-----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, Fxs7JsH4VI9eZvAjE946adNIN4XcUm8Ah1lApMQ9gqW7XR91HntZl9hN+x3FPTGE 1Rt3ibyT05YjhxrG1Q55lQ== 0000950152-96-003480.txt : 19960717 0000950152-96-003480.hdr.sgml : 19960717 ACCESSION NUMBER: 0000950152-96-003480 CONFORMED SUBMISSION TYPE: SB-2/A PUBLIC DOCUMENT COUNT: 2 FILED AS OF DATE: 19960716 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: GAYLORD COMPANIES 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: 1933 Act SEC FILE NUMBER: 333-07327 FILM NUMBER: 96595572 BUSINESS ADDRESS: STREET 1: 4006 VENTURE COURT CITY: COLUMBUS STATE: OH ZIP: 43228 BUSINESS PHONE: 6147712777 MAIL ADDRESS: STREET 1: 4006 VENTURE COURT CITY: COLUMBUS STATE: OH ZIP: 43228 SB-2/A 1 GAYLORD COMPANY 1 As filed with the Securities and Exchange Commission on July 16, 1996 REGISTRATION NO. 333-07327 ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ----------- AMENDMENT NO 1 TO FORM SB-2 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ----------- GAYLORD COMPANIES, INC. (Name of small business issuer in its charter) DELAWARE 5995 31-1421571 (State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer incorporation or organization) Classification Code Number) Identification No.)
GAYLORD COMPANIES, INC. 4006 VENTURE COURT COLUMBUS, OHIO 43228 (614) 771-2777 (Name, address and telephone number of principal executive offices and principal place of business) JOHN GAYLORD GAYLORD COMPANIES, INC. 4006 VENTURE COURT COLUMBUS, OHIO 43228 (614) 771-2777 (Name, address and telephone number of agent for service) ------------------- Copies to: MARTIN C. LICHT, ESQ. 845 Third Avenue New York, New York 10022 (212) 935-3131 --------------- APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after this Registration Statement becomes effective. -------------- If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box./X/ 2 CALCULATION OF REGISTRATION FEE
================================================================================================================================= TITLE OF EACH CLASS OF SECURITIES MOUNT TO BE PROPOSED OFFERING PROPOSED AGGREGATE AMOUNT OF TO BE REGISTERED REGISTERED PRICE PER SHARE (1) OFFERING PRICE (1) REGISTRATION FEE - --------------------------------------------------------------------------------------------------------------------------------- Shares of Common Stock, $.01 par value ("Common Stock")(2)..................................... 1,015,000 1.5625 1,585,937.50 546.88 - --------------------------------------------------------------------------------------------------------------------------------- Common Stock Purchase Warrants(2)......................... 800,000 .4375 350,000 120.69 - --------------------------------------------------------------------------------------------------------------------------------- Shares of Common Stock underlying the Common Stock Purchase Warrants.......................... 800,000 1.5625 1,250,000 431.04 - --------------------------------------------------------------------------------------------------------------------------------- Total Registration Fee.................................... 1,098.61 =================================================================================================================================
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. (1) Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457. (2) Pursuant to Rule 416 there are also being registered such additional shares of Common Stock as may become issuable pursuant to the antidilution provisions of the Common Stock Purchase Warrants. (3) The registration fee was paid upon the initial filing of this Registration Statement. (ii) 3 GAYLORD COMPANIES, INC. CROSS REFERENCE SHEET
ITEM NO. CAPTION IN FORM SB-2 LOCATION IN PROSPECTUS -------- -------------------- ---------------------- 1. Forepart of the Registration Statement and Outside Front Cover Page of Prospectus.................................. Outside Front Cover. 2. Inside Front and Outside Bank Cover Pages of Prospectus ..................................................... Inside Front and Outside Back Covers. 3. Summary Information; Risk Factors................................ Prospectus Summary; Risk Factors. 4. Use of Proceeds.................................................. Use of Proceeds. 5. Determination of Offering Price.................................. Plan of Distribution. 6. Selling Security-Holders......................................... Selling Securityholders. 7. Plan of Distribution............................................. Plan of Distribution. 8. Legal Proceedings................................................ Business - Litigation. 9. Directors, Executive Officers, Promoters and Control Persons.................................................. Management. 10. Security Ownership of Certain Beneficial Owners and Management...................................................... Principal Shareholders. 11. Description of Securities ....................................... Description of Securities. 12. Interests of named Experts and Counsel........................... Legal Matters; Experts. 13. Disclosure of Commission Position on Indemnification for Securities Act Liabilities.................................. Description of Securities. 14. Organization Within Last Five Years.............................. Prospectus Summary. 15. Description of Business.......................................... Prospectus Summary; Management's Discussion and Analysis of Financial Condition and Results of Operations; Business; and Financial Statements. 16. Management's Discussion and Analysis or Plan of Operation....................................................... Management's Discussion and Analysis of Financial Condition and Results of Operations. 17. Description of Property.......................................... Business - Leased Properties. 18. Certain Relationships and Related Transactions................... Certain Transactions. 19. Market for Common Equity and Related Stockholder Market for Common Equity and Related Matters......................................................... Stockholder Matters. 20. Executive Compensation........................................... Management - Executive Compensation. 21. Financial Statements............................................. Financial Statements. 22. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures............................ Change in Accountants
(iii) 4 PROSPECTUS (Subject to Completion) Issued July 16, 1996 1,015,000 SHARES OF COMMON STOCK 800,000 COMMON STOCK PURCHASE WARRANTS GAYLORD COMPANIES, INC. Gaylord Companies, Inc. is hereby offering (the "Offering") 1,015,000 shares (the "Shares") of its common stock, $.01 par value (the "Common Stock") and 800,000 common stock purchase warrant (the "Warrants") on behalf of certain selling securityholders (the "Selling Securityholders"). The Shares and the Warrants are sometimes collectively referred to as the "Securities." The Company will not receive any of the proceeds from the sale of the Securities by the Selling Securityholders. Each Warrant expires on October 30, 2000, and entitles the holder, commencing October 31, 1996 to purchase one share of Common Stock for $3.00. The exercise price of the Warrants is subject to adjustment in certain events pursuant to the antidilution provisions thereof. The Warrants are redeemable by the Company at a price of $.05 per Warrant commencing October 31, 1997 and prior to their expiration, provided that (i) prior notice of not less than 30 days is given to the holders of the Warrants, and (ii) the closing sale price of the Common Stock as reported on the National Association of Securities Dealers Automated Quotation System ("NASDAQ") for 20 consecutive trading days, ending on the tenth day prior to the date on which the Company gives notice of redemption, has been at least $4.50. The holders of the Warrants shall have exercise rights until the close of the business day preceding the date fixed for redemption. See "DESCRIPTION OF SECURITIES." The Securities may be offered from time to time by the Selling Securityholders through ordinary brokerage transactions in the over-the-counter market, in negotiated transactions or otherwise, at market prices prevailing at the time of sale or at negotiated prices. The Company's Common Stock and Warrants are traded on NASDAQ under the symbols GJCO and GJCOW, respectively, and on the Boston Stock Exchange under the symbols GJC and GJCW, respectively. ------------------- THESE SECURITIES ARE SPECULATIVE AND INVOLVE A HIGH DEGREE OF RISK. PURCHASERS SHOULD CAREFULLY CONSIDER THE MATTERS DESCRIBED UNDER "RISK FACTORS" ON PAGE 8. ------------------------------- THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION, OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. The date of this Prospectus is , 1996. 5 AVAILABLE INFORMATION A Registration Statement on Form SB-2 (the "Registration Statement") under the Securities Act relating to the securities offered hereby has been filed by the Company with the Securities and Exchange Commission (the "Commission"), Washington, D.C. This Prospectus does not contain all of the information set forth in the Registration Statement and the exhibits and schedules thereto. For further information with respect to the Company and the securities offered hereby, reference is made to such Registration Statement, exhibits and schedules. Statements contained in this Prospectus as to the contents of any contract or other document referred to are not necessarily complete, and in each instance reference is made to the copy of such contract or other document filed as exhibits to the Registration Statement, each such statement being qualified in all respects by such reference. A copy of the Registration Statement may be inspected without charge at the Commission's principal offices in Washington, D.C., and copies of all or any part thereof may be obtained from the Commission upon the payment of certain fees prescribed by the Commission. The Company is subject to the informational requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance therewith files periodic reports, proxy statements and other information with the Commission. Such reports, proxy statements and other information concerning the Company may be inspected or copied at the public reference facilities of the Commission located at 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549, and at the Commission's Regional Offices in New York, 7 World Trade Center, 13th Floor, New York, New York 10048, and in Chicago, Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511. Copies of such documents can be obtained at the public reference section of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. The Company intends to furnish its shareholders with annual reports containing audited financial statements certified by an independent public accounting firm. - 2 - 6 PROSPECTUS SUMMARY The following is a summary of certain information contained in this Prospectus and is qualified in its entirety by reference to the more detailed information, the consolidated financial statements and the notes thereto appearing elsewhere in this Prospectus. The Company was formed on July 19, 1994. As of August 1, 1994, the Company became a holding company with six operating subsidiaries when all of the shareholders of the operating entities exchanged all of the issued and outstanding shares of common stock of such companies for all of the then issued and outstanding shares of Common Stock of the Company. Accordingly, all of the information appearing in the Prospectus reflects this new ownership structure as if the subsidiaries were wholly-owned by the Company for all periods presented. Unless otherwise indicated, the information in this Prospectus does not give effect to the exercise of any options, warrants or conversion rights. See "CERTAIN TRANSACTIONS," and "DESCRIPTION OF SECURITIES - 1996 Financing." Each prospective investor is urged to read this Prospectus in its entirety. THE COMPANY Gaylord Companies, Inc. (the "Company") is a specialty retailer of books and quality cookware and serving equipment. Unless the context otherwise indicates, the term "Company" includes Gaylord Companies, Inc. and its six wholly-owned subsidiaries (the "Subsidiaries"). The Company owns and operates six retail "Little Professor" bookstores (the "Bookstores") and four specialty retail stores offering quality cookware and serving equipment, cooking accessories and certain select food products as well as cookbooks and food-related publications (the "Cookstores"). The Company's strategy is to capitalize upon its dual experience as a specialty retailer of books in the Bookstores and of quality cookware and serving equipment in the Cookstores and to expand these approaches into regional malls and select other sites throughout the country. The Company intends to focus its plans for expansion on the Cookstores because of what is believed to be the higher margins, the fragmented nature of competition in this line of business and the relatively few number of stores owned by its chief national competitors. The Company believes that there is greater competition in the Bookstore business which has lower margins and less opportunity for growth. Although the Company may open additional Bookstores in select sites in the future, the Company is not presently planning to open any additional Bookstores. See "BUSINESS - Strategy." The Bookstores are operated pursuant to separate license agreements (the "License Agreements") with Little Professor Book Centers, Inc. (the "Franchisor") and are situated in regional malls and strip shopping centers in Ohio. Five of the six Bookstores are known as Little Professor Book Company superstores (the "Superstores") and range from 8,000 to 18,000 square feet in size. Each Superstore offers 60,000 to 80,000 book titles. In addition, all of the Superstores offer thousands of foreign and domestic magazines, books on cassette, out-of-town newspapers, travel guides, maps and calendars. The Company believes that one of the keys to its success is that it has created a warm, comfortable atmosphere in the Superstores, with furnishings that include fireplaces, pianos, reading rooms and comfortable chairs, with an added emphasis on special children's sections with child-sized furniture. Activities are conducted for readers of all ages, including visits, readings, workshops and booksignings by locally and nationally acclaimed writers and book illustrators. The other Bookstore is known as a Little Professor Bargain Bookstore (the "Bargain Bookstore"). The Bargain Bookstore is approximately 2,000 square feet in size and offers approximately 10,000 titles. The Bargain Bookstore sells deeply discounted publisher overstock, remaindered and used books. - 3 - 7 The Cookstores are each approximately 3,300 square feet in size and are situated in regional retail malls in Ohio. These stores carry cookware sold under such brand names as Calphalon, Le Crueset, Cuisinart, Kitchen Aid, Krups, Braun and Melitta, which are believed to be the trademarks of their respective owners. The merchandising philosophy of the Company is "if it is used in the kitchen, it can be purchased at The Cookstore." Accordingly, the Company attempts to carry a broad range of merchandise in the following categories: accessories, bakeware, books, cookware, cutlery, electrics, food, furniture, gadgets, gifts, tableware and textiles. See "BUSINESS." The first of the Company's six wholly-owned Subsidiaries was formed and commenced operating a Bookstore in 1977. The first Cookstore was opened by one of the Subsidiaries in 1981. The Company was formed on July 19, 1994 for the purpose of consolidating the activities of the six Subsidiaries: Gaylord Book Company, Sawworth Book Company, formerly known as Little Professor Enterprises, Inc., Gaylord's, Inc., Gaylord Enterprises, Inc., The Cookstore, Inc. and The Cookstore Worthington, Inc., formerly known as Gaylord Companies, Inc. As of August 1, 1994, all of the shareholders of the Subsidiaries entered into an agreement (the "Exchange Agreement") whereby such shareholders exchanged all of the issued and outstanding common stock of each of the Subsidiaries for all of the then outstanding Common Stock of the Company. The Company's principal executive offices are located at 4006 Venture Court, Columbus, Ohio 43228 and its telephone number is (614) 771-2777. See "BUSINESS" and "CERTAIN TRANSACTIONS." THE OFFERING Securities Offered.............................................................. 1,015,000 shares of Common Stock 800,000 Warrants Offering Price.................................................................. The market price thereof at the time of sale by the Selling Securityholders. Common Stock Outstanding prior to the Offering................................................................... 2,750,000 shares Common Stock Outstanding after the Offering....................................................................... 2,750,000 shares (1) Warrants Outstanding prior to Offering.......................................... 1,725,000 Warrants Outstanding after Offering............................................. 1,725,000(2) Exercise Terms of Warrants...................................................... Each Warrant expires on October 30, 2000 and entitles the holder thereof to purchase one share of Common Stock for $3.00, commencing October 31, 1996. See "DESCRIPTION OF SECURITIES - Warrants." Redemption of Warrants.......................................................... The Warrants are redeemable by the Company, commencing October 31, 1997, at a price of $.05 per Warrant upon not less than 30 days prior notice to the holders of such Warrants, provided
- 4 - 8 that the closing sale price of the Common Stock as reported on NASDAQ is at least $4.50, for 20 consecutive trading days ending on the tenth day prior to the date on which the Company gives notice of redemption. See "DESCRIPTION OF SECURITIES - Warrants." Use of Proceeds ................................................................ The Company will not receive any of the proceeds from the sale of the Securities offered hereby. Risk Factors.................................................................... The purchase of the shares of Common Stock and the Warrants offered hereby involves a high degree of risk. See "RISK FACTORS." Trading Symbols: BOSTON NASDAQ STOCK EXCHANGE ------ -------------- Common Stock .................................................................. GJCO GJC Warrants....................................................................... GJCOW GJCW (1) Does not include (i) a maximum of 1,725,000 shares of Common Stock, subject to adjustment, issuable upon the exercise of the Warrants sold in the Company's initial public offering (the "Initial Public Offering"); (ii) an aggregate of 1,708,337 shares of Common Stock, subject to adjustment, issuable upon exercise of outstanding options, warrants, and conversion rights; (iii) a maximum of 333,333 shares of Common Stock which are issuable upon exercise of options which may be granted pursuant to the Company's 1994 Stock Option Plan; and (iv) 415,000 shares of Common Stock issuable upon the conversion of notes (the "Convertible Notes") in the aggregate original principal amount of $622,500 issued in June 1996 (the "1996 Financing"). See "MANAGEMENT - Stock Options" and "DESCRIPTION OF SECURITIES - 1996 Financing." (2) Does not include the Warrants issuable upon the exercise of rights to acquire up to 800,000 Warrants. See "DESCRIPTION OF SECURITIES - 1996 Financing" and "- Recent Developments."
SUMMARY FINANCIAL DATA The following summary financial information is derived from, and should be read in conjunction with, the financial statements of the Company included elsewhere in this Prospectus. The summary financial information for the three months ended March 31, 1996 and 1995 are derived from the Company's unaudited interim financial statements for those periods. In the opinion of management those interim unaudited financial statements have been prepared on the same basis as the Company's audited financial statements and include all adjustments, consisting of normal recurring adjustments, necessary for the fair presentation of such interim financial information. The results of operations for the three months ended March 31, 1996 are not necessarily indicative of results of operations that may be expected for the full year ending December 31, 1996. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS," and "FINANCIAL STATEMENTS." - 5 - 9
YEARS ENDED THREE MONTHS ENDED DECEMBER 31, MARCH 31, ---------------------------- -------------------------- STATEMENT OF OPERATIONS DATA: 1995 1994 1996 1995 ---- ---- ---- ---- Net Sales ....................................... $ 13,722,144 $ 12,621,148 $ 2,884,819 $ 2,919,495 Cost of goods sold, including store occupancy and delivery costs ............................... 10,177,693 9,185,959 2,206,362 2,217,357 ------------ ------------ ----------- ----------- Gross profit .................................... 3,544,451 3,435,189 678,457 702,138 Operating expenses .............................. 3,848,101 3,559,490 962,554 931,412 ------------ ------------ ----------- ----------- Operating income (loss) ......................... (303,650) (124,301) (284,097) (229,274) Other expenses - net ............................ (573,767) (379,565) (91,172) (96,645) ------------ ------------ ----------- ----------- Income (loss) before income tax expense (benefit) (877,417) (503,866) (375,269) (325,919) Income tax expense (benefit) (267,490) (202,000) (150,107) (130,368) ------------ ------------ ----------- ----------- Net income (loss) $ (609,927) $ (301,866) $ (225,162) $ (195,551) ============ ============ =========== =========== Earnings (loss) per common share $ (0.29) $ (0.15) $ (0.08) $ (0.09) ============ ============ =========== =========== Weighted average common shares used 2,125,000 2,000,000 2,750,000 2,125,000 ============ ============ =========== ===========
MARCH 31, 1996 -------------- BALANCE SHEET DATA: Current assets................................................................ $2,924,017 Working capital............................................................... 414,447 Property and equipment........................................................ 663,470 Goodwill...................................................................... 124,311 Deferred income taxes......................................................... 357,061 Investment.................................................................... 125,000 Other assets.................................................................. 39,475 Current liabilities........................................................... 2,509,570 Capital lease obligations..................................................... 5,018 Stockholders' equity.......................................................... 1,718,746
1996 FINANCING In June 1996 the Company consummated a private placement to 12 investors of an aggregate of $622,500 of its Convertible Notes. The Convertible Notes are due and payable on December 11, 1996. Interest is payable at the rate of 5% per annum. The principal amount of each Convertible Note is convertible into shares of Common Stock at the rate of $1.50 per share. In the event that the shares of Common Stock issuable upon the conversion of the Convertible Notes are not registered under the Securities Act of 1933, as amended, on or before August 11, 1996, then the interest rate is 20% per annum calculated as of June 11, 1996. The shares of Common Stock issuable upon the conversion of the Convertible Notes are being offered hereby. RECENT DEVELOPMENTS As of April 23, 1996, the Company entered into a twenty-four month financial consulting and investor relations agreement with Solay, Inc. Pursuant to the financial consulting and investor relations agreement, Solay, Inc. is entitled to receive $135,000 payable over six months, which amount has been prepaid by the Company. In addition, Solay, Inc. received $65,000 in connection with financial advisory services rendered to the Company in connection with the 1996 Financing. Pursuant to the financial consulting and investor relations agreement, Solay, Inc. has the right to purchase 300,000 shares of Common Stock and 600,000 Warrants identical to the Warrants offered in the Initial Public Offering - 6 - 10 through October 23, 1996, for an aggregate purchase price of $300,000. In addition, Rodika Salter, an affiliate of Solay, Inc., has an option to purchase up to 200,000 shares of Common Stock until October 23, 1996 for $1.50 per share. In connection with the 1996 Financing, Lido Equities Corp. received an aggregate of $35,175 of commissions and non-accountable expenses. Pursuant to a consulting agreement, Lido Equities Corp. has been granted the right to acquire 100,000 shares of Common Stock and 200,000 Warrants identical to the Warrants offered in the Initial Public Offering until November 30, 1996, for an aggregate purchase price of $100,000. - 7 - 11 RISK FACTORS THIS OFFERING INVOLVES SUBSTANTIAL INVESTMENT RISKS AND THE SECURITIES SHOULD BE PURCHASED ONLY BY PERSONS WHO CAN AFFORD TO SUSTAIN THE LOSS OF THEIR ENTIRE INVESTMENT. IN EVALUATING AN INVESTMENT IN THE COMPANY AND ITS BUSINESS PRIOR TO PURCHASE, PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER THE FOLLOWING RISK FACTORS AS WELL AS OTHER INFORMATION SET FORTH ELSEWHERE IN THIS PROSPECTUS. OPERATING HISTORY The Company incurred losses of $609,927 and $225,162 for fiscal 1995 and the first three months of 1996, respectively. There can be no assurance that the Company's future operations will be profitable. The Company may, in fact, continue to incur losses for the foreseeable future. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" and "BUSINESS." DEPENDENCE ON PROPOSED EXPANSION PROGRAM The Company's continued growth depends to a significant degree on its ability to open new Cookstores, increase sales at existing stores and achieve and sustain profitability. The Company currently intends to open three or possibly four new Cookstores during the next 12 to 18 months. The Company is basing its plans for expansion principally on the operation of the Cookstores because of what is believed to be higher margins, the fragmented nature of competition in this line of business and the relatively few number of stores of its chief national competitors. There can be no assurance that the Company will be able to hire, train and integrate employees, locate and obtain favorable store sites, and adapt its management information and other operational systems, to the extent necessary to grow in a profitable manner. In addition, the costs associated with the planned expansion of the Cookstores may have a material adverse impact upon the Company's results and prospects. In the event that the Company's plans for expansion are not successful, there could be a material adverse affect on the Company's business. See "Need for Additional Financing" and "BUSINESS." LICENSE AGREEMENTS Four of the Subsidiaries are licensees under five separate License Agreements with the Franchisor with respect to the Bookstores. There can be no assurance that the Company or the Subsidiaries will be able to comply with all of the terms and conditions of the License Agreements. Noncompliance under any of the License Agreements may lead to termination of all of the License Agreements by the Franchisor. In such event, the Company may be compelled, among other things, to rename its stores and advertise such name change, which may have a material adverse affect on the Company. See "BUSINESS - License Agreements." NEED FOR ADDITIONAL FINANCING, CONVERSION OF CONVERTIBLE NOTES The Company intends to develop, open and operate three or possibly four additional Cookstores during the next 12 to 18 months. However, the Company must refinance its existing credit facilities which expire in January 1997, of which there can be no assurance. In addition, in the event that any or all of the Convertible Notes are not converted into shares of Common Stock, additional financing will - 8 - 12 be required. Moreover, additional short-term financing may be required to meet the Company's increased seasonal working capital requirements due to the Company's anticipated expansion. The Company has not made any arrangements for any additional financing. If the Company's revenues are not sufficient for the operation of the Company, or to enable the Company to complete its present plans for expansion, then the Company will have to seek additional financing. Moreover, the Company intends to further expand the number of stores, when and if appropriate, and anticipates that it will need to seek additional financing for such expansion. Such additional financing may be in the form of indebtedness from institutional lenders or other third parties or as equity financing. There can be no assurance that such financing will be available and, if so, on acceptable terms. Any such financing may result in significant dilution to investors in this Offering or cause the Company to become overly leveraged. In such event, the shareholders, including purchasers in this Offering, may lose or experience a substantial reduction in the value of their investment in the Company. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Liquidity and Financial Resources." SECURED LIENS -- EXISTENCE OF LIENS ON ALL OF THE COMPANY'S ASSETS All of the assets of the Company and the Subsidiaries (the "Secured Assets") have been pledged as collateral to secure obligations owed to Bank One Columbus, N.A. and to Ingram Book Company (the "Consignor"), the primary supplier of the Bookstores. The payments due to such parties are based upon the prime rate of interest. If the prime rate of interest rises, there may be a negative impact on results of operations. Assuming that the average amount owed to the Consignor for the goods consigned by the Consignor to the Bookstores is equal to approximately $2,600,000 during the next 12 months (of which interest accrues on approximately $2,300,000) and that the Company's outstanding bank debt is approximately $1,050,491 as of May 31, 1996, and there are no other changes with respect to the Company's obligations, then each percentage point increase in the prime rate of interest will decrease the Company's net earnings before income taxes by approximately $33,500 per annum. There can be no assurance that the prime rate of interest will not increase. In fiscal 1994 the Company's interest expense was $274,401 compared to $391,081 in fiscal 1995. The increase was due to higher average bank borrowings in fiscal 1995, together with higher interest rates on the Company's debt which was attributable to significant increases in the prime rate of interest. Furthermore, in the event that the Company or its Subsidiaries fail to comply with such obligations, including the making of required payments of principal and interest, the indebtedness could be declared immediately due and payable and, in certain cases, the lender could foreclose upon the Secured Assets. Moreover, to the extent that the assets of the Company or its Subsidiaries continue to be pledged to secure outstanding indebtedness, such assets will be unavailable to secure additional debt financing, which may adversely affect the Company's ability to borrow in the future. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Liquidity and Financial Resources." DEPENDENCE ON CREDIT FACILITIES The Company's operations are dependent upon the availability of credit. The Company's existing line of credit expires on January 10, 1997 and Bank One Columbus, N.A. has advised the Company that it does not intend to renew the Company's credit facilities. Moreover, the Company may not draw any additional advances under the line of credit. In the event that the Company is not able to obtain financing on favorable terms, there would be a material adverse affect on the Company. The Company believes that additional short-term financing may be required to meet the Company's increased working capital requirements due to the Company's anticipated expansion. There can be no assurance that such financing - 9 - 13 will be available, or, if so, on acceptable terms. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Liquidity and Financial Resources." COMPETITION The specialty retail business is highly competitive. The Company's Bookstores compete with other retail stores including, most notably, Barnes & Noble, Inc., the Borders-Walden Group, a subsidiary of K Mart Corporation, and Media Play, a division of Musicland Stores Corporation. The Company's Cookstores compete with other retail stores including Williams-Sonoma, Inc., Lechter's, Inc., Linens & Things and Bed Bath & Beyond, as well as other specialty stores and department stores. Certain of the Company's competitors have greater financial, distribution and marketing resources than the Company. There can be no assurance that the Company will have the ability to compete successfully. See "BUSINESS - Competition." RISK OF OPENING SUPERSTORE COOKSTORES The Company is considering opening Cookstores which would each be in excess of 5,000 square feet in size. No definitive plans have been formulated and the Company does not presently intend to open any such stores during the next 18 months. These "superstore" Cookstores would expand each product category carried in the Cookstores, particularly the food and tableware categories. The Company does not have any experience in operating superstore Cookstores. If the Company opens any superstore Cookstores and if they are not successful, there would be a material adverse affect on the Company. See "BUSINESS - Strategy." SUPPLIERS Although the Cookstores currently acquire their products from over 200 suppliers, certain suppliers of well-known products are particularly important to the Cookstores' ability to offer the quality of products necessary to implement the Company's strategy. These suppliers are not obligated to continue to furnish products to the Company. Moreover, the Bookstores acquire approximately 70% of their products from the Consignor. The Company does not have any written contracts with its suppliers other than the consignment agreements with the Consignor. In the event that the Company cannot maintain its existing relationships with its suppliers on terms no less advantageous than currently available, or experiences any delay or difficulty in obtaining alternative suppliers on comparable terms, then there could be a material adverse affect on the Company's business. See "BUSINESS - Suppliers and Distribution." NONCOMPLIANCE WITH CONSIGNMENT AGREEMENTS The Subsidiaries have not satisfied all of the provisions of the consignment agreements with the Consignor. However, the Consignor has never declared a default under the consignment agreements. Upon a default under any of the consignment agreements the Consignor may terminate all of such consignment agreements. As of March 31, 1996, the Company was holding approximately $2,600,000 of consigned goods, at cost, under the consignment agreements. In the event such consignment agreements are terminated, the Company would be required to return the consigned goods to the Consignor. Moreover, the Company would find it necessary to seek alternative sources of inventory financing. There can be no assurance that such financing will be available and, if so, on acceptable terms. - 10 - 14 In the event that the consignment agreements are terminated, there could be a material adverse affect on the Company. See "BUSINESS - Suppliers and Distribution." DEPENDENCE ON KEY PERSONS The Company is dependent upon the services of both John Gaylord and John D. Critser, both of whom serve as officers and members of the Company's Board of Directors under employment agreements which expire in April 2001. The Company carries keyman insurance in the amount of $1,000,000 on the lives of both John Gaylord and John D. Critser. The loss or curtailment of the services of either would have a material adverse affect on the Company's operations and prospects. In addition, the Company has an ongoing need to expand its management personnel, marketing and support staff. Competition for personnel having the qualifications required by the Company is intense and no assurance exists that the Company will be successful in recruiting or retaining such personnel in the future. See "BUSINESS Employees" and "MANAGEMENT." CONTROL BY CURRENT OFFICERS AND DIRECTORS; RELATIONSHIP OF PRINCIPAL SHAREHOLDERS The current officers and directors of the Company own an aggregate of approximately 56% of the Company's Common Stock and are in a position to influence the election of the Company's directors and otherwise essentially control the outcome of all matters requiring shareholder approval. Moreover, all of the principal shareholders of the Company are related by blood or marriage and own an aggregate of approximately 70% of the Common Stock. See "MANAGEMENT" and "PRINCIPAL SHAREHOLDERS." LEASES The Company currently leases all of its properties. No assurance can be given that the Company will be able to find favorable store sites for expansion and negotiate leases on satisfactory terms and conditions or that the Company will be able to comply with the provisions of the current leases or renegotiate favorable lease terms as they expire. See "BUSINESS - Leased Properties." SEASONALITY The Company's business is subject to substantial seasonal variations. Historically, a significant portion of the Company's net sales and net earnings have been realized during the period from October through December, and levels of net sales and net earnings have generally been significantly lower during the period from January through September. The Company believes that this is the general pattern associated with similar retail industries. If for any reason the Company's sales were to be substantially below seasonal norms during the October through December period, the Company's annual results could be materially and adversely affected. Unfavorable economic conditions affecting retailers generally during the Christmas selling season in any year could materially and adversely affect the Company's results of operations for the year. The Company must also make decisions regarding how much inventory to buy well in advance of the season in which it will be sold, especially for the Christmas selling season. Significant deviations in actual from projected demand for products can have an adverse affect on the Company's sales and profitability. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS." - 11 - 15 POTENTIAL LIMITATION ON TRADEMARK PROTECTION The Cookstore, Inc. has been granted a registered trademark for "The Cookstore" and has applied for registration of a logo for "The Cookstore." The Company does not have any other trademark applications pending. However, additional trademark registration applications which may be filed by the Company with the United States Patent and Trademark Office may or may not be granted and the breadth or degree of protection which the Company's existing or future trademarks, whether or not registered, afford the Company may not be adequate. Moreover, the Company may not be able to defend successfully any legal rights it obtains. See "BUSINESS - Trademarks." POTENTIAL ANTI-TAKEOVER EFFECT OF PROVISIONS OF CERTIFICATE OF INCORPORATION AND DELAWARE LAW Section 203 of the Delaware General Corporation Law prohibits a publicly held Delaware corporation from engaging in a "business combination" with an "interested stockholder" for a period of three years after the date of the transaction in which the person became an interested stockholder, unless (i) prior to the date of the business combination, the transaction is approved by the board of directors of the corporation, (ii) upon consummation of the transaction which resulted in the stockholder becoming an interested stockholder, the interested stockholder owns at least 85% of the outstanding voting stock, or (iii) on or after such date the business combination is approved by the board of directors and by the affirmative vote of at least 66 2/3% of the outstanding voting stock which is not owned by the interested stockholder. A "business combination" includes mergers, asset sales and other transactions resulting in a financial benefit to the stockholder. An "interested stockholder" is a person who, together with affiliates and associates, owns (or within three years, did own), 15% or more of the corporation's voting stock. This provision of law could similarly discourage, prevent or delay a change in control of the Company, which could have the effect of discouraging bids for the Company and thereby prevent stockholders from receiving the maximum value for their shares. See "DESCRIPTION OF SECURITIES." AUTHORIZATION AND DISCRETIONARY ISSUANCE OF PREFERRED STOCK The Company's Certificate of Incorporation authorizes the issuance of "blank check" preferred stock with such designations, rights and preferences as may be determined from time to time by the Board of Directors. Accordingly, the Board of Directors is empowered, without shareholder approval, to issue preferred stock with dividends, liquidation, conversion, voting or other rights which could decrease the amount of earnings and assets available for distribution to holders of Common Stock and adversely affect the relative voting power or other rights of the holders of the Company's Common Stock. In the event of issuance, the preferred stock could be used, under certain circumstances, as a method of discouraging, delaying or preventing a change in control of the Company. Although the Company has no present intention to issue any shares of its preferred stock, there can be no assurance that the Company will not do so in the future. See "DESCRIPTION OF SECURITIES." NO DIVIDENDS In the past, several of the Subsidiaries have paid nominal dividends on their common stock. However, the Company's loan agreements with an institutional lender prohibits the payment of any cash dividends. The Company has not paid and does not anticipate declaring or paying any dividends in the foreseeable future. See "DIVIDEND POLICY." - 12 - 16 SHARES AVAILABLE FOR RESALE The Company has outstanding 2,750,000 shares of Common Stock. In addition, up to 1,725,000 shares of Common Stock are issuable upon the exercise of the Warrants and 1,708,337 shares of Common Stock are issuable upon the exercise of outstanding options, warrants and conversion rights, and 415,000 shares of Common Stock are issuable upon the conversion of the Convertible Notes. Moreover, options to purchase 333,333 shares of Common Stock may be issued under the Company's 1994 Stock Option Plan. To the extent that such stock options, warrants and conversion rights are exercised, dilution to the interests of the Company's shareholders will occur. Moreover, the terms upon which the Company will be able to obtain additional equity capital may be adversely affected since the holders of the outstanding options, warrants and conversion rights can be expected to exercise them, to the extent they are able to, at a time when the Company would, in all likelihood, be able to obtain any needed capital on terms more favorable to the Company than those provided in the options, warrants and conversion rights. Furthermore, the sale of Common Stock or other securities held by or issuable to the holders, or merely the potential of such sales, could have an adverse effect on the market price of the Company's securities. See "MANAGEMENT - Executive Compensation," "CERTAIN TRANSACTIONS" and "DESCRIPTION OF SECURITIES." Of the shares of Common Stock outstanding, 1,930,525 are "restricted securities" as that term is defined in Rule 144 under the Securities Act and may only be sold pursuant to a registration statement filed under the Securities Act or in compliance with Rule 144 or another exemption from the registration requirements of the Securities Act. The holders of such shares of Common Stock have agreed not to sell any of their shares of Common Stock without the consent of RAS Securities Corp., the representative of the underwriters of the Company's Initial Public Offering, until October 31, 1997. It is not anticipated that RAS Securities Corp. will consent to the sales of any shares if any such sales might have an adverse impact on the market price of the Common Stock. Sales of the Company's Common Stock by present shareholders may, in the future, have a depressive effect on the market price of the Company's securities. See "DESCRIPTION OF SECURITIES" and "PLAN OF DISTRIBUTION." POTENTIAL ADVERSE EFFECT OF REDEMPTION OF WARRANTS The Warrants offered hereby are redeemable by the Company at a price of $.05 per Warrant, commencing October 31, 1997 and prior to their expiration, provided that (i) prior notice of not less than 30 days is given to the holders of the Warrants, and (ii) the closing sale price of the Common Stock as reported on NASDAQ on each of the 20 consecutive trading days ending on the tenth day prior to the date on which the Company gives notice of redemption has been at least $4.50. The holders of the Warrants shall have exercise rights until the close of the business day preceding the date fixed for redemption. Notice of redemption of the Warrants could force the holders to exercise the Warrants and pay the exercise price at a time when it may be disadvantageous for them to do so, to sell the Warrants at the market price when they might otherwise wish to hold the Warrants, or to accept the redemption price which is likely to be substantially less than the market value of the Warrants at the time of redemption. See "DESCRIPTION OF SECURITIES - Warrants." RELATIONSHIP OF UNDERWRITERS TO TRADING The underwriters of the Initial Public Offering (the "Underwriters") may act in a brokerage capacity with respect to the purchase or sale of the Common Stock or Warrants on NASDAQ or the Boston Stock Exchange. The Underwriters also have the right to act as the Company's sole agent in - 13 - 17 connection with any future solicitation of the holders of the Warrants to exercise their Warrants. Unless granted an exemption by the Commission from Rule 10b-6 promulgated under the Exchange Act, the Underwriters and any soliciting broker-dealers will be prohibited from engaging in any market-making activities with regard to the Company's securities during a period beginning nine business days prior to the commencement of any such solicitation and ending on the later of the termination of such solicitation activity or the termination (by waiver or otherwise) of any right that the Underwriters and soliciting broker-dealers may have to receive a fee for soliciting the exercise of the Warrants. As a result, the Underwriters and soliciting broker-dealers may be unable to continue to provide a market for the Company's securities during certain periods while the Warrants are exercisable. Such a limitation, while in effect, could impair the liquidity and market price of the Common Stock. CURRENT PROSPECTUS AND STATE BLUE SKY REGISTRATION REQUIRED TO EXERCISE WARRANTS Holders of the Warrants will have the right to exercise the Warrants for the purchase of shares of Common Stock only if a current prospectus relating to such shares is then in effect and only if the shares are qualified for sale, or there is an exemption from the applicable qualification requirements, under the securities laws of the applicable state or states. The Company has undertaken and intends to file and keep effective and current a prospectus which will permit the purchase and sale of the Common Stock underlying the Warrants, but there can be no assurance that the Company will be able to do so. Although the Company intends to seek to qualify for sale the shares of Common Stock underlying the Warrants in those states in which the securities are to be offered, no assurance can be given that such qualification will occur. The Warrants may be deprived of any value if a prospectus covering the shares issuable upon the exercise thereof is not kept effective and current or if such underlying shares are not, or cannot be, registered in the applicable states. Although the Company does not presently intend to do so, the Company reserves the right to call the Warrants for redemption whether or not a current prospectus is in effect or such underlying shares are not, or cannot be, registered in the applicable states. If the Company calls the Warrants under such circumstances, the holders of the Warrants may have difficulty in selling or exercising their Warrants prior to redemption. See "DESCRIPTION OF SECURITIES - - Warrants." UNDERWRITERS' WARRANTS AND REGISTRATION RIGHTS The Company has sold to the Underwriters for $18.00, Underwriters' Warrants to purchase an aggregate of 75,000 shares of Common Stock and 150,000 Warrants. The shares of Common Stock and the Warrants issuable upon exercise of the Underwriters' Warrants are identical to those offered hereby. The Underwriters' Warrants are exercisable for a period of four years commencing October 31, 1996. The exercise of the Underwriters' Warrants may dilute the value of the shares of Common Stock and may adversely affect the Company's ability to obtain equity capital. Moreover, if the Common Stock issuable upon the exercise of the Underwriters' Warrants is sold in the public market it may adversely affect the market price of the Common Stock. The Underwriters have been granted certain "piggyback" registration rights for a period of seven years from October 31, 1995, and demand registration rights for a period of five years from October 31, 1995, with respect to the registration under the Securities Act of the securities issuable upon exercise of the Underwriters' Warrants. The exercise of such rights could result in substantial expense to the Company. - 14 - 18 LACK OF TRADING MARKET; NASDAQ MAINTENANCE; POSSIBLE DELISTING OF SECURITIES FROM NASDAQ; RISKS OF LOW-PRICED STOCKS Prior to the Initial Public Offering, there had been no established public trading market for the Company's Securities and there is no assurance that a regular public trading market for the Company's Securities will be sustained. The Company's Securities are listed on the NASDAQ small capitalization market. For continued listing, the Company, generally, must have $2,000,000 in total assets, $1,000,000 in total capital and surplus, $200,000 in market value of public float, a minimum bid price of $1.00 per share, a minimum of 100,000 shares publicly held and a minimum of 300 shareholders. If the Company is unable to satisfy NASDAQ's maintenance criteria in the future, the Securities will be subject to being delisted, and trading, if any, in the Company's Securities would thereafter be conducted in the over-the-counter market in the so-called "pink sheets" or the NASD's "Electronic Bulletin Board." As a consequence of such delisting, an investor would likely find it more difficult to dispose of, or to obtain quotations as to the price of, the Securities. PENNY STOCK REGULATION In the event that the Company is unable to satisfy the NASDAQ maintenance requirements, trading would be conducted in the pink sheets or the NASD's Electronic Bulletin Board. In the absence of the Securities being quoted on NASDAQ, or the Company having $2,000,000 in net tangible assets, trading in the Securities would be covered by Rule 15g-9 promulgated under the Exchange Act for non-NASDAQ and non-exchange listed securities. Under such rule, broker-dealers who recommend such securities to persons other than established customers and accredited investors must make a special written suitability determination for the purchaser and receive the purchaser's written agreement to a transaction prior to sale. Securities are exempt from this rule if the market price is at least $5.00 per share. The Commission has adopted regulations that generally define a "penny stock" to be any equity security that has a market price of less than $5.00 per share, subject to certain exceptions. Such exceptions include an equity security listed on NASDAQ and an equity security issued by an issuer that has (i) net tangible assets of at least $2,000,000, if such issuer has been in continuous operation for three years, (ii) net tangible assets of at least $5,000,000, if such issuer has been in continuous operation for less than three years, or (iii) average revenue of at least $6,000,000 for the preceding three years. Unless an exception is available, the regulations require the delivery, prior to any transaction involving a penny stock, of a disclosure schedule explaining the penny stock market and the risks associated therewith. If the Company's securities were subject to the regulations applicable to penny stocks, the market liquidity for the securities would be severely affected by limiting the ability of broker-dealers to sell the securities and the ability of purchasers in this Offering to sell their securities in the secondary market. There is no assurance that trading in the Company's securities will not be subject to these or other regulations that would adversely affect the market for such securities. - 15 - 19 USE OF PROCEEDS The Company will not receive any of the proceeds from the sale of the Securities offered hereby. DIVIDEND POLICY Several of the Subsidiaries have previously paid nominal dividends on their capital stock. However, the Company's loan agreements prohibit the distribution of cash dividends. Except for the payment of dividends on the Company's Series A Preferred Stock, the Company has not in the past paid, and does not anticipate paying in the foreseeable future, cash dividends, but instead intends to retain future earnings, if any, for reinvestment in its business. Any future determination to pay cash dividends will be at the discretion of the Board of Directors and will be dependent upon the Company's financial condition, results of operations, capital requirements and such other factors as the Board of Directors deems relevant. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL Gaylord Companies, Inc. is a specialty retailer of books and quality cookware and serving equipment. The Company was formed on July 19, 1994 for the purpose of consolidating the activities of its six wholly-owned Subsidiaries: Gaylord Book Company, Sawworth Book Company, formerly known as Little Professor Enterprises, Inc., Gaylord's, Inc., Gaylord Enterprises, Inc., The Cookstore, Inc. and The Cookstore Worthington, Inc., formerly known as Gaylord Companies, Inc. As of August 1, 1994, all of the shareholders of the Subsidiaries entered into the Exchange Agreement whereby such shareholders exchanged all of the issued and outstanding common stock of each of the Subsidiaries for all of the then outstanding Common Stock of the Company. See "CERTAIN TRANSACTIONS." The Company's strategy is to capitalize upon its dual experience as a specialty retailer of books in the Bookstores and of quality cookware and serving equipment in the Cookstores and to expand these approaches into regional malls and select other sites throughout the country. The Company intends to focus its plans for expansion on the Cookstores because of what is believed to be the higher margins, fragmented nature of competition in this line of business and the relatively few number of stores owned by its chief national competitors. The Company believes that there is greater competition in the Bookstore business, which has lower margins and less opportunity for growth. Although the Company may open additional Bookstores in select sites in the future, the Company is not presently planning to open any additional Bookstores. See "BUSINESS - Strategy." Barnes and Noble, Inc. owns three superstore bookstores, and Media Play, a division of Musicland Stores Corporation, owns three superstores, in Columbus, Ohio. Media Play and Barnes and Noble, Inc. are both discount retailers and their presence had a significant negative impact on the Company's sales and profitability. In addition, Barnes & Noble, Inc. opened a superstore in Boardman, Ohio late in 1995. In Cincinnati, Ohio the Company experienced a similar negative competitive impact on the performance of its only store in the market due to the opening of an approximately 40,000 square foot bookstore by the Borders-Walden Group and the opening of stores by Barnes & Noble, Inc., Media Play and a regional independent operator. The Company believes that the Borders-Walden Group plans - 16 - 20 to open a new store in Boardman, Ohio in the fall of 1996 in the close proximity to the Bookstore in the Plaza at Sawmill Place in Columbus, Ohio. Discount retailers significantly affected the Company's sales and margins in fiscal 1993 through fiscal 1995. As a result, the Company introduced its own discount pricing strategy in order to provide its customers with comparable price value and meet the competition. The Company has also engaged in marketing promotions, offered a new product mix and changed its purchasing strategy. The original Cookstore was opened in 1981 in Columbus, Ohio. Management believes that the Cookstores are upscale, high fashion culinary stores that attract the professional as well as the everyday buyer. Management has refined its Cookstore operations and in late December 1993 opened its second location in Worthington, Ohio. Management believes that opportunities exist for expansion in the fragmented cookware market and has shifted the emphasis of its expansion plans from Bookstores to Cookstores. In 1994, the Company doubled the number of Cookstore locations from two to four. A third Cookstore in Dayton, Ohio and a fourth Cookstore in Akron, Ohio opened during the fourth quarter of 1994. A fifth Cookstore is scheduled to open in the fall of 1996 in Indianapolis, Indiana. The original Cookstore has been remodeled to the standards of the other locations. RESULTS OF OPERATIONS THREE MONTHS ENDED MARCH 31, 1996 AND 1995 Consolidated Operations The Company incurred a net loss of $225,162 in the three months ended March 31, 1996 as compared to a net loss of $195,551 for the comparable period in the prior year. Management believes that the increase in the net loss in the three months ended March 31, 1996 as compared to the same period in 1995 was primarily due to lower gross profit margins, higher store operating expenses and higher administrative costs. Net sales in the three months ended March 31, 1996 were $2,884,819, a 1.2% decrease over net sales of $2,919,495 for the comparable period in the prior year. Management believes that the decrease was due primarily to the fact that the Superstores in both Boardman and Cincinnati, Ohio posted significant sales decreases as a result of competition from stores operated by Barnes & Noble, Inc. in close proximity during the three months ended March 31, 1996. Such stores did not encounter such competition in the same period in 1995. Except for the Bargain Bookstore which experienced slightly lower sales, the Company's other stores had increased sales in the three months ended March 31, 1996 as compared to the same period in the prior year. All net sales are comparable in the period. Cost of goods sold, including store occupancy and delivery costs, was $2,206,362 for the three months ended March 31, 1996 as compared to $2,217,357 for the three months ended March 31, 1995. Gross profit as a percentage of net sales was 23.5% for the three months ended March 31, 1996 as compared to 24.0% during the same period in 1995. Management believes that the primary reason for the lower gross profit as a percentage of net sales for the three months ended March 31, 1996, as compared to the same period in 1995, is the lower gross profit as a percentage of sales in the Company's Superstore in Boardman, Ohio, due to more aggressive discounting in response to the October 1995 opening of a superstore by Barnes & Noble, Inc. in close proximity. In addition, while sales decreased in the Superstore in Boardman, Ohio, for the three months ended March 31, 1996, as compared to the same period in 1995, occupancy costs remained substantially the same. - 17 - 21 Store level operating expenses were $604,292 for the three months ended March 31, 1996 as compared to $575,178 for the three months ended March 31, 1995. Management believes that the increase in such expenses was due primarily to the reclassification of certain payroll expenses to store level operating expenses for the three months ended March 31, 1996. Such expenses were classified as administrative expenses in the same period in 1995. Store level operating expenses were 21.0% of net sales for the three months ended March 31, 1996 as compared to 19.7% in the same period in 1995. Management believes that the increase in such expenses as a percentage of net sales is due primarily to the fact that while store level operating expenses increased in the three months ended March 31, 1996 as compared to the same period in the prior year, net sales decreased. Administrative expenses for the three months ended March 31, 1996 were $310,200 compared to $291,861 for the three months ended March 31, 1995. Management believes that the increase in administrative expenses is due primarily to the Company's anticipated expansion. Depreciation and amortization for the three months ended March 31, 1996 were $48,062 compared to $64,373 for the three months ended March 31, 1995. Management believes that the decrease in deprecation and amortization is due primarily to the fact that some assets had been completely depreciated or amortized in the three months ended March 31, 1996 as compared to the same period in the prior year. Interest expense for the three months ended March 31, 1996 was $76,817 compared to $79,536 in the same period in the prior year. Amortization of discount on notes payable for the three months ended March 31, 1996 was $0 compared to $17,292 for the three months ended March 31, 1995. The decrease in amortization of discount on notes payable is due primarily to the fact that the amortization was accelerated upon the repayment of the bridge loans in the original principal amount of $500,000 (the "Bridge Loans") upon the completion of the Initial Public Offering in November of 1995 and the amortization was subsequently discontinued. Cookstore Operations Net sales in the three months ended March 31, 1996 were $579,541, a 13.9% increase over net sales of $508,734 during the same period in the prior year. Net sales increased in all of the Cookstores for the period ended March 31, 1996 as compared to the same period in the prior year. All Cookstore net sales are comparable in the period. Cost of goods sold, including store occupancy and delivery costs, was $420,425 for the three months ended March 31, 1996 as compared to $381,153 for the three months ended March 31, 1995. Management believes that such increase was due primarily to the increased level of sales. Gross profit as a percentage of net sales was 27.5% for the three months ended March 31, 1996 as compared to 25.1% during the same period in 1995. Management believes that the primary reasons for the higher gross profit as a percentage of net sales for the three months ended March 31, 1996, as compared to the same period in 1995, are that while sales increased for the three months ended March 31, 1996, as compared to the same period in 1995, occupancy costs remained the same. Bookstore Operations Net sales in the three months ended March 31, 1996 were $2,305,278, a 4.4% decrease over net sales of $2,410,761 in the prior year. Management believes that the decrease was due primarily to - 18 - 22 significant sales decreases in Superstores in both Boardman and Cincinnati, Ohio, as discussed above. Except for sales in the Bargain Bookstores, all of the Company's other Bookstores had sales increases in the three months ended March 31, 1996 as compared to the same period in the prior year. All Bookstore sales are comparable for the period. Cost of good sold, including store occupancy and delivery costs, was $1,785,936 for the three months ended March 31, 1996 as compared to $1,836,204 for the three months ended March 31, 1995. Management believes that such decrease was due primarily to the decreased level of sales. Gross profit as a percentage of net sales was 22.5% for the three months ended March 31, 1996 as compared to 23.8% during the same period in 1995. Management believes that the primary reason for the lower gross profit as a percentage of net sales for the three months ended March 31, 1996, as compared to the same period in 1995, is the lower gross profit as a percentage of sales in the Superstore in Boardman, Ohio, due to more aggressive discounting in response to the early October 1995 opening of a store by Barnes & Noble, Inc. in close proximity. In addition, while sales decreased in the Company's Book Superstore in Boardman, Ohio, for the three months ended March 31, 1996, as compared to the same period in 1995, occupancy costs remained substantially the same. YEARS ENDED DECEMBER 31, 1995 AND 1994 Consolidated Operations The Company incurred a net loss of $609,927 in fiscal 1995 as compared to a net loss of $301,866 for fiscal 1994. Management believes that the increase in the net loss in fiscal 1995 as compared to fiscal 1994 was primarily due to lower gross profit margins, higher store operating expenses, higher administrative expenses, higher interest expenses and a higher amortization of discounts on notes payable in fiscal 1995 as compared to fiscal 1994. Net sales in fiscal 1995 were $13,722,144, an 8.7% increase over net sales of $12,621,148. Management believes that the increase was due primarily to the fact that the two newest Cookstores were open for twelve months in fiscal 1995 as compared to having been open only a few weeks at the end of fiscal 1994, and increases in comparable Cookstore net sales. Comparable store net sales were up 0.5% in fiscal 1995 as compared to fiscal 1994. Cost of goods sold, including store occupancy and delivery costs, was $10,177,693 for fiscal 1995 as compared to $9,185,959 for fiscal 1994. Management believes that such increase was due primarily to the increased level of sales and the inclusion of the occupancy costs for the two newest Cookstores for the full twelve month period in fiscal 1995 compared to only a few weeks at the end of fiscal 1994. Gross profit as a percentage of net sales was 25.8% for fiscal 1995 as compared to 27.2% during fiscal 1994. Management believes that the primary reasons for the higher gross profit as a percentage of net sales for fiscal 1994, as compared to fiscal 1995, are higher occupancy costs as a percentage of net sales due primarily to seasonality in the two newest Cookstores that were open for twelve months in fiscal 1995 compared to having been open only a few weeks in fiscal 1994. While the store occupancy cost portion of cost of goods sold are relatively fixed throughout a twelve month period, December Cookstore net sales account for approximately 29% of total net Cookstore sales for a twelve month period. In addition, "Grand Opening" price promotions were conducted in the two newest Cookstores in the first quarter of 1995 that were not conducted in 1994. - 19 - 23 Store level operating expenses for fiscal 1995 were $2,394,236 compared to $2,259,523 for fiscal 1994. Management believes that such increase was due primarily to the increased level of sales. Store level operating expenses were 17.5% of net sales for fiscal 1995 as compared to 17.9% in fiscal 1994. Administrative expenses for fiscal 1995 were $1,206,874 compared to $1,017,768 for fiscal 1994. Management believes that the increase in administrative expenses is due primarily to the Company's expansion plans and increased costs due to the Initial Public Offering. Depreciation and amortization for fiscal 1995 were $246,991 compared to $242,199 for fiscal 1994. Interest expenses for fiscal 1995 were $391,081 compared to $274,401 for fiscal 1994. Management believes that the increase in interest expenses is due primarily to a higher level of bank debt and higher rates of interest in fiscal 1995 as compared to fiscal 1994. Amortization of discount on notes payable for fiscal 1995 was $190,208 compared to $17,292 for fiscal 1994. Management believes that the increase in amortization of discount on notes payable is due primarily to the fact that the amortization was accelerated upon the repayment of the Bridge Loans in the aggregate principal of $500,000 after the completion of the Initial Public Offering in fiscal 1995 compared to fiscal 1994. Cookstore Operations Net sales in fiscal 1995 were $3,042,412 a 62.9% increase over net sales of $1,867,872 during fiscal 1994. Management believes that the increase was due primarily to the opening of the two newest Cookstores for all of fiscal 1995 as compared to having been open only a few weeks at the end of fiscal 1994, and increases in comparable stores net sales. Comparable store net sales were up 9.4% in fiscal 1995 as compared to fiscal 1994. Cost of goods sold, including store occupancy and delivery costs, was $2,103,086 for fiscal 1995 as compared to $1,134,658 for fiscal 1994. Management believes that such increase was due primarily to the increased level of sales and the inclusion of the occupancy costs for the newest Cookstores. Gross profit as a percentage of net sales was 30.9% for fiscal 1995 as compared to 39.3% during fiscal 1994. Management believes that the primary reasons for the higher gross profit as a percentage of net sales for fiscal 1994, as compared to the same period in fiscal 1995, are higher occupancy costs as a percentage of net sales due primarily to seasonality in the two newest Cookstores that were open for all of fiscal 1995 as compared to having been open only a few weeks at the end of fiscal 1994. While the store occupancy cost portion of cost of goods sold is generally relatively fixed throughout the year, December net sales in the Cookstores were approximately 29% of total net sales for the twelve month period. In addition, "Grand Opening" price promotions were conducted in the two newest Cookstores in the first quarter of 1995 that were not conducted in 1994. - 20 - 24 Bookstore Operations Net sales in fiscal 1995 were $10,679,732, a 0.7% decrease over net sales of $10,753,276 in fiscal 1994. All Bookstore net sales are comparable in the period. Cost of goods sold, including store occupancy and delivery costs, was $8,074,607 for fiscal 1995 as compared to $8,051,301 for fiscal 1994. Gross profit as a percentage of net sales was 24.4% for fiscal 1995 as compared to 25.1% in fiscal 1994. Management believes that the decrease in the gross profit as a percentage of net sales for fiscal 1995 as compared to fiscal 1994 is due primarily to the fact that while sales decreased, occupancy costs remained approximately the same. LIQUIDITY AND CAPITAL RESOURCES Through March 31, 1996, the Company funded its requirements for working capital and capital expenditures from the net proceeds of the Initial Public Offering and through borrowings under its bank credit facilities. As of March 31, 1996, the Company had a revolving line of credit of $395,000 and secured term debt in the aggregate amount of $579,989. The bank debt bears interest at rates of 1% to 1.5% over the prime rate of interest. The line of credit and the secured term debt mature on January 10, 1997 and September 30, 1996, respectively. Under the loan agreements, no additional advances will be made under the line of credit through the maturity date of January 10, 1997. The failure of the Company to refinance the Company's existing credit facilities, of which there can be no assurance, would have a material adverse affect on the Company. The Company's capital expenditures totaled $307,100 in fiscal 1994 and $26,775 in fiscal 1995 and $1,501 in the three months ended March 31, 1996 and $10,699 in the three months ended March 31, 1995. Capital expenditures were higher in 1994 because the Company opened two new Cookstores. Management estimates that capital expenditures, including the funds needed for opening three or possibly four new retail stores, during the next 12 to 18 months will aggregate approximately $750,000. At December 31, 1995, the Company has recorded deferred tax assets aggregating approximately $409,000. Such deferred tax assets are primarily related to net operating loss carryforwards aggregating $799,000, which expire in the years 2009 and 2010, and book over tax depreciation of $110,000. The Company has assessed its past earnings history coupled with its plans for expansion, specifically the opening of new Cookstores, and has concluded, although there can be no assurance, that it is more likely than not that it will realize the benefits of these tax assets through future profitable operations sometime prior to their expiration. In its most recently completed fiscal year, the Company had a pre-tax loss of approximately $877,000. However, the Company believes that this is not representative of what can be expected of future performance, although there can be no assurance, since such loss included approximately $190,000 of note discount write-offs and other expenses connected with the Company's activities in becoming a publicly traded corporation. The Company has plans to institute cost saving measures to help it achieve profitability. The Company also has plans to raise additional financing to achieve its growth plans. However, there can be no assurance that these results will occur. Taxable income would need to average approximately $65,000 per year over the next 14 years to take full advantage of the deferred tax assets prior to the expiration of any portion thereof. On November 7, 1995, the Company consummated the Initial Public Offering of 750,000 shares of Common Stock and 1,725,000 Warrants at a price to the public of $3.00 and $0.10, respectively. In - 21 - 25 addition, certain principal stockholders of the Company purchased 60,000 shares of the Company's Series A Preferred Stock at a price of $5.00 per share. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS MARKET INFORMATION From inception the Common Stock and Warrants have been quoted on the NASDAQ Small Capitalization Market under the symbols GJCO and GJCOW, respectively, and on the Boston Stock Exchange under the symbols GJC and GJCW, respectively. The following table sets forth the range of high and low bid quotations prior to the end of the fourth Quarter of 1995, through June 13, 1996 as reported by the NASDAQ Small Capitalization Market. Prior to October 31, 1995 there was no public market for the Common Stock or Warrants. Common Stock Redeemable Warrants ------------ ------------------- High Low High Low ---- --- ---- --- 1995 - ---- Fourth Quarter* ............................... 4 3 2 .10 1996 - ---- First Quarter (through 3/31/96)................ 5 3/8 1 17/32 2 1/16 3/8 Second Quarter (through 6/13/96)............... 3 3/8 15/16 1 1/8 5/32 * Prior to such time there was no public market for the Common Stock and the Warrants.
HOLDERS The Company has approximately 330 record holders of its Common Stock. - 22 - 26 BUSINESS GENERAL The Company is a specialty retailer of books in the Bookstores and quality cookware and serving equipment in the Cookstores. The Company owns and operates six Bookstores and four Cookstores. In 1977 Gaylord Book Company, the first of the Company's Subsidiaries, purchased the assets of a Bookstore located at the Lane Avenue Shopping Center in Columbus, Ohio which had been operated by George Gaylord and Mary Jo Gaylord, his wife (the "Founders"), through a corporation controlled by them for part of such time, beginning in 1970. Gaylord Book Company also owns and operates a Bargain Bookstore in the Lane Avenue Shopping Center which it opened in 1993. Sawworth Book Company, formerly known as, Little Professor Enterprises, Inc., was organized in 1984 and has operated a Bookstore in the Worthington Mall in Worthington, Ohio since that time. Sawworth Book Company has also operated a Superstore in the Plaza at Sawmill Place in Columbus, Ohio since 1988, which had been previously operated at a nearby location since 1985. Gaylord's, Inc. was organized in 1989 and has operated a Superstore in the Forest Fair Mall in Cincinnati, Ohio since 1989. Gaylord Enterprises, Inc. was organized in 1993 and opened a Superstore in Boardman Plaza in Boardman, Ohio in 1993. The Cookstore, Inc. was organized in 1981 and has operated a Cookstore in the Lane Avenue Shopping Center since 1981 and opened a Cookstore at the Summit Mall in Akron, Ohio in December 1994. The Cookstore Worthington, Inc., formerly known as Gaylord Companies, Inc., was organized in 1993, opened a Cookstore in the Worthington Mall in 1993, and a Cookstore at The Mall at Fairfield Commons, Beavercreek, Ohio, a suburb of Dayton, Ohio in November 1994. As of August 1, 1994, all of the shareholders of the Subsidiaries entered into the Exchange Agreement whereby such shareholders exchanged all of the issued and outstanding common stock of each of the Subsidiaries for all of the Common Stock of the Company then outstanding. See "CERTAIN TRANSACTIONS." The Bookstores are operated pursuant to separate License Agreements with the Franchisor and are situated in regional malls and strip shopping centers in Ohio. Five of the six Bookstores are known as Superstores and range from 8,000 to 18,000 square feet in size. Each Superstore offers 60,000 to 80,000 book titles. In addition, all of the Superstores offer thousands of foreign and domestic magazines, books on cassette, out-of-town newspapers, travel guides, maps and calendars. The Company believes that the environment created at the Superstores is one of the keys to its success. The Company believes that it has created a warm, comfortable atmosphere in the Superstores, with furnishings that include fireplaces, pianos, reading rooms and comfortable chairs, with an added emphasis on special children's sections with child-sized furniture. Activities are conducted for readers of all ages, including visits, readings, workshops and booksignings by locally and nationally acclaimed writers and book illustrators. The other Bookstore is known as a Bargain Bookstore. The Bargain Bookstore is approximately 2,000 square feet in size and offers approximately 10,000 titles. The Bargain Bookstore sells deeply discounted publisher overstock, remaindered and used books. The Cookstores are each approximately 3,300 square feet in size and are situated in regional retail malls in Ohio. These stores carry cookware sold under such brand names as Calphalon, Le Crueset, Cuisinart, Kitchen Aid, Krups, Braun and Melitta, which are believed to be the trademarks of their respective owners. The merchandising philosophy of the Company is "if it is used in the kitchen, it can be purchased at The Cookstore." Accordingly, the Company attempts to carry a broad range of merchandise in the following categories: accessories, bakeware, books, cookware, cutlery, electrics, food, - 23 - 27 furniture, gadgets, gifts, tableware and textiles. The full range of the Cookstore's products are displayed and stocked on the retail floor in what the Company believes is an upscale and fashionable setting. The following table sets forth information relating to each of the Company's Subsidiaries:
DATE OF SUBSIDIARY INCORPORATION STORE LOCATION STORE OPENING STORE TYPE ---------- ------------- -------------- ------------- ---------- Gaylord Book Company 1977 Lane Avenue Shopping Center, August 1977 Little Professor Book Columbus, Ohio Company Store Lane Avenue Shopping Center, October 1993 Little Professor Columbus, Ohio Bargain Bookstore The Cookstore, Inc......... 1981 Lane Avenue Shopping Center, October 1981 Cookstore Columbus, Ohio Summit Mall, December 1994 Cookstore Akron, Ohio Castleton Square Shopping Planned opening: Cookstore Center Fall 1996 Indianapolis, Indiana Sawworth Book Little Professor Book Company................... 1984 Worthington Mall, October 1984 Company Bookstore Worthington, Ohio Plaza at Sawmill Place, April 1985 Little Professor Book Columbus, Ohio Company Bookstore Gaylord's Inc.............. 1989 Forest Fair Mall, April 1989 Little Professor Book Cincinnati, Ohio Company Bookstore The Cookstore Worthington Mall, December 1993 Cookstore Worthington, Inc.......... 1993 Worthington, Ohio The Mall at Fairfield Commons, November 1994 Cookstore Beavercreek, Ohio Gaylord Enterprises, Inc... 1993 Boardman Plaza, December 1993 Little Professor Book Boardman, Ohio Company Bookstore
STRATEGY The Company's strategy is to capitalize upon its dual experience as a specialty retailer of books in the Bookstores and of quality cookware and serving equipment in the Cookstores and to expand these approaches into regional malls and select other sites throughout the country. The Company intends to focus its plans for expansion on the Cookstores because of what is believed to be the higher margins, the fragmented nature of competition in this line of business and the relatively few number of stores owned by its chief national competitors. The Company believes that there is greater competition in the Bookstore business, which has lower margins and less opportunity for growth. Although the Company may open additional Bookstores in select sites in the future, the Company is not presently planning to open any additional Bookstores. The Company believes that the combination of its Bookstore and Cookstore approaches will provide it with operating, financial and marketing efficiencies while providing the Company with a level of diversification. The Company anticipates achieving efficiencies through the sharing of marketing - 24 - 28 information, real estate services, finance and central management. The Company intends to achieve its objectives by pursuing the strategy described below. STORE CHARACTERISTICS The six Bookstores are located in regional malls and shopping centers in Ohio. The Superstores are based upon the Company's "superstore" concept and range from 8,000 to 18,000 square feet in size while offering 60,000 to 80,000 book titles. The Superstores offer thousands of foreign and domestic magazines, books on cassette, out-of-town newspapers, travel guides, maps and calendars. The Bargain Bookstore is approximately 2,000 square feet in size and offers approximately 10,000 book titles. The Bargain Bookstore sells deeply discounted publisher overstock, remaindered and used books. The Company's long-term strategy is to selectively locate and open additional Bookstores, although the Company does not have any present plans to do so. The Cookstores are each approximately 3,300 square feet in size and are situated in regional retail malls. Each store offers approximately 6,000 different types of products which includes 30,000 to 50,000 separate items and includes products from over 200 vendors. The current product lines for the Cookstores fall into 12 distinct categories including accessories, bakeware, books, cookware, cutlery, electrics, food, furniture, gadgets, gifts, tableware and textiles. Management intends to use its existing Cookstores as the basic store design prototype for most of the Company's anticipated expansion. The Company is also considering implementing a "superstore" concept for the Cookstores. These superstore Cookstores would expand each product category carried in the basic prototype store, particularly the food and tableware categories. The superstore Cookstores would be in excess of 5,000 square feet in size. The Company believes that by offering a far greater selection than a typical bookstore or store carrying cookware, its superstore Bookstores and superstore Cookstores would each be able to establish itself as the leading source for its products in its community. STORE DESIGN AND AMBIANCE The Company believes that it has created a warm, comfortable atmosphere in the Bookstores which are Superstores. The Superstores contain furnishings that include fireplaces, pianos, reading rooms and comfortable chairs, including special children's sections with child-sized furniture. In the Cookstores, the Company's strategy is to present the merchandise in what the Company believes is an upscale and fashionable setting. The full range of the stores' products are displayed and stocked on the retail floor. The merchandise is arranged by category for shopping convenience and every item is tagged with the current retail price. Feature displays are arranged throughout the store emphasizing seasonal products or particular themes. The Company believes that its attractive store environments have caused its Bookstores and Cookstores to become places where customers enjoy browsing and shopping. ADVERTISING The Superstores utilize marketing programs aimed at reading activities for readers of all ages including visits, readings, workshops and booksignings by locally and nationally acclaimed writers and book illustrators. The Superstores place special emphasis on marketing aimed at the sale of children's books including its "Rug Club Storytime" and "Read-n-Grow Kid's Club" reading programs for children. - 25 - 29 Current Cookstore promotions center around seasonal events and holidays in which certain product lines are traditional favorites. Promotions are planned around in-store demonstrations and will be advertised in local newspapers, press releases and/or through direct mail and point of sale materials. Customer Service The Company emphasizes customer service in both the Bookstores and Cookstores and, through its salespeople, strives to provide its customers with an enjoyable shopping experience. The Company adheres to a number of customer service policies and practices to reinforce customer confidence in the Company. Expansion The Company's strategy is to expand its marketing approach into regional malls and strip shopping centers and other select sites throughout the country, with an emphasis in the Midwest. The Company anticipates that a significant portion of its expansion efforts will be directed toward