Document:

exv10w3

 

Exhibit 10.3

THE FASHION HOUSE HOLDINGS, INC.

CONDENSED CONSOLIDATED BALANCE SHEET

SEPTEMBER 30, 2005

(UNAUDITED)

	 	 	 	 	 
	ASSETS
	 
	 	 	 	 
	Current assets:
	 	 	 	 
	 
	 	 	 	 
	Cash
	 	$	536,884	 
	Accounts receivable
	 	 	328,583	 
	Prepaid expenses
	 	 	120,152	 
	 
	 	 	 
	 
	 	 	 	 
	Total current assets
	 	 	985,619	 
	 
	 	 	 	 
	Property and equipment, net
	 	 	306,284	 
	Deposits
	 	 	47,373	 
	 
	 	 	 
	 
	 	 	 	 
	 
	 	$	1,339,276	 
	 
	 	 	 
	LIABILITIES AND STOCKHOLDERS’ DEFICIT
	 
	 	 	 	 
	Current liabilities:
	 	 	 	 
	Accounts payable and accrued expenses
	 	$	480,118	 
	Accrued payroll and related
	 	 	295,245	 
	Due to factor
	 	 	210,475	 
	Accrued interest
	 	 	228,382	 
	Convertible notes payable, net of debt discount of $321,000
	 	 	229,000	 
	Note payable to stockholder
	 	 	769,000	 
	Warrant liability
	 	 	712,000	 
	 
	 	 	 
	 
	 	 	 	 
	Total current liabilities
	 	 	2,924,220	 
	 
	 	 	 
	 
	 	 	 	 
	Commitments and Contingencies
	 	 	 	 
	 
	 	 	 	 
	Stockholders’ deficit:
	 	 	 	 
	Common stock, no par value; 100,000,000 shares authorized;
18,733,737 shares issued and outstanding
	 	 	4,146,894	 
	Accumulated deficit
	 	 	(5,731,838	)
	 
	 	 	 
	 
	 	 	 	 
	Total stockholders’ deficit
	 	 	(1,584,944	)
	 
	 	 	 
	 
	 	 	 	 
	 
	 	$	1,339,276	 
	 
	 	 	 

See accompanying notes to financial statements.

1

 

THE FASHION HOUSE HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

NINE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004

(UNAUDITED)

	 	 	 	 	 	 	 	 	 
	 	 	2005	 	2004
	Net sales
	 	$	1,202,192	 	 	$	4,362,098	 
	 
	 	 	 	 	 	 	 	 
	Cost of sales
	 	 	1,096,169	 	 	 	2,799,496	 
	 
	 	 	 	 	 	 
	 
	 	 	 	 	 	 	 	 
	Gross profit
	 	 	106,023	 	 	 	1,562,602	 
	 
	 	 	 	 	 	 	 	 
	Operating expenses:
	 	 	 	 	 	 	 	 
	Selling, general and administrative
	 	 	2,168,444	 	 	 	1,234,684	 
	Payroll and related
	 	 	756,034	 	 	 	365,875	 
	Royalties
	 	 	421,563	 	 	 	312,116	 
	 
	 	 	 	 	 	 
	 
	 	 	 	 	 	 	 	 
	Total operating expenses
	 	 	3,346,041	 	 	 	1,912,675	 
	 
	 	 	 	 	 	 
	 
	 	 	 	 	 	 	 	 
	Loss from operations
	 	 	(3,240,018	)	 	 	(350,073	)
	 
	 	 	 	 	 	 	 	 
	Other income (expense):
	 	 	 	 	 	 	 	 
	Gain on sale of license
	 	 	—	 	 	 	1,350,000	 
	Interest expense
	 	 	(1,122,410	)	 	 	(117,841	)
	 
	 	 	 	 	 	 
	 
	 	 	 	 	 	 	 	 
	Total other income (expense), net
	 	 	(1,122,410	)	 	 	1,232,159	 
	 
	 	 	 	 	 	 
	 
	 	 	 	 	 	 	 	 
	Net income (loss)
	 	$	(4,362,428	)	 	$	882,086	 
	 
	 	 	 	 	 	 
	 
	 	 	 	 	 	 	 	 
	Basic and diluted net income (loss) per share
	 	$	(0.29	)	 	$	0.06	 
	Weighted average shares oustanding:
	 	 	 	 	 	 	 	 
	Basic and diluted
	 	 	14,826,416	 	 	 	13,041,862	 
	 
	 	 	 	 	 	 

See accompanying notes to financial statements.

