Exhibit No. 4.1
Xxxxxx Designs, Inc.
Form 10-KSB/ 1997
File No. 33-49854-A
SUBSCRIPTION AGREEMENT
AND INVESTMENT LETTER
________________
Date
To the Board of Directors
Xxxxxx Designs, Inc.
0000 Xxx Xxxx Xxxx
Xxxxx 000
Xxxxxxx, Xxxxx 00000
Re: Subscription to Purchase Units
of Xxxxxx Designs, Inc.
Gentlemen:
This will acknowledge that the undersigned hereby agrees to
irrevocably purchase from Xxxxxx Designs, Inc. (the "Company" or
"Xxxxxx"), a corporation formed in July 1991 and now organized
under the laws of the State of Delaware, ___________________
unit(s) (collectively the "Units") at a price of $100,000 per
Unit. The Unit(s) to be purchased by the undersigned is (are)
part of a private placement of securities (the "Offering") by the
Company of up to 16 Units which is being made only to "accredited
investors" as defined herein on a 12 Unit minimum or none to 16
Unit maximum best efforts basis by the Company through July 31,
1996. Based thereon, if 12 Units are not sold and paid for on or
prior to August 15, 1996 (unless extended as provided below), the
Offering will not become effective and all funds collected from
subscribers will be promptly returned to them without interest
thereon or deduction therefrom. The Company reserves the right
to sell fractions of a Unit.
All funds collected from subscribers pending consummation or
termination of the Offering as set forth herein will be held in
the escrow account described below. The Company is required to
obtain the permission of its primary lender, Nations Bank of
Texas (the "Bank"), in order to effect this Offering.
Accordingly, no funds will be released from the escrow account to
the Company unless the Bank's permission is obtained.
If all of the Units are sold, the Company will receive aggregate
gross proceeds of $1,600,000 less the expenses of this Offering
which management estimates will approximate $223,000, including
the fee and expense allowance payable to Xxxxxxx and Company
Securities, Inc. ("Xxxxxxx") described below. Xxxxxxx, a member
of the New York Stock Exchange, is acting as the placement agent
for the Company in placing this Offering. The Offering will
terminate on the sooner to occur of the sale of all of the Units
or August 15, 1996, unless extended for an additional 30 days by
the mutual consent of the Company and Xxxxxxx.
The undersigned understands that the information provided to him
with respect to the Company has not been independently verified
by Xxxxxxx. Accordingly, there is no representation by Xxxxxxx
as to the completeness or accuracy of such information.
Xxxxxxx will receive (i) a fee equal to 10% and a non-accountable
expense allowance equal to 3% of the aggregate purchase price of
the Units sold; and (ii) a number of Warrants equal to 10% of the
number Warrants issuable as part of Units sold. Xxxx X. Xxxxx, a
director of the Company, is also a principal of Xxxxxxx.. Neither
the Company nor Xxxxxxx has obtained any independent opinion
relating to the fairness of the terms of this Offering or the
compensation to be paid to Xxxxxxx for the services it will
render in connection herewith.
Payment for the Units shall be made by check payable to
"Citibank, N.A. - Xxxxxx Designs, Inc. Escrow Account" and
delivered to Xxxxxxx, together with all executed copy of this
Subscription Agreement and Investment Letter and the Purchaser
Questionnaire appended hereto as EXHIBIT A. Payment may be made
by wire transfer pursuant to instructions available on request
from Xxxxxxx.
The Company intends to obtain stockholder approval for a one for
two reverse split of its common stock, par value $0.0001 per
share, (the "Common Stock") after which there will be
approximately 3.22 million shares of Common Stock outstanding
including approximately 420,000 shares reserved for issuance
pursuant to the exercise of currently outstanding options and
currently authorized warrants. Each Unit consists of (i) a note
(collectively the "Notes") in the principal amount of $100,000;
and (ii) 50,000 warrants (the "Warrants"), each to purchase one
share of post split Common Stock at a price of $0.25 per share
for a period of seven years. The Notes and Warrants will be
immediately detachable.
The Notes will bear annual interest at the rate of 12% for the
first six months after issuance. Thereafter the interest rate
will increase by 2% each six months until the shares of Common
Stock underlying the Notes and the Warrants (the "Underlying
Shares") are registered as provided below, up to a maximum of
18%. Interest will be payable quarterly. The Notes will be
subordinated to "Senior Indebtedness" as defined therein. They
will not be personally guaranteed and there will be no sinking
fund, trustee or indenture with respect thereto.
The Notes will mature on the earlier or 36 months after issuance
or the closing of the "Public offering" as defined below. Each
Note will be immediately convertible into post split Common Stock
at the rate of $1.50 per share. The Notes will not be repayable
for up to six months after the date of issuance except for
repayment from the proceeds of the Public Offering. Thereafter,
they will be prepayable prior to maturity on 30 day's notice
without penalty unless such prepayment occurs before Underlying
Shares and the Warrant Shares are registered. In such event,
Note holders may convert their Notes during the 30 day notice
period into post split Common Stock at the lower of $1.50 per
share or 50% of the market value of the Common Stock as
determined in the Note. If prepayment is effected after
registration of the Underlying Shares and the Warrant Shares, the
Notes will be convertible only at the rate of $1.50 per share.
The Notes will also be convertible into the units to be sold in
the Public Offering at a discount of 50% from the Public Offering
price.
The conversion rate of the Notes and the exercise price of the
Warrants will be subject to adjustment in accordance with
appropriate anti-diltition provisions. In addition, in the event
that, prior to the repayment of the Notes, the Company is
acquired, or effects a merger where it is not the surviving
entity, or participates in a similar transaction, at the option
of the Note holders, the Notes will be repaid or converted into
two times the amount of the securities and/or other consideration
to be distributed to Common Stock holders upon consummation of
the transaction if the holders had converted their Notes
immediately before the effective date of the transaction.