developing its Cookstore business. The Company plans to open at least three or possibly four additional Cookstores during the next 12 to 18 months. The number of additional Cookstores that will be opened during the next 12 to 18 months will be dependent upon site opportunities, the cost of opening such stores, the refinancing of the Company's existing credit facilities and cash flow from operations. There can be no assurance that the Company will have sufficient financing to pursue its plans for expansion. The Company believes that the primary markets for the basic Cookstore are middle to upper income shopping destinations. The majority of these locations are in regional shopping malls located in suburban and urban core revitalization areas. Smaller specialty malls and select, upper end in-line shopping centers are additional target locations. The Company believes that due to the industry's highly fragmented nature, and the relatively few number of stores of its chief national competitors, Williams-Sonoma, Inc., Bed Bath & Beyond, Linens & Things and Lechter's, Inc., there are hundreds of prime locations available for future Cookstores although there is no assurance that such locations can be obtained on terms favorable or acceptable to the Company. The Company intends to begin expansion close to its current Midwest base. The Company intends to focus on those locations in which products may be delivered direct from suppliers by United Parcel Service or truck, eliminating the costs which would be necessitated by central warehousing and distribution. Prime considerations for successful new stores are market and site demographics, competition and the Company's ability to successfully manage the logistics of store operations. The Company may consider commencing catalogue sales in the future. The Company has no experience in this area and has not conducted any investigation of such activity or commenced a review of the feasibility of its capability to fulfill any orders generated from catalogue sales. Furthermore, there is no assurance that the Company will actively investigate the catalogue sales business or enter into the catalogue sales business. In the event that the Company commences operation in the catalogue sales area and is not successful, it could have a material adverse affect on the Company's business. - 26 - 30 COMPETITION The Bookstores The retail bookselling business is highly competitive. The Company competes in the bookstore business with Barnes & Noble, Inc., Media Play, a division of Musicland Stores Corporation, and Borders-Walden Group, a subsidiary of K mart Corporation, which is the largest operator of mall bookstores in the country. In the Bookstore business, the Company competes with other national chains, which operate substantially more superstores than the Company. The Company also competes with regional chains, as well as independent single store operators, local multi-store operators, department stores, variety discounters, drug stores and warehouse clubs. The Company competes with its competitors on the basis of price and its presentation of its products. Many of the Company's competitors have been expanding in both store size and number of outlets, while others have announced their intentions to pursue such expansion. In addition, certain of the Company's competitors have substantially greater financial, advertising and other resources than the Company, which may give them certain competitive advantages. The Cookstores The specialty retail business is highly competitive. The Company's stores compete against a wide variety of stores, including department and specialty stores, as well as mail order catalogs. Certain of the Company's competitors have greater financial, distribution, advertising and marketing resources than the Company, which may give them certain competitive advantages. The Company competes on the basis of its selection and quality of merchandise, and service to its customers. While some cooking product lines are carried in many stores stocking a broad range of products, few stores specialize totally in kitchen/cookware as do the Cookstores. The specialized market is highly fragmented with many local independent stores and small regional chains. The only national specialized kitchen products stores are Williams-Sonoma, Inc. and Lechter's, Inc. In addition, the Company competes with other well-known stores, including Linens & Things and Bed Bath & Beyond. Other local and small regional competitors vary widely in design, product selection and customer service. The Company believes that most local competitors are small, highly specialized operations situated in less desirable retail or non-retail locations. While these operators may be localized competition for the Cookstores, the Company believes that most markets do not have significant local operators and few competitors, with the exception of Williams-Sonoma, Inc. and Lechter's, Inc., are located in the mall locations where the Company anticipates opening Cookstores. SUPPLIERS AND DISTRIBUTION The Company purchases approximately 70% of its products for the Bookstores from Ingram Book Company (the "Consignor") and approximately 10% from Ohio Periodicals. The Bookstores do not purchase more than 5% of their inventory from any other single supplier. Four of the Subsidiaries are parties to five separate consignment agreements with the Consignor. Two of such consignment agreements may be terminated upon 120 days prior written notice by the Consignor. The balance of the consignment agreements may generally be terminated by the Consignor upon 270 days prior written notice. Although the Subsidiaries have not satisfied certain provisions in the consignment agreements, the Consignor has never declared a default under any of the consignment agreements, or expressed an intention to do so. Specifically, the Company has not met the provisions in the consignment agreements with respect to the required inventory turnover ratios. The inventory turnover provisions under the consignment agreements require the Company to sell consigned goods at a rate equal to 2.5 to 3 times the average amount of - 27 - 31 consigned goods held by the Company at certain Bookstore locations on an annualized and/or a calendar year basis. In 1995 the Company failed to meet such requirements in the five Bookstores subject to the consignment agreements and does not expect to meet such requirements in 1996. The inventory turnover ratios ranged from 41% to 70%, of the required inventory turnover ratios for each of the Bookstores, respectively. In addition, the Company may have failed to comply with the provisions in the consignment agreements with respect to the amount of consigned goods on hand in two of the Bookstores. The Company does not anticipate curing such defaults in the future unless required to do so by the Consignor. Upon a default by any of the Subsidiaries under any of the consignment agreements, the Consignor may terminate all of such consignment agreements. Management believes that the consignment agreements with the Consignor are advantageous to the Company and that in the event that such consignment agreements are terminated, there could be a material adverse affect on the Company. The Cookstores acquire their inventory from approximately 200 suppliers and do not purchase more than 5% of their inventory from any single supplier. The Company does not have any written supply agreements with these vendors, who are not obligated to continue to furnish products to the Company. The Company believes that its decentralized distribution and inventory control system has significantly enhanced its ability to control costs and to manage its inventory on a store-by-store basis for both the Bookstores and the Cookstores. The Company's suppliers ship inventory directly to the stores and almost all of the inventory is displayed and stocked on the retail floor. Management believes that this distribution system has resulted in significant cost savings for the Company. Although the Company may make commitments for significant warehouse space in the future, management believes that its present distribution system can continue to be utilized in connection with the Company's plans for expansion. However, there is no assurance that the Company will not have to centralize its inventory and lease warehouse space in connection with the Company's plans for expansion. MANAGEMENT INFORMATION SYSTEM The Company's information systems provide management with sales, inventory and other information and are important to the Company's ability to achieve cost efficiencies, operate profitably and control shrinkage. The Company uses retail point-of-sale systems which are polled daily and which generate sales reports and supporting documentation which are forwarded to the main office for auditing and input into the Company's automated accounting program. The point-of-sale system provides daily accounting of sales and gross profit as well as other control items such as discounts, price overrides and refunds. Financial statements, including income statements and balance sheets, are produced monthly for each location. Complete inventories are taken once or twice a year. Each item in the Bookstores and the Cookstores has its own distinct item number which is used by the point-of-sales system to record sale and cost information. Items are also tracked for reorder information and generation of historical sales reports used to make purchasing and reorder decisions. LICENSE AGREEMENTS Four of the Subsidiaries have entered into five separate License Agreements with the Franchisor, Little Professor Book Centers, Inc., with respect to the six Bookstores. The License Agreements replaced separate franchise agreements relating to five of the Bookstores. The Company owns approximately 10% of the outstanding common stock of the Franchisor. The initial term of the License Agreements will expire on December 31, 1996 and may be extended by the Company until December 31, 2001. The Company pays to the Franchisor a royalty of 1/2 of 1% of monthly sales for all of the Bookstores. If - 28 - 32 there is a default by any of the Subsidiaries under any one of the License Agreements, then the Franchisor may terminate all of the License Agreements. The Company and the Franchisor have also entered into a separate agreement (the "Supplementary Agreement") which includes, among other things, consulting services to be rendered to the Franchisor, rights of first refusal permitting the Company to open additional franchises, the termination of the License Agreements and the Franchisor's repurchase of its common stock owned by the Company. Pursuant to the Supplementary Agreement, the Company or the Franchisor may terminate the License Agreements and the Supplementary Agreement upon 12 months notice and the payment of $100,000. The initial term of the Supplementary Agreement expires on December 31, 1996 and may be extended by the Franchisor until December 31, 2001. In addition, upon the termination of the Supplementary Agreement, the Franchisor has the right to purchase its shares of common stock owned by the Company at the greatest of the cost to the Company, the book value or the fair market value of such shares. The Franchisor has granted the Company a right of first refusal for the opening of any Little Professor Bookstore in Ohio, or in Collier County or Lee County, Florida. The Company has not exercised its right of first refusal in either Ohio or Florida to date. Management believes that the Company would have to consider its ability to manage the logistics of store operations in locations that are distant from its principal executive offices in Columbus, Ohio before electing to open any Little Professor Bookstores in Florida. Upon the opening of Little Professor Book Company bookstores by third parties in excess of 8,000 square feet in size, the Franchisor will pay to the Company the greater of $10,000 or 15% of the Franchisor's then current initial franchise fees plus 2/10 of 1% of the monthly sales during the initial term of any such agreements. In April 1996, the Company received a fee of $10,000 from the initial franchise fee for a store opened by a third party in Temecula, California. TRADEMARKS The Cookstore, Inc. has been granted a registered trademark for "The Cookstore" with the United States Patent and Trademark Office. The Company intends to submit applications to register any new trademarks that it develops in the future. PROPERTIES The Company currently operates and occupies, pursuant to written leases, five Superstores, one Bargain Bookstore and four Cookstores. Total rental expenses for the Company's real estate leases were $1,075,002 and $1,156,662 in 1994 and 1995, respectively, including contingent rentals at $195,842 in 1994 and $166,266 in 1995. The five Superstores average approximately 13,250 square feet in size and have current minimum rents which average approximately $11.32 per square foot. However, if the additional base rent for 1995 paid on the premises located at Forest Fair Mall in Cincinnati, Ohio is considered, then the average base rent for the Bookstores is approximately $12.09 per square foot. All of the Bookstore leases have initial terms which expire between September 1998 and October 2003, and four of the five leases give the Company an option or options to renew the lease for additional periods ranging from five to ten years. The Bargain Bookstore operates under a month-to-month lease, is approximately 2,000 square feet, and pays 10% of its gross receipts as rent. The Cookstores average approximately 3,300 square feet and have current minimum rents which average approximately $23.55 per square foot. All of the Cookstore leases - 29 - 33 have initial terms which expire in 2003 or 2004 and one of the four leases gives the Company an option to renew the lease for an additional five years. In November 1995 the Company entered into a lease for a Cookstore in the Castleton Square Shopping Center, Marion County, Indiana (suburban Indianapolis). The term of the lease is ten years, the square footage is 3,790 square feet and the rent is $28.50 per square foot. The Company anticipates opening the store in the fall of 1996. In addition to current minimum rent, the Bookstore and Cookstore leases generally require the Company to pay additional rent which is calculated as a percentage of gross sales over an agreed upon figure. For the Bookstore leases, the percentage ranges from 3% to 6% and the amount of gross sales ranges from approximately $2,000,000 to $4,500,000. For the Cookstore leases, the percentage ranges from 5% to 6% and the gross sales number ranges from approximately $968,000 to $1,500,000. Generally, except for the Forest Fair Mall site, the Company has not paid percentage rent in excess of minimum base rent. In addition, the Company is generally obligated to pay common area maintenance charges and other charges on each of the Superstores and Cookstores leases. All of the Company's leased properties are situated in regional malls, specialty centers or strip centers located in Ohio. The Company leases 9,620 square feet for a Superstore, 2,000 square feet for a Bargain Bookstore and 3,298 square feet for a Cookstore at the Lane Avenue Shopping Center, Columbus, Ohio, a 225,000 square foot enclosed specialty center containing approximately 100 stores, including Micro Center, Talbots, Banana Republic and Bombay Company. The Company leases 8,929 square feet for a Superstore and 3,341 square feet for a Cookstore at the Worthington Mall, Worthington, Ohio, a 175,000 square foot enclosed specialty center containing approximately 50 stores including Talbots, The Gap, Ann Taylor and Jos. A. Bank. The Company leases 17,782 square feet for a Superstore at the Plaza at Sawmill Place, Columbus, Ohio, a 110,000 square foot strip center containing approximately 25 stores, including Service Merchandise and Blockbuster Video. The Company leases 18,312 square feet for a Superstore at the Forest Fair Mall, Cincinnati, Ohio, a 1,400,000 square foot enclosed regional center containing approximately 100 stores, including Elder Beerman, Parisian and Biggs. The Company leases 11,565 square feet for a Superstore at Boardman Plaza, Boardman, Ohio, a 450,000 square foot strip center containing approximately 100 stores, including Burlington Coat Factory and Radio Shack. The Company leases 3,598 square feet for a Cookstore at the Mall at Fairfield Commons, Beavercreek, Ohio, a suburb of Dayton, which is a 1,000,000 square foot major regional mall with approximately 100 stores, including The Limited, The Gap and five major department stores. The Company leases 3,227 square feet for a Cookstore at the Summit Mall in Akron, Ohio, which is an 850,000 square foot major regional mall with approximately 100 stores, including Kaufman's, Dillards, The Limited and The Gap. EMPLOYEES As of March 31, 1996, the Company had 72 full-time employees and 60 part-time employees of which 117 were involved in retail store sales and 15 in general management and administration. The Company believes its success will depend upon its ability to identify, hire and retain capable management. As there is significant competition for qualified personnel, there can be no assurance that the Company will succeed in recruiting or retaining suitable staff. In particular, the Company's success is dependent on the continued availability of both John Gaylord and John D. Critser, either of whose loss or impairment could have a material adverse affect on the Company. The Company considers its relations with its employees, none of whom are covered by collective bargaining agreements, to be generally good. - 30 - 34 INSURANCE The Company presently maintains insurance as required by law, including workers' compensation coverage, and liability insurance in respect of hazards on the Company's business premises. The Company carries a general liability policy which provides for coverage of $1,000,000 per occurrence and $2,000,000 in the aggregate. The Company carries key man life insurance in the amount of $1,000,000 on the lives of both John Gaylord and John D. Critser with the Company as beneficiary. LITIGATION The Company is not a party to any material pending litigation. SEASONALITY The Company's business is subject to substantial seasonal variations. Historically, a significant portion of the Company's net sales and net earnings have been realized during the period from October through December, and levels of net sales and net earnings have generally been significantly lower during the period from January through September. - 31 - 35 MANAGEMENT DIRECTORS AND EXECUTIVE OFFICERS The following table sets forth certain information concerning the directors and executive officers of the Company.
NAME AGE POSITION ---- --- -------- George Gaylord.................... 69 Senior Chairman of the Board and Director John Gaylord...................... 41 Chairman of the Board, Chief Executive Officer, Treasurer, Chief Financial Officer and Director John D. Critser................... 41 President, Chief Operating Officer and Director Janet Gaylord Goodburn............ 36 Secretary Martin C. Licht................... 54 Director
All directors of the Company hold office until the next annual meeting of shareholders and until their respective successors are duly elected and qualify. Officers serve at the discretion of the Board of Directors. The following is a brief summary of the background of each executive officer and director of the Company: GEORGE GAYLORD has been a director and Senior Chairman of the Company since its inception in July 1994. Mr. Gaylord opened the Company's first Little Professor Book Center in 1970 and was Chairman and Chief Executive Officer of each of the Subsidiaries from their inception through November 1993. Mr. Gaylord has been a director and Chairman Emeritus of the Subsidiaries since November 1993. Mr. Gaylord is the father of John Gaylord, Janet Gaylord Goodburn, Susan Gaylord Noble and Judy Gaylord and is the uncle of John D. Critser. JOHN GAYLORD has been Chairman of the Board of Directors, Chief Executive Officer, Treasurer, Chief Financial Officer and a director of the Company since its inception in July 1994. Since November 1993, Mr. Gaylord has served as Chairman of the Board of Directors and Chief Executive Officer of the Subsidiaries. From August 1977 through November 1993, Mr. Gaylord served as President or Vice President of each of the Subsidiaries. Mr. Gaylord is the son of George Gaylord, the brother of Janet Gaylord Goodburn, Susan Gaylord Noble and Judy Gaylord, and the first cousin of John D. Critser. JOHN D. CRITSER has been a director, President and Chief Operating Officer of the Company since its inception in July 1994. Mr. Critser has been President and Chief Operating Officer of each of the Subsidiaries since November 1993. Prior to joining the Company in July 1993, Mr. Critser was Vice President - - Store Operations for Eckerd Vision Group, a division of the Eckerd Corporation. Mr. Critser joined Eckerd Corporation in 1983 as an operations manager and served as a Vice President of the Eckerd Vision Group since February 1991. He holds a B.S. degree in Administrative Science (1976) and an M.B.A. degree from the University of South Florida (1981). Mr. Critser is the first cousin of John Gaylord, Janet Gaylord Goodburn, Susan Gaylord Noble and Judy Gaylord and the nephew of George Gaylord. - 32 - 36 JANET GAYLORD GOODBURN has been the Secretary of the Company since its inception in July 1994. Commencing in October 1984 Ms. Goodburn served as a Vice President of each of the Subsidiaries and she has also served as the Secretary and/or Treasurer of certain of the Subsidiaries. Ms. Goodburn is the daughter of George Gaylord and the sister of John Gaylord, Susan Gaylord Noble and Judy Gaylord and the first cousin of John D. Critser. MARTIN C. LICHT has been a practicing attorney since 1967 and has been a partner of the law firm of Gallet Dreyer & Berkey, LLP, since October 1993. From April 1993 until that time, he was a partner of Solomon, Weiss & Moskowitz, P.C. For one year prior thereto he was a partner of the law firm of Summit, Solomon & Feldesman. Prior to such time, Mr. Licht was a member of the law firm of Herzfeld & Rubin, P.C. for twelve years. All of such firms are located in New York City. Mr. Licht is also a director of two companies traded on NASDAQ, Natural Health Trends Corp., which owns and operates three vocational schools, and an alternative medical clinic in Florida and Cable & Co. Worldwide, Inc., a wholesale footwear company. DIRECTORS' COMPENSATION Directors of the Company do not receive any fixed compensation for their services as directors. However, the Board of Directors may authorize the payment of a fixed sum to non-employee directors for their attendance at regular and special meetings of the Board as is customary for similar companies. Directors will be reimbursed for their reasonable out-of-pocket expenses incurred in connection with their duties to the Company. For the fiscal year ended December 31, 1995, neither the Company nor the Subsidiaries paid its directors any cash or other form of compensation for acting in such capacity except that directors who were also executive officers of the Company and Subsidiaries received cash compensation for acting in the capacity of executive officers. - 33 - 37 EXECUTIVE COMPENSATION SUMMARY COMPENSATION TABLE The following table provides a summary of cash and non-cash compensation for each of the last three fiscal years ended December 31, 1993, 1994 and 1995 with respect to the following officers of the Company:
ANNUAL COMPENSATION LONG-TERM COMPENSATION ------------------- -------------------------------- AWARDS PAYOUTS --------------------- ---------- SECURITIES RESTRICTED UNDERLYING OTHER ANNUAL STOCK OPTIONS LTIP ALL OTHER NAME AND PRINCIPAL POSITIONS YEAR SALARY($) BONUS($) COMPENSATION(4)(1) AWARD(S)($) SARS(#) PAYOUTS($) COMPENSATION - ---------------------------- ---- --------- -------- ------------------ ----------- ------- ---------- ------------ John Gaylord................. 1995 136,259 -- -- -- -- -- -- Chief Executive Officer and 1994 139,832 -- -- -- -- -- -- Chairman of the Board(2) 1993 126,522 -- -- -- -- -- -- George Gaylord............... 1995 216,010 -- -- -- -- -- -- Senior Chairman of the Board 1994 234,641 -- -- -- -- -- -- 1993 209,846 -- -- -- -- -- -- John D. Critser.............. 1995 103,076 -- -- -- -- -- -- President and Chief Operatin 1994 88,443 40,000(5) -- -- -- -- -- Officer(4) 1993 -- -- -- -- -- -- -- - -------------------------------- (1) Excludes perequisites and other personal benefits that in the aggregate do not exceed 10% of each of such individual's total annual salary and bonus. (2) John Gaylord received such compensation as President of each of the Subsidiaries through November 1993 when he became Chairman and Chief Executive Officer thereof. (3) George Gaylord received such compensation as Chairman and Chief Executive Officer of each of the Subsidiaries through November 1993 when he became Chairman Emeritus thereof. Excludes amounts paid or payable to George Gaylord from Gaylord Family Limited. See "CERTAIN TRANSACTIONS." (4) John D. Critser, the Company's President, received an automobile allowance and health benefits, but did not receive a salary, for the period commencing in July 1993 through December 31, 1993. (5) Mr. Critser received 21,845 shares of Common Stock in 1994 which were valued at $40,000.
EMPLOYMENT AND CONSULTING AGREEMENTS The Company has entered into employment agreements with George Gaylord, John Gaylord and John D. Critser, which will expire in April 2001, under which they each will receive annual salaries of $150,000. The agreements provide that the executive will be eligible to receive short-term incentive bonus compensation if the Company is profitable, the amount of which, if any, will be determined by the Board of Directors based on the employee's performance, contributions to the Company's success and on the Company's ability to pay such incentive compensation. The employment agreements also provide for termination based on death, disability, voluntary resignation or material failure in performance. The employment agreements provide for severance payments upon termination unless the executive is - 34 - 38 terminated with cause. In the event that the executive is terminated without cause, the executive will receive the executive's salary until the later of two years from the date of termination or the termination date of the agreement as severance. The agreements contain non-competition provisions that preclude each executive from competing with the Company for a period of one year from the date of termination of employment. In addition, as a precondition for the underwriting of the Initial Public Offering, RAS Securities Corp. required the Company to engage RAS Securities Corp. for a period of 24 months as a financial consultant. As a financial consultant, RAS Securities Corp. will assist the Company in the review and analysis of the Company's operations, recommend action based on such review and assist the Company in preparing a business plan. The Company paid RAS Securities Corp. a consulting fee of $23,000 for such services. In June 1996, the Company paid RAS Securities Corp. a fee of $24,000 in connection with a waiver of a right of first refusal relating to the 1996 Financing. STOCK OPTIONS No options were granted to, held or exercised by, any of the Company's officers during fiscal 1995. The Company has adopted the 1994 Stock Option Plan under which up to 333,333 options to purchase shares of Common Stock may be granted to key employees, consultants and members of the Board of Directors of the Company. The exercise price of the options will be determined by the Stock Option Committee selected by the Board of Directors, but the exercise price will not be less than 85% of the fair market value of the Common Stock on the date of grant. - 35 - 39 CERTAIN TRANSACTIONS As of August 1, 1994, George Gaylord, John Gaylord, Judy Gaylord, Jennifer Lynn Gaylord, Susan Gaylord Noble, Janet Gaylord Goodburn and John D. Critser entered into the Exchange Agreement with the Company whereby such parties exchanged 100% of the issued and outstanding common stock in the Subsidiaries for an aggregate of 2,610,082 shares of Common Stock in the Company which represented 100% of the Common Stock of the Company then outstanding. The following table sets forth the ownership of the Subsidiaries prior to the execution of the Exchange Agreement and the ownership of the Company resulting from the transactions effectuated by the Exchange Agreement as of August 1, 1994.