2

 

THE FASHION HOUSE HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

THREE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004

(UNAUDITED)

	 	 	 	 	 	 	 	 	 
	 	 	2005	 	2004
	Net sales
	 	$	455,867	 	 	$	1,407,856	 
	 
	 	 	 	 	 	 	 	 
	Cost of sales
	 	 	294,623	 	 	 	792,119	 
	 
	 	 	 	 	 	 
	Gross profit
	 	 	161,244	 	 	 	615,737	 
	Operating expenses:
	 	 	 	 	 	 	 	 
	Selling, general and administrative
	 	 	707,951	 	 	 	476,662	 
	Payroll and related
	 	 	375,486	 	 	 	135,306	 
	Royalties
	 	 	74,688	 	 	 	108,227	 
	 
	 	 	 	 	 	 
	Total operating expenses
	 	 	1,158,125	 	 	 	720,195	 
	 
	 	 	 	 	 	 
	Loss from operations
	 	 	(996,881	)	 	 	(104,458	)
	Other income (expense):
	 	 	 	 	 	 	 	 
	Gain on sale of license
	 	 	—	 	 	 	1,350,000	 
	Interest expense
	 	 	(504,864	)	 	 	(69,470	)
	 
	 	 	 	 	 	 
	Total other income (expense), net
	 	 	(504,864	)	 	 	1,280,530	 
	 
	 	 	 	 	 	 
	Net income (loss)
	 	$	(1,501,745	)	 	$	1,176,072	 
	Basic and diluted net income (loss) per share
	 	$	(0.09	)	 	$	0.09	 
	Weighted average shares oustanding:
	 	 	 	 	 	 	 	 
	Basic and diluted
	 	 	16,207,951	 	 	 	13,041,862	 
	 
	 	 	 	 	 	 

See accompanying notes to financial statements.

3

 

THE FASHION HOUSE HOLDING, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

NINE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004

(UNAUDITED)

	 	 	 	 	 	 	 	 	 
	 	 	2005	 	2004
	CASH FLOWS FROM OPERATING ACTIVITIES:
	 	 	 	 	 	 	 	 
	 
	 	 	 	 	 	 	 	 
	Net income (loss)
	 	$	(4,362,428	)	 	$	882,086	 
	Adjustments to reconcile net income (loss) to net cash used in operating activities:
	 	 	 	 	 	 	 	 
	Depreciation and amortization
	 	 	33,604	 	 	 	24,670	 
	Gain on sale of license
	 	 	—	 	 	 	(1,350,000	)
	Amortization of estimated fair value of beneficial conversion features
	 	 	631,000	 	 	 	—	 
	Amortization of estimated fair value of warrants
	 	 	358,000	 	 	 	—	 
	Changes in operating assets and liabilities:
	 	 	 	 	 	 	 	 
	Accounts receivable
	 	 	(112,424	)	 	 	(2,674	)
	Prepaid expenses
	 	 	(96,988	)	 	 	(104,359	)
	Deposits
	 	 	(34,021	)	 	 	(4,311	)
	Accounts payable and accrued expenses
	 	 	271,185	 	 	 	157,276	 
	Settlement payable
	 	 	(135,000	)	 	 	135,000	 
	Accrued payroll and related
	 	 	12,284	 	 	 	—	 
	Accrued interest
	 	 	158,640	 	 	 	117,637	 
	 
	 	 	 	 	 	 
	 
	 	 	 	 	 	 	 	 
	Net cash used in operating activities
	 	 	(3,276,148	)	 	 	(144,675	)
	 
	 	 	 	 	 	 
	 
	 	 	 	 	 	 	 	 
	CASH FLOWS FROM INVESTMENT ACTIVITIES:
	 	 	 	 	 	 	 	 
	Purchases of property and equipment
	 	 	(191,739	)	 	 	(125,768	)
	Proceeds from sales of license
	 	 	—	 	 	 	1,350,000	 
	 
	 	 	 	 	 	 
	 
	 	 	 	 	 	 	 	 
	Net cash provided by (used in) investing activities
	 	 	(191,739	)	 	 	1,224,232	 
	 
	 	 	 	 	 	 
	 
	 	 	 	 	 	 	 	 
	CASH FLOWS FROM FINANCING ACTIVITIES:
	 	 	 	 	 	 	 	 
	Proceeds from note payable to stockholder
	 	 	370,000	 	 	 	141,634	 
	Repayments of notes payable to stockholder
	 	 	(161,000	)	 	 	—	 
	Proceeds from convertible notes payable
	 	 	1,750,000	 	 	 	—	 
	Repayments of convertible notes payable
	 	 	(625,000	)	 	 	—	 
	Due to factor, net
	 	 	96,382	 	 	 	—	 
	Proceeds from the issuance of common stock, net of issuance costs of $486,210
	 	 	2,402,540	 	 	 	—	 
	 
	 	 	 	 	 	 
	 
	 	 	 	 	 	 	 	 
	Net cash provided by financing activities
	 	 	3,832,922	 	 	 	141,634	 
	 
	 	 	 	 	 	 
	 
	 	 	 	 	 	 	 	 
	Net increase in cash
	 	 	365,035	 	 	 	1,221,191	 
	 
	 	 	 	 	 	 	 	 
	Cash, beginning of the period
	 	 	171,849	 	 	 	10,639	 
	 
	 	 	 	 	 	 
	 
	 	 	 	 	 	 	 	 
	Cash, ending of the period
	 	$	536,884	 	 	$	1,231,830	 
	 
	 	 	 	 	 	 
	 
	 	 	 	 	 	 	 	 
	SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
	 	 	 	 	 	 	 	 
	Cash paid during the period for interest
	 	$	38,324	 	 	$	50,100	 
	Cash paid during the period for income taxes
	 	$	—	 	 	$	—	 
	 
	 	 	 	 	 	 

See accompanying notes to financial statements.

