holder among the securities of the Company to be distributed by such underwriters. The holders of Registrable Securities to be distributed by such underwriters shall be parties to the underwriting agreement between the Company and such underwriters and may, at their option, require that any or all of the representations and warranties by, and the other agreements on the part of, the Company to and for the benefit of such underwriters shall also be made to and for the benefit of such holders of Registrable Securities and that any or all of the conditions precedent to the obligations of such underwriters under such underwriting agreement be conditions precedent to the obligations of such holders of Registrable Securities. Any such 5 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, 6 claim, damage, liability or action to the extent that it arises out of, or is based upon, an untrue statement or allegedly untrue statement or omission or alleged omission made in connection with such registration statement, preliminary prospectus, final prospectus, or amendments or supplements thereto, in reliance upon and in conformity with information furnished in writing expressly for use in connection with such registration by such holder, the Company will reimburse each such holder for any legal or other expenses reasonably incurred by each such holder in connection with investigating or defending any such loss, claim, damage, liability or action. (b) To the extent permitted by law, each holder selling Registrable Securities pursuant to this Section 1 will indemnify and hold harmless the Company, each of its directors, officers and employees, each person, if any, who controls the Company within the meaning of the Securities Act, and any underwriter for the Company (within the meaning of the Securities Act) against any losses, claims, damages or liabilities to which the Company or any such person or underwriter may become subject, under the Securities Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereto) arise out of, or are based upon, any untrue or allegedly untrue statement of any material fact contained in such registration statement, including any preliminary prospectus or final prospectus contained therein or any amendments or supplements thereto, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or allegedly necessary to make the statements therein not misleading, in each case to the extent that such untrue statement or allegedly untrue statement or omission or alleged omission was made in such registration statement, preliminary prospectus, or amendments or supplements thereto in reliance upon and in conformity with information furnished in writing by such holder expressly for use in connection with such registration; provided, however, that the indemnity agreement contained in this Section 1.8(b) shall not apply to amounts paid in settlement of any such loss, claim, damage, liability or action if such settlement is effected without the written consent of such holder, which shall not be unreasonably withheld; and each such holder will reimburse the Company or any such person or underwriter for any legal or other expenses reasonably incurred by the Company or any such person or underwriter in connection with investigating or defending any such loss, claim, damage, liability or action. (c) Promptly after receipt by an indemnified party under this Section 1.8 of notice of the commencement of any action, such indemnified party will, if a claim in respect thereof is to be made against any indemnifying party under this Section 1.8, notify the indemnifying party in writing of the commencement thereof and generally summarize such action. The indemnifying party shall have the right to participate in and to assume the defense thereof with counsel mutually satisfactory to the parties; provided that each indemnified party shall have the right to employ its own counsel in any such case, but the fees and expense of such counsel shall be at the expense of such indemnified party unless the employment of such counsel shall have been authorized in writing by the indemnifying party in connection with the defense of such action or the indemnifying party shall not have employed counsel to have charge of the defense of such action or such indemnified party or the indemnified parties shall have reasonably concluded that there may be defenses available to it or them that are different from or additional to those available to the indemnifying party (in which case the indemnifying party shall not have 7 the right to direct the defense of such action on behalf of the indemnified party or parties) in any of which events the fees and expenses of such counsel shall be borne by the indemnifying parties. The failure of any indemnified party to give notice as provided herein shall not relieve the indemnifying party of its obligations under this Section 1.8, except to the extent that the indemnifying party is actually and materially prejudiced by such failure to give notice. 2. Sale or Exercise Without Registration. If, at the time of any exercise, transfer or surrender for exchange of a Warrant or Common Stock (or Other Securities) previously issued upon the exercise of Warrants, such Warrant or Common Stock (or Other Securities) shall not be registered under the Securities Act, the Company may require, as a condition of allowing such exercise, transfer or exchange, that the holder or transferee of such Warrant or Common Stock (or Other Securities), as the case may be, furnish to the Company a satisfactory opinion of counsel to the effect that such exercise, transfer or exchange may be made without registration under the Securities Act, provided that nothing contained in this Section 2 shall relieve the Company from complying with any request for registration pursuant to Section 1 hereof. 3. Exercise of Warrant; Partial Exercise; Cashless Exercise. 3.1. Exercise in Full. Subject to the provisions hereof, this Warrant may be exercised in full one year after the date hereof by the holder hereof by surrender of this Warrant, with the form of subscription attached hereto as Schedule I ("Subscription Form") duly executed by such holder, to the Company at its principal office accompanied by payment, in cash or by certified or official bank check payable to the order of the Company, in the amount obtained by multiplying the number of shares of Common Stock called for on the face of this Warrant, as adjusted herein, by the Purchase Price. 3.2. Partial Exercise. Subject to the provisions hereof, this Warrant may be exercised in part one year after the date hereof by the holder hereof by surrender of this Warrant in the manner and at the place provided in Section 3.1 except that the amount payable by the holder upon any partial exercise shall be the amount obtained by multiplying (a) the number of shares of Common Stock, as adjusted herein, designated by the holder in the Subscription Form, by (b) the Purchase Price. Upon any such partial exercise, the Company at its expense will forthwith issue and deliver to or upon the order of the holder hereof a new Warrant or Warrants of like tenor, in the name of the holder hereof or as such holder (upon payment by such holder of any applicable transfer taxes) may request, calling in the aggregate on the face or faces thereof for the number of shares of Common Stock equal (without giving effect to any adjustment therein) to the number of such shares called for on the face of this Warrant minus the number of such shares designated by the holder in the Subscription Form. 3.3. Exercise by Surrender of Warrant. In addition to the method of payment set forth in Sections 3.1 and 3.2 and in lieu of any cash payment required thereunder, the holder of the Warrant shall have the right at any time (one year after the date hereof) and from time to time to exercise the Warrants in full or in part by surrendering the Warrant Certificate in the 8 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 9 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 11 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 12 Security pursuant to Section 7.2, (iv) any transaction with respect to which an adjustment shall have been made pursuant to Sections 5 or 6, and (v) the issuance or sale of any Common Stock pursuant to the exercise or conversion of any option, right or Convertible Security that was issued on or prior to the Original Issue Date. 8. Further Assurances. The Company will take all such action as may be necessary or appropriate in order that the Company may validly and legally issue fully paid and non-assessable shares of stock upon the exercise of the Warrants. 