The undersigned understands that the Company and Xxxxxxx have
entered into a letter of intent dated July 31, 1995, which
provides, in part, that Xxxxxxx may, but is not obligated to,
undertake to sell securities of the Company for its own account
("Firm Underwriting") in a public offering (the "Public
Offering") subsequent to the completion of the Private Placement.
The letter of intent further provides that any registration
statement ("Registration Statement") to be filed with the
Securities and Exchange Commission (the "Commission") will
include provisions for the registration of the Underlying Shares.
The undersigned acknowledges that no assurance can be given that
the Registration Statement, if filed, will be declared effective
by the Commission or, if it is, that the Public Offering will
ever be successfully completed. Accordingly, he warrants and
represents to the Company that he is purchasing the Units without
relying on the occurrence of the Public Offering.
If the Registration Statement is not declared effective by
December 31, 1996, the holders of a majority of the Underlying
Shares shall have the right, on one occasion only through one
year after the date on which all of the Notes have been repaid
and/or converted and all of the Warrants have expired and/or been
exercised, to demand that the Company register the Underlying
Shares with the Commission and use its best efforts to have such
registration statement declared effective. The Company will also
grant the Unit purchasers unlimited "piggy back" registration
rights with respect to the Underlying Shares.
The undersigned acknowledges that the Units, and the underlying
Notes and Warrants (the "Underlying Securities") he is
purchasing, as well as any Underlying Shares into which the Notes
may be converted and/or for which the Warrants may be exercised,
have not been registered under the Securities Act of 1933 (the
"Act") or qualified under applicable state securities laws and
that the transferability thereof is restricted by the
registration provisions of the Act as well as such state laws.
Based upon the representations and agreements being made by him
herein, the Units and Underlying Securities are being sold to him
pursuant to an exemption from such registration provided by
Section 4 (2) of the Act and applicable state securities law
qualification exemptions. The undersigned further acknowledges
that the basis for these exemptions may not be available if,
notwithstanding such representations, he intends merely acquiring
these securities for a fixed or determinable period in the
future, or for a. market rise, or for sale if the market does not
rise. The undersigned represents and warrants that he does not
have any such intention. The undersigned agrees that the
documentation representing the Underlying Securities to be
received by him, as well as the certificates representing any
Underlying Shares, will bear a legend indicating that transfer of
these securities is restricted by reason of the fact that they
have not been so registered or qualified.
The undersigned represents that he is acquiring the Units and
Underlying Securities, and will acquire the Underlying Shares if
he should convert the Notes and/or exercise the Warrants, solely
for his own account as principal and not as a nominee or agent,
for investment purposes only and not with a view to resale or
other distribution or fractionalization thereof, nor with the
intention of selling, transferring or otherwise disposing of all
or any part of such securities for any particular event or
circumstance, except selling, transferring or disposing of them
upon full compliance with all applicable provisions of the Act,
the Securities Exchange Act of 1934 (the "Exchange Act"), the
Rules and Regulations promulgated by the Commission thereunder,
and any applicable state securities laws. The undersigned
further understands and agrees that (i) the securities may be
sold only if they are subsequently registered under the Act and
qualified under any applicable state securities laws or, in the
opinion of the Company's counsel, an exemption from such
registration and qualification is available; (ii) any routine
sales of securities made in reliance upon Rule 144 can be made
only in the amounts set forth in and pursuant to the other terms
and conditions, including applicable holding periods, of that
Rule; and (iii) the Company is under no obligation to assist him
in complying with any exemption from registration under the Act,
or, except as otherwise set forth herein, to register the Units,
Underlying Securities or Underlying Shares on his behalf.
The undersigned represents and warrants that he has received (i)
a copy of the form of the Note appended hereto as EXHIBIT B; (ii)
a copy of the form of Warrant appended hereto as EXHIBIT C; (iii)
a copy of the Company's Form 10-KSB for the fiscal year ended
March 31, 1996 appended hereto as EXHIBIT D; (iv) a copy of the
Company's Form 8-K dated March 12, 1996 appended hereto as
EXHIBIT E; (v) a copy of the Company's Form 8-K dated March 29,
1996 appended hereto as EXHIBIT F; and (vi) a copy of the
Company's Proxy Statement for the Company's Annual Meeting to be
held on July 26, 1996 appended hereto as EXHIBIT G (collectively
the "Information Documents") and that he has read and understood
all of these documents.
The undersigned also represents and warrants that he (i) has
reviewed such other documents and obtained such other information
from the Company as he deems necessary in order for him to make
an informed investment decision; and (ii) is fully aware of the
Company's current business prospects, financial condition, and
operating history as set forth herein and in the Information
Documents. Except as may be provided in this Subscription
Agreement and Investment Letter and in the Information Documents,
he warrants that no representations, statements or inducements
were made to him to purchase the Units.
Based on the foregoing, the undersigned acknowledges that, among
other matters relating to the Company, he is aware of the
following:
The Company is an importer of foreign ceramic tile and marble and
a distributor of these products as well as domestic ceramic tile,
marble and other home design/building products. The Company's
products are distributed to a wide and varied retail and
wholesale customer base through 13 showroom/warehouse facilities
and three showrooms in seven states.
The Company markets its products to at least five general types
of customers. These include pool contractors, residential and
commercial remodeling contractors, new home builders, architects
and designers, and "do-it-yourself" consumers. A substantial
portion of the marketing to the contractor trade is effected by
retail sales to the ultimate consumer through the retail
showrooms. Sales are conducted in the showroom facilities by
trained, experienced tile sales personnel.
Merchandise is distributed by various methods depending upon the
warehouse support structure for a particular sales location.
Where a warehouse is attached to a showroom, the customer may
obtain products immediately, but where the showroom is
independent of a warehouse facility, the customer may wait as
long as two weeks to receive the merchandise. In cases of
special orders, or when a warehouse is out of stock, the delivery
time may exceed two weeks. The vast majority of the Company's
products are picked up by the customers or their contractors at
the Company's warehouse facilities or showrooms. Only a small
portion of orders are delivered or shipped directly to customers.