4

 

THE FASHION HOUSE HOLDING, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

NINE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004

(UNAUDITED)

	 	 	 	 	 	 	 	 	 
	 	 	2005	 	2004
	Supplemental Schedule of Noncash Investing and Financing Activities:
	 	 	 	 	 	 	 	 
	 
	 	 	 	 	 	 	 	 
	Issuance of common stock on conversion of debt and accrued interest
	 	$	579,554	 	 	$	  —	 
	Esitmated fair value of beneficial conversion features of certain convertible notes payable
	 	$	788,000	 	 	$	  —	 
	Estimated fair value of warrants issued in connection with certain convertible notes payable
	 	$	522,000	 	 	$	—	 
	Estimated fair value of warrants issued in connection with private placement
	 	$	190,000	 	 	$	—	 

See accompanying notes to financial statements.

5

 

THE FASHION HOUSE HOLDINGS, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2005

(UNAUDITED)

NOTE 1 — ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The accompanying condensed consolidated financial statements have been prepared in accordance with
the Securities and Exchange Commission’s (“SEC”) regulations for interim financial information.
Accordingly, they do not include all of the disclosures required by accounting principles generally
accepted in the United States of America (“GAAP”) for complete financial statements. In the opinion
of management, all adjustments (which consist only of normal and recurring adjustments) considered
necessary for a fair presentation have been included. The results of operations for the three and
nine month periods ended September 30, 2005 are not necessarily indicative of the results that may
be expected for the entire fiscal year.

Organization and Nature of Operations

On August 19, 2005, TDI Holding Corporation (“TDI”) entered into an agreement of Plan of
Reorganization (“Merger”) with The Fashion House, Inc. (“TFH”) in a tax free share exchange under
Section 368(a)(1)(B) of the Internal Revenue Code of 1986, as amended. Immediately prior to the
Merger (after considering the stock split), TDI had 1,006,344 shares of common stock issued and
outstanding and no preferred stock issued and outstanding. Pursuant to the Merger, all of the
outstanding shares of TFH’s common stock were exchanged into 14,114,200 shares of TDI common stock.
Immediately after the Merger, TDI had 15,120,544 shares of common stock issued and outstanding and
no shares of preferred stock issued and outstanding. In addition, pursuant to the Merger, TFH paid
$325,000 to TDI, which TFH expensed as acquisition costs, which is included in selling, general and
administrative expenses in the accompanying condensed consolidated statements of operations during
the period ended September 30, 2005.

Immediately after the Merger, the officers and directors of TDI resigned and the management of TFH
controlled such positions; therefore, effecting a change of control. As a result, the transaction
was recorded as a “reverse merger” whereby TFH was considered to be the accounting acquirer as it
retained control of TDI after the Merger. Simultaneously with the Merger, TDI changed its name to
The Fashion House Holdings, Inc. (hereafter referred to as the “Company”).

TFH was incorporated under the laws of the State of Delaware on April 11, 2002 and commenced
operations on January 1, 2003. TFH designs, develops and markets women’s dress footwear with an
emphasis on celebrity appeal, style, quality and fit. The Company targets the moderate to
premium-priced categories of the women’s footwear industry and implements its business model by
licensing recognized brand names.

Basis of Presentation

The condensed consolidated financial statements have been prepared in accordance with accounting
principles generally accepted in the United States of America.

Principles of Consolidation

These consolidated financial statements include the accounts of the Company and its wholly owned
subsidiary. All material intercompany accounts have been eliminated in consolidation.

6

 

THE FASHION HOUSE HOLDINGS, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2005

(UNAUDITED)

NOTE 1 — ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted
in the United States of America requires management to make estimates and judgments that affect the
reported amounts of assets, liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and reported amounts of revenues and expenses during the reporting
periods. Significant estimates made by management include, among others, collectibility of
receivables, recoverability of long-lived assets and valuation of warrants to purchase common stock
and deferred tax assets. Actual results may differ from these estimates under different assumptions
or conditions.

Going Concern

The financial statements have been prepared on a going concern basis which contemplates the
realization of assets and the satisfaction of liabilities in the normal course of business. The
Company incurred a net loss of $4,362,428 for the nine months ended September 30, 2005, had a
working capital deficit of $1,938,601 and an accumulated deficit of $5,731,838 at September 30,
2005. These factors raise substantial doubt about the Company’s ability to continue as a going
concern. The ability of the Company to continue as a going concern is dependent on obtaining
sufficient debt or equity financing in the very near future and achieving profitable operations.
These financial statements do not include any adjustments that might be necessary if the Company is
unable to continue as a going concern.

Risks and Uncertainties

Credit Risk

The Company maintains its cash accounts in financial institutions. Accounts at these institutions
are insured by the Federal Deposit Insurance Corporation (“FDIC”) up to $100,000. At September 30,
2005, the Company has cash balances which exceeded the insured limit by $401,207.