APPROXIMATE OWNERSHIP OF THE SUBSIDIARIES PRIOR TO THE EXECUTION OF THE EXCHANGE AGREEMENT APPROXIMATE -------------------------------------------------- OWNERSHIP OF THE GAYLORD THE SAWWORTH COMPANY AFTER THE BOOK COOKSTORE BOOK GAYLORD'S THE COOKSTORE GAYLORD EXECUTION OF THE COMPANY INC. COMPANY INC. WORTHINGTON, INC. ENTERPRISES, INC. EXCHANGE AGREEMENT ------- ---- ------- ---- ----------------- ----------------- ------------------ George Gaylord 66% 50% 52% 40% 35% 35% 35.4% John Gaylord -- 25% 12% 15% 25% 25% 22.2% Jennifer Lynn Gaylord -- 25% -- -- 10% -- 3.7% Janet Gaylord Goodburn -- -- 12% 15% 10% 16% 10.4% Judy Gaylord -- -- 12% 15% 10% 12% 10.4% Susan Gaylord Noble -- -- 12% 15% 10% 12% 10.4% John D. Critser 34% -- -- -- -- -- 7.5% --- --- --- --- --- --- ----- TOTAL: 100% 100% 100% 100% 100% 100% 100.0%
After the completion of the transactions contemplated in the Exchange Agreement, the Company issued an additional 21,845 shares of Common Stock to John D. Critser, as additional compensation for serving as the Company's President during 1994. In March 1995, upon the request of RAS Securities Corp. as a precondition to proceeding with the Initial Public Offering, the following individuals surrendered to the Company for no cash consideration an aggregate of 41,667 shares of Common Stock: George Gaylord surrendered 14,647 shares, John Gaylord surrendered 9,167 shares, Judy Gaylord surrendered 4,282 shares, Jennifer Lynn Gaylord surrendered 1,540 shares, Susan Gaylord Noble surrendered 4,282 shares, Janet Gaylord Goodburn surrendered 4,282 shares and John D. Critser surrendered 3,467 shares. In May 1995, upon the request of RAS Securities Corp. as a precondition to proceeding with the Initial Public Offering, the following individuals surrendered to the Company for no cash consideration an aggregate of 659,735 additional shares of Common Stock: George Gaylord surrendered 231,897 shares, John Gaylord surrendered 145,132 shares, Judy Gaylord surrendered 67,782 shares, Jennifer Lynn Gaylord surrendered 24,382 shares, Susan Gaylord Noble surrendered 67,782 shares, Janet Gaylord Goodburn surrendered 67,782 shares and John D. Critser surrendered 54,978 shares. Four of the Subsidiaries have entered into five separate License Agreements with the Franchisor. The License Agreements replaced separate Franchise Agreements originally entered into between the Franchisor and Mary Jo Gaylord and/or George Gaylord or Gaylord's, Inc. As a condition of entering into the License Agreements, the Franchisor and the Company entered into a mutual release agreement relieving such parties of any liability under such Franchise Agreements. Pursuant to an agreement dated September 12, 1994 between Gaylord Family Limited ("GFL") and the Franchisor, the Franchisor has agreed to make payments to GFL for the development of the - 36 - 40 superstore concept for two Little Professor bookstores. GFL is owned by John Gaylord, George Gaylord, Janet Gaylord Goodburn, Susan Gaylord Noble and Judy Gaylord. The Franchisor has agreed to pay to GFL 25% of the initial franchise fees and 33% of the royalties paid to the Franchisor by Little Professor bookstores unaffiliated with the Company located in Ft. Wayne, Indiana (the "Ft. Wayne Store") and Reston, Virginia (the "Reston Store"). As of May 31, 1996, GFL had received $91,016 with respect to both stores. This reflects $20,000 due to GFL with respect to the initial franchise fees and $71,016 with respect to royalties through March 31, 1995. Pursuant to an agreement among the members of GFL, George Gaylord receives all of the payments, net of expenses, received by GFL from the Franchisor. John Gaylord and George Gaylord have guaranteed, jointly and severally, certain loans in the aggregate principal amount of $1,050,491 as of May 31, 1996 due to Bank One Columbus, N.A. John Gaylord and Jennifer Lynn Gaylord, his wife, and George Gaylord have mortgaged their respective residences to secure the guarantees. John Gaylord and Jennifer Lynn Gaylord have guaranteed, jointly and severally, the lease for the Cookstore located in the Lane Avenue Shopping Center, Columbus, Ohio. George Gaylord has guaranteed the lease for the Superstore located in the Lane Avenue Shopping Center, Columbus, Ohio. In addition, John Gaylord has guaranteed certain capital leases with M&I First National Leasing Company. George Gaylord is a founder of the Company and may be deemed a parent of the Company as a result of his ownership of approximately 34% of the Common Stock prior to the Initial Public Offering, his service as a director, and his relationship to his children who collectively owned approximately 55% of the Common Stock of the Company prior to the Initial Public Offering. John Gaylord may be deemed a parent of the Company as a result of his ownership of approximately 25% of the Common Stock prior to the Initial Public Offering, including the 71,345 shares of Common Stock owned by his wife, Jennifer Lynn Gaylord, his executive position, his service as a director, and his relationship to his father, George Gaylord, who owned approximately 34% of the Common Stock of the Company prior to the Initial Public Offering. As of May 31, 1996, George Gaylord, John Gaylord, Susan Gaylord Noble, Janet Gaylord Goodburn and Judy Gaylord owed the Company an aggregate of $76,105 in connection with advances made to such individuals by the Company and the Subsidiaries. The debt is evidenced by a term note (the "Note"), dated February 28, 1995, in the original principal amount of $88,701 executed by such individuals. Each of the parties are jointly and severally liable for the entire amount due under the Note. The Note bears interest at the prime rate and is payable in sixty equal monthly installments of principal and interest which commenced August 1, 1995. Martin C. Licht, a partner of Gallet Dreyer & Berkey, LLP, the Company's counsel, is a director of the Company. The Company paid Gallet Dreyer & Berkey, LLP legal fees of $50,000, $275,423 and $63,202 in 1994, 1995 and 1996, respectively. - 37 - 41 PRINCIPAL SHAREHOLDERS The following table sets forth certain information as to the Common Stock and Series A Preferred Stock ownership of each of the Company's directors, executive officers, all executive officers and directors as a group and all persons known by the Company to be the beneficial owners of more than five percent of the Company's Common Stock.
NAME AND ADDRESS OF BENEFICIAL COMMON SERIES A ------------------------------ COMMON STOCK STOCK PREFERRED SERIES A PREFERRED OWNER NUMBER OF SHARES(1) PERCENTAGE STOCK-NUMBER STOCK-PERCENTAGE ----- ------------------- ---------- ------------ ---------------- George Gaylord....................... 678,580(2)(4) 24.6% 28,320 47.2% 2611 Clarion Court Columbus, Ohio 43220 John Gaylord......................... 496,036(2)(3) 18.0 20,720 34.5 8836 Finlarig Drive Dublin, Ohio 43017 Judy Gaylord......................... 198,344(2) 7.2 2,945 4.9 8667 Blanca Ct. Powell, Ohio 43065 Janet Gaylord Goodburn............... 198,344(2) 7.2 2,946 4.9 3935 Cedric Lane Dublin, Ohio 43017 Susan Gaylord Noble.................. 198,344(2) 7.2 2,945 4.9 2933 Kicking Bird Trace Dublin, Ohio 43017 John D. Critser...................... 160,877(2)(4) 5.9 2,124 3.5 8562 Torwoodlee Ct. Dublin, Ohio 43017 Martin C. Licht...................... 4,167(5) -- -- -- Selden Lane Greenwich, Connecticut 06831 Solay, Inc........................... 300,000(6) 9.8 -- -- 888 Prospect Street, Suite 225 La Jolla, California 92037 All present officers and directors as a group (5 persons)........................ 1,538,004 55.8 60,000 100% - --------------- (1) Unless otherwise noted, all persons named in the table have sole voting and dispositive power with respect to all shares of Common Stock and Series A Preferred Stock beneficially owned by them. (2) Each of these five members of the Gaylord family named, as well as John D. Critser, disclaims beneficial ownership of the securities owned by the other individuals named in the above table. (3) Includes 71,345 shares of Common Stock and 2,960 shares of Series A Preferred Stock owned by John Gaylord's wife, Jennifer Lynn Gaylord.
- 38 - 42 (4) The foregoing does not reflect an agreement between Mr. Critser and George Gaylord whereby George Gaylord may purchase from Mr. Critser up to the following number of shares if Mr. Critser's employment with the Company is terminated for any reason during any of the 12-month periods ending on July 31st of the years indicated: 118,488 shares (1996), 78,992 shares (1997) and 39,497 shares (1998). The purchase price for the shares of Common Stock will be Mr. Critser's cost. (5) Consists of warrants to purchase 4,167 shares of Common Stock acquired in connection with the Bridge Loans. (6) Does not include up to 200,000 shares of Common Stock issuable to Rodika Salter, the sister of the sole stockholder of Solay, Inc. upon the exercise of options granted to Ms. Salter and does not include Warrants to purchase up to 600,000 shares of Common Stock granted to Solay, Inc. which are not exerciseable until October 31, 1996. See "DESCRIPTION OF SECURITIES - Recent Developments." - 39 - 43 DESCRIPTION OF SECURITIES GENERAL The total amount of authorized capital stock of the Company is 10,000,000 shares of Common Stock, $.01 par value per share and 1,500,000 shares of Preferred Stock, $.01 par value per share. Prior to this Offering the Company had 2,750,000 shares of Common Stock issued and outstanding, an aggregate of 1,708,337 shares of Common Stock issuable upon the exercise of outstanding options and warrants, and 415,000 shares of Common Stock issuable upon the conversion of the Convertible Notes, excluding the shares of Common Stock issuable upon the exercise of options issuable under the Company's 1994 Stock Option Plan. COMMON STOCK Each share of Common Stock entitles the holder thereof to one vote on all matters submitted to a vote of the shareholders. Since the holders of Common Stock do not have cumulative voting rights, holders of more than 50% of the outstanding shares can elect all of the directors of the Company then being elected and holders of the remaining shares by themselves cannot elect any directors. Upon completion of this Offering, the current officers and directors of the Company will own an aggregate of approximately 56% of the Company's Common Stock and will be in a position to influence the election of the Company's directors and otherwise essentially control the outcome of all matters requiring shareholder approval. The holders of Common Stock do not have preemptive rights or rights to convert their Common Stock into other securities. Holders of Common Stock are entitled to receive ratably such dividends as may be declared by the Board of Directors out of funds legally available therefor. In the event of a liquidation, dissolution or winding up of the Company, holders of the Common Stock have the right to a ratable portion of the assets remaining after payment of liabilities. All shares of Common Stock outstanding are fully paid and nonassessable. See "MANAGEMENT" and "PRINCIPAL SHAREHOLDERS." PREFERRED STOCK The Company is authorized by its Certificate of Incorporation to issue a maximum of 1,500,000 shares of Preferred Stock of which 60,000 shares are issued and outstanding, in one or more series and containing such rights, privileges and limitations, including voting rights, dividend rates, conversion privileges, redemption rights and terms, redemption prices and liquidation preferences, as the Board of Directors of the Company may, from time to time, determine. The Company is not required by current Delaware law to seek shareholder approval prior to any issuance of authorized but unissued stock and the Board of Directors does not currently intend to seek shareholder approval prior to any issuance of shares of Preferred Stock or Common Stock, unless otherwise required by law. The issuance of shares of Preferred Stock pursuant to the Board's authority could decrease the amount of earnings and assets available for distribution to holders of Common Stock, and otherwise adversely affect the rights and powers, including voting rights, of such holders and may have the effect of delaying, deferring or preventing a change in control of the Company. Series A Preferred Stock George Gaylord, John Gaylord, Judy Gaylord, Jennifer Lynn Gaylord, Susan Gaylord Noble, Janet Gaylord Goodburn and John D. Critser own an aggregate of 60,000 shares of the Company's Series - 40 - 44 A Preferred Stock, $.01 par value. The Series A Preferred Stock with respect to dividend rights and with respect to rights of liquidation, dissolution and winding up, ranks, senior to the Common Stock. The holders of the Series A Preferred Stock will be entitled to receive dividends payable in cash, when, as and if declared by the Board of Directors out of legally available funds for such purpose, payable in quarterly installments commencing three months from the date of issuance of the Series A Preferred Stock. Dividends on the Series A Preferred Stock accrue at the annual rate of $.60 per share, subject to adjustment. Dividends on the Series A Preferred Stock are cumulative from the date of its original issuance (whether or not in any dividend period or periods, there shall be capital surplus or earnings of the Company legally available for the payment of such dividends). Shares of Series A Preferred Stock have no voting rights. The Company has the right, in its discretion, to redeem any or all of the shares of Series A Preferred Stock outstanding on a pro rata basis from time to time upon not less than 10 days prior written notice at a price of $5.00 per share, subject to adjustment. In the event of any liquidation, dissolution or winding up of the Company, then out of the assets of the Company before any distribution of payment to the holders of Common Stock, the holders of the shares of Series A Preferred Stock are entitled to be paid $5.00 per share, subject to adjustment. In the event of any liquidation, dissolution or winding up of the Company, the Company by resolution of the Board of Directors, will, to the extent of any legally available funds therefor, declare a dividend payable only in cash on the Series A Preferred Stock payable before any distribution is made to any holders of Common Stock in an amount equal to the accrued and unpaid dividends, calculated at the dividend rate, which will be added to the amount to be received by the holders of the Series A Preferred Stock upon such liquidation, dissolution or winding up. WARRANTS Each Warrant is issued pursuant to a Warrant Agreement between the Company and Continental Stock Transfer & Trust Company as warrant agent (the "Warrant Agent"). The following statements are subject to the detailed provisions of, and are qualified in their entirety by reference to, the Warrant Agreement, which is included as an exhibit to the registration statement of which this Prospectus is a part. Each Warrant entitles the registered holder to purchase one share of the Company's Common Stock for $3.00 for a period of four years commencing October 31, 1996. The exercise price of the Warrants and the number of shares issuable upon exercise of such Warrants are subject to adjustment to protect against dilution in the event of stock dividends, stock splits, combinations, subdivisions and reclassification. Warrants may be exercised by surrendering to the Warrant Agent the Warrants and the payment of the exercise price in United States funds by cash or certified or bank check. No fractional shares of Common Stock will be issued in connection with the exercise of Warrants. Upon exercise, the Company will pay the holder the value of any such fractional shares based upon the market value of the Common Stock at such time. The Warrants may not be exercised unless a registration statement pursuant to the Securities Act, as amended, covering the underlying shares of Common Stock is current and such shares have been qualified, or there is an exemption from qualification requirements, under the securities laws of the state of residence of the holder of the Warrants. Commencing October 31, 1997, the Company may redeem the Warrants at a price of $.05 per Warrant by giving not less than 30 days' prior written notice to the record holders if the closing sale price of the Common Stock as reported on NASDAQ equals or exceeds $4.50 for the 20 consecutive trading days ending on the tenth day prior to the date on which the notice of redemption is given. In the event the Company notifies record holders of its intent to redeem the Warrants, the record holders may exercise - 41 - 45 same at any time prior to the close of business on the day immediately preceding the date fixed for redemption. Unless extended by the Company at its discretion, the Warrants will expire at 5:00 p.m. New York time on October 30, 2000. In the event a holder of Warrants fails to exercise the Warrants prior to such time, the Warrants will expire and the holder thereof will have no further rights with respect to the Warrants. 1996 FINANCING In June 1996 the Company consummated a private placement to 12 investors of an aggregate of $622,500 of its Convertible Notes. The Convertible Notes are due and payable on December 11, 1996. Interest is payable at the rate of 5% per annum. The principal amount of each Convertible Note is convertible into shares of Common Stock at the rate of $1.50 per share. In the event that the shares of Common Stock issuable upon the conversion of the Convertible Notes are not registered under the Securities Act of 1933, as amended, on or before August 11, 1996, then the interest rate is 20% per annum calculated as of June 11, 1996. The shares of Common Stock issuable upon the conversion of the Convertible Notes are being offered hereby. RECENT DEVELOPMENTS As of April 23, 1996, the Company entered into a twenty-four month financial consulting and investor relations agreement with Solay, Inc. Pursuant to the financial consulting and investor relations agreement, Solay, Inc. is entitled to receive $135,000 payable over six months, which amount has been prepaid by the Company. In addition, Solay, Inc. received $65,000 in connection with financial advisory services rendered to the Company in connection with the 1996 Financing. Pursuant to the financial consulting and investor relations agreement, Solay, Inc. has the right to purchase 300,000 shares of Common Stock and 600,000 Warrants identical to the Warrants offered in the Initial Public Offering through October 23, 1996, for an aggregate purchase price of $300,000. In addition, Rodika Salter, an affiliate of Solay, Inc., has an option to purchase up to 200,000 shares of Common Stock until October 23, 1996 for $1.50 per share. In connection with the 1996 Financing, Lido Equities Corp. received an aggregate of $35,175 of commissions and non-accountable expenses. Pursuant to a consulting agreement, Lido Equities Corp. has been granted the right to acquire 100,000 shares of Common Stock and 200,000 Warrants identical to the Warrants offered in the Initial Public Offering until November 30, 1996, for an aggregate purchase price of $100,000. CERTIFICATE OF INCORPORATION AND BYLAWS Pursuant to Delaware Law, the power to adopt, amend and repeal bylaws is conferred solely upon the stockholders unless the corporation's certificate of incorporation also confers such power upon the board of directors. Under the Company's Certificate of Incorporation, the Board of Directors are granted the power to amend the Bylaws of the Company. Such Bylaws provide that each director has one vote on each matter for which directors are entitled to vote. The Certificate of Incorporation and/or the Bylaws also provide that (i) from time to time, by resolution, the Board has the power to decrease the number of directors to three and increase the number of directors to up to nine members, provided that no decrease will have the effect of shortening the term of any incumbent director, (ii) the directors will hold office until the next annual meeting of stockholders and until their respective successors are elected and qualified, (iii) the stockholders of the Company may not apply to request that the Delaware Court of Chancery summarily order an election to be held to fill vacancies in the Board of Directors, and (iv) - 42 - 46 special meetings of stockholders may only be called by the Senior Chairman of the Board, the Chairman of the Board, the President or a majority of the Board of Directors of the Company. These provisions, in addition to the existence of authorized but unissued capital stock, may have the effect, either alone or in combination with each other, of making more difficult or discouraging an acquisition of the Company deemed undesirable by the Board of Directors. Management is not aware of any potential takeover attempts relating to the Company. The Company is not presently contemplating the adoption of any additional anti-takeover provisions. The Board of Directors of the Company currently consists of four persons. See "MANAGEMENT - Executive Officers and Directors." SECTION 203 OF THE DELAWARE LAW Section 203 of the Delaware Law prohibits a publicly held Delaware corporation from engaging in a "business combination" with an "interested stockholder" for a period of three years after the date of the transaction in which the person became an interested stockholder, unless (i) prior to the date of the business combination, the transaction is approved by the board of directors of the corporation; (ii) upon consummation of the transaction which resulted in the stockholder becoming an interested stockholder, the interested stockholder owns at least 85% of the outstanding voting stock, or (iii) on or after such date the business combination is approved by the board of directors and by the affirmative vote of at least 66 2/3% of the outstanding voting stock that is not owned by the interested stockholder. A "business combination" includes mergers, asset sales and other transactions resulting in a financial benefit to the stockholder. An "interested stockholder" is a person, who, together with affiliates and associates, owns (or within three years, did own) 15% or more of the corporation's voting stock. This provision of law could discourage, prevent or delay a change in management or stockholder control of the Company, which could have the effect of discouraging bids for the Company and thereby prevent stockholders from receiving the maximum value for their shares, or a premium for their shares in a hostile takeover situation. INDEMNIFICATION OF OFFICERS AND DIRECTORS The Certificate of Incorporation of the Company provides that the Company shall indemnify to the fullest extent permitted by Delaware law any person whom it may indemnify thereunder, including directors, officers, employees and agents of the Company. Such indemnification (other than as ordered by a court) shall be made by the Company only upon a determination that indemnification is proper in the circumstances because the individual met the applicable standard of conduct. Advances for such indemnification may be made pending such determination. In addition, the Certificate of Incorporation provides for the elimination, to the extent permitted by Delaware law, of personal liability of directors to the Company and its stockholders for monetary damages for breach of fiduciary duty as directors. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Company pursuant to the foregoing provisions, or otherwise, the Company 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 Company of expenses incurred or paid by a director, officer of controlling person of the Company 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 Company, 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 of 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. - 43 - 47 TRANSFER AGENT AND REGISTRAR The transfer agent, registrar and warrant agent for the shares of Common Stock and Warrants is Continental Stock Transfer & Trust Company, 2 Broadway, New York, New York 10004. - 44 - 48 SHARES ELIGIBLE FOR FUTURE SALE COMMON STOCK Of the presently outstanding shares of the Company's Common Stock, 1,930,525 are "restricted securities" as that term is defined in Rule 144 under the Securities Act. Such shares may be sold in the future only pursuant to a registration statement under the Securities Act or in compliance with Rule 144 or pursuant to another exemption therefrom. Sales of the Company's Common Stock by present shareholders in the future may have a depressive effect on the price of the Company's Common Stock. Of such outstanding shares of Common Stock, 1,930,525 shares are "control securities" (as that term is defined in Rule 144) because they are held by "affiliates" of the Company. The holders of such shares of Common Stock have agreed not to sell any of their shares of Common Stock without the consent of RAS Securities Corp. until October 31, 1997. SELLING SECURITYHOLDERS The Selling Securityholders are offering an aggregate of 415,000 shares of Common Stock issuable upon the conversion of the Convertible Notes in the aggregate amount of $622,500 and an additional 600,000 shares of Common Stock and 800,000 Warrants. The Company has agreed to register the public offering of of such Securities and to pay substantially all of the expenses in connection therewith. Except as set forth below, none of the Selling Securityholders has ever held any position or office with the Company or had any other material relationship with the Company. The following table sets forth certain information with respect to the Selling Securityholders.
WARRANTS/WARRANT WARRANTS/WARRANT NAME OF SHARES BENEFICIALLY SHARES BENEFICIALLY SHARES BENEFICIALLY SHARES BENEFICIALLY SELLING SECURITYHOLDER OWNED PRIOR TO SALE OWNED AFTER SALE(1) OWNED PRIOR TO SALE OWNED AFTER SALE ---------------------- --------------------------------------- ------------------- ---------------- Christopher Cirri 10,000 0 0 0 Michael Citrin 20,000 0 0 0 Andrea E. Dougherty 40,000 0 0 0 Michele Freeman 20,000 0 0 0 HST Partnership 30,000 0 0 0 Peter Janssen 60,000 0 0 0 Omega Development Group, Inc. 20,000 0 0 0 Jerome Rosen 10,000 0 0 0 Darrow C. Roundy 100,000 0 0 0 Wainscott Capital Ltd. 40,000 0 0 0 Wheatear, Inc. 25,000 0 0 0 Francie Whittenburg 40,000 0 0 0 Solay, Inc. 300,000 0 600,000 0 Rodika Salter 200,000 0 0 0 Lido Equities Corp. 100,000 0 200,000 0 --------- - ------- - Total.............................. 1,015,000 0 800,000 0 ========= = ======= = - -------------------------------- (1) Assumes that all Selling Securityholder's Securities are sold by such persons and no additional securities are acquired thereby.