A number of other companies market tile and related products to
wholesale and retail customers. Many of them possess greater
financial and managerial resources as well as general market
acceptance. The Company's retail competitors include Color Tile,
Home Depot, Builders Square and other major retail warehouse
distributors. Major wholesale distributors include Florida Tile,
Dal Tile, American Olean, American Tile Supply, Arizona Tile,
Laufen and C.I.T. Xxxxxx competes on the basis of product quality
and selection, price and service. The Company's business is
seasonal, generally with more activity in the spring and summer
than in fall and winter.
The Company obtains its products from a diversified group of
domestic and international suppliers. In general, purchases can
be broken out as follows: 40% from Italy; 30% from the United
States; 15% from Japan; and 15% from a number of other countries.
The major domestic suppliers are Mutual Materials, Interstate
Brick, P&M Tile, and Laufen International. For the fiscal year
ended March 31, 1996, no single foreign or domestic source
provided the Cornpany with more than 10% of its products and no
single customer accounted for 10% or more of the Company's
revenues.
The Company currently has 88 full time employees in addition to
its seven executive officers. Of these, 28 are in
administration, 26 in sales and 34 in operations.
Xxxxxx has operations in seven states with retail showroom
locations in Houston, Dallas, Austin, The Woodlands, Xxxxxxx and
Corpus Christi, Texas; Atlanta, Georgia; Orlando, Florida;
Boston, Massachusetts; Phoenix, Arizona; Anaheim, Northridge and
Los Angeles, California; and Denver, Colorado. The Company plans
to close its Boston operation shortly. Xxxxxx maintains a
100,000 square foot warehouse facility in Houston, Texas, where
the major portion of its inventory is located, and 20,000 square
foot satellite warehouse and showroom facilities in Anaheim,
California, Atlanta, Georgia and Dallas, Texas.
In February 1995 the Company acquired 100% of the common stock of
TCM Holdings Corporation ("TCM") in exchange for 644,276 of its
Common Stock. Management estimates that, in accordance with
certain final price adjustments provided by the terms of the
purchase agreement, 240,000 of these shares will be returned to
the Company. In August 1995, due to recurring losses, TCM was
required to cease its operations. In November 1995 TCM was
placed into a Chapter 7 filing under the U.S. Bankruptcy Code by
the U.S. Bankruptcy Court, District of Massachusetts, Eastern
Division (Case Number 94-10762-WCH). The Company has suffered a
significant loss ($4,351,837) during the fiscal year ended March
31, 1996, primarily attributable to the financial problems
encountered by its TCM subsidiary.
The Company is in violation of certain loan covenants of its
credit facility with the Bank. Consequently, the Bank may demand
repayment of the entire outstanding balance of the note
(currently $5,780,000), which is secured by all of the Company's
inventory and accounts receivable, and the debt must be recorded
in full as a current liability. This issue has caused the
Company's independent accountants to insert a "going concern"
qualification in their report. (See Report of Independent
Certified Public Accountants and Note 2 of Notes to the Company's
Consolidated Financial Statements, both contained in the
Company's Form 10-KSB for the year ended March 31, 1996 appended
hereto as EXIHIBIT D (the "March 31, 1996 Form 10-KSB").
Management believes that it has adequately accrued for all
remaining losses due to the closure of TCM. In addition, the
Company is seeking to refinance its existing credit facility and
secure additional financing such as that which it will receive if
this Offering is consummated. No assurance can be given,
however, that the Company will be successful in refinancing its
credit facility or obtaining additional financing sufficient to
support its continuing operations.
Reference is made to Item 6 (Management's Discussion and Analysis
of Financial Condition and results of operations) of the March
31, 1996 Form 10-KSB and Notes 2, 3 and 5 to Notes to the
Company's Consolidated Financial Statements included therein for
additional information relating to the transactions involving TCM
and their effect on the Company's financial condition.
The directors and executive officers of the Company are as
follows:
Name Age Position
X. Xxxxxxx Xxx 60 President, Chairman of the Board and
Chief Executive Officer
Xxxxxxx Xxxxx 58 Vice President-Retail Training and
Secretary
Xxxxxx X. Xxxxxx 55 Vice President-Marketing
Xxxxxx X. Xxxxxxxxx 52 Vice President-Westem Region
Xxxxx X. Xxxxxxxxx 49 Chief Financial Officer
Xxxx X. Xxxxx 46 Director
Xxxxxx X. Xxxxxx, Xx. 45 Vice President-General Manager
and
Director
Xxxxxx X. Xxxx, Xx. 58 Director
Xxxxx Xxxxxxx 46 Vice President-consumer
Reference is made to Items 9 (Directors, Executive Officers,
Promoters and Control Persons), 10 (Executive Compensation) and
11 (Principal Stockholders) of the March 31, 1996 Form 10-KSB for
information relating to the background of the Company's officers
and directors, executive compensation, and ownership of the
Common Stock by the Company's principal shareholders. Reference
is also made to Item 12 (Certain Relationships with Related
Transactions) of the March 31, 1996 Form 10-KSB for information
relating to transactions with parties affiliated with the
Company, including a limited guarantee by Xx. Xxx of the
Company's credit facility, and financial consulting agreements
between the Company and affiliates of Xx. Xxxxx.
The Company is authorized to issue 10,000,000 shares of Common
Stock, $0.0001 par value per share, of which approximately 3.22
million shares will be issued and outstanding, including shares
reserved for options and warrants, after a one for two reverse
split of the Common Stock which, as noted above, is to be
completed prior to the consummation of this Offering. The shares
of Common Stock as set forth in the March 31, 1996 Form 10-KSB
and the Financial Statements included therein do not reflect the
effect of this reverse split.