The Company assigns the majority of its trade accounts receivable to a factor (see Note 2), however
the Company maintains the credit risk with respect to collection of these amounts. The Company
makes sales to customers not approved by its factor at its own risk and monitors the outstanding
receivable balance. At September 30, 2005, the Company determined that no allowance for doubtful
accounts was necessary.

The Company operates in an industry that is subject to intense competition and government
regulation. The Company’s operations are subject to significant risks and uncertainties including
financial, operational, technological, regulatory and other risks associated with an operating
business, including the potential risk of business failure.

Merchandise Risk

The Company’s success is largely dependent upon its ability to gauge the market trends and the
tastes of its targeted consumers and provide merchandise that satisfies consumer demand. Any
inability to provide appropriate merchandise in sufficient quantities in a timely manner could have
a material adverse effect on the Company’s business, operating results and financial condition.

The Company purchases substantially all of its inventory from two vendors. The loss of either of
these vendors could have a material adverse effect on the Company’s cash flow and financial
position.

7

 

THE FASHION HOUSE HOLDINGS, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2005

(UNAUDITED)

NOTE 1 — ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued

Property and Equipment

Property and equipment are stated at cost. Depreciation of equipment is provided for by using the
straight-line method over the estimated useful lives of the related assets, which are 5 years for
machinery and equipment and 7 years for furniture and fixtures. Expenditures for maintenance and
repairs are charged to expense as incurred; additions, renewals and betterments are capitalized.
When property and equipment are retired or otherwise disposed of, the related cost and accumulated
depreciation are removed from the respective accounts, and any gain or loss is included in
operations.

Long-Lived Assets

In accordance with Statement of Financial Accounting Standards (“SFAS”) No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets, the Company evaluates the carrying value of long-lived
assets for impairment whenever events or change in circumstances indicate that such carrying values
may not be recoverable. The Company estimates the future undiscounted cash flows derived from an
asset to assess whether or not a potential impairment exists when events or circumstances indicate
the carrying value of a long-lived asset may not be recoverable. Am impairment loss is recognized
when the undiscounted future cash flows are less than its carrying amount. If assets are considered
to be impaired, the impairment to be recognized is measured by the amount by which the carrying
amount exceeds the fair value of the assets. At September 30, 2005, the Company’s management
believes there is no impairment of its long-lived assets. There can be no assurance, however, that
market conditions will not change or demand for the Company’s products or services will continue,
which could result in additional future impairment of long-lived assets.

Fair Value of Financial Instruments

The Company’s financial instruments consist of cash, accounts receivable, accounts payable and
accrued expenses, due to factor, accrued interest and convertible notes payable. The carrying value
for all such instruments approximates fair value at September 30, 2005. The fair value of the note
payable to stockholder is not determinable as the borrowings are with a related party.

Revenue Recognition

Securities and Exchange Commission Staff Accounting Bulletin (“SAB”) 101, Revenue Recognition , as
amended by SAB 104, outlines the basic criteria that must be met to recognize revenue and provide
guidance for presentation of revenue and for disclosure related to revenue recognition policies in
financial statements filed with the Securities and Exchange Commission. Management believes that
the Company’s revenue recognition policy conforms to SAB 104.

We evaluate the criteria of the Financial Accounting Standards Board (“FASB”) Emerging Issues Task
Force (“EITF”) Issue No. 99-19, Reporting Revenue Gross as a Principal Versus Net as an Agent, in
determining whether it is appropriate to record the gross amount of revenue and related costs or
the net amount earned as commissions. The Company is the primary obligor, is subject to inventory
risk, has latitude in establishing prices and selecting suppliers, establishes product
specifications, and has the risk of loss as it relates to the ultimate collection of accounts
receivable and cargo losses. Accordingly, the Company’s revenue is recorded on a gross basis.

8

 

THE FASHION HOUSE HOLDINGS, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2005

(UNAUDITED)

NOTE 1 — ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued

The Company utilizes a trading company (see Note 2) to provide trade finance and factoring services
in connection with the manufacture, distribution and sale of the Company’s products (referred to
hereinafter as the “Goods”) to customers. The trading company issues letters of credit in favor of
the manufacturers at the request of the Company, and in accordance with the information provided in
such requests. The trading company imports and delivers Goods, as instructed by the Company, to a
public warehouse and pays the manufacturers for the cost of Goods and the related costs covered by
the requests.

Goods are held by the Company at a public warehouse on a consignment basis. The Company arranges
and maintains the Goods while in its possession at its expense. The trading company has title to
the Goods when shipped from the manufacturer, during delivery, and in the public warehouse. The
trading Company is paid for the Goods upon their sales and shipment to the Company’s customers.
Goods that remain unsold in the public warehouse on or after sixty days from receipt are billed by
the trading company and title to the goods is transferred to the Company. For all Goods purchased,
the Company’s charged cost plus 4% by the trading company. There were no unsold Goods billed by the
trading company and purchased by the Company during the three and nine months ended September 30,
2005 and 2004.

Revenue is recognized upon shipment of goods from the public warehouse to the customers. The
trading company approves credit to the customers and factors the sale. The trading company charges
the Company 2.5% of the sales which are factored. For sales that are not factor approved, the
Company purchases Goods from the trading company and sells the Goods directly to the customers.