- 45 - 49 PLAN OF DISTRIBUTION The Selling Securityholders may sell the Selling Securityholders' Securities from time to time in their discretion on NASDAQ, in the over-the-counter market, the Boston Stock Exchange or in privately-negotiated transactions, at fixed prices which may be changed, at market prices prevailing at the time of sale, at prices related to such prevailing market prices or at negotiated prices. The Selling Securityholders may effect such transactions in their discretion in sales to or through broker-dealers, and such broker-dealers may receive compensation in the form of discounts, concessions or commissions from the Selling Securityholders or the purchasers of the Selling Securityholders' Securities for whom such broker-dealers may act as agent or to whom they sell as principal, or both (which compensation to a broker-dealer might be in excess of customary commissions). The Selling Securityholders and any broker-dealers who act in connection with the sale of the Securities offered hereby may be deemed to be "underwriters" as that term is defined in the Securities Act with respect to the securities offered and any profits realized or commissions received may be deemed underwriting compensation. LEGAL MATTERS Certain legal matters with respect to the issuance of the securities offered hereby will be passed upon for the Company Martin C. Licht, 845 Third Avenue, New York, New York 10022. Martin C. Licht is a member of the Board of Directors of the Company. Mr. Licht's wife owns warrants to purchase up to 4,167 shares of Common Stock. CHANGE IN ACCOUNTANTS KPMG Peat Marwick LLP had served as the independent accountants in connection with the review of the Company's financial statements for the years ended December 31, 1992 and 1993 and had been engaged to perform an audit of the financial statements for such years. In September 1994, the Company and KPMG Peat Marwick LLP mutually agreed to terminate their relationship and the Company engaged Feldman Radin & Co., P.C. to serve as its auditors. The change to Feldman Radin & Co., P.C. was ratified by the Company's Board of Directors. The engagement of KPMG Peat Marwick LLP was terminated prior to the completion of the audits and prior to the issuance of any audit report on the Company's financial statements for the years ended December 31, 1992 and 1993. The Company believes, and has been advised by KPMG Peat Marwick LLP that it concurs in such belief, that in connection with the incomplete audits of the Company's financial statements for each of the two fiscal years ended December 31, 1992 and 1993 and subsequent thereto, the Company and KPMG Peat Marwick LLP did not have any disagreement as of the date of KPMG Peat Marwick LLP's termination on any matters of accounting principles or practices, financial statement disclosure or auditing scope or procedure, which disagreement, if not resolved to the satisfaction of KPMG Peat Marwick LLP, would have caused KPMG Peat Marwick LLP to make reference to the matter in their reports. - 46 - 50 EXPERTS The consolidated financial statements of the Company as of December 31, 1995 and for each of the two years in the period then ended have been included herein and in the Registration Statement in reliance upon the report of Feldman Radin & Co., P.C., independent certified public accountants, appearing elsewhere herein, and upon the authority of such firm as experts in accounting and auditing. - 47 - 51 GAYLORD COMPANIES, INC. AND SUBSIDIARIES INDEX TO FINANCIAL STATEMENTS
Page ---- Independent Auditors' Report F-2 Consolidated Balance Sheets at December 31, 1995 F-3-4 Consolidated Statements of Operations for the years ended December 31, 1995 and 1994 F-5 Consolidated Statement of Stockholders' Equity for the years ended December 31, 1995 and 1994 F-6 Consolidated Statements of Cash Flows for the years ended December 31, 1995 and 1994 F-7 Notes to Consolidated Financial Statements F-8-19 Unaudited Financial Statements for the Quarter Ended March 31, 1996: - -------------------------------------------------------------------- Consolidated Balance Sheet F-20 Consolidated Statement of Operations F-21 Consolidated Statement of Cash Flows F-22 Notes to Consolidated Financial Statements F-23
F - 1 52 INDEPENDENT AUDITORS' REPORT ---------------------------- To the Shareholders and Board of Directors Gaylord Companies, Inc. We have audited the accompanying consolidated balance sheet of Gaylord Companies, Inc. and subsidiaries as of December 31, 1995, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the two 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 Gaylord Companies, Inc. as of December 31, 1995, and the results of its operations and its cash flows for each of the two years then ended in conformity with generally accepted accounting principles. /s/ Feldman Radin & Co., P.C. February 16, 1996 Certified Public Accountants F - 2 53 GAYLORD COMPANIES, INC. ----------------------- BALANCE SHEETS -------------- DECEMBER 31, 1995 ----------------- ASSETS ------ CURRENT ASSETS: Cash $ 649,019 Restricted cash (Note 5) 250,000 Accounts receivable - trade 42,098 Other receivables (Note 2) 193,707 Inventories (Note 3) 1,810,452 Deferred income taxes - current (Note 8) 52,000 Prepaid expenses and other current assets 111,371 ---------- TOTAL CURRENT ASSETS 3,108,647 PROPERTY AND EQUIPMENT (Note 4) 708,592 GOODWILL, (net of accumulated amortization of $88,705 in 1995 and $83,346 in 1994) 125,651 DEFERRED INCOME TAXES (Note 8) 357,062 INVESTMENT (Note 1) 125,000 OTHER ASSETS 40,181 ---------- $4,465,133 ==========
The notes are an integral part of the consolidated financial statements. F-3 54 GAYLORD COMPANIES, INC. ----------------------- BALANCE SHEETS -------------- DECEMBER 31, 1995 ----------------- LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------ CURRENT LIABILITIES: Accounts payable $1,482,315 Sales tax payable 179,303 Current portion of long-term debt (Note 5) 628,764 Current installments of capital lease obligations 11,859 Other current liabilities (Note 7) 202,215 ---------- TOTAL CURRENT LIABILITIES 2,504,456 CAPITAL LEASE OBLIGATIONS 7,769 ---------- 2,512,225 ---------- COMMITMENTS (Note 6) STOCKHOLDERS' EQUITY: Cumulative preferred stock, par value $.01 per share; 1,500,000 shares authorized, 60,000 shares issued and outstanding 300,000 Common stock, par value $.01 per share; 10,000,000 shares authorized, 2,750,000 shares issued and outstanding 27,500 Paid-in-capital in excess of par value of common stock 1,600,817 Retained earnings 24,591 ---------- TOTAL STOCKHOLDERS' EQUITY 1,952,908 ---------- $4,465,133 ==========
The notes are an integral part of the consolidated financial statements. F-4 55 GAYLORD COMPANIES, INC. ----------------------- STATEMENT OF OPERATIONS -----------------------
Year ended December 31, ---------------------------- 1995 1994 ------------ ------------ NET SALES $ 13,722,144 $ 12,621,148 COST OF GOODS SOLD, including store occupancy and delivery costs (Note 3) 10,177,693 9,185,959 ------------ ------------ GROSS PROFIT 3,544,451 3,435,189 OPERATING EXPENSES: Store operating expenses 2,394,236 2,259,523 Administrative 1,206,874 1,017,768 Depreciation and amortization 246,991 242,199 Non-cash imputed compensation expense -- 40,000 ------------ ------------ 3,848,101 3,559,490 ------------ ------------ OPERATING INCOME (LOSS) (303,650) (124,301) ------------ ------------ OTHER INCOME (EXPENSE): Interest expense (391,081) (274,401) Interest income 4,448 -- Write-off of registration costs -- (92,700) Amortization of discount on notes payable (190,208) (17,292) Gain (loss) on disposal of property and equipment -- 3,265 Other income (expense) 3,074 1,563 ------------ ------------ (573,767) (379,565) ------------ ------------ INCOME (LOSS) BEFORE INCOME TAX EXPENSE (BENEFIT) (877,417) (503,866) INCOME TAX EXPENSE (BENEFIT) (Note 8) (267,490) (202,000) ------------ ------------ NET INCOME (LOSS) $ (609,927) $ (301,866) ============ ============ EARNINGS (LOSS) PER COMMON SHARE $ (0.29) $ (0.15) ============ ============ WEIGHTED AVERAGE COMMON SHARES USED 2,125,000 2,000,000 ============ ============
The notes are an integral part of the consolidated financial statements. F-5 56 GAYLORD COMPANIES, INC. ----------------------- STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY --------------------------------------------
Preferred Stock Common Stock Paid-in Capital -------------------- --------------------- In Excess Of Retained Shares Amount Shares Amount Par Value Earnings Totals -------- --------- --------- --------- ---------- --------- ----------- BALANCE - DECEMBER 31, 1993 -- $ -- 1,908,680 $ 19,087 $ 20,451 $ 958,249 $ 997,787 Reclassification of paid-in capital -- -- -- -- 16,486 (16,486) -- Stock issued in connection with bridge financing -- -- 69,475 695 149,305 -- 150,000 Stock issued as compensation -- -- 21,845 218 39,782 -- 40,000 Net income -- -- -- -- -- (301,866) (301,866) -------- --------- --------- --------- ---------- --------- ----------- BALANCE - DECEMBER 31, 1994 -- -- 2,000,000 20,000 226,024 639,897 885,921 Sale of preferred stock 60,000 300,000 -- -- -- -- 300,000 Sale of common stock and warrants -- -- 750,000 7,500 1,374,793 -- 1,382,293 Dividends paid on preferred stock -- -- -- -- -- (5,379) (5,379) Net income -- -- -- -- -- (609,927) (609,927) -------- --------- --------- --------- ---------- --------- ----------- BALANCE - DECEMBER 31, 1995 60,000 $ 300,000 2,750,000 $ 27,500 $1,600,817 $ 24,591 $ 1,952,908 ======== ========= ========= ========= ========== ========= ===========
The notes are an integral part of the consolidated financial statements. F-6 57 GAYLORD COMPANIES, INC. AND SUBSIDIARIES ---------------------------------------- CONSOLIDATED STATEMENT OF CASH FLOWS ------------------------------------
Year ended December 31, -------------------------- 1995 1994 ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ (609,927) $ (301,866) ----------- ----------- Adjustments to reconcile net income (loss) to net cash provided (used) by operating activities: Depreciation and amortization 246,991 242,199 Non-cash imputed compensation expense -- 40,000 Write-off of registration costs -- 92,700 Amortization of discount on notes payable 190,208 17,292 Changes in assets and liabilities: Decrease (increase) in accounts receivable (9,674) 16,153 Decrease (increase) in other receivables 5,844 (41,957) Decrease (increase) in inventory 3,148 (623,761) Decrease (increase) in prepaid expenses and other assets (60,505) (114,475) Decrease (increase) in other assets 8,862 (7,839) Decrease (increase) in refundable income taxes 91,365 (34,780) Decrease (increase) in deferred income taxes (352,477) (56,585) Increase (decrease) in accounts payable (253,272) 781,544 Increase (decrease) in sales tax payable 32,560 40,215 Increase (decrease) in other current liabilties (51,823) 29,806 Decrease (increase) in deferred registration costs 192,832 (285,532) ----------- ----------- Total adjustments 44,059 94,980 ----------- ----------- NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES (565,868) (206,886) ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property and equipment (26,775) (307,100) ----------- ----------- NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES (26,775) (307,100) ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of preferred stock 300,000 -- Proceeds from issuance of common stock and warrants 1,382,293 -- Dividends paid (5,379) -- Proceeds from issuance of debt 250,000 1,980,655 Repayments of debt (688,817) (1,168,290) Increase in restricted cash (250,000) -- Costs incurred in association with bridge financing -- (57,500) Principal payments of capital lease obligations (8,062) (17,028) ----------- ----------- NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES 980,035 737,837 ----------- ----------- NET INCREASE (DECREASE) IN CASH 387,392 223,851 CASH AT BEGINNING OF YEAR 261,627 37,776 ----------- ----------- CASH AT END OF YEAR $ 649,019 $ 261,627 =========== =========== SUPPLEMENTAL CASH FLOW DISCLOSURES: Cash paid during the year for: Interest $ 147,391 $ 78,335 =========== =========== Income taxes $ -- $ 28,497 =========== =========== Noncash activity: Discount recorded in connection with debt financing $ -- $ 150,000 =========== ===========
The notes are an integral part of the consolidated financial statements. F-7 58 GAYLORD COMPANIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1995 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 (Note 9). All significant intercompany balances and transactions have been eliminated in the consolidated financial statements. The Company is a specialty retailer of books, quality cookware and serving equipment, with all operations in Ohio. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that effect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. (b) Inventories Inventories are stated at the lower of cost or market. Cost is determined using the retail method and the FIFO method. (c) Investment The investment security represents a ten percent interest in the common stock of a franchisor organization, Little Professor Book Company ("LPBC"), held for long-term investment purposes, which is stated at cost which management believes approximates fair market value. An agreement with the franchisor states that the franchisor may purchase the stock from the Company at the end of the license agreements with the franchisor at the higher of cost, book value, or market value. F - 8 59 (d) Property and Equipment Property and equipment are stated at cost. Property and equipment held under capital leases are stated at the lower of the present value of minimum lease payments at the beginning of the lease term or fair value at the inception of the lease. Depreciation of property and equipment is calculated using the straight-line method over the estimated useful lives of the assets. Property and equipment held under capital leases and leasehold improvements are amortized using the straight-line method over the shorter of the lease term or estimated useful life of the asset. (e) Goodwill Goodwill, which arose as a result of the purchase of one of the Company's bookstores in 1977 is being amortized on a straight-line basis over a period of 40 years. The Company assesses the recoverability of the goodwill by evaluating whether the amortization of the goodwill balance over its remaining useful life can be recovered through projected undiscounted future results of the acquired entity. The amount of goodwill impairment, if any, is measured based on projected discounted future results, using a discount rate reflecting the Company's average cost of capital. (f) Preopening Costs Expenses associated with the opening of new stores are deferred and amortized ratably over a twelve month period beginning on the date of the store opening. (g) Net Earnings (Loss) Per Share Net earnings (loss) per share is computed based on the weighted average number of common shares outstanding after giving retroactive effect for all periods presented to the Exchange Agreement (Note 9), the subsequent issuance of 13,107 shares of common stock to an officer (Note 9) and the issuance of 41,680 shares in connection with the bridge financing (Note 9). (h) Accumulated Earnings Under S Corporation Status In accordance with S.E.C. accounting rules, during the year ended December 31, 1994 the Company reclassified approximately $17,000 from retained earnings to paid in capital reflecting the undistributed earnings of its then S corporation subsidiaries when such S corporation elections were terminated on January 1, 1994. F - 9 60 (i) Reclassifications Certain amounts in the December 31, 1994 financial statements have been reclassified to conform to the current year's presentation. 2. OTHER RECEIVABLES ----------------- Other receivables consist of the following at December 31, 1995: Officers' receivable $ 82,418 Other receivables 111,289 ------- $ 193,707 =======
Certain officers have received funds from the Company which are due in monthly installments through July 2000 and bear interest at the rate of 8.5% per annum. 3. INVENTORIES ----------- The Company, as consignee, has entered into consignment agreements whereby title to the consigned goods remain with the consignor until sold by the Company. These consignment agreements have an original term of 2 years with automatic one-year renewals, unless terminated by either party. The Company is obligated to pay a formula based consignment fee. Such formula is based on the average amount of consigned goods held during the period at prime plus 2 percent (10.5% at December 31, 1995 and 1994) plus a fixed charge. The total consignment fees for the years ended December 31, 1995 and 1994 were $254,300 and $214,800, respectively. The Company may return consigned goods to the consignor up to a defined level without a fee. Upon the termination of the consignment agreements, the consignor shall be entitled to the immediate return of all of the consigned goods. As the consigned goods remain the property of the consignor until sold, the consigned goods (cost of approximately $2,749,000 at December 31, 1995) are not reflected as inventory in the accompanying consolidated financial statements. The maximum amount of consigned goods the Company may have on hand at any time cannot exceed $4,670,000 (at retail value). The consigned goods sold under this arrangement were approximately 61% and 63% of cost of sales in the years ended December 31, 1995 and 1994, respectively. Currently, the Company is not in compliance with the provisions in the consignment F - 10 61 agreement with respect to the Company's inventory turnover ratios. Upon a default under the consignment agreements, the Consignor may terminate all of such consignment agreements. 4. PROPERTY AND EQUIPMENT ---------------------- The following is a summary of property and equipment at December 31, 1995:
Depreciable Life ------------------ Computers and equipment 5 years $ 205,165 Leasehold improvements 10 years 539,580 Furniture and fixtures 7 years 978,453 Vehicles 5 years 21,038 --------- 1,744,236 Accumulated depreciation and amortization 1,035,644 --------- $ 708,592 =========
5. LONG-TERM DEBT -------------- The following is a summary of long-term debt at December 31, 1995: Term loans (1) $ 378,764 Time loan (1) 250,000 Notes payable to bridge lenders, bearing interest at 10%, payable through October 1997 (2) --------- $ 628,764 =========
F - 11 62 (1) In November 1995, the Company entered into a master financing agreement with its lending bank, which replaced several existing term loans, and which provides for three different lending facilities: (a) a term loan in the amount of $17,222 plus interest at prime plus 1%; (b) a time loan in the amount of $250,000 bearing interest at prime plus 1.5%, with principal due upon the termination date of the financing agreement (however with prepayments necessary upon the receipt by the Company of tenant allowances from landlords of property on which new stores are opened); and (c) a revolving credit loan providing for total borrowing of $550,000, bearing interest at prime plus 1.5%, provided however, that the bank is not required to advance any funds to the Company during the continuance of an event of default. At December 31, 1995, the Company did not have any balance due on the revolving credit loan. The financing agreement expires in October 1997, at which time any unpaid principal is due. For calendar years 1996 through 1997 the principal maturities are: $197,993 in 1996 and $180,771 in 1997. The Company's accounts receivable, inventory, property and equipment, investment and a $250,000 certificate of deposit with the lending bank are pledged as security under the Company's loan agreement. Also, certain stockholders have personally guaranteed the long-term debt. The financing agreement requires the Company to meet covenants pertaining to the following financial measurements: 1) quarterly net income before taxes; 2) tangible net worth; 3) cash flow coverage of debt service. At December 31, 1995, the Company was in violation of all three measurements, and therefore was in technical default of this financing agreement. The bank has granted the Company waivers through May 31, 1996, but since such waiver period is for less than one year, all debt under this agreement has been reclassified as current. In connection with obtaining such waivers, the Company agreed to be bound under the default rate of interest, which is prime plus 2.5%, and is precluded from obtaining any funds under the revolving credit portion of this loan agreement. (2) In accordance with Accounting Principles Board Opinion No. 14, the proceeds received for the bridge financings were allocated between the equity and debt securities included in such units based upon their relative estimated fair values. The difference between the face amount and the allocated value of the debt was recorded as a discount on the notes payable totaling $150,000. An additional $57,500 of financing costs were also recorded as discounts. Remaining unamortized discount totaling $132,568, was written off during November 1995 upon the Company's accelerated repayment of the bridge loans with the proceeds F - 12 63 of its Initial Public Offering. 6. COMMITMENTS ----------- (i) Leases The Company has nine noncancelable operating leases, primarily for buildings and facilities. Such leases expire variously over the next ten years, but also provide for renewal options. Future minimum lease payments under noncancelable operating leases are as follows:
Operating Year ending December 31, leases ------------------------ ---------------- 1996 $ 950,550 1997 966,583 1998 1,019,251 1999 896,664 2000 672,056 Later years, through 2004 2,037,734
Total rental expense for operating leases was $1,156,662 and $1,075,002 in 1995 and 1994, respectively, including contingent rentals of $166,266 and $195,842 in 1995 and 1994, respectively. Certain principal shareholders of the Company have jointly and severally guaranteed two of the aforementioned operating leases. (ii) License Agreements Four of the subsidiaries have recently entered into five separate license agreements with LPBC with respect to six bookstores. The license agreements replaced separate franchise agreements relating to five of the bookstores. The Company owns approximately 10% of the outstanding common stock of LPBC (See Note 1(c)). The initial term of the license agreements will expire on December 31, 1996 and may be extended by the Company until December 31, 2001. The Company will pay LPBC a royalty of 1/2 of 1% of monthly sales for all of the bookstores. If there is a default by any of the Subsidiaries under any one of the license agreements, then LPBC may terminate all of the license agreements. The Company and LPBC have also recently entered into a separate agreement (the F - 13 64 "Supplementary Agreement") which includes, among other things, consulting services to be rendered to LPBC, rights of first refusal permitting the Company to open additional franchises, the termination of the license agreements and LPBC's repurchase of its common stock owned by the Company. Pursuant to the Supplementary Agreement, the Company or LPBC may terminate the license agreements and the Supplementary Agreement upon 12 months notice and the payment of $100,000. The initial term of the Supplementary Agreement expires on December 31, 1996 and may be extended by LPBC until December 31, 2001. In addition, upon the termination of the Supplementary Agreement, LPBC has the right to repurchase its shares of common stock owned by the Company at the greater of the cost to the Company, the book value or the fair market value of such shares. LPBC has granted the Company a right of first refusal for the opening of any Little Professor Bookstore in Ohio, or in Collier County or Lee County, Florida. Upon the opening of Little Professor Book Company bookstores by third parties in excess of 8,000 square feet in size, LPBC will pay to the Company the greater of $10,000 or 15% of its then current initial franchise fees plus 2/10 of 1% of the monthly sales during the initial term of any such agreements. (iii) Employment Agreements The Company has entered into employment agreements with three of its executive officers which expire in April 1998. Aggregate annual salaries under these agreements are $425,000. 7. OTHER CURRENT LIABILITIES ------------------------- Other current liabilities consist of the following at December 31, 1995: Accrued payroll and payroll taxes $ 130,033 Gift certificates payable 60,592 Other payables 11,590 -------- $ 202,215 ========
F - 14 65 8. INCOME TAX EXPENSE (BENEFIT) ---------------------------- The Company accounts for income taxes under Statement of Financial Accounting Standards No. 109. Income tax expense (benefit) consists of the following:
Years ended December 31, ------------------------ 1995 1994 --------- --------- Current refundable federal $ (30,000) $ (96,000) Current refundable state and local (40,000) (20,000) Deferred federal (197,490) (86,000) --------- --------- $(267,490) $(202,000) ========= =========
The differences between income taxes computed by applying the statutory federal income tax rate (34%) and income tax expense (benefit) in the consolidated financial statements are:
Years ended December 31, ------------------------ 1995 1994 --------- --------- Tax benefit computed at statutory rate $(297,000) $(178,000) State and local taxes, net of federal benefit (40,000) (24,000) Effect of permanent differences 68,000 -- Other, net 1,510 -- --------- --------- $(267,490) $(202,000) ========= =========