9. Accountants' Certificate as to Adjustments. In each case of any adjustment or readjustment in the shares of Common Stock (or Other Securities) issuable upon the exercise of the Warrant, the Company at its expense will promptly cause the Company's regularly retained auditor to compute such adjustment or readjustment in accordance with the terms of the Warrant and prepare a certificate setting forth such adjustment or readjustment and showing in detail the facts upon which such adjustment or readjustment is based, and the number of shares of Common Stock outstanding or deemed to be outstanding. The Company will forthwith mail a copy of each such certificate to the holder of this Warrant. 10. Notices of Record Date, etc. In the event of (a) any taking by the Company of a record of the holders of any class of securities for the purpose of determining the holders thereof who are entitled to receive any dividend (other than a cash dividend payable out of earned surplus of the Company) or other distribution, or any right to subscribe for, purchase or otherwise acquire any shares of stock of any class or any other securities or property, or to receive any other right, or (b) any capital reorganization of the Company, any reclassification or recapitalization of the capital stock of the Company or any transfer of all or substantially all the assets of the Company to or consolidation or merger of the Company with or into any other person, or (c) any voluntary or involuntary dissolution, liquidation or winding-up of the Company, or (d) any proposed issue or grant by the Company of any shares of stock of any class or any other securities, or any right or option to subscribe for, purchase or otherwise acquire any shares of stock of any class or any other securities (other than the issue of Common Stock on the exercise of the Warrant), then and in each such event the Company will mail or cause to be mailed to each holder of the Warrant a notice specifying (i) the date on which any such record is to be taken for the purpose of such dividend, distribution or right, and stating the amount and character of such dividend, distribution or right, (ii) the date on which any such reorganization, reclassification, recapitalization, transfer, consolidation, merger, dissolution, liquidation or 13 winding-up is to take place, and the time, if any, as of which the holders of record of Common Stock (or Other Securities) shall be entitled to exchange their shares of Common Stock (or Other Securities) for securities or other property deliverable upon such reorganization, reclassification, recapitalization, transfer, consolidation, merger, dissolution, liquidation or winding-up, and (iii) the amount and character of any stock or other securities, or rights or options with respect thereto, proposed to be issued or granted, the date of such proposed issue or grant and the persons or class of persons to whom such proposed issue or grant is to be offered or made. Such notice shall be mailed at least 20 days prior to the date therein specified. 11. Reservation of Stock, etc., Issuable on Exercise of Warrants. The Company will at all times reserve and keep available, solely for issuance and delivery upon the exercise of the Warrant, all shares of Common Stock (or Other Securities) from time to time issuable upon the exercise of the Warrant. 12. Listing on Securities Exchanges; Registration. If the Company at any time shall list any Common Stock on any national securities exchange, or interdealer quotation system, and shall register such Common Stock under the Securities Exchange Act of 1934 (as then in effect, or any similar statute then in effect), the Company will, at its expense, simultaneously list on such exchange, upon official notice of issuance upon the exercise of the Warrant, and maintain such listing of all shares of Common Stock from time to time issuable upon the exercise of the Warrant; and the Company will so list on any national securities exchange, will so register and will maintain such listing of, any Other Securities if and at the time that any securities of like class or similar type shall be listed on such national securities exchange by the Company. 13. Exchange of Warrants. Subject to the provisions of Section 2 hereof, upon surrender for exchange of the Warrant, properly endorsed, to the Company, the Company at its own expense will issue and deliver to or upon the order of the holder thereof a new Warrant or Warrants of like tenor, in the name of such holder or as such holder (upon payment by such holder of any applicable transfer taxes) may direct, calling in the aggregate on the face or faces thereof for the number of shares of Common Stock called for on the face or faces of the Warrant or Warrants so surrendered. 14. Replacement of Warrant. Upon receipt of evidence reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of the Warrant and, in the case of any such loss, theft or destruction, upon delivery of an indemnity agreement reasonably satisfactory in form and amount to the Company or, in the case of any such mutilation, upon surrender and cancellation of the Warrant, the Company at its expense will execute and deliver, in lieu thereof, a new Warrant of like tenor. 15. Warrant Agent. The Company may, by written notice to each holder of a Warrant, appoint an agent having an office in New York, New York, for the purpose of issuing Common Stock (or Other Securities) upon the exercise of the Warrants pursuant to Section 3, exchanging Warrants pursuant to Section 13, and 14 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. 15 Dated: August 12, 1998 ROLLING PIN KITCHEN EMPORIUM, INC. By________________________________ Chairman of the Board [Corporate Seal] Attest: _______________________________________ Secretary 16 SCHEDULE I FORM OF SUBSCRIPTION (To be signed only upon exercise or surrender of each Warrant) To: ROLLING PIN KITCHEN EMPORIUM, INC. The undersigned, the holder of the within Warrant, hereby irrevocably elects to exercise the purchase right represented by such Warrant for, and to purchase thereunder, _________ shares of Common Stock of ROLLING PIN KITCHEN EMPORIUM, INC., and herewith [use version (a) in the event of the payment of cash purchase price] (a) makes payment of $_________ therefor, and requests that the certificates for such shares be issued in the name of, and delivered to, __________ , whose address is _________________________________. or [use version (b) in the event of a cashless exercise] (b) surrenders that portion of the Warrant representing ____ shares of Common Stock, and requests that the certificates for such shares be issued in the name of, and delivered to ___________________, whose address is ______________________________. To the extent that the exercise hereunder is for less than all of the shares of Common Stock represented by the Warrant, the undersigned hereby requests that a new Warrant for the remaining amount of shares of Common Stock be issued to __________________ whose address is _____________________________________. Dated: ________________________________________________ (Signature must conform in all respects to name of holder as specified on the face of the Warrant) (Address) __________________________ __________________________ Insert here the number of shares called for on the face of the Warrant (or, in the case of a partial exercise, the portion thereof as to which the Warrant is being exercised), in either case without making any adjustment for additional Common Stock or any other stock or other securities or property or cash which, pursuant to the adjustment provisions of the Warrant, may be deliverable upon exercise. 