Holders of Common Stock are entitled to receive dividends when,
as and if declared by the Board of Directors out of funds legally
available therefor. They have no preemptive or other rights to
subscribe for additional shares and the Common Stock has no
redemption, sinking fund or conversion provisions. Each share of
Common Stock is entitled to one vote on any matter submitted to
the holders thereof and to equal rights in the assets of the
Company upon liquidation subject to the prior rights on
liquidation of creditors. The outstanding shares of Common Stock
are fully paid and non-assessable.
The shares of Common Stock have non-cumulative voting rights,
which means that the holders of more than 50% of the shares
voting for the election of directors can elect all of the
directors of the Company. In such event, the holders of the
remaining shares will not be able to elect any of the directors.
The Company has initially reserved 1,946,667 shares of post split
Common Stock for issuance upon the conversion of the Notes and
the exercise of the Warrants. Should the Notes be convertible at
a price of less than $1.50 per qhare, the Company commits to
reserve such additional shares as are necessary to allow the
Notes to be converted fully. In addition, shares of post split
Common Stock have been reserved for issuance upon the exercise of
currently existing options as well as authorized warrants, only
some or which arc currcnfly outstanding.
The transfer agent for the Common Stock is lnterwest Transfer Co.
If all of the Units are sold, the undersigned understands that
the Company will receive aggregate net proceeds in the amount of
$1,377,000 which will be used for the following purposes:
Repayment of debt 1,000,000
Working capital $ 377,000*
Total $1,377,000
_______________________
* This amount will be reduced to the extent that less than the
maximum number of Units offered hereby is sold.
The undersigned is also aware of the following considerations
relating to his investment in the Units:
Potential Adverse Effect of Loan Covenant Default on Company's
Financial Condition. Because the Company is in violation
of'certain loan covenants of its credit facility with the Bank,
the Bank may demand repayment of the entire outstanding loan
balance (currently $5,780,000), which is secured by all of the
Company's inventory and accounts receivable. Although as of the
date hereof lntile has received no notice of demand from the Bank
for such repayment, no representation can be given that a demand
will not be made. The Company's operations and financial
condition would be significantly adversely affected should the
Bank require lntile to repay the loan in full. In such event, it
is unlikely that the Company could continue its business unless
it could obtain alternate financing of which there can be no
assurance.
Independent Auditors' Report. Because Xxxxxx suffered a
significant loss for the fiscal year ended March 31, 1996 and is
in violation of certain loan covenants of its credit facility,
the opinion of its independent auditors with respect to it
financial statements includes an explanatory paragraph as to the
uncertainty of the Company's ability to continue as a going
concern without refinancing its credit facility and obtaining
additional financing. The ability of lntile to continue as a
going concern is dependent upon its successful completion of this
Offering and the curing of its loan covenant defaults of which no
assurance can be given.
Additional Financing. Xxxxxx'x prospects are dependent, among
other things, upon its ability to obtain adequate financing, such
as that contemplated by this Offering, and to generate sufficient
cash flow from its operations to satisfy its obligations on a
consistent basis. Management believes that the proceeds from the
sale of the Units offered hereby together with revenue to be
generated by the operation of the Company's business should be
adequate to finance Xxxxxx'x intended level of operations for at
least the 12 months after the closing of the Offering. This
belief is based, in part, on management's belief that the Company
can obtain alternate credit financing which will permit the
servicing of its current credit line in a manner which will not
adversely affect the Company's operations and financial
condition. No assurance can be given, however, that such
alternate financing can be obtained or, even if it is, that
additional financing will not be required during this period. No
representation can be made that such financing will be available
if required or, if available, that it can be obtained on terms
acceptable to the Company.
Growth Stage Company. The Company is in the process of expanding
and developing its business. A portion of the net proceeds of
this Offering will be committed to that effort. It is not
possible to predict the Company's degree of success in
implementing this expansion. If the business is successfully
expanded, the Company will need to acquire the managerial and
support resources necessary to manage this expansion which may
require additional capital. There is no assurance that the
Company will be successful in assembling the financial,
managerial, and other resources needed to implement its expansion
plans.
Limited Market. The market for tile and related products in the
United States is limited in comparison with other parts of the
world. Development of this market depends, in part, on
acceptance of tile as a building material by consumers and
members of the construction industry. Although management
believes, based on information provided by a Distribution Profile
Survey conducted by the Ceramic Tile Dealers Association in
December 1994, that the acceptance of tile as a building material
in the United States is increasing, there is no assurance that
this trend will continue.
Risks of International Supply Factors. Approximately 70% of the
Company's products during the 1992 fiscal year were secured from
suppliers located outside of the United States. There are
significant risks in obtaining products from suppliers located in
foreign countries. These include, among others, exposure to
currency fluctuations and devaluations or restrictions on money
supplies, foreign and domestic export laws and regulations,
taxation, tariffs, import quotas and restrictions, shipping
interruptions, and other economic and political events totally
beyond the Company's control.
Competition. The business in which the Company competes is
subject to intense competition. A number of other companies
market tile and related products to wholesale and retail
customers, many of whom possess significantly greater financial
and managerial resources as well as general market acceptance
than does the Company. No assurance can be given that the
Company can continue to compete at a commercially acceptable
level.
Dependence on and Intense Competition for Key Personnel. Primary
responsibility for the conduct of the Company's affairs rests
with X. Xxxxxxx Xxx, the Company's President and Chief Executive
Officer. There can be no assurance that if the Company should
lose his services, a qualified replacement could be obtained.
There is a $1.5 million policy on Xx. Xxx'x life with the Company
as the beneficiary. No assurance can be given, however, that in
the event of Xx. Xxx'x death the proceeds of this policy would be
sufficient to retain personnel adequate to replace Xx. Xxx.
Xxxxxx'x future success also depends in large part on the
continued service of its key management, marketing and sales
personnel and on its ability to attract and retain qualified
employees. The competition for such personnel is intense and the
loss of key employees could have a materially adverse impact on
the Company. The Company does not have employment agreements
with any of its officers or employees.