The Company has title to all Goods returned by customers to the public warehouse. At September 30,
2005, returned inventory was not material to the overall financial statements.

Shipping and handling costs billed to the customers are recorded in sales. Shipping and handling
costs as incurred by the Company are recorded in cost of sales.

Advertising

The company expenses advertising costs, consisting primarily of placement in multiple publications,
along with design and printing costs of sales materials, when incurred. Advertising expense for the
nine month periods ended September 30, 2005 and 2004 amounted to $38,039 and $60,529, respectively.

Income Taxes

The Company determines its income taxes under the asset and liability method in accordance with the
SFAS No. 109, “Accounting for Income Taxes.” Under the asset and liability approach, deferred
income tax assets and liabilities are calculated and recorded based upon the future tax
consequences of temporary differences by applying enacted statutory tax rates applicable to future
periods for differences between the financial statements carrying amounts and the tax basis of
existing assets and liabilities. Generally, deferred income taxes are classified as current or
non-current in accordance with the classification of the related asset or liability. Those not
related to an asset or liability are classified as current or non-current depending on the periods
in which the temporary differences are expected to reverse. Valuation allowances are provided for
significant deferred income tax assets when it is more likely than not that some or all of the
deferred tax assets will not be realized.

9

 

THE FASHION HOUSE HOLDINGS, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2005

(UNAUDITED)

NOTE 1 — ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued

Earnings Per Share

The Company uses SFAS No. 128, Earnings Per Share for calculating the basic and diluted income
(loss) per share. Basic income (loss) per share is computed by dividing net income (loss) by the
weighted average number of common shares outstanding during the period. Diluted income (loss) per
share is computed similar to basic income (loss) per share. All potentially dilutive shares,
935,000 as of September 30, 2005 have been excluded from diluted loss per share, as their effect
would be anti-dilutive for the period then ended. There were no potentially dilutive shares during
the period ended September 30, 2004.

Stock-Based Compensation

In December 2004, the FASB issued SFAS No. 123 (revised 2004) (“SFAS 123(R)”), “Share-Based
Payment,” to provide investors and other users of financial statements with more complete and
neutral financial information by requiring that the compensation cost relating to share-based
payment transactions be recognized in financial statements. That cost will be measured based on the
fair value of the equity or liability instruments issued. SFAS 123(R) covers a wide range of
share-based compensation arrangements including share options, restricted share plans,
performance-based awards, share appreciation rights, and employee share purchase plans. SFAS 123(R)
replaces SFAS No. 123, and supersedes APB No. 25. SFAS No. 123, as originally issued in 1995,
established as preferable a fair-value-based method of accounting for share-based payment
transactions with employees. However, that Statement permitted entities the option of continuing to
apply the guidance in APB No. 25, as long as the footnotes to financial statements disclosed what
net income (loss) would have been had the preferable fair-value-based method been used. Small
business issuers will be required to apply SFAS 123(R) as of the first interim or annual reporting
period that begins after December 15, 2005. The Company will apply SFAS 123(R) to all stock-based
employee compensation arrangements. There have been no options issued to employees as of September
30, 2005.

Stock-based awards to non-employees are accounted for using the fair value method in accordance
with SFAS No. 123 and EITF Issue No. 96-18, Accounting For Equity Instruments That Are Issued To
Other Than Employees For Acquiring, Or In Conjunction With Selling Goods Or Services . All
transactions in which goods or services are the consideration received for the issuance of equity
instruments are accounted for based on the fair value of the consideration received or the fair
value of the equity instrument issued, whichever is more reliably measurable. The measurement date
used to determine the fair value of the equity instrument issued is the earlier of the date on
which the third-party performance is complete or the date on which it is probable that performance
will occur.

10

 

THE FASHION HOUSE HOLDINGS, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2005

(UNAUDITED)

NOTE 1 — ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Derivative Financial Instruments

In connection with the issuance of warrants with convertible notes payable (see Note 5), the
Company is required to file a registration statement within 75 days of issuance of the convertible
notes and have such registration statement declared effective no later than 180 days following the
Merger (the “Effectiveness Deadline”). In addition, the Company will be required to issue the
holders of convertible notes a number of warrants equal to 123,750 for each subsequent 30 day
period that such registration statement has not been filed. Also, the Company will be required to
issue the holders of convertible notes a number of warrants equal to 123,750 for each 30 day period
following the Effectiveness Deadline. In addition, the Company is required to include the warrants
issued to the placement agent for the private placement in such registration statement (see Note
6). The Company determined that the registration rights are an embedded derivative instrument
pursuant to SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities , as
amended. Under the provisions of EITF Issue No. 00-19, Accounting for Derivative Financial
Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock,” the accounting
treatment of these derivative financial instruments requires that the Company record the
derivatives at their fair values as of the inception date of the note agreements and at fair value
as of each subsequent balance sheet date. Any change in fair value will be recorded as
non-operating, non-cash income or expense at each balance sheet date. If the fair value of the
derivatives is higher at the subsequent balance sheet date, the Company will record a
non-operating, non-cash charge. If the fair value of the derivatives is lower at the subsequent
balance sheet date, the Company will record non-operating, non-cash income.