17 SCHEDULE II FORM OF ASSIGNMENT (To be signed only upon transfer of Warrant) For value received, the undersigned hereby sells, assigns and transfers unto ______________ the right represented by the within Warrant to purchase _____________shares of Common Stock of ROLLING PIN KITCHEN EMPORIUM, INC., to which the within Warrant relates, and appoints _______________________ as attorney to transfer such right on the books of ROLLING PIN KITCHEN EMPORIUM, INC. with full power of substitution in the premises. Dated: ________________________________________ (Signature must conform in all respects to name of holder as specified on the face of the Warrant) (Address) ____________________________ ____________________________ ____________________________ ____________________________ (Signature guaranteed by a Bank or Trust Company having its principal office in New York City or by a Member Firm of the New York or American Stock Exchange) 18 EX-4.23 3 EXHIBIT 4.23 Void after August 31, 2003 This Warrant and any shares acquired upon the exercise of this Warrant have not been registered under the Securities Act of 1933. This Warrant and such shares may not be sold or transferred in the absence of such registration or an exemption therefrom under said Act and no transfer of this Warrant or such shares shall be valid or effective unless and until such conditions shall have been complied with. ROLLING PIN KITCHEN EMPORIUM, INC. COMMON STOCK PURCHASE WARRANT ROLLING PIN KITCHEN EMPORIUM, INC. (the "Company"), having its principal office at 4264 Winters Chapel Road, Building B, Atlanta, Georgia 30360 hereby certifies that, for value received, Spinnernet Financial Services, Ltd. ("Spinnernet") or assigns, is entitled, subject to the terms set forth below, to purchase from the Company at any time on or from time to time after the effective date of the Company's initial public offering and before 5:00 P.M., New York City time, on August 31, 2003 (the "Expiration Date") 4,500 fully paid and non-assessable shares of Common Stock of the Company, at the price per share of the Purchase Price. The number and character of such shares of Common Stock and the Purchase Price as hereinafter defined are subject to adjustment as provided herein. This Warrant is one of the Common Stock Purchase Warrants (the "Warrants") originally issued as of the Original Issue Date (as defined below) and evidencing the right to purchase an aggregate of 4,500 shares of Common Stock of the Company, subject to adjustment as provided herein. As used herein the following terms, unless the context otherwise requires, have the following respective meanings: (a) The term "Company" includes any corporation which shall succeed to or assume the obligations of the Company hereunder. (b) The term "Common Stock" means the Class A Common Stock, $.01 par value, of the Company and its successors. (c) The "Original Issue Date" is August 12, 1998, the date as of which the Warrant was first issued. (d) The term "Other Securities" refers to any stock (other than Common Stock) and other securities of the Company or any other person (corporate or otherwise) which the holder of the Warrant at any time shall be entitled to receive, or shall have received, upon the exercise of the Warrant, in lieu of or in addition to Common Stock, or which at any time shall be issuable or shall have been issued in exchange for or in replacement of Common Stock or Other Securities pursuant to Section 6 or otherwise. 1 (e) The term "Purchase Price" shall be 165% of the initial price to the public pursuant to which the Company first sells $1 million or more of Common Stock (taking into account gross proceeds, not net proceeds), as set forth on the cover page of the prospectus contained in the registration statement pertaining to such offering, as such price may be adjusted pursuant to the terms hereof. (f) The terms "registered" and "registration" refer to a registration effected by filing a registration statement in compliance with the Securities Act, to permit the disposition of Common Stock (or Other Securities) issued or issuable upon the exercise of Warrants, and any post-effective amendments and supplements filed or required to be filed to permit any such disposition. (g) The term "Registrable Securities" shall mean the shares of Common Stock or Other Securities issuable upon exercise of the Warrants, excluding Common Stock or other Securities that (a) have been registered under the Securities Act pursuant to an effective registration statement filed thereunder and disposed of in accordance with such registration statement or (b) are eligible for sale under Rule 144(k) under the Securities Act, or have been sold pursuant to Rule 144 under the Securities Act. (h) The term "Registration Period" shall mean the period commencing concurrently with the closing of the Company's first public offering of $1 million or more of securities registered under the Securities Act that takes place after the Original Issue Date and ending on the earlier of the second anniversary thereof and the Expiration Date. (i) The term "Securities Act" means the Securities Act of 1933 as the same shall be in effect at the time. 1. Registration Rights. 1.1. Incidental Registration. During the Registration Period, each holder of Registrable Securities will have a right to have its Registrable Securities included in registration statements filed by the Company on general registration forms under the Securities Act, except as otherwise provided herein. The Company will notify each such holder in writing (the "Company Notice") promptly after making the decision to file a registration statement under the Securities Act with respect to the proposed sale of the Company's equity securities (except with respect to registration statements filed on Forms S-4 or S-8 or such others in similar form then in effect under the Securities Act), specifying in the Company Notice the form of registration statement, the number of shares of securities the Company proposes to register, the name of the managing underwriter or underwriters (if any) and the general terms and conditions of the 2 proposed registration and sale. Subject to Section 1.6 and the remainder of this Section 1.1, if requested by any holder of Registrable Securities in a writing (the "Investor Notice"), delivered to the Company not later than 30 days after the Company gives the Company Notice, to include in such registration statement Registrable Securities (the "Requested Shares"), the Company will, unless prohibited by the Underwriter, include the Requested Shares in the registration statement, and, if the proposed sale is to be underwritten, to cause the underwriters of securities to be sold by the Company in such registration statement to purchase such Requested Shares. In the event that any registration pursuant to this Section 1.1 shall be an underwritten offering of securities of the Company, any request by such holders pursuant to this Section 1.1 to register