The Company had deferred tax assets representing the tax effect of the net operating loss carryforwards totaling $799,000, book depreciation in excess of tax depreciation of $110,000, and other items aggregating $76,000 as of December 31, 1995. The tax effect resulting in the deferred tax asset was approximately $45,000 for depreciation, other items aggregating $31,000, and $333,000 for net operating loss carryforwards. The net operating loss carryforwards expire in the years 2009 and 2010. F - 15 66 9. STOCKHOLDERS' EQUITY -------------------- Prior to August 1, 1994, each of the Company's subsidiaries were separately owned companies, which had previously been combined for financial reporting purposes based on common control of the subsidiary companies and interrelated operations. In July 1994, the Company was established as a holding company. On August 1, 1994, the individual shareholders of the subsidiary companies entered into an Exchange Agreement whereby they exchanged 100% of the issued and outstanding common stock of the subsidiary companies for 1,566,053 shares of common stock of the Company. Accordingly, these consolidated financial statements reflect the new ownership structure as if the Company had owned all of the subsidiaries for all periods presented. After completion of the Exchange Agreement transactions, the Company issued 21,845 shares of common stock to an officer of the Company. In accordance with S.E.C. Staff Accountants Bulletin #83 the 21,845 shares of common stock which were issued for services within one year of the initial filing of the Company's registration statement for its public offering were valued at approximately 85% of the anticipated offering price. This resulted in a non-cash charge to income of $40,000 in the fiscal year ended December 31, 1994. On September 20, 1994, the Company completed a private placement "Bridge Financing." The Bridge Financing notes, which had a face amount of $500,000, bore interest at 10% per annum and were due at the earlier of the closing of the Company's initial public offering or August 1997. In connection with the Bridge Financing, the Company issued 69,475 shares of common stock to the Bridge Lenders. A value of approximately $150,000 was attributed to the 69,475 shares of common stock and accordingly, the face amount of the Bridge Financing notes was reduced by a corresponding amount as a discount, with paid in capital credited. Any remaining unamortized portion of this amount was written off upon repayment of the notes. In addition, the Bridge Lenders were issued warrants to purchase 83,337 shares of common stock at $4.32 per share. On August 1, 1994, the Company adopted the 1994 Stock Option Plan under which up to 333,333 options to purchase shares of common stock may be granted to key employees, consultants and members of the Board of Directors. As of December 31, 1995, no options have been issued under this plan. In March and May 1995, certain principal shareholders surrendered an aggregate of 41,667 and 659,735 shares, respectively, of the Company's common stock and such shares were retired. These transactions have been accounted for as a recapitalization of the Company and have been given retroactive effect in the accompanying consolidated financial statements for all periods presented. F - 16 67 In October 1995 the Company effected a stock split of one and two-thirds shares for each issued and outstanding share in the form of a stock dividend. All common stock data in these financial statements are adjusted to reflect this transaction. The Company can issue a maximum of 1,500,000 shares of preferred stock, in one or more series, containing such rights, including voting rights, dividend rates, redemption prices and liquidation preferences, as the Board of Directors may determine. In November 1995, the Company sold 60,000 shares of Series A Cumulative preferred stock to certain shareholders for $5.00 per share. The shares pay an annual dividend of $0.60 per share and contain a liquidation preference of $5.00 per share. 10. INITIAL PUBLIC OFFERING ----------------------- The Company completed an Initial Public Offering in November 1995, selling a total of 750,000 shares of common stock for $3.00 per share, and 1,725,000 warrants at $0.10 per warrant. The warrants entitle the holder to purchase one share of Company common stock at $3.00 per share through October 30, 2000. Warrants are redeemable by the Company at $0.05 per warrant, generally, upon the common stock achieving certain price levels. Net proceeds to the Company after underwriter discounts and other expenses were approximately $1.4 million. F - 17 68 11. SEGMENT INFORMATION ------------------- Summary information for the Company's two industry segments is as follows:
Bookstore Cookstore Total ------------ ----------- ------------ FOR THE YEAR ENDED DECEMBER 31, 1995: ------------------------------------- Net Sales $ 10,679,732 $ 3,042,412 $ 13,722,144 Cost of Goods Sold, including store occupancy and delivery costs 8,074,607 2,103,086 10,177,693 ------------ ----------- ------------ Gross Profit 2,605,125 939,326 3,544,451 Store Operating Expenses 1,803,698 590,538 2,394,236 ------------ ----------- ------------ Store Level Income 801,427 348,788 1,150,215 Depreciation and Amortization 156,128 90,863 246,991 Administrative 939,292 267,582 1,206,874 ------------ ----------- ------------ Operating income $ (293,993) $ (9,657) (303,650) ============ =========== Other expenses 573,767 ------------ Income before taxes $ (877,417) ============ Identifiable assets $ 2,385,618 $ 1,620,389 $ 4,006,007 ============ =========== Corporate assets 459,126 ------------ Total assets $ 4,465,133 ============ Other information: Depreciation and amortization $ 156,128 $ 90,863 $ 246,991 ============ =========== ============ Capital acquisitions $ 14,518 $ 12,257 $ 26,775 ============ =========== ============
F - 18 69 FOR THE YEAR ENDED DECEMBER 31, 1994: ------------------------------------- Net sales $ 10,753,276 $1,867,872 $ 12,621,148 Cost of Goods Sold, including store occupancy and delivery costs 8,051,301 1,134,658 9,185,959 ------------ ---------- ------------ Gross Profit 2,701,975 733,214 3,435,189 Store Operating Expenses 1,949,268 310,255 2,259,523 ------------ ---------- ------------ Store Level Income 752,707 422,959 1,175,666 Depreciation and Amortization 206,624 35,575 242,199 Administrative 867,143 150,625 1,017,768 Non-cash Imputed Compensation Expense 34,080 5,920 40,000 ------------ ---------- ------------ Operating income $ (355,140) $ 230,839 (124,301) ============ ========== Other expenses 379,565 ------------ Income before taxes $ (503,866) ============ Identifiable assets $ 2,052,737 $1,136,877 3,189,614 ============ ========== Corporate assets 792,438 ------------ Total assets $ 3,982,052 ============ Other information: Depreciation and amortization $ 207,221 $ 34,978 $ 242,199 ============ ========== ============ Capital acquisitions $ 74,551 $ 232,549 $ 307,100 ============ ========== ============
F - 19 70 GAYLORD COMPANIES, INC. ----------------------- CONSOLIDATED BALANCE SHEET -------------------------- MARCH 31, 1996 -------------- (UNAUDITED) ASSETS ------ CURRENT ASSETS: Cash $ 514,126 Accounts receivable - trade 32,569 Other receivables 215,133 Inventories 1,848,695 Deferred income taxes - current 202,250 Prepaid expenses and other current assets 111,244 ----------- TOTAL CURRENT ASSETS 2,924,017 PROPERTY AND EQUIPMENT 663,470 GOODWILL 124,311 DEFERRED INCOME TAXES 357,061 INVESTMENT 125,000 OTHER ASSETS 39,475 ----------- $ 4,233,334 =========== LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------ CURRENT LIABILITIES: Accounts payable $ 1,371,726 Line of credit 395,000 Bank note - short term 250,000 Sales tax payable 78,818 Current portion of long-term debt 329,989 Current installments of capital lease obligations 11,859 Other current liabilities 72,178 ----------- TOTAL CURRENT LIABILITIES 2,509,570 CAPITAL LEASE OBLIGATIONS 5,018 ----------- 2,514,588 ----------- COMMITMENTS STOCKHOLDERS' EQUITY: Cumulative preferred stock, par value $.01 per share; 1,500,000 shares authorized, 60,000 shares issued and outstanding 300,000 Common stock, par value $.01 per share; 10,000,000 shares authorized, 2,750,000 shares issued and outstanding 27,500 Paid-in-capital in excess of par 1,600,817 Retained earnings (deficit) (209,571) ----------- TOTAL STOCKHOLDERS' EQUITY 1,718,746 ----------- $ 4,233,334 ===========
See notes to consolidated financial statements. F-20 71 GAYLORD COMPANIES, INC. ----------------------- CONSOLIDATED STATEMENT OF OPERATIONS ------------------------------------ (UNAUDITED)
Three Months Ended March 31, -------------------------- 1996 1995 ----------- ----------- NET SALES $ 2,884,819 $ 2,919,495 COST OF GOODS SOLD, including store occupancy and delivery costs 2,206,362 2,217,357 ----------- ----------- GROSS PROFIT 678,457 702,138 OPERATING EXPENSES: Store operating expenses 604,292 575,178 Administrative 310,200 291,861 Depreciation and amortization 48,062 64,373 ----------- ----------- 962,554 931,412 ----------- ----------- OPERATING INCOME (LOSS) (284,097) (229,274) ----------- ----------- OTHER INCOME (EXPENSE): Interest expense (76,817) (79,536) Amortization of discount on notes payable -- (17,292) Other income (expense) (14,355) 183 ----------- ----------- (91,172) (96,645) ----------- ----------- INCOME (LOSS) BEFORE INCOME TAX EXPENSE (BENEFIT) (375,269) (325,919) INCOME TAX EXPENSE (BENEFIT) (150,107) (130,368) ----------- ----------- NET INCOME (LOSS) $ (225,162) $ (195,551) =========== =========== EARNINGS (LOSS) PER COMMON SHARE $ (0.08) $ (0.09) =========== =========== WEIGHTED AVERAGE COMMON SHARES USED 2,750,000 2,125,000 =========== ===========
See notes to consolidated financial statements. F-21 72 GAYLORD COMPANIES, INC. AND SUBSIDIARIES ---------------------------------------- CONSOLIDATED STATEMENT OF CASH FLOWS ------------------------------------ (UNAUDITED)
Three Months Ended March 31, ------------------------- 1996 1995 --------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $(225,162) $ (195,551) --------- ----------- Adjustments to reconcile net income (loss) to net cash provided (used) by operating activities: Depreciation and amortization 48,062 62,268 Changes in assets and liabilities: Decrease (increase) in accounts receivable 9,529 (10,404) Decrease (increase) in other receivables (21,426) (20,610) Decrease (increase) in inventory (38,243) (38,705) Decrease (increase) in prepaid expenses and other assets 127 (157,472) Decrease (increase) in deferred income taxes (150,250) -- Increase (decrease) in accounts payable (110,588) (541,758) Increase (decrease) in sales tax payable (100,485) (95,765) Increase (decrease) in other current liabilties (138,430) (11,911) ----------- Total adjustments (501,704) (814,357) --------- ----------- NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES (726,866) (1,009,908) --------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property and equipment (1,501) (10,699) --------- ----------- NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES (1,501) (10,699) --------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of debt 395,000 850,000 Repayments of debt (48,775) (50,166) Principal payments of capital lease obligations (2,751) (3,100) --------- ----------- NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES 343,474 796,734 --------- ----------- NET INCREASE (DECREASE) IN CASH (384,893) (223,873) CASH AT BEGINNING OF PERIOD 899,019 261,627 --------- ----------- CASH AT END OF PERIOD $ 514,126 $ 37,754 ========= =========== SUPPLEMENTAL CASH FLOW DISCLOSURES: Cash paid during the period for: Interest $ 15,612 $ 30,537 ========= =========== Income taxes $ -- $ 100 ========= ===========
See notes to consolidated financial statements. F-22 73 GAYLORD COMPANIES, INC. AND SUBSIDIARIES ---------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ------------------------------------------ THREE MONTHS ENDED MARCH 31, 1996 --------------------------------- (UNAUDITED) 1. BASIS OF PRESENTATION --------------------- The accompanying financial statements are unaudited, but reflect all adjustments which, in the opinion of management, are necessary for a fair presentation of financial position and the results of operations for the interim periods presented. All such adjustments are of a normal and recurring nature. The results of operations for any interim period are not necessarily indicative of the results attainable for a full fiscal year. 2. LOSS PER SHARE -------------- Per share information is computed based on the weighted average number of shares outstanding during the period. F-23 74 ================================================================================ NO DEALER, SALESPERSON OR ANY OTHER PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITY OTHER THAN THE SECURITIES OFFERED BY THIS PROSPECTUS, OR AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED OR IS UNLAWFUL. THE DELIVERY OF THIS PROSPECTUS SHALL NOT, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE OF THE PROSPECTUS. ------ TABLE OF CONTENTS
PAGE ---- PROSPECTUS SUMMARY ..................................................... RISK FACTORS ........................................................... USE OF PROCEEDS ........................................................ DIVIDEND POLICY ........................................................ MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ................................................ BUSINESS ............................................................... MANAGEMENT ............................................................. CERTAIN TRANSACTIONS ................................................... PRINCIPAL SHAREHOLDERS ................................................. DESCRIPTION OF SECURITIES .............................................. SHARES ELIGIBLE FOR FUTURE SALE ........................................ SELLING SECURITYHOLDERS ................................................ LEGAL MATTERS .......................................................... CHANGE IN ACCOUNTANTS .................................................. EXPERTS ................................................................ INDEX TO FINANCIAL STATEMENTS .......................................F-1
------ ================================================================================ 1,015,000 SHARES OF COMMON STOCK 800,000 COMMON STOCK PURCHASE WARRANTS GAYLORD COMPANIES, INC. -------------- PROSPECTUS -------------- , 1996 ================================================================================ 75 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 24. INDEMNIFICATION OF OFFICERS AND DIRECTORS. Section 145 of the Delaware General Corporation Law ("DGCL") permits, in general, a Delaware corporation to indemnify any person made, or threatened to be made, a party to an action or proceeding by reason of the fact that he or she was a director or officer of the corporation, or served another entity in any capacity at the request of the corporation, against any judgment, fines, amounts paid in settlement and expenses, including attorney's fees actually and reasonably incurred as a result of such action or proceeding, or any appeal therein, if such person acted in good faith, for a purpose he or she reasonably believed to be in, or, in the case of service for another entity, not opposed to, the best interests of the corporation and, in criminal actions or proceedings, in addition had no reasonable cause to believe that his or her conduct was unlawful. Section 145(e) of the DGCL permits the corporation to pay in advance of a final disposition of such action or proceeding the expenses incurred in defending such action or proceeding upon receipt of an undertaking by or on behalf of the director or officer to repay such amount as, and to the extent, required by statute. Section 145(f) of the DGCL provides that the indemnification and advancement of expense provisions contained in the DGCL shall not be deemed exclusive of any rights to which a director or officer seeking indemnification or advancement of expenses may be entitled. The Company's Certificate of Incorporation provides, in general, that the Company shall indemnify, to the fullest extent permitted by Section 145 of the DGCL, any and all persons whom it shall have power to indemnify under said section from and against any and all of the expenses, liabilities or other matters referred to in, or covered by, said section. The Certificate of Incorporation also provides that the indemnification provided for therein shall not be deemed exclusive of any other rights to which those indemnified may be entitled under any By-Law, agreement, vote of stockholders or disinterested directors or otherwise, both as to actions taken in his or her official capacity and as to acts in another capacity while holding such office. In accordance with that provision of the Certificate of Incorporation, the Company shall indemnify any officer or director (including officers and directors serving another corporation, partnership, joint venture, trust, or other enterprise in any capacity at the Company's request) made, or threatened to be made, a party to an action or proceeding (whether civil, criminal, administrative or investigative) by reason of the fact that he or she was serving in any of those capacities against judgments, fines, amounts paid in settlement and reasonable expenses (including attorney's fees) incurred as a result of such action or proceeding. Indemnification would not be available if a judgment or other final adjudication adverse to such director or officer establishes that (i) his or her acts were committed in bad faith or were the result of active and deliberate dishonesty or (ii) he or she personally gained in fact a financial profit or other advantage to which he or she was not legally entitled. II-1 76 ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. The following table sets forth the various expenses which will be paid by the Company in connection with the issuance and distribution of the securities being registered, with the exception of the registration fee, all amounts shown are estimates. Registration fee.................................................................... $ 1,099 Blue Sky fees and expenses (including legal and filing)............................. 6,500 Printing expenses................................................................... 3,000 Legal fees and expenses (other than Blue Sky)....................................... 75,000 Miscellaneous expenses.............................................................. 401 --------- Total...................................................................... $86,000 =======
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES. In the past three years, the Company has made the sales of unregistered securities set forth below, all of which sales were intended to be exempt from the registration requirements of the Securities Act pursuant to Section 4(2) based upon the representations of the parties to the Exchange Agreement, as defined below. Each of the parties represented that they acquired the shares for investment and without a view to the distribution thereof. I. As of August 1, 1994, George Gaylord, John Gaylord, Judy Gaylord, Jennifer Lynn Gaylord, Susan Gaylord Noble, Janet Gaylord Goodburn and John D. Critser entered into the Exchange Agreement (the "Exchange Agreement") with the Company whereby such parties exchanged 100% of the issued and outstanding common stock in the Subsidiaries for an aggregate of 1,566,053 shares of Common Stock in the Company which represented 100% of the Common Stock of the Company then outstanding. George Gaylord owned approximately 66% of the shares of common stock of Gaylord Book Company, 50% of the shares of common stock of The Cookstore, Inc., 52% of the shares of common stock of Sawworth Book Company, 40% of the shares of the common stock of Gaylord's, Inc., 35% of the shares of common stock of The Cookstore Worthington, Inc. and 35% of the shares of common stock of Gaylord Enterprises, Inc. and he received approximately 35% of the Common Stock of the Company then outstanding. John Gaylord owned 25% of the shares of common stock of The Cookstore, Inc., 12% of the shares of common stock of Sawworth Book Company, 15% of the shares of common stock of Gaylord's, Inc., 25% of the shares of common stock of The Cookstore Worthington, Inc. and 25% of the shares of common stock of Gaylord Enterprises, Inc. and he received approximately 22% of the Common Stock of the Company then outstanding. Jennifer Lynn Gaylord owned 25% of the shares of common stock of The Cookstore, Inc., 10% of the shares of common stock of The Cookstore Worthington, Inc. and she received approximately 4% of the Common Stock of the Company then outstanding. II-2 77 Janet Gaylord Goodburn owned 12% of the shares of common stock of Sawworth Book Company, 15% of the shares of common stock of Gaylord's, Inc., 10% of the shares of common stock of The Cookstore Worthington, Inc, and 16% of the shares of common stock of Gaylord Enterprises, Inc. and she received approximately 10% of the Common Stock of the Company then outstanding. Judy Gaylord owned 12% of the shares of common stock of Sawworth Book Company, 15% of the shares of common stock of Gaylord's, Inc., 10% of the shares of common stock of The Cookstore Worthington, Inc. and 12% of the shares of common stock of Gaylord Enterprises, Inc. and she received approximately 10% of the Common Stock of the Company then outstanding. Susan Gaylord Noble owned 12% of the shares of common stock of Sawworth Book Company, 15% of the shares of common stock of Gaylord's, Inc., 10% of the shares of common stock of The Cookstore Worthington, Inc. and 12% of the shares of Gaylord Enterprises, Inc. and she received approximately 10% of the Common Stock of the Company then outstanding. John D. Critser owned approximately 34% of the shares of Common Stock of Gaylord Book Company and he received approximately 8% of the Common Stock of the Company then outstanding. After the completion of the transactions contemplated in the Exchange Agreement, the Company issued an additional 13,107 shares of Common Stock to John D. Critser. II. During August through October 1994, the Company borrowed an aggregate of $500,000 from the Bridge Lenders, and issued thereto Bridge Notes in the principal amounts and on the various dates, set forth below. In partial consideration for making such loans, the Company issued an aggregate of 69,475 shares of Common Stock and 83,337 warrants as set forth below. These sales were intended to be exempt from the registration requirements of the Securities Act pursuant to Rule 506 promulgated thereunder. Meridian, Dunhill & Co., Inc. acted as the exclusive placement agent in connection with the Bridge Financing and received commissions aggregating $47,500 in connection with such sales. See "CERTAIN TRANSACTIONS" and "DESCRIPTION OF SECURITIES - Bridge Financing."
NUMBER NUMBER PRINCIPAL OF OF DATE NAME OF SHAREHOLDER AMOUNT SHARES WARRANTS - ---- ------------------- ------ ------ -------- 8/17/94 Ralph C. Liebert Family Trust $25,000 3,474 4,167 FBO Andrea B. Liebert 8/17/94 Ralph C. Liebert Family Trust 25,000 3,474 4,167 FBO Michelle Liebert 8/17/94 Michael Cantor 75,000 10,420 12,500 8/17/94 James Lynch 25,000 3,474 4,167 8/17/94 Carl Backes 25,000 3,474 4,167 8/17/94 Eugene Silverman 25,000 3,474 4,167 8/17/94 Thomas & Christine Pittarese 25,000 3,474 4,167 8/17/94 Leonard Perre, III 25,000 3,474 4,167 9/01/94 Smith Barney as Roll-over 50,000 6,947 8,333 Custodian for Stanley Katz
II-3 78
NUMBER NUMBER PRINCIPAL OF OF DATE NAME OF SHAREHOLDER AMOUNT SHARES WARRANTS - ---- ------------------- ------ ------ -------- 9/01/94 Julian Herskowitz 25,000 3,474 4,167 9/01/94 David & Kathleen Carroll 100,000 13,894 16,667 9/14/94 Richard Reiss 25,000 3,474 4,167 9/14/94 Robert Liebert 25,000 3,474 4,167 10/17/94 Rona J. Licht 25,000 3,474 4,167
III. In November 1995, George Gaylord, John Gaylord, Jennifer Lynn Gaylord, Susan Gaylord Noble, Janet Gaylord Goodburn and John D. Critser purchased an aggregate of 60,000 shares of the Company's Series A Preferred Stock at a price of $5.00 per share. Based upon the representations of the purchasers, such sales were exempt from the registration requirements of the Securities Act pursuant to Section 4(2) thereof. See "PRINCIPAL SHAREHOLDERS" and "DESCRIPTION OF SECURITIES Preferred Stock." IV. In June 1996, the Company borrowed an aggregate of $622,500 from 12 investors and issued thereto the Convertible Notes in the principal amounts on the dates set forth below. These sales and the issuance of the shares of Common Stock upon the conversion of the Convertible Notes are intended to be exempt from the registration requirements of the Securities Act pursuant to Section 4(2) and/or Rule 506 promulgated thereunder. Pursuant to a consulting agreement, Lido Equities Corp. received an aggregate of $35,175 of commissions and non-accountable expenses. Pursuant to a consulting agreement, Lido Equities Corp. has been granted the right to acquire 100,000 shares of Common Stock and 200,000 Warrants identical to the Warrants offered in the Initial Public Offering until November 30, 1996, for an aggregate purchase price of $100,000. See "DESCRIPTION OF SECURITIES - 1996 Financing."
PRINCIPAL DATE NAME OF SECURITYHOLDER AMOUNT - ---- ---------------------- ------ 6/11/96 Christopher Cirri $ 15,000 6/11/96 Michael Cirtin 30,000 6/11/96 Andrea E. Dougherty 60,000 6/11/96 Michele Freeman 30,000 6/11/96 HST Parnership 45,000 6/11/96 Peter Janssen 90,000 6/11/96 Omega Development Group, Inc. 30,000 6/11/96 Jerome Rosen 15,000 6/11/96 Darrow C. Roundy 150,000
II-4 79
PRINCIPAL DATE NAME OF SECURITYHOLDER AMOUNT - ---- ---------------------- ------ 6/11/96 Wainscott Capital Ltd. 60,000 6/11/96 Wheatear, Inc. 37,500 6/11/96 Francie Whittenburg 60,000
V. As of April 23, 1996, the Company entered into a twenty-four month financial consulting and investor relations agreement with Solay, Inc. Pursuant to the financial consulting and investor relations agreement, Solay, Inc. has been granted the right to purchase 300,000 shares of Common Stock and 600,000 Warrants identical to the Warrants offered in the Initial Public Offering through October 23, 1996, for an aggregate purchase price of $300,000. In addition, Rodika Salter, an affiliate of Solay, Inc., has been granted an option to purchase up to 200,000 shares of Common Stock until October 23, 1996 for $1.50 per share. These sales were intended to be exempt from the registration requirements of the Act pursuant to Section 4(2) thereof. ITEM 27. EXHIBITS.