Volatility of Share Price. The Common Stock is traded in the
over-the-counter market on the NASDAQ Electronic Bulletin Board.
The market price of these securities over the last two years has
been volatile. The most significant factor affecting the price
has been the substantial loss incurred by the Company during its
last fiscal year. As a result thereof the market price for the
pre split Common Stock has dropped from a high of $6.50 per share
during the summer of 1995 to a current low bid price of
approximately $0.25 per share. No assurance can be given that
the price of the Common Stock will increase or, if it does, that
it will not continue to be subject to severe volatility.
Absence of Public Market and Limited Transferability. There is
no public market for the Units, the Notes or the Warrants and
none is expected to develop. As previously noted, these
securities and the Underlying Shares have not been registered
under the Securities Act or qualified under any state securities
laws. Accordingly, they cannot be sold or otherwise transferred
unless they are subsequently registered under the Act and
qualified under any applicable state securities law or an
exemption from such registration and qualification is available.
Although the Unit holders have certain rights to register their
Underlying Shares, these rights are dependent upon the ability of
the Company to satisfy the requirements of applicable federal and
state securities laws. Circumstances could arise where the
Company is unable to meet these requirements so that the
Underlying Shares could not be registered. Even if registered,
there is no assurance that the market in the Common Stock will be
sufficiently active to permit a Unit holder to liquidate his
Underlying Shares at acceptable prices if at all.
Lack of Dividends. Xxxxxx has not paid dividends on its Common
Stock since its inception and does not intend to pay any cash
dividends on its Common Stock in the foreseeable future. It
currently intends to retain all earnings, if any, in its
business.
Subordination of Notes; Lack of Guarantees; Risk of Failure to
Service or Repay Notes. The Notes will be subordinated to all of
Xxxxxx'x current and future Senior Debt (as defined therein) and
will not be personally guaranteed. As a result, Note holders
will be dependent upon the Company's resources and the Company's
ability to generate sufficient revenue from operations to satisfy
all of its obligations on such Debt in addition to servicing the
Notes. In view of the Company's recent substantial losses and
the other factors noted herein, there is a significant risk that
Xxxxxx may not be able to service the Notes in accordance with
their terms or repay them when they mature. In addition, if a
default were to occur, there is no assurance that Note holders
would be able to obtain repayment of the sums then due under
their Notes.
Limitation on Right to Pursue Remedies. In the event the Company
should default in payment under the terms of the Notes, unless
the holders of 25% of the principal amount of the Notes elect to
declare a default, no individual Note holder will have the right
to pursue his remedies thereunder.
Original Issue Discount; Portion of Repayment of Note Principal
Treated as Income to Note Holder. A portion of the Unit price
may be allocated to the Warrants causing the Notes to be issued
with an original issue discount. In such event, upon repayment
of Note principal, a Note holder would receive taxable income in
the amount equal to the original issue discount allocated to his
Note. Each prospective purchaser should consult his tax advisor
to determine the effect of this transaction on his personal tax
status.
Control By Management. Upon completion of this offering the
Company's officers and directors will own approximately 42% of
the outstanding Common Stock. The Company's Certificate of
Incorporation does not provide for cumulative voting.
Accordingly, the Company's current management, if they act as a
group, may be able to elect all of the Company's directors and
continue to control the Company's affairs and operations.
Anti Take Over Provisions of the Delaware Corporation Law. The
Delaware Corporation Law contains provisions which may enable
management to retain control and resist a takeover of the
Company. Accordingly, these provisions could discourage or make
more difficult a merger or other type of corporate reorganization
even if they could be favorable to the interests of the
stockholders.
Use of Proceeds to Repay Prior Debt. A significant portion of
the net proceeds to be obtained from this Offering (up to $1
million or 72.6% if all of the Units offered hereby are sold)
will be used to repay existing debt.
Broad Discretion in Use of Proceeds. A significant portion of
the net proceeds to be obtained from this Offering (up to
$377,000 or 27.4% if all of the Units offered hereby are sold)
will be used for working capital which will permit management
broad discretion with respect to the use of these funds.
No Firm Commitment to Purchase Units. No commitment has been
made by anyone to purchase all or any part of the Units being
offered hereby. The funds available to the Company from the
proceeds of this Offering will be reduced and the Company's
proposed operations will be limited to the extent that less than
the maximum number of Units is sold.
Retention of Subscribers' Funds. If the Offering is unsuccessful
because the minimum number of Units offered hereby is not sold,
subscribers' funds may be retained through August 30, 1996 and
then returned without interest.
The undersigned understands that, because of the significant risk
factors referred to herein and in the Information Documents, if
the Offering is consummated, he could lose his entire investment.
The undersigned also understands the following:
THE UNITS HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OR
ANY STATE SECURITIES LAWS AND ARE BEING OFFERED AND SOLD IN
RELIANCE ON EXEMPTIONS FROM THE REGISTRATION REQUIREMENTS OF
THESE LAWS. THE UNITS HAVE NOT BEEN APPROVED OR DISAPPROVED BY
THE COMMISSION OR ANY STATE SECURITIES REGULATORY AUTHORITY NOR
HAS THE COMMISSION OR ANY SUCH AUTHORITY PASSED UPON OR ENDORSED
THE MERITS OF THE OFFERING OR THE ACCURACY OR ADEQUACY OF THIS
SUBSCRIPTION AGREEMENT AND INVESTMENT LETTER AND/OR THE
INFORMATION DOCUMENTS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
IN MAKING AN INVESTMENT DECISION, INVESTORS MUST RELY ON THEIR
OWN EXAMINATION OF THE PERSON OR ENTITY CREATING THE SECURITIES
AND THE TERMS OF THE OFFERING, INCLUDING THE MERITS AND RISKS
INVOLVED. THESE SECURITIES HAVE NOT BEEN RECOMMENDED BY ANY
FEDERAL OR STATE SECURITIES COMMISSION OR REGULATORY AUTHORITY.