the Requested Shares, may, but need not, specify that such shares are to be included in the underwriting on the same terms and conditions as the securities, if any, otherwise being sold through underwriters under such registration. In the event of an underwritten offering of securities of the Company, such notice shall also specify as to whether such holder of Registrable Securities desires that any of such Requested Shares to be included in any such registration statement be subject to any over-allotment option granted the underwriters of such offering. No holder shall be required to have its Requested Shares be part of any underwritten offering and/or subject to any over-allotment option granted any underwriter by the Company. Notwithstanding the foregoing, if the managing underwriter or underwriters shall inform the Company of its opinion, at least 15 days prior to the date that the registration statement becomes effective, that part or all of the Requested Shares be excluded from the registration statement on the ground that the inclusion of such Requested Shares will adversely affect the orderly sales and distribution of the Common Stock being sold, the Company shall include all securities to be sold by holders, including the Company, which have the right to require that their securities be included in the registration on a pro rata basis. If the underwriters agree to purchase any of the Requested Shares beneficially owned by any holder who has agreed that such Requested Shares shall be sold pursuant to the underwritten offering or pursuant to the exercise of any over-allotment option as described above, such holders will enter into a reasonably customary underwriting agreement with the underwriters and will sell such Requested Shares to the underwriters unless, and except to the extent that, upon written notice to the Company and the managing underwriter or underwriters at least two days prior to the effective date of the registration statement, any such holder withdraws any portion of such Requested Shares. If the underwriters elect to purchase less than all the Requested Shares beneficially owned by holders who have agreed that such Requested Shares shall be sold pursuant to the underwritten offering or pursuant to the exercise of any over-allotment option, the underwriters shall purchase such Requested Shares on a pro rata basis among the Requested Shares that were included in the timely requests from holders of Registrable Securities under this subsection and the Requested Shares requested to be included in the registration statement by other stockholders holding registration rights and who have requested that such shares be sold pursuant to the underwritten offering or pursuant to the exercise of an over-allotment option. Notwithstanding the foregoing, the Company may withdraw any registration statement referred to in this Section 1 without any liability to the holders of Registrable Securities. 3 1.2. Market Standoff. Each holder of Registrable Securities agrees that if the managing underwriter or underwriters of the offering contemplated by Section 1.1 so request, such holder shall not effect any public sale or distribution of any Registrable Securities being registered thereunder or of any securities convertible into or exchangeable or exercisable for such Registrable Securities being registered thereunder for a period equal to the lesser of (x) the period management of the Company has agreed to lockup and (y) 90 days after the effective date of the registration statement filed in connection with the public offering. 1.3. Obligations of the Company. When required under Section 1.1 effect the registration of any Registrable Securities, the Company shall, as expeditiously as is reasonably possible: (a) Prepare and file with the SEC a registration statement with respect to such Registrable Securities and such amendments and supplements to such registration statement and the prospectus used in connection therewith as may be necessary to exercise the Company's best efforts to cause such registration statement to become effective at the earliest practicable date and to remain effective for a period of 90 days or until the holders and any underwriter purchasing such Registrable Securities have sold or otherwise disposed of the Registrable Securities registered in such registration statement, whichever is earlier. (b) Furnish to each holder selling Registrable Securities such number of copies of conformed copies of such registration statement and of each such amendment and supplement thereto (with all exhibits) and such number of copies of the prospectus, including a preliminary prospectus, in conformity with the requirements of the Securities Act, and such other documents as such holder may reasonably request in order to facilitate the disposition of Registrable Securities to be sold by such holder pursuant to such registration statement. (c) Exercise the Company's best efforts to register and qualify the Registrable Securities covered by such registration statement under other securities laws or State Securities Laws of such states or jurisdictions where a self-executing exemption is not available and as any seller of such Registrable Securities shall reasonably request; provided, however, that the Company shall not be required in connection therewith or as a condition thereto to qualify to do business or to file a general consent to service of process in any such states or jurisdictions. (d) Cause all securities covered by such registration statement to be registered with or approved by such other federal or state governmental agencies or authorities as may be necessary in the opinion of counsel to the Company and counsel to the seller or sellers of securities to enable the seller or sellers thereof to consummate the disposition of such securities. (e) Notify each seller of securities covered by such registration statement at any time when a prospectus relating thereto is required to be delivered under the Securities Act, upon discovery that, or upon the happening of any event as a result of which, the prospectus included in such registration statement, as then in effect, includes an untrue statement of a material fact or omits to state any material fact required to be stated therein or necessary to make the statements therein not misleading, in the light of the circumstances under which they were made, and at the request of any such seller promptly prepare and furnish to it a reasonable number of copies of a supplement to or an amendment of such prospectus as may be necessary so that, as thereafter delivered to the purchasers of such securities, such prospectus shall not include an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statement therein not misleading in the light of the circumstances under which they were made. 4 (f) Comply with all applicable rules and regulations of the SEC, make timely filing of all reports pursuant to the Securities Exchange Act of 1934, as amended ("Exchange Act") at such time as the Company's securities are registered under the Exchange Act, and make available to its securities holders, as soon as reasonably practicable, an earnings statement covering the period of at least twelve months, but not more than eighteen months, beginning with the first full calendar month after the effective date of such registration statement, which earnings statement shall satisfy the provisions of Section 11(a) of the Securities Act and Rule 158 promulgated thereunder, and promptly furnish to each such seller of securities a copy of such earnings statement. (g) Use its best efforts to list all securities covered by such registration statement on any national securities exchange on which securities of the same class and, if applicable, series, covered by such registration statement are then listed or on the Nasdaq Stock Market ("Nasdaq") if the securities are reported on Nasdaq. 