At September 30, 2005, there are derivative liabilities of $712,000 related to the warrants with
registration rights. Due to the close proximity of the balance sheet date to the issuance date of
the warrants, there was no change in valuation of the related derivatives.

Warrant-related derivatives were valued using the Black-Scholes Option Pricing Model with the
following assumptions during the nine months ended September 30, 2005: dividend yield of 0%; annual
volatility of 62%; and risk free interest rate of 3.0%.

Beneficial Conversion Feature

The convertible feature of certain convertible notes payable (see Note 5) provides for a rate of
conversion that is below market value. Such feature is normally characterized as a “beneficial
conversion feature” (“BCF”). Pursuant to EITF Issue No. 98-5 (“EITF 98-5”), Accounting For
Convertible Securities with Beneficial Conversion Features or Contingently Adjustable Conversion
Ratio and EITF Issue No. 00-27, Application of EITF Issue No. 98-5 To Certain Convertible
Instruments, the fair values of the BCFs have been recorded as a discount from the face amount of
the respective debt instrument. The Company is amortizing the discount using the effective interest
method through maturity of such instruments. The Company will record the corresponding unamortized
debt discount related to the BCF and warrants as interest expense when the related instrument is
converted into the Company’s common stock.

11

 

NOTE 1 — ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Recent Accounting Pronouncements

In December 2004, the FASB issued SFAS 153, Exchanges of Nonmonetary Assets, an amendment of APB
29, Accounting for Nonmonetary Transactions . This Statement’s amendments are based on the
principle that exchanges of nonmonetary assets should be measured based on the fair value of the
assets exchanged. Further, SFAS 153 eliminates the narrow exception for nonmonetary exchanges of
similar productive assets and replaces it with a broader exception for exchanges of nonmonetary
assets that do not have commercial substance. Provisions of this statement are effective for fiscal
periods beginning after June 15, 2005. The adoption of this statement is not expected to have a
material impact on the financial statements.

In May 2005, the FASB issued SFAS 154, Accounting Changes and Error Corrections . SFAS 154 replaces
APB 20, Accounting Changes and SFAS 3, Reporting Accounting Changes in Interim Financial Statements
and establishes retrospective application as the required method for reporting a change in
accounting principle. SFAS 154 provides guidance for determining whether retrospective application
of a change in accounting principle is impracticable and for reporting a change when retrospective
application is impracticable. The reporting of a correction of an error by restating previously
issued financial statements is also addressed. SFAS 154 is effective for accounting changes and
corrections of errors made in fiscal years beginning after December 15, 2005. The Company does not
expect the adoption of this statement to have a material impact on the financial statements.

NOTE 2 — ACCOUNTS RECEIVABLE FACTORING

On February 1, 2003, the Company signed a factoring agreement with Madison Administrative Services,
Inc. (“MAS”), a New York corporation. Under the factoring agreement, MAS charged the Company a
factoring fee of 1% of the gross invoice amount of each account receivable, subject to a minimum
annual fee of $9,000. MAS, to the extent of any financing provided, held a security interest in all
assets of the Company over the term of the factoring agreement. During the nine months ended
September 30, 2005 and 2004, factoring fees charged by MAS totaled $3,033 and $39,878,
respectively. During the three months ended September 30, 2005 and 2004, factoring fees charged by
MAS totaled zero and $8,958, respectively.

In November 2004, the Company terminated its factoring activities with MAS and signed a conditional
mutual release with MAS on April 6, 2005, whereby the Company agreed to pay MAS $135,000, of which
$50,000 was due upon signing and $85,000 due in June 2005. The Company remitted the $85,000 balance
in July 2005.

On November 14, 2004, the Company signed a factoring agreement with Itochu International, Inc.
(“Itochu”), a New York corporation. Under the factoring agreement, the Company is charged a
factoring fee of 1.5% of the gross invoice amount, with no minimum annual fee, and all invoices are
subject to approval by Itochu. Itochu, to the extent of any financing provided, holds a security
interest in all assets of the Company over the term of the factoring agreement. Either party may
terminate the factoring agreement by providing 60 days written notice. In accordance with the
agreement, Itochu will advance the invoice amount, but at no time will the outstanding balance of
advances exceed $500,000.

At September 30, 2005, amounts due from Itochu, included in the accompanying balance sheet, is
$288,127.

NOTE 3 — NOTEPAYABLE TO STOCKHOLDER

From time to time, the Company borrows funds from a founding stockholder for working capital
purposes, which bear interest at 8% per annum and are due in January 2006. As of September 30,
2005, outstanding borrowings totaled $769,000, and accrued interest totaled $147,669.

12

 

THE FASHION HOUSE HOLDINGS, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2005

(UNAUDITED)

NOTE 4 — COMMITMENTS AND CONTINGENCIES

Licensing Agreements

For the rights to use trademarks, the Company has entered into licensing agreements with various
licensors. The agreements enable the Company to sell products using the name of the licensor in
return for a licensing fee based upon sales of the product using the licensor’s name.