FURTHERMORE THE FOREGOING AUTHORITIES HAVE NOT CONFIRMED THE
ACCURACY OR ADEQUACY OF THIS DOCUMENT. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE. THESE SECURITIES ARE SUBJECT TO
RESTRICTIONS ON TRANSFERABILITY AND RESALE AND MAY NOT BE
TRANSFERRED OR RESOLD EXCEPT AS PERMITTED UNDER THE SECURITIES
ACT, AND THE APPLICABLE STATE SECURITIES LAWS PURSUANT TO
REGISTRATION OR EXEMPTION THEREFROM. INVESTORS SHOULD BE AWARE
THAT THEY WILL BE REQUIRED TO BEAR THE FINANCIAL RISKS OF
INVESTMENT FOR AN INDEFINITE PERIOD OF TIME.
FLORIDA RESIDENTS ARE ADVISED THAT THESE SECURITIES HAVE NOT BEEN
REGISTERED WITH THE STATE OF FLORIDA. ANY REPRESENTATION TO THE
CONTRARY IS UNLAWFUL.
PURSUANT TO SECTION 517.061 (11) (A) OF THE FLORIDA SECURITIES
AND INVESTOR PROTECTION ACT, THE SALE OF SHARES TO A FLORIDA
RESIDENT SHALL BE VOIDABLE BY THE PURCHASER EITHER (i) WITHIN
THREE DAYS AFTER THE FIRST TENDER OF CONSIDERATION IS MADE BY THE
PURCHASER TO THE ISSUER, AN AGENT OF THE ISSUER OR AN ESCROW
AGENT, OR (ii) WITHIN THREE DAYS AFTER THE AVAILABILITY OF THAT
PRIVILEGE HAS BEEN COMMUNICATED TO THE PURCHASER, WHICHEVER
OCCURS FIRST, PROVIDED, HOWEVER, THAT THERE ARE MORE THAN FIVE
FLORIDA PURCHASERS. TO ACCOMPLISH SUCH WITHDRAWAL, A FLORIDA
RESIDENT NEED ONLY SEND A LETTER OR A TELEGRAM TO THE COMPANY AT
0000 XXX XXXX XXXX, XXXXX 000, XXXXXXX, XXXXX 00000 INDICATING
HIS OR HER INTENTION TO WITHDRAW. SUCH LETTER OR TELEGRAM MUST
BE SENT AND POSTMARKED PRIOR TO THE END OF THE APPLICABLE PERIOD
NOTED ABOVE. IF A LETTER IS SENT, IT IS PRUDENT TO SEND IT BY
CERTIFIED MAIL, RETURN RECEIPT REQUESTED, TO INSURE THAT IT IS
RECEIVED AND ALSO TO EVIDENCE THE TIME AND DATE OF MAILING. IF A
FLORIDA RESIDENT MAKES THIS REQUEST ORALLY, HE OR SHE SHOULD ASK
FOR WRITTEN CONFIRMATION THAT THE REQUEST HAS BEEN RECEIVED.
In connection with the subscription being made hereby the
undersigned also warrants and represents that:
(a) He has not received any general solicitation or
advertising regarding the Offering or been furnished with any
oral representation or oral information in connection with the
Offering which is not set forth herein or in the Information
Documents;
(b) He has sufficient knowledge and experience of financial
and business matters so that he is able to evaluate the merits
and risks of purchasing the Units and has determined that the
Units are a suitable investment for him;
(c) He has the means to provide for his personal needs,
possesses the ability to bear the economic risk hereunder
indefinitely, and can afford a complete loss of his investment;
(d) He has carefully read and reviewed this Subscription
Agreement and Investment Letter, the form of Note, the Security
Agreement, the form of Warrant and the other Information
Documents, and has asked such questions of the Company's
management and received from them such information as he deems
necessary in order for him to make an informed decision with
respect to the purchase of the Units;
(e) He understands the meaning of the ninth and tenth
paragraphs of this Subscription Agreement and Investment Letter
and that the Company will prohibit the transfer of the
undersigned's Units, Underlying Securities and Underlying Shares
absent full compliance with the Act, the Exchange Act and all
applicable state securities laws;
(f) He has had substantial experience in previous private
and public purchases of speculative securities and is not relying
on the Company or its affiliates with respect to economic
considerations involved in this investment; and
(g) He has reviewed carefully the definition of "accredited
investor" as set forth below and is an "accredited investor"
within that definition. The particular subparagraph or
subparagraphs by which the undersigned qualifies as such is (are)
filled in by him below.
Definition of Accredited Investor
The term "accredited investor" is defined in Rule 501 (a) of
Regulation D promulgated under the Act as follows:
(a) Certain banks, savings and loan institutions, broker-
dealers, investment companies and other entities
including an employee benefit plan within the meaning
of Title I of the Employee Retirement Income Security
Act of 1974 with total assets in excess of $5,000,000;
(b) Certain banks, savings and loan institutions, broker-
dealers, investment companies and other entities
including an employee benefit plan within the meaning
of Title I of the Employee Retirement Income Security
Act of 1974 with total assets in excess of $5,000,000;
(c) Any private business development company as defined in
Section 202 (a) (22) of the Investment Advisers Act of
1940;
(d) Any organization described in Section 501 (c) (3) of
the Internal Revenue Code, not formed for the specific
purpose of acquiring the Units, with total assets in
excess of $5,000,000;
(e) Any director, executive officer or general partner of
the issuer of the securities being offered or sold, or
any director, executive officer or general partner of a
general partner of that issuer;
(f) Any natural person whose individual net worth, or joint
net worth with that person's spouse, at the time of his
purchase exceeds $ 1,000,000;
(g) Any natural person who had an individual income in
excess of $200,000 or, with that person's spouse a
joint income in excess of $300,000 in each of the two
most recent years and who reasonably expects an income
in excess of $200,000, or $300,000 with that person's
spouse, in the current year;
(h) Any trust with total assets in excess of $5,000,000 not
formed for the specific purpose of acquiring the
securities offered, whose purchase is directed by a
sophisticated person as described in Section 230.506
(b) (2) (ii) of Regulation D; or
(i) Any entity in which all of the equity owners are
accredited investors under any of the paragraphs above.