1.4. Information to be Furnished. It shall be a condition precedent to the obligation of the Company to take any action pursuant to this Section 1 that the holders of Registrable Securities promptly furnish to the Company such information regarding them, the securities of the Company held by them and the intended method of disposition of such securities as the Company shall reasonably request and as shall be required in connection with the Company's obligations under this Section 1. 1.5. Underwritten Offerings. (a) Incidental Underwritten Offerings. If the Company proposes to register any of its securities under the Securities Act as contemplated by Section 1.1 and such securities are to be distributed by or through one or more underwriters, the Company will, if requested by any holder of Registrable Securities, use its best efforts to arrange for such underwriters to include all the securities to be offered and sold by such requesting holder among the securities of the Company to be distributed by such underwriters. The holders of Registrable Securities to be distributed by such underwriters shall be parties to the underwriting agreement between the Company and such underwriters and may, at their option, require that any or all of the representations and warranties by, and the other agreements on the part of, the Company to and for the benefit of such underwriters shall also be made to and for the benefit of such holders of Registrable Securities and that any or all of the conditions precedent to the obligations of such underwriters under such underwriting agreement be conditions precedent to the obligations of such holders of Registrable Securities. Any such requesting holder of Registrable Securities shall not be required to make any representations or warranties to or agreements with the Company other than representations, warranties or agreements regarding such holder, such holder's securities and such holder's intended method of distribution or any other representations required by applicable law. 5 1.6. Notice. In connection with the preparation and filing of each registration statement under the Securities Act pursuant to this Agreement, the Company shall promptly notify the holders of Registrable Securities included in the Registration Statement and their respective counsel of any stop order issued or threatened by the SEC and take all reasonable actions required to prevent the entry of such stop order or to remove it if entered. 1.7. Registration Expenses. All expenses incurred by the Company and the holders of Registrable Securities in complying with this Section 1, including, without limitation, all registration, NASD and filing fees, duplication and printing expenses, travel expenses, fees and disbursements of counsel for the Company or its independent public accountants, reasonable fees and disbursements of counsel for holders of securities included in a Company registration statement and the expense of any special audits incident to or required by any such registration shall be paid by the Company, except that each holder of Registrable Securities shall pay underwriting discounts and commissions attributable to such holder's shares, and transfer taxes on shares held by such holder. 1.8. Indemnification. In the event any of the Common Stock of a holder of Registrable Securities is included in a registration statement pursuant to this Section 1: (a) To the extent permitted by law, the Company will indemnify and hold harmless each holder of Registrable Securities (and its officers, directors, employees, partners and affiliates) selling Registrable Securities, any underwriter (as defined in the Securities Act) with respect to the Registrable Securities, and each person, if any, who controls such holder or underwriter within the meaning of the Securities Act, against any losses, claims, damages or liabilities, to which they may become subject under the Securities Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any untrue or allegedly untrue statement of any material fact contained in such registration statement, including any preliminary prospectus or final prospectus contained therein or any amendments or supplements thereto, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or allegedly necessary to make the statements therein not misleading; and will reimburse each such holder of Registrable Securities (and its officers, directors, employees, partners and affiliates), underwriter or controlling person for any legal or other expenses reasonably incurred by them in connection with investigating or defending any such loss, claim, damage, liability or action; provided, however, that the indemnity agreement contained in this Section 1.8(a) shall not apply to amounts paid in settlement of any such loss, claim, damage, liability or action if such settlement is effected without the written consent of the Company, which shall not be unreasonably withheld, nor shall the Company be liable under this Section 1.8(a) to such a holder, underwriter or controlling person for any such loss, claim, damage, liability or action to the extent that it arises out of, or is based upon, an untrue statement or allegedly untrue statement or omission or alleged omission made in connection with such registration statement, preliminary prospectus, final prospectus, or amendments or supplements thereto, in reliance upon and in conformity with information furnished in writing expressly for use in connection with such registration by such holder, the Company will reimburse each such holder for any legal or other expenses reasonably incurred by each such holder in connection with investigating or defending any such loss, claim, damage, liability or action. 6 (b) To the extent permitted by law, each holder selling Registrable Securities pursuant to this Section 1 will indemnify and hold harmless the Company, each of its directors, officers and employees, each person, if any, who controls the Company within the meaning of the Securities Act, and any underwriter for the Company (within the meaning of the Securities Act) against any losses, claims, damages or liabilities to which the Company or any such person or underwriter may become subject, under the Securities Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereto) arise out of, or are based upon, any untrue or allegedly untrue statement of any material fact contained in such registration statement, including any preliminary prospectus or final prospectus contained therein or any amendments or supplements thereto, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or allegedly necessary to make the statements therein not misleading, in each case to the extent that such untrue statement or allegedly untrue statement or omission or alleged omission was made in such registration statement, preliminary prospectus, or amendments or supplements thereto in reliance upon and in conformity with information furnished in writing by such holder expressly for use in connection with such registration; provided, however, that the indemnity agreement contained in this Section 1.8(b) shall not apply to amounts paid in settlement of any such loss, claim, damage, liability or action if such settlement is effected without the written consent of such holder, which shall not be unreasonably withheld; and each such holder will reimburse the Company or any such person or underwriter for any legal or other expenses reasonably incurred by the Company or any such person or underwriter in connection with investigating or defending any such loss, claim, damage, liability or action. (c) Promptly after receipt by an indemnified