The Company acquired rights to use four trademarks as evidenced by licensing agreements entered
into with Nicole Miller, Richard Tyler, Tyler and Oscar by Oscar de la Renta, which expire on March
3, 2009, November 26, 2007, November 26, 2007 and June 30, 2010, respectively. Under these
licensing agreements, the Company agreed to pay the greater of between 3% and 8% of net sales of
the licensed products or guaranteed minimums ranging from $54,600 to $210,000 per annum. The
licensor may terminate the licensing agreements upon event of default, as defined.

In 2004, the Company sold the trademark rights of Nicole Miller for $1,350,000 and realized a gain
of $1,350,000.

Minimum annual guaranteed royalty payments on the above licenses are as follows:

	 	 	 	 	 
	Years ending December 31,	 	 	 	 
	2005
	 	$	429,000	 
	2006
	 	 	593,000	 
	2007
	 	 	832,000	 
	2008
	 	 	1,007,000	 
	2009
	 	 	1,384,000	 
	Thereafter
	 	 	510,000	 
	 
	 	 	 
	 
	 	$	4,825,000	 
	 
	 	 	 

Indemnities and Guarantees

The Company has made certain indemnities and guarantees, under which it may be required to make
payments to a guaranteed or indemnified party, in relation to certain actions or transactions. The
Company indemnifies its directors, officers, employees and agents, as permitted under the laws of
the State of Delaware. In connection with its facility leases, the Company has indemnified its
lessors for certain claims arising from the use of the facilities. Additionally, the Company
indemnifies its factor and licensors under the factoring and license agreements, respectively,
against certain claims as a result of the violation of any law. The duration of the guarantees and
indemnities varies, and is generally tied to the life of the agreement. These guarantees and
indemnities do not provide for any limitation of the maximum potential future payments the Company
could be obligated to make. Historically, the Company has not been obligated nor incurred any
payments for these obligations and, therefore, no liabilities have been recorded for these
indemnities and guarantees in the accompanying balance sheet.

Litigation

The Company is, from time to time, involved in various legal and other proceedings which arise in
the ordinary course of operating its business. In the opinion of management, the amount of ultimate
liability, if any, with respect to these actions will not materially affect the financial position
or results of operations of the Company.

13

 

THE FASHION HOUSE HOLDINGS, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2005

(UNAUDITED)

NOTE 5 — CONVERTIBLE NOTES PAYABLE 

In April and May 2005, the Company issued convertible notes payable totaling $625,000, bearing
interest at 11 percent per annum (the “11% Notes”). The notes and accrued interest were due through
August 2005, as amended. In addition, the principal and accrued interest on the 11% Notes are
convertible into shares of the Company’s common stock at a conversion price equal to $0.80 per
share. The Company recorded a BCF of $375,250 in connection with the conversion feature of the
notes payable during the nine months ended September 30, 2005 and amortized $375,250 to interest
expense in the accompanying statement of operations during such period. In connection with the
issuance of the 11% Notes, the Company issued warrants to purchase an aggregate of 687,500 shares
of the Company’s common stock (see Note 6), including a warrant to purchase 62,500 shares of the
Company’s common stock issued in connection with an extension of the maturity date. In August 2005,
the Company repaid such amounts, including accrued interest of $35,392. The holder of the 11% Notes
has the right to purchase up to 50% of any equity security, including convertible debt, to be
issued by the Company on the same terms as such securities are offered to other parties through May
2008.

In July 2005, the Company issued a convertible note payable totaling $550,000, bearing interest at
11 percent per annum (the “July 11% Note”). The notes and accrued interest are due in January 2006.
In addition, the principal and accrued interest on the July 11% Notes are convertible into shares
of the Company’s common stock at a conversion price equal to $0.80 per share. The Company recorded
a BCF of $269,000 in connection with the conversion feature of the notes payable during the nine
months ended September 30, 2005 and amortized $112,000 to interest expense in the accompanying
statement of operations during such period. In connection with the issuance of the July 11% Notes,
the Company issued warrants to purchase an aggregate of 550,000 shares of the Company’s common
stock (see Note 6). At September 30, 2005, the balance of the July 11% Notes is $269,000, net of
unamortized debt discounts of $157,000 and $164,000 related to the BCF and warrants, respectively.

In June and August 2005, the Company issued convertible notes payable totaling $575,000, bearing
interest at 6 percent per annum (the “6% Notes”). The notes and accrued interest were due at the
earlier of the initial closing of the Company’s private placement (see Note 6) or June 2006. In
addition, the principal and accrued interest on the 6% Notes were convertible into shares of the
Company’s common stock at a conversion price equal to $0.80 per share. The Company recorded a BCF
of $143,750 in connection with the conversion feature of the notes payable during the nine months
ended September 30, 2005 and amortized $143,750 to interest expense in the accompanying statement
of operations during such period. In conjunction with the initial closing of the Company’s
reorganization (see Note 1), the entire balance of $575,000 of 6% Notes, and $4,554 of accrued
interest, was converted into 724,443 shares of the Company’s common stock in accordance with the
related agreements.