THE UNDERSIGNED SUBSCRIBER IS AN ACCREDITED INVESTOR BY REASON OF
SUBPARAGRAPH(S) ____________________ SET FORTH IN THE DEFINITION
ABOVE.
In connection with the foregoing representations the undersigned
has appended hereto as EXHIBIT A, a Purchaser Questionnaire which
he has completed and executed. He represents and warrants that
the information set forth therein as well as all other
information which he is furnishing to the Company with respect to
his financial condition and business experience is accurate and
complete as of the date hereof and he covenants that, in the
event a material change should occur in such information, he will
immediately provide the Company with such revised or corrected
information.
All notices, requests, demands and other communications under
this Subscription Agreement shall be in writing and shall be
deemed to have been given only when delivered in person or, if
mailed, when mailed by certified or registered mail prepaid, to
the parties at their respective addresses set forth herein, or at
such other address as my be given in writing in future by either
party to the other.
Thee undersigned acknowledges and agrees that:
(a) He has full power and authority to enter into this
Agreement which, upon his execution, will constitute a valid and
legally binding obligation by him;
(b) The Company may, in its sole discretion (i) reject this
Subscription Agreement in whole or in part; and (ii) accept
subscription agreements other than in the order received;
(c) If for any reason this Offering does not close or the
undersigned's subscription is not accepted by the Company, the
undersigned shall have no claims against the Company, Xxxxxxx, or
their respective officers, directors, employees or affiliates and
shall have no interest in the Units, Underlying Securities,
Underlying Shares or the Company;
(d) He shall indemnify and hold harmless the Company,
Xxxxxxx, and their respective officers, directors, employees and
affiliates against any loss, liability, claim, damage or expense,
(including, but not limited to, any and all expenses reasonably
incurred in investigating, preparing or defending against any
litigation commenced or threatened or any claim) arising out of
or based upon any false representation or warranty or breach or
failure by the undersigned to comply with any covenant or
agreement made by him herein or in any other document provided by
him to any of the foregoing in connection with this transaction;
(e) The representations, warranties and agreements made by
the undersigned set forth herein shall survive the closing of the
Offering;
(f) Neither this Subscription Agreement nor any provisions
hereof shall be modified, discharged or terminated except by an
instrument in writing signed by the party against whom any
waiver, change, discharge or termination is sought;
(g) The laws of the State of Texas shall govern the
interpretation and enforcement of this Subscription Agreement.
In the event of a dispute, the undersigned agrees that any law
suit brought to enforce or interpret the provisions hereof shall
be brought in state or federal courts, as appropriate, in Xxxxxx
County, Texas, and the undersigned agrees to submit to the
personal jurisdiction of such court;
(h) This Subscription Agreement may be executed in
counterparts, each of which shall be deemed an original, but all
of which shall constitute the same instrument; and
(i) This Subscription Agreement constitutes the entire
agreement of the parties hereto, and supersedes all prior
understandings with respect to the subject matter hereof.
The undersigned hereby agrees to purchase ________ Unit(s) as set
forth in the first paragraph of this Subscription Agreement and
Investment Letter, and is tendering herewith his check therefor
in the amount of $________________ made payable to "Citibank,
N.A.- Xxxxxx Designs, Inc. Escrow Account."
THE UNDERSIGNED ACKNOWLEDGES THAT THIS SUBSCRIPTION AGREEMENT
CONSISTS OF 15 PAGES AND INCLUDES EXHIBITS A THROUGH G.
Very truly yours,
DATE: _____________________
____________________________
(Signature)
____________________________
(Please print name)
ADDRESS _______________________ TELEPHONE
NUMBER:____________________
_______________________ SOCIAL SECURITY OR
IRS IDENTIFICATION
_______________________ NUMBER:
_____________________________
DATE: _______________________
ACCEPTED:
XXXXXX DESIGNS, INC.
[SEAL] By
____________________________________
X. Xxxxxxx Xxx, President
ATTEST: __________________________
Xxxxxxx Xxxxxx, Secretary
EXHIBIT A
TO
XXXXXX DESIGNS, INC.
SUBSCRIPTION AGREEMENT
AND
INVESTMENT LETTER
PURCHASER QUESTIONNAIRE
INSTRUCTIONS. Each prospective purchaser of Units (the "Units")
of Xxxxxx Designs, Inc. (the "Company") must complete and sign
this Purchaser Questionnaire.
If the prospective purchaser(s) will be joint owners, each person
involved (except a spouse with the same principal residence) must
complete Parts I, II and III of the Purchaser Questionnaire.
If the prospective purchaser is a corporation, partnership,
trust, or other entity, please complete Parts I, II and III with
reference to the individual who is authorized to sign on its
behalf, and complete Part IV of the Purchaser Questionnaire with
reference to the corporation, partnership, trust, or other
entity.
In order for a partnership or corporation to be treated as an
accredited investor, each of its equity owners must be an
accredited investor and complete Parts I, II and III of the
Purchaser Questionnaire.
All information will be treated confidentially; however, the
purpose of this Questionnaire is to assist the Company in
determining whether the prospective purchaser complies with the
requirements of Section 4 (2) under the Securities Act of 1933,
(the "1933 Act") and any applicable state securities laws.
Accordingly, the Company may present this Questionnaire to such
parties as it deems necessary in order to establish an exemption
from registration under the 1933 Act or any applicable state
securities laws.
Please complete all items, sign, date and return this
Questionnaire to Xxxxxx Designs, Inc., 0000 Xxx Xxxx Xxxx, Xxxxx
000, Xxxxxxx, Xxxxx 00000, together with any of the Verification
Documents that are called for on page 7.
Please print or type. If the answer to any question is "None" or
"Not Applicable," please so state.