party under this Section 1.8 of notice of the commencement of any action, such indemnified party will, if a claim in respect thereof is to be made against any indemnifying party under this Section 1.8, notify the indemnifying party in writing of the commencement thereof and generally summarize such action. The indemnifying party shall have the right to participate in and to assume the defense thereof with counsel mutually satisfactory to the parties; provided that each indemnified party shall have the right to employ its own counsel in any such case, but the fees and expense of such counsel shall be at the expense of such indemnified party unless the employment of such counsel shall have been authorized in writing by the indemnifying party in connection with the defense of such action or the indemnifying party shall not have employed counsel to have charge of the defense of such action or such indemnified party or the indemnified parties shall have reasonably concluded that there may be defenses available to it or them that are different from or additional to those available to the indemnifying party (in which case the indemnifying party shall not have the right to direct the defense of such action on behalf of the indemnified party or parties) in any of which events the fees and expenses of such counsel shall be borne by the indemnifying parties. The failure of any indemnified party to give notice as provided herein shall not relieve the indemnifying party of its obligations under this Section 1.8, except to the extent that the indemnifying party is actually and materially prejudiced by such failure to give notice. 7 2. Sale or Exercise Without Registration. If, at the time of any exercise, transfer or surrender for exchange of a Warrant or Common Stock (or Other Securities) previously issued upon the exercise of Warrants, such Warrant or Common Stock (or Other Securities) shall not be registered under the Securities Act, the Company may require, as a condition of allowing such exercise, transfer or exchange, that the holder or transferee of such Warrant or Common Stock (or Other Securities), as the case may be, furnish to the Company a satisfactory opinion of counsel to the effect that such exercise, transfer or exchange may be made without registration under the Securities Act, provided that nothing contained in this Section 2 shall relieve the Company from complying with any request for registration pursuant to Section 1 hereof. 3. Exercise of Warrant; Partial Exercise; Cashless Exercise. 3.1. Exercise in Full. Subject to the provisions hereof, this Warrant may be exercised in full one year after the date hereof by the holder hereof by surrender of this Warrant, with the form of subscription attached hereto as Schedule I ("Subscription Form") duly executed by such holder, to the Company at its principal office accompanied by payment, in cash or by certified or official bank check payable to the order of the Company, in the amount obtained by multiplying the number of shares of Common Stock called for on the face of this Warrant, as adjusted herein, by the Purchase Price. 3.2. Partial Exercise. Subject to the provisions hereof, this Warrant may be exercised in part one year after the date hereof by the holder hereof by surrender of this Warrant in the manner and at the place provided in Section 3.1 except that the amount payable by the holder upon any partial exercise shall be the amount obtained by multiplying (a) the number of shares of Common Stock, as adjusted herein, designated by the holder in the Subscription Form, by (b) the Purchase Price. Upon any such partial exercise, the Company at its expense will forthwith issue and deliver to or upon the order of the holder hereof a new Warrant or Warrants of like tenor, in the name of the holder hereof or as such holder (upon payment by such holder of any applicable transfer taxes) may request, calling in the aggregate on the face or faces thereof for the number of shares of Common Stock equal (without giving effect to any adjustment therein) to the number of such shares called for on the face of this Warrant minus the number of such shares designated by the holder in the Subscription Form. 3.3. Exercise by Surrender of Warrant. In addition to the method of payment set forth in Sections 3.1 and 3.2 and in lieu of any cash payment required thereunder, the holder of the Warrant shall have the right at any time (one year after the date hereof) and from time to time to exercise the Warrants in full or in part by surrendering the Warrant Certificate in the manner and at the place specified in Section 3.1 as payment of the aggregate Purchase Price. The number of shares subject to the portion of the Warrant to be surrendered in payment of the aggregate Exercise Price for the shares to be purchased shall be determined by multiplying the number of shares to be purchased by the Purchase Price, and then dividing the product thereof by an amount equal to the Market Price (as defined below). Upon any such partial exercise, the Company, at its expense will forthwith issue and deliver to or upon the order of the holder hereof a new Warrant of like tenor, in the name of such holder or as such holder may designate (upon payment by such holder of any applicable transfer taxes), calling in the aggregate on the face thereof for the number of shares of Common Stock equal (without giving effect to any adjustment therein) to (A) the number of shares called for on the face of this Warrant minus (B) the sum of (i) the number of shares so surrendered by the holder pursuant to this Section plus (ii) the number of shares issued in the exchange. Solely for the purposes of this paragraph, Market Price shall be calculated as the average of the Market Prices for each of the ten (10) trading days preceding the date which the form of election attached hereto is deemed to have been sent to the Company ("Notice Date"). 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. 4. Delivery of Stock Certificates, etc., on Exercise. As soon as practicable after the exercise of this Warrant in full or in part, and in any event within 10 days thereafter, the Company at its expense (including the payment by it of any applicable issue taxes) will cause to be issued in the name of and delivered to the holder hereof, or as such holder (upon payment by such holder of any applicable transfer taxes) may direct, a certificate or certificates for the number of fully paid and non-assessable shares of Common Stock (or Other Securities) to which such holder shall be entitled upon such exercise, plus, in lieu of any fractional share to which such holder would otherwise be entitled, cash equal to such fraction multiplied by the then current Market Price of one full share, together with any other stock or other securities and property (including cash, where applicable) to which such holder is entitled upon such exercise pursuant to Section 5 or otherwise. 9 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 11 of exchange, upon the conversion or exchange thereof, the adjusted Purchase Price shall, forthwith upon any such increase becoming effective, be readjusted to reflect the same, and provided further, that upon the expiration of such rights of conversion or exchange of such Convertible Securities, if any thereof shall not have been exercised, the adjusted Purchase Price shall forthwith be readjusted and thereafter be the price which it would have been had an adjustment been made on the basis that the only shares of Common Stock so issued or sold were issued or sold upon the conversion or exchange of such Convertible securities, and that they were issued or sold for the consideration actually received by the Company upon such conversion or exchange, plus the consideration, if any, actually received by the Company for the issue or sale of all of such Convertible Securities which shall have been converted or exchanged; provided that, notwithstanding the foregoing, no readjustment shall be effectuated hereunder with respect to any shares of Common Stock already issued upon exercise of the Warrant. 