NUMBER DESCRIPTION OF EXHIBIT - ------ ---------------------- 1.1 -- Form of Underwriting Agreement between the Company and the Underwriters.+ 3.1 -- Certificate of Incorporation of the Company.+ 3.2 -- By-Laws of the Company.+ 4.1 -- Form of Warrant Agreement between the Company and Continental Stock Transfer & Trust Company, as warrant agent.+ 4.2 -- Specimen Certificate of the Company's Common Stock.+ 4.3 -- 1994 Stock Option Plan, as amended.+ 4.4 -- Specimen Certificate of the Company's Warrant.+ 4.5 -- Form of Underwriter's Warrants.+ 4.6 -- Option Agreement between the Company and Lido Equities Corp.* 4.7 -- Option Agreement between the Company and Solay, Inc.* 4.8 -- Stock Option Agreement between the Company and Rodika Salter.* 4.9 -- Form of Convertible Note.* 5.1 -- Opinion of Gallet Dreyer & Berkey, LLP counsel to the Company. 10.1 -- Form of Employment Agreement between the Company and John D. Critser.+ 10.2 -- Form of Employment Agreement between the Company and John Gaylord.+ 10.3 -- Form of Employment Agreement between the Company and George Gaylord.+ 10.4 -- Agreements between the Subsidiaries and Bank One, Columbus, N.A.+ 10.5 -- Exchange Agreement, dated as of August 1, 1994, by and among George Gaylord, John Gaylord, Janet Gaylord Goodburn, Susan Gaylord Noble, Judy Gaylord, Jennifer Lynn Gaylord, John D. Critser and Gaylord Companies, Inc.+ 10.6 -- Lease, dated September 30, 1987, between UAP-Columbus JV326132, as Landlord, and Gaylord Book Company, as Tenant, as amended, for premises located at 1655 and 1657 West Lane Avenue, Lane Avenue Shopping Center, Upper Arlington, Ohio.+
II-5 80
NUMBER DESCRIPTION OF EXHIBIT - ------ ---------------------- 10.7 -- Lease, dated December 15, 1988, between Retail Projects of Cincinnati, Inc., as Landlord, and Little Professor Enterprises, Inc., as Tenant, as subsequently assigned to Gaylord's Inc. and amended, for premises located at Space 180, Forest Fair Mall, Forest Park, Ohio.+ 10.8 -- Lease, dated June 13, 1989, between UAP-Columbus JV326132, as Landlord, and The Cookstore, Inc., as Tenant, as amended, for premises located at 1677 West Lane Avenue, M-1/4 and M-6, Lane Avenue Shopping Center, Upper Arlington, Ohio.+ 10.9 -- Lease, dated September 24, 1990, between Planned Communities Company, as Landlord, and Little Professor Enterprises, Inc., as Tenant, for premises located at Worthington Square Shopping Center, Worthington, Ohio.+ 10.10 -- Lease, dated July 16, 1992, between Sawmill Place Plaza Associates, as Landlord, and Little Professor Enterprises, Inc., as Tenant, as amended, for premises known as Space 122, Plaza at Sawmill Place, 2700 Sawmill Place Blvd., Columbus, Ohio.+ 10.11 -- Lease, dated September 10, 1993, between UAP-Columbus, JV326132, as Landlord, and Gaylord Book Co., Inc., as Tenant, as amended, for premises located at 1595 West Lane Avenue, Upper Arlington, Ohio.+ 10.12 -- Lease, dated September 13, 1993, between Aetna Life Insurance Company, as Landlord, and Gaylord Companies, Inc., as Tenant, for premises located at Worthington Mall, Worthington, Ohio.+ 10.13 -- Lease, dated October 21, 1993, between Greater Boardman Plaza, Inc., as Landlord, and Gaylord Enterprises, Inc., as Tenant, for premises located at Room No. 101, Greater Boardman Plaza Shopping Center, 255 Boardman-Canfield Road, Youngstown, Ohio.+ 10.14 -- Lease, dated July 15, 1994, between Glimcher Properties Limited Partnership, as Landlord, and Gaylord Companies, as Tenant, for premises located at the Mall at Fairfield Commons, Store #E181, Beavercreek, Ohio.+ 10.15 -- Lease, dated August 19, 1994, between DeBartolo Capital Partnership, as Landlord, and The Cookstore Inc., as Tenant, for premises located at Room 240, Summit Mall Shopping Center, 3265 West Market Street, Akron, Ohio.+ 10.16 -- Sublease, dated August 31, 1994, between J.E. Hanger, Inc., sublessor and The Gaylord Companies, Inc., sublessee, as a sublease under the master lease dated April 23, 1991 between Teachers Insurance and Annuity Association, as lessor, and J. E. Hanger, Inc., as lessee, for premises located at 4006 Venture Court, Columbus, Ohio.+ 10.17 -- Consignment Agreement, dated February 25, 1989, between Ingram Industries, Inc., as Consignor, and Gaylord's, Inc., as Consignee, relating to the store located at 1018 Forest Fair Drive, Cincinnati, Ohio.+ 10.18 -- Consignment Agreement dated May 21, 1991, between Ingram Book Company, as Consignor, and Little Professor Enterprises, Inc., as Consignee, relating to the store located at 155 Worthington Square, Worthington, Ohio.+ 10.19 -- Consignment Agreement, dated February 10, 1993, between Ingram Book Company, as Consignor, and Gaylord Book Company, as Consignee, relating to the store located at 1646 W. Lane Avenue, Columbus, Ohio.+ 10.20 -- Consignment Agreement, dated February 10, 1993, between Ingram Book Company, as Consignor, and Little Professor Enterprises, Inc., as Consignee, relating to the store located at 6490 Sawmill Road, Columbus, Ohio.+
II-6 81
NUMBER DESCRIPTION OF EXHIBIT - ------ ---------------------- 10.21 -- Consignment Agreement, dated December 1993, between Ingram Book Company, as Consignor, and Gaylord Enterprises, Inc., as Consignee, relating to the store located at 101 Boardman-Canfield Road, Boardman, Ohio.+ 10.22 -- License Agreement, dated as of January 1, 1994, between Sawworth Book Company, as License Owner, and Little Professor Book Centers, Inc., as Franchisor, relating to 155 Worthington Square, Worthington, Ohio. + 10.23 -- License Agreement, dated as of January 1, 1994, between Sawworth Book Company, as License Owner, and Little Professor Book Centers, Inc., as Franchisor, relating to 6490 Sawmill Road, Columbus, Ohio.+ 10.24 -- License Agreement, dated as of January 1, 1994, between Gaylord Enterprises, Inc., as License Owner, and Little Professor Book Centers, Inc., as Franchisor, relating to 101 Boardman-Canfield Road, Boardman, Ohio.+ 10.25 -- License Agreement, dated as of January 1, 1994, between Gaylord's, Inc., as License Owner, and Little Professor Book Centers, Inc., as Franchisor, relating to 1018 Forest Fair Drive, Cincinnati, Ohio.+ 10.26 -- License Agreement, dated as of January 1, 1994, between Gaylord Book Company, as License Owner, and Little Professor Book Centers, Inc., as Franchisor, relating to 1657 W. Lane Avenue, Columbus, Ohio.+ 10.27 -- Agreement, dated as of January 1, 1994, between the Company and Little Professor Book Centers, Inc.+ 10.28 -- Letter Agreement, dated September 12, 1994, from Little Professor Book Centers, Inc. to Gaylord Family Limited.+ 10.29 -- Mutual Release Agreement, dated September 12, 1994, among Little Professor Book Centers, Inc. and the Company Gaylord's, Inc., Gaylord Family Investments, Inc., Gaylord Book Company, Sawworth Book Company, Gaylord Enterprises, Inc., Gaylord Family Limited, George Gaylord and John Gaylord.+ 10.30 -- Form of Engagement Agreement: Financial Consultant Services between the Underwriter and the Company.+ 10.31 -- Consulting Agreement dated as of April 23, 1996 by and between Solay, Inc. and the Company.* 10.32 -- Consulting Agreement between the Company and Lido Equities Corp.* 10.33 -- Amendments to Agreements between the Company and Bank One Columbus, N.A.* 10.34 -- Amendment No. 1 to Employment Agreement between the Company and John Critser.* 10.35 -- Amendment No. 1 to Employment Agreement between the Company and John Gaylord.* 10.36 -- Amendment No. 1 to Employment Agreement between the Company and George Gaylord.* 16.1 -- Letter from KPMG Peat Marwick, LLP on change in certifying accountant.+ 21.1 -- List of Subsidiaries.+ 23.1 -- Consent of Feldman Radin & Co., P.C.* 23.2 -- Consent of Gallet Dreyer & Berkey, LLP (contained in Exhibit 5.1). 23.3 -- Consent of Martin C. Licht to serve as a director.+ 24.1 -- Power of Attorney (included on the signature page of this Registration Statement). + Previously filed with the Registration Statement on Form SB-2, Registration No. 33-90832. * Previously filed upon the initial filing of this Registration Statement.
II-7 82 ITEM 28. UNDERTAKINGS. 1. The undersigned, Company, hereby undertakes: (a) To file, during any period in which the Company offers or sells securities, a post-effective amendment(s) to this registration statement: (1) To include any prospectus required by Section 10(a)(3) of the Securities Act; (2) To reflect in the prospectus any facts or events which, individually or together, represent a fundamental change in the information in the registration statement; and (3) To include any additional or changed material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement; (b) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering; and (c) That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. 2. Insofar as indemnification for liabilities arising under the Securities Act of 1933 (the "Act") may be permitted to directors, officers and controlling persons of the Company pursuant to the foregoing provisions, or otherwise, the Company has been advised that in the opinion of the Securities and Exchange Commission (the "Commission") such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Company of expenses incurred or paid by a director, officer or controlling person of the Company 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 Company 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 of whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. II-8 83 SIGNATURES In accordance with the requirements of the Securities Act of 1933, the Registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing this Amendment to Form SB-2 and has authorized this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Columbus, State of Ohio, on July 15, 1996. GAYLORD COMPANIES, INC. By: /s/ John Gaylord ----------------------------------- John Gaylord, Chairman of the Board and Chief Executive Officer KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints JOHN GAYLORD and/or JOHN D. CRITSER his true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments (including post-effective amendments) to this Registration Statement, and to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney-in-fact and agent, full power and authority to do and perform each and every act and thing requisite or necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agent or either of them or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. In accordance with the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated.
SIGNATURE TITLE DATE --------- ----- ---- /s/ John Gaylord Chairman of the Board, Chief July 15, 1996 - ------------------------------ Executive Officer and Treasurer John Gaylord (Principal Executive Officer, Principal Financial Officer and Principal Accounting Officer) /s/ John D. Critser President, Chief Operating July 15, 1996 - ----------------------------- Officer and Director John D. Critser /s/ George Gaylord Senior Chairman of the Board and July 15, 1996 - ----------------------------- Director George Gaylord /s/ Martin C. Licht Director July 15, 1996 - ----------------------------- Martin C. Licht
II-9 84 EXHIBIT INDEX
NUMBER DESCRIPTION OF EXHIBIT - ------ ---------------------- 1.1 -- Form of Underwriting Agreement between the Company and the Underwriters.+ 3.1 -- Certificate of Incorporation of the Company.+ 3.2 -- By-Laws of the Company.+ 4.1 -- Form of Warrant Agreement between the Company and Continental Stock Transfer & Trust Company, as warrant agent.+ 4.2 -- Specimen Certificate of the Company's Common Stock.+ 4.3 -- 1994 Stock Option Plan, as amended.+ 4.4 -- Specimen Certificate of the Company's Warrant.+ 4.5 -- Form of Underwriter's Warrants.+ 4.6 -- Option Agreement between the Company and Lido Equities Corp.* 4.7 -- Option Agreement between the Company and Solay, Inc.* 4.8 -- Stock Option Agreement between the Company and Rodika Salter.* 4.9 -- Form of Convertible Note.* 5.1 -- Opinion of Gallet Dreyer & Berkey, LLP counsel to the Company. 10.1 -- Form of Employment Agreement between the Company and John D. Critser.+ 10.2 -- Form of Employment Agreement between the Company and John Gaylord.+ 10.3 -- Form of Employment Agreement between the Company and George Gaylord.+ 10.4 -- Agreements between the Subsidiaries and Bank One, Columbus, N.A.+ 10.5 -- Exchange Agreement, dated as of August 1, 1994, by and among George Gaylord, John Gaylord, Janet Gaylord Goodburn, Susan Gaylord Noble, Judy Gaylord, Jennifer Lynn Gaylord, John D. Critser and Gaylord Companies, Inc.+ 10.6 -- Lease, dated September 30, 1987, between UAP-Columbus JV326132, as Landlord, and Gaylord Book Company, as Tenant, as amended, for premises located at 1655 and 1657 West Lane Avenue, Lane Avenue Shopping Center, Upper Arlington, Ohio.+ 10.7 -- Lease, dated December 15, 1988, between Retail Projects of Cincinnati, Inc., as Landlord, and Little Professor Enterprises, Inc., as Tenant, as subsequently assigned to Gaylord's Inc. and amended, for premises located at Space 180, Forest Fair Mall, Forest Park, Ohio.+ 10.8 -- Lease, dated June 13, 1989, between UAP-Columbus JV326132, as Landlord, and The Cookstore, Inc., as Tenant, as amended, for premises located at 1677 West Lane Avenue, M-1/4 and M-6, Lane Avenue Shopping Center, Upper Arlington, Ohio.+ 10.9 -- Lease, dated September 24, 1990, between Planned Communities Company, as Landlord, and Little Professor Enterprises, Inc., as Tenant, for premises located at Worthington Square Shopping Center, Worthington, Ohio.+ 10.10 -- Lease, dated July 16, 1992, between Sawmill Place Plaza Associates, as Landlord, and Little Professor Enterprises, Inc., as Tenant, as amended, for premises known as Space 122, Plaza at Sawmill Place, 2700 Sawmill Place Blvd., Columbus, Ohio.+ 10.11 -- Lease, dated September 10, 1993, between UAP-Columbus, JV326132, as Landlord, and Gaylord Book Co., Inc., as Tenant, as amended, for premises located at 1595 West Lane Avenue, Upper Arlington, Ohio.+
85
NUMBER DESCRIPTION OF EXHIBIT - ------ ---------------------- 10.12 -- Lease, dated September 13, 1993, between Aetna Life Insurance Company, as Landlord, and Gaylord Companies, Inc., as Tenant, for premises located at Worthington Mall, Worthington, Ohio.+ 10.13 -- Lease, dated October 21, 1993, between Greater Boardman Plaza, Inc., as Landlord, and Gaylord Enterprises, Inc., as Tenant, for premises located at Room No. 101, Greater Boardman Plaza Shopping Center, 255 Boardman-Canfield Road, Youngstown, Ohio.+ 10.14 -- Lease, dated July 15, 1994, between Glimcher Properties Limited Partnership, as Landlord, and Gaylord Companies, as Tenant, for premises located at the Mall at Fairfield Commons, Store #E181, Beavercreek, Ohio.+ 10.15 -- Lease, dated August 19, 1994, between DeBartolo Capital Partnership, as Landlord, and The Cookstore Inc., as Tenant, for premises located at Room 240, Summit Mall Shopping Center, 3265 West Market Street, Akron, Ohio.+ 10.16 -- Sublease, dated August 31, 1994, between J.E. Hanger, Inc., sublessor and The Gaylord Companies, Inc., sublessee, as a sublease under the master lease dated April 23, 1991 between Teachers Insurance and Annuity Association, as lessor, and J. E. Hanger, Inc., as lessee, for premises located at 4006 Venture Court, Columbus, Ohio.+ 10.17 -- Consignment Agreement, dated February 25, 1989, between Ingram Industries, Inc., as Consignor, and Gaylord's, Inc., as Consignee, relating to the store located at 1018 Forest Fair Drive, Cincinnati, Ohio.+ 10.18 -- Consignment Agreement dated May 21, 1991, between Ingram Book Company, as Consignor, and Little Professor Enterprises, Inc., as Consignee, relating to the store located at 155 Worthington Square, Worthington, Ohio.+ 10.19 -- Consignment Agreement, dated February 10, 1993, between Ingram Book Company, as Consignor, and Gaylord Book Company, as Consignee, relating to the store located at 1646 W. Lane Avenue, Columbus, Ohio.+ 10.20 -- Consignment Agreement, dated February 10, 1993, between Ingram Book Company, as Consignor, and Little Professor Enterprises, Inc., as Consignee, relating to the store located at 6490 Sawmill Road, Columbus, Ohio.+ 10.21 -- Consignment Agreement, dated December 1993, between Ingram Book Company, as Consignor, and Gaylord Enterprises, Inc., as Consignee, relating to the store located at 101 Boardman-Canfield Road, Boardman, Ohio.+ 10.22 -- License Agreement, dated as of January 1, 1994, between Sawworth Book Company, as License Owner, and Little Professor Book Centers, Inc., as Franchisor, relating to 155 Worthington Square, Worthington, Ohio. + 10.23 -- License Agreement, dated as of January 1, 1994, between Sawworth Book Company, as License Owner, and Little Professor Book Centers, Inc., as Franchisor, relating to 6490 Sawmill Road, Columbus, Ohio.+
86
NUMBER DESCRIPTION OF EXHIBIT - ------ ---------------------- 10.24 -- License Agreement, dated as of January 1, 1994, between Gaylord Enterprises, Inc., as License Owner, and Little Professor Book Centers, Inc., as Franchisor, relating to 101 Boardman-Canfield Road, Boardman, Ohio.+ 10.25 -- License Agreement, dated as of January 1, 1994, between Gaylord's, Inc., as License Owner, and Little Professor Book Centers, Inc., as Franchisor, relating to 1018 Forest Fair Drive, Cincinnati, Ohio.+ 10.26 -- License Agreement, dated as of January 1, 1994, between Gaylord Book Company, as License Owner, and Little Professor Book Centers, Inc., as Franchisor, relating to 1657 W. Lane Avenue, Columbus, Ohio.+ 10.27 -- Agreement, dated as of January 1, 1994, between the Company and Little Professor Book Centers, Inc.+ 10.28 -- Letter Agreement, dated September 12, 1994, from Little Professor Book Centers, Inc. to Gaylord Family Limited.+ 10.29 -- Mutual Release Agreement, dated September 12, 1994, among Little Professor Book Centers, Inc. and the Company Gaylord's, Inc., Gaylord Family Investments, Inc., Gaylord Book Company, Sawworth Book Company, Gaylord Enterprises, Inc., Gaylord Family Limited, George Gaylord and John Gaylord.+ 10.30 -- Form of Engagement Agreement: Financial Consultant Services between the Underwriter and the Company.+ 10.31 -- Consulting Agreement dated as of April 23, 1996 by and between Solay, Inc. and the Company.* 10.32 -- Consulting Agreement between the Company and Lido Equities Corp.* 10.33 -- Amendments to Agreements between the Company and Bank One Columbus, N.A.* 10.34 -- Amendment No. 1 to Employment Agreement between the Company and John Critser.* 10.35 -- Amendment No. 1 to Employment Agreement between the Company and John Gaylord.* 10.36 -- Amendment No. 1 to Employment Agreement between the Company and George Gaylord.* 16.1 -- Letter from KPMG Peat Marwick, LLP on change in certifying accountant.+ 21.1 -- List of Subsidiaries.+ 23.1 -- Consent of Feldman Radin & Co., P.C. 23.2 -- Consent of Gallet Dreyer & Berkey, LLP (contained in Exhibit 5.1). 23.3 -- Consent of Martin C. Licht to serve as a director.+ 24.1 -- Power of Attorney (included on the signature page of this Registration Statement). + Previously filed with the Registration Statement on Form SB-2, Registration No. 33-90832. * Previously filed upon the initial filing of this Registration Statement.
EX-5.1 2 EXHIBIT 5.1 1 EXHIBIT 5.1 [GALLET DREYER & BERKEY, LLP LETTERHEAD] July 16, 1996 Gaylord Companies, Inc. 4006 Venture Court Columbus, Ohio 43228 Attn: John Gaylord Re: Registration Statement on Form SB-2 ----------------------------------- Gentlemen: We refer to the offering (the "Offering") of the following securities (collectively, the "Securities") of Gaylord Companies, Inc., a Delaware corporation (the "Company"), as described in the Registration Statement on Form SB-2, Registration No. 333-07327, as subsequently amended from time to time (collectively, the "Registration Statement"): 1. Up to 1,015,000 shares of Common Stock, $.01 par value (the "Common Stock"), of the Company, being registered on behalf of certain selling security holders; 2. Up to 800,000 common stock purchase warrants (the "Warrants") and the shares of Common Stock underlying the Warrants, being registered on behalf of certain selling security holders; In furnishing our opinion, we have examined copies of the Registration Statement and the Exhibits thereto. We have conferred with officers of the Company and have examined the originals or certified, conformed or photostatic copies of such records of the Company, certificates of officers of the Company, certificates of public officials, and such other documents as we have deemed relevant and necessary under the circumstances as the basis of the opinion expressed herein. In all such examinations, we have assumed the authenticity of all documents submitted to us as originals or duplicate originals, the conformity to original documents of all document copies, the authenticity of the respective originals of such latter documents, and the correctness and completeness of such certificates. Finally, we have obtained from officers of the Company such assurances as we have considered necessary for the purposes of this opinion. Based upon and subject to the foregoing and such other matters of fact and questions of law as we have deemed relevant in the circumstances, and in reliance thereon, it is our opinion that, when and if (a) the Registration Statement shall be declared effective by the 2 GALLET DREYER & BERKEY, LLP Gaylord Companies, Inc. July 16, 1996 Page 2 Securities and Exchange Commission, as the same may hereafter be amended; and (b) the Securities to be sold for the account of certain selling security holders shall have been sold as contemplated in the Registration Statement, then all of the Securities, upon execution and delivery of proper certificates therefor, will be duly authorized, validly issued and outstanding, fully paid and nonassessable. The undersigned hereby consents to the use of its name in the Registration Statement and in the prospectus forming a part of the Registration Statement (the "Prospectus"), to references to this opinion contained therein under the caption of the Prospectus entitled "Legal Matters," and to the inclusion of this opinion in the Exhibits to the Registration Statement. Please note that, as set forth in the Prospectus, Martin C. Licht, a partner of this firm, is a director of the Company. We are members of the Bar of the State of New York and we do not express herein any opinion as to any matters governed by any law other than the law of the State of New York, the corporate law of the State of Delaware, and the Federal laws of the United States. This opinion is limited to the matters set forth herein, and may not be relied upon in any matter by any other person or used for any other purpose other than in connection with the corporate authority for the issuance of the Securities pursuant to and as contemplated by the Registration Statement. Very truly yours, GALLET DREYER & BERKEY, LLP -----END PRIVACY-ENHANCED MESSAGE-----