I. GENERAL INFORMATION
Name of
purchaser:_______________________________________________________
_______
Social Security or Tax Identification
Number:_________________________________________
Home
address:_________________________________________________________
_________
Home telephone
number:_________________________________________________________
In which state do you maintain your legal residence and
domicile?_____________Age:________
Occupation or
profession:______________________________________________________
___
Name of
employer:________________________________________________________
______
Nature of
business:________________________________________________________
______
Position and general
duties:_______________________________________________________
Please describe your principal business activities during the
last five years:__________________
_________________________________________________________________
_____________
_________________________________________________________________
_____________
_________________________________________________________________
_____________
Education and professional background (List your highest level of
education and any licenses):
Degree
School or License Year Major
(if any)
_________________________________________________________________
_____________
_________________________________________________________________
_____________
_________________________________________________________________
_____________
_________________________________________________________________
_____________
_________________________________________________________________
_____________
II. FINANCIAL DATA
1. My individual net worth, combined with that of my spouse, if
any, as of this date, is:
(a) including all residences, furnishings and automobiles (check
one):
_______ Less than $150,000 _______$150,000
to $499,000 _______$500,000 to $999,000
_______$1,000,000 or more
(b) excluding principal residence, furnishings and automobiles
(check one):
_______Less than $150,000
_______$150,000 to $499,000
_______$500,000 to $999,000
_______$1,000,000 or more
2. I had income individually from all sources in excess of
$200,000 in the year 1993:
Yes ________ No _______
3. I had income individually from all sources in excess of
$200,000 in the year 1994:
Yes ________ No _______
4. I had income individually from all sources in excess of
$200,000 in the year 1995:
Yes ________ No _______
5. My estimated 1996 income individually from all sources will
be in excess of (check one):
_______$80,000 _______$100,000
________$150,000 _______$200,000
_______$300,000 or more
6. My income combined with that of my spouse was at least
$300,000 in each of the years 1993, 1994 and 1995:
Yes _________ No _______
7. To the best of my knowledge, my income combined with that of
my spouse will be at least $300,000 in 1996:
Yes _________ No ________
8. I can afford the complete loss of my investment in the
Units, I have no need for liquidity of this investment, and this
investment will not affect my ability to provide for my current
needs and possible personal financial contingencies.
Yes _________ No _________
9. Stated below are my previous investments in other private,
high risk investments during the past five years.
Name of Type of Approx.
Issuer Business Amount
or Program Year or Program Invested
_________________________________________________________________
____________
_________________________________________________________________
_____________
_________________________________________________________________
_____________
_________________________________________________________________
_____________
_________________________________________________________________
_____________
III. METHOD OF INVESTMENT EVALUATION
1. I have by myself sufficient knowledge and experience in
financial and business matters to be capable of evaluating the
merits and risks of an investment in the Program.
Yes _______ No _______
2. I will have an attorney, accountant, investment advisor or
other consultant review this investment.
Yes _______ No _______
If Yes:
Name:
_________________________________________________________________
______
Firm:
_________________________________________________________________
_______
Telephone number:
_(____)______________________________________________________
Address:
_________________________________________________________________
_____
IV. ADDITIONAL INFORMATION FOR CORPORATION, PARTNER-SHIP TRUST OR
OTHER ENTITY
Name of organization:
___________________________________________________________
Business address:
_______________________________________________________________
Telephone number:
_____________________________________________________________
Send communications to the attention of:
____________________________________________
Date of organization:
____________________________________________________________
State of organization:
____________________________________________________________
Tax Identification Number:
_______________________________________________________
Form of organization:
Corporation ____________Company __________Trust _____________
Other ______________
If a corporation, the organization has has not elected to be
taxed as a small business corporation for Federal income tax
purposes under the provisions of Subchapter S of the Internal
Revenue Code of 1986, as amended.
The organization is actively engaged in the conduct of a trade or
business:
Yes _______ No _______
Describe purpose of formation or principal trade or business
activity:
_________________________________________________________________
_____________
_________________________________________________________________
_____________
_________________________________________________________________
_________________________________________________________________
__________________________
Attach a complete list:
If a corporation, the names of all officers, directors, and
stockholders; or
If a partnership, the names of all partners indicating whether
each person is a general partner or limited partner.
V. PURCHASER'S REPRESENTATIONS AND ACKNOWLEDGMENTS
The foregoing statements are true and accurate to the best of my
information and belief, and I will promptly notify the Manager of
any changes therein.
I am duly authorized and empowered to legally represent and bind
the principal, person, trust, partnership, corporation or other
entity, if any, named herein as purchaser.
SIGNATURE
IN WITNESS WHEREOF, I have executed this Questionnaire this
______ day of __________, 19____.
____________________________________
SIGNATURE
____________________________________
Print Name
____________________________________
Title, if applicable
Place of Execution: _________________________
If other than individual, check one:
________Community Property ________Custodian ________Company
________Joint Tenants with ________Corporate
________Trust
Right of Survivorship
________Tenants in Common
VERIFICATION DOCUMENTS
The signed Purchaser Questionnaire must be accompanied by:
CORPORATE SUBSCRIBER
A certified copy of a resolution of the corporation's board of
directors designating the officer(s) of the corporation
authorized to sign on behalf of the corporation; and
A certified copy of a resolution of the corporation's board of
directors authorizing the contemplated investment.
PARTNERSHIP SUBSCRIBER
A certified copy of the partnership agreement; and
A certificate signed by all the general partners, authorizing the
general partner who has signed the signature page on behalf of
the partnership to sign and to make the contemplated investment
on behalf of the partnership.
TRUST SUBSCRIBER
A certified copy of the Trust instrument; and
A certificate signed by all the trustees authorizing the trustee
who has signed the signature page on behalf of the Trust to sign
and to make the contemplated investment on behalf of the Trust.
CUSTODIAN SUBSCRIBER
A certified copy of the instrument pursuant to which the
custodian is acting.