7.3. Rights and Options. Except as provided in Section 7.4, in case the Company shall grant any rights or options to subscribe for, purchase or otherwise acquire Common Stock after the Original Issue Date, there shall be determined the price per share for which Common Stock is issuable upon the exercise of such rights or options, such determination to be made by dividing (a) the total amount, if any, received or receivable by the Company as consideration for the granting of such rights or options, plus the minimum aggregate amount of additional consideration payable to the Company upon the exercise of such rights or options, by (b) the maximum number of shares of Common Stock of the Company issuable upon the exercise of such rights or options. If the price per share so determined shall be less than the applicable Purchase Price, then the granting of such rights or options shall be deemed to be an issue or sale for cash (as of the date of the granting of such rights or options) of such maximum number of shares of Common Stock at the price per share so determined, provided that, if such rights or options shall by their terms provide for an increase or increases, with the passage of time, in the amount of additional consideration payable to the Company upon the exercise thereof, the adjusted purchase price per share shall, forthwith upon any such increase becoming effective, be readjusted to reflect the same, and provided, further, that upon the expiration of such rights or options, if any thereof shall not have been exercised, the adjusted Purchase Price shall forthwith be readjusted and thereafter be the price which it would have been had an adjustment been made on the basis that the only shares of Common Stock so issued or sold were those issued or sold upon the exercise of such rights or options and that they were issued or sold for the consideration actually received by the Company upon such exercise, plus the consideration, if any, actually received by the Company for the granting of all such rights or options, whether or not exercised. 7.4. Exceptions. The provisions of Sections 7.1, 7.2 and 7.3 do not apply to (i) the exercise of any Warrant,(ii) the exercise of any right or option with respect to which an adjustment shall have been made at the time of the issuance of such right or option pursuant to Section 7.3, (iii) conversion or exchange of any Convertible Security with respect to which an adjustment shall have been made at the time of the issuance of such Convertible Security pursuant to Section 7.2, (iv) any transaction with respect to which an adjustment shall have been made pursuant to Sections 5 or 6, and (v) the issuance or sale of any Common Stock pursuant to the exercise or conversion of any option, right or Convertible Security that was issued on or prior to the Original Issue Date. 12 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, or interdealer quotation system, and shall register such Common Stock under the Securities Exchange Act of 1934 (as then in effect, or any similar statute then in effect), the Company will, at its expense, simultaneously list on such exchange, upon official notice of issuance upon the exercise of the Warrant, and maintain such listing of all shares of Common Stock from time to time issuable upon the exercise of the Warrant; and the Company will so list on any national securities exchange, will so register and will maintain such listing of, any Other Securities if and at the time that any securities of like class or similar type shall be listed on such national securities exchange by the Company. 13. Exchange of Warrants. Subject to the provisions of Section 2 hereof, upon surrender for exchange of the Warrant, properly endorsed, to the Company, the Company at its own expense will issue and deliver to or upon the order of the holder thereof a new Warrant or Warrants of like tenor, in the name of such holder or as such holder (upon payment by such holder of any applicable transfer taxes) may direct, calling in the aggregate on the face or faces thereof for the number of shares of Common Stock called for on the face or faces of the Warrant or Warrants so surrendered. 14. Replacement of Warrant. Upon receipt of evidence reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of the Warrant and, in the case of any such loss, theft or destruction, upon delivery of an indemnity agreement reasonably satisfactory in form and amount to the Company or, in the case of any such mutilation, upon surrender and cancellation of the Warrant, the Company at its expense will execute and deliver, in lieu thereof, a new Warrant of like tenor. 15. Warrant Agent. The Company may, by written notice to each holder of a Warrant, appoint an agent having an office in New York, New York, for the purpose of issuing Common Stock (or Other Securities) upon the exercise of the Warrants pursuant to Section 3, exchanging Warrants pursuant to Section 13, and replacing Warrants pursuant to Section 14, or any of the foregoing, and thereafter any such issuance, exchange or replacement, as the case may be, shall be made at such office by such agent. 14 16. Negotiability, etc. This Warrant is issued upon the following terms, to all of which each holder or owner hereof by the taking hereof consents and agrees: (a) subject to the provisions hereof, title to this Warrant may be transferred by endorsement (by the holder hereof executing the form of assignment attached hereto as Schedule II) and delivery in the same manner as in the case of a negotiable instrument transferable by endorsement and delivery; (b) subject to the foregoing, any person in possession of this Warrant properly endorsed is authorized to represent himself as absolute owner hereof and is empowered to transfer absolute title hereto by endorsement and delivery hereof to a bona fide purchaser hereof for value; each prior taker or owner waives and renounces all of his equities or rights in this Warrant in favor of each such bona fide purchaser and each such bona fide purchaser shall acquire absolute title hereto and to all rights represented hereby; and (c) until this Warrant is transferred on the books of the Company, the Company may treat the registered holder hereof as the absolute owner hereof for all purposes, notwithstanding any notice to the contrary. 17. Notices, etc. All notices and other communications from the Company to the holder of this Warrant shall be mailed by first class registered or certified mail, postage prepaid, at such address as may have been furnished to the Company in writing by such holder, or, until an address is so furnished, to and at the address of the last holder of this Warrant who has so furnished an address to the Company. 18. Miscellaneous. This Warrant and any term hereof may be changed, waived, discharged or terminated only by an instrument in writing signed by the party against which enforcement of such change, waiver, discharge or termination is sought. This Warrant is being delivered in the State of New York and shall be construed and enforced in accordance with and governed by the laws of such State. The headings in this Warrant are for purposes of reference only, and shall not limit or otherwise affect any of the terms hereof. 19. Assignability. Subject to the transfer conditions referred to in the legend endorsed hereon, this Warrant is fully assignable at any time upon surrender of this Warrant with a properly executed Assignment (in the form of Schedule II hereto) at the principal office of the Company. 15 Dated: August 12, 1998 ROLLING PIN KITCHEN EMPORIUM, INC. By: ------------------------------- Chairman of the Board [Corporate Seal] Attest: - --------------------------------- Secretary 16 SCHEDULE I FORM OF SUBSCRIPTION (To be signed only upon exercise or surrender of each Warrant) To: ROLLING PIN KITCHEN EMPORIUM, INC. The undersigned, the holder of the within Warrant, hereby irrevocably elects to exercise the purchase right represented by such Warrant for, and to purchase thereunder, _________ shares of Common Stock of ROLLING PIN KITCHEN EMPORIUM, INC., and herewith [use version (a) in the event of the payment of cash purchase price] (a) makes payment of $_________ therefor, and requests that the certificates for such shares be issued in the name of, and delivered to, __________ , whose address is _________________________________. or [use version (b) in the event of a cashless exercise] (b) surrenders that portion of the Warrant representing ____ shares of Common Stock, and requests that the certificates for such shares be issued in the name of, and delivered to ___________________, whose address is _________________________. To the extent that the exercise hereunder is for less than all of the shares of Common Stock represented by the Warrant, the undersigned hereby requests that a new Warrant for the remaining amount of shares of Common Stock be issued to __________________ whose address is _____________________________________. Dated: __________________________________________________ (Signature must conform in all respects to name of holder as specified on the face of the Warrant) (Address) __________________________ __________________________ Insert here the number of shares called for on the face of the Warrant (or, in the case of a partial exercise, the portion thereof as to which the Warrant is being exercised), in either case without making any adjustment for additional Common Stock or any other stock or other securities or property or cash which, pursuant to the adjustment provisions of the Warrant, may be deliverable upon exercise. 17 SCHEDULE II FORM OF ASSIGNMENT (To be signed only upon transfer of Warrant) For value received, the undersigned hereby sells, assigns and transfers unto ______________ the right represented by the within Warrant to purchase _____________shares of Common Stock of ROLLING PIN KITCHEN EMPORIUM, INC., to which the within Warrant relates, and appoints _________________________________ as attorney to transfer such right on the books of ROLLING PIN KITCHEN EMPORIUM, INC. with full power of substitution in the premises. Dated: ___________________________________________________________ (Signature must conform in all respects to name of holder as specified on the face of the Warrant) (Address) ____________________________ ____________________________ ____________________________ _______________________________________ (Signature guaranteed by a Bank or Trust Company having its principal office in New York City or by a Member Firm of the New York or American Stock Exchange) 18 EX-10.9 4 EXHIBIT 10.9 FIRST AMENDMENT TO LOAN AND SECURITY AGREEMENT THIS FIRST AMENDMENT TO LOAN AND SECURITY AGREEMENT ("First Amendment") is entered into as of November 25, 1998, between Rolling Pin Kitchen Emporium, Inc. (formerly known as Home Retail (Holdings, Inc.), a Delaware corporation ("Borrower"), the Guarantors whose signatures are set forth below and GREENFIELD COMMERCIAL CREDIT, L.L.C., a Michigan limited liability company ("Lender"). RECITALS Lender and Borrower entered into a Loan and Security Agreement as of August 20, 1998 ("Loan Agreement"). Lender and Borrower have agreed to modify the terms and conditions of the Loan Agreement and Borrower and Lender wish to set forth their agreement in this First Amendment. The Loan Agreement, as amended by this First Amendment, shall be also referred to as the "Loan Agreement". NOW, THEREFORE, in consideration of the mutual covenants, conditions, and provisions as hereinafter set forth, the parties hereto agree as follows: The following new section is hereby added to the Loan Agreement: 12A. Purchase of Put Options. On or before December 11, 1998, Borrower shall pay to Lender the sum of $100,000.00 in exchange for Lender's agreement to execute and deliver to Borrower contemporaneously herewith an Amendment to Common Stock Purchase Warrant dated as of November 25, 1998 substantially in the form of Exhibit A attached. If Borrower fails to make such payment when due, then the Amendment to Common Stock Purchase Warrant shall be void ab initio. Borrower agrees to reimburse Lender for all costs and expenses, including attorneys fees incurred by Lender with respect to this First Amendment. Except as amended hereby, the Loan Agreement remains in full force and effect. This First Amendment may be executed in counterparts, which together shall constitute one original. IN WITNESS WHEREOF, the parties hereto have caused this First Amendment to be executed and delivered as of the date first hereinabove set forth. BORROWER: ROLLING PIN KITCHEN EMPORIUM, INC. (formerly known as Home Retail Holdings, Inc.), a Delaware corporation By: /s/ John D. Critser -------------------------------------- John Critser Its: President GUARANTORS: THE COOKSTORE, INC., an Ohio corporation By: /s/ Greg Dukoff ----------------------------- Greg Dukoff Its: Secretary THE COOKSTORE WORTHINGTON, INC., an Ohio corporation By: /s/ Greg Dukoff ----------------------------- Greg Dukoff Its: Secretary AROPI, INCORPORATED, an Iowa corporation By: /s/ Greg Dukoff ----------------------------- Greg Dukoff Accepted: Its: Secretary GREENFIELD COMMERCIAL CREDIT, L.L.C. By: /s/ Donald G. Barr -------------------------------- Donald G. Barr, Jr. Its: President EX-23 5 EXHIBIT 23.1 EXHIBIT 23.1 CONSENT OF INDEPENDENT AUDITORS We consent to the use in this Registration Statement on Form SB-2, Amendment Number 3, of our report dated August 12, 1998, relating to the consolidated financial statements of Gaylord Companies, Inc. for the years ended December 31, 1997 and 1996, and of our report dated October 30, 1998 related to the consolidated balance sheet of Rolling Pin Kitchen Emporium, Inc. as of August 12, 1998, and the reference to our firm under the caption "Experts" in this Registration Statement. /s/ FELDMAN SHERB EHRLICH & CO., P.C. -------------------------------------- FELDMAN SHERB EHRLICH & CO., P.C. Certified Public Accountants New York, New York December 4, 1998 EX-23.2 6 EXHIBIT 23.2 EXHIBIT 23.2 INDEPENDENT AUDITORS CONSENT We hereby consent to the use in Amendment No. 3 of the Rolling Pin Kitchen Emporium, Inc. Registration Statement (Registration Statement) of our report dated August 24, 1998, relating to the financial statements of Aropi, Incorporated, which appears in the Registration Statement. We also consent to the reference to us under the heading Experts in such Registration Statement. /s/ Smith & Radigan, Certified Public Accountants, LLC ------------------------------------------------------ Smith & Radigan, Certified Public Accountants, LLC Atlanta, Georgia December 4, 1998 EX-27.1 7 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 3,682,452 0 0 300,000 40,950 (1,632,654) 2,390,748 3,724,157 3,724,157 3,508,874 3,508,874 0 0 79,710 (1,391,380) 400,649 (2,026,654) (1,224,845) 0 0 (3,251,499) (.85) (.85)
EX-27.2 8 FINANCIAL DATA SCHEDULE
5 1 U.S. DOLLARS 9-MOS DEC-31-1998 JAN-01-1998 SEP-30-1998 1 146,171 0 70,854 0 3,008,646 3,271,098 1,050,421 426,521 5,277,982 5,606,588 0 0 240,000 16,770 (1,135,376) 5,277,982 728,767 728,767 436,628 436,628 0 0 184,842 (1,215,376) 0 (1,215,376) 0 0 0 (1,215,376) (0.72) (0.72)
-----END PRIVACY-ENHANCED MESSAGE-----