14

 

THE FASHION HOUSE HOLDINGS, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2005

(UNAUDITED)

NOTE 6 — EQUITY TRANSACTIONS 

Common Stock

On June 1, 2005, the Company entered into an agreement with Brookstreet Securities Corporation
(“BSC”), a NASD member investment banker based in Irvine, California, as its placement agent and
financial consultant to sell newly issued common stock at $1.00 per share for a total offering from
a minimum of 2,500,000 shares to a maximum of 4,600,000 shares, in order to raise minimum capital
of $2,175,000 to maximum capital of $4,002,000, net of expenses. The Company agreed to pay BSC an
8% retail sales commission, a 2% non-accountable marketing allowance and a 3% non-accountable
expense allowance. BSC also received warrants to purchase 433,313 shares of the Company’s common
stock at an exercise price of $1.00 per share.

On August 19, and September 7, 2005, The Company completed the initial closings of the minimum
amount of its private placement through BSC with the sale of 2,888,750 shares of its common stock
receiving proceeds of $2,402,540, net of commissions, fees and expenses of $486,210.

Warrants

During the nine months ended September 30, 2005, the Company issued warrants to purchase an
aggregate of 1,237,500 shares of the Company’s common stock in connection with the issuance of
convertible notes payable (see Note 5), with fair values totaling $522,000 as determined under SFAS
No. 123 and recorded such as a debt discount and warrant liability (see Note 1). These warrants
vested upon grant, have exercise prices of $0.80 and expire on various dates through July 2008. As
of September 30, 2005, $358,000 has been amortized to interest expense.

During the nine months ended September 30, 2005, the Company issued warrants to purchase an
aggregate of 433,313 shares of the Company’s common stock to BSC in connection with the initial
closings of the Company’s private placement (see above), with fair values totaling $190,000 as
determined under SFAS No.123. These warrants vested upon grant, have exercise prices of $1.00 and
expire through September 2010. The fair value of the warrants has been classified as a liability
and an offset to the proceeds received in the private placement.

15EX-10.1

 

Exhibit
10.1

SECOND AMENDMENT TO

THIRD AMENDED AND RESTATED CREDIT AGREEMENT

          THIS SECOND AMENDMENT TO THIRD AMENDED AND RESTATED CREDIT AGREEMENT (this “Amendment”) dated
as of October 28, 2005 (the “Effective Date”), is among VALLEY NATIONAL GASES, INC., a West
Virginia corporation (the “Company”), VALLEY NATIONAL GASES INCORPORATED, a Pennsylvania
corporation
(“VNGI”), VALLEY NATIONAL GASES DELAWARE, INC., a Delaware corporation
(“VNGDI”), JPMORGAN CHASE BANK, N.A. (successor by merger to Bank One, N.A.
(Main Office Chicago)), NATIONAL CITY BANK, a national banking association, FIFTH THIRD BANK, and
LASALLE BANK NATIONAL ASSOCIATION, a national banking association (collectively, the “Lenders”),
and JPMORGAN CHASE BANK, N.A., as Administrative Agent (the “Agent”) for the Lenders from time to
time parties to that certain Third Amended and Restated Credit Agreement, dated as of April 30,
2004, as amended by the First Amendment to Third Amended and Restated Credit Agreement dated as of
June 24, 2004 (the “Credit Agreement”).

Recital

          Pursuant to Section 2.02(g) of the Credit Agreement, the Company has requested the Lenders to
increase their aggregate Commitments to $90,000,000.00, and to consent to a New Acquisition not
permitted under the Credit Agreement. Subject to the terms and conditions stated in this Amendment,
the Lenders are willing to increase their respective Commitments and to consent to the proposed New
Acquisition, which requires the Lenders’ approval under the Credit Agreement.

Amendment

          NOW, THEREFORE, in consideration of the mutual covenants and agreements herein, and each act
performed and to be performed hereunder, the parties hereto agree as follows:

          1.
Definitions. All terms used in this Amendment that are defined in the Credit Agreement and
that are not otherwise defined in this Amendment shall have the same meanings in this Amendment as
are ascribed to such terms in the Credit Agreement, as amended by this Amendment.

          2.
Amendments to Credit Agreement. Effective as of the Effective Date, the Credit Agreement is
amended as follows:

     (a) New Definition. The following new definitions are added to Section 1.01:

 

 

“Reynolds Acquisition” means the acquisition by the Company of 100% of the
issued and outstanding capital stock of Reynolds Welding Supply Co., a
Minnesota corporation, under and pursuant to that certain Purchase and
Sale Agreement dated August 18, 2005, among the Company, as purchaser, and
Michael P.
Reynolds, William J. Reynolds, and Thomas J. Reynolds, as sellers.

“Second Amendment” means that certain Second Amendment to Third Amended
and Restated Credit Agreement dated as of October 28, 2005, among the
Company, VNGI, VNGDI, the Lenders, and the Agent.

(b) Maximum Availability. Pursuant to Section 2.02(g), the Maximum Availability is increased to
$90,000,000.00.

(c) Replacement of Schedules. Schedule 1.01-a and the Pricing Schedule to the Credit Agreement are
replaced with Schedule 1.01-a and the Pricing Schedule attached to this Amendment.

(d) Amendment of Section 2.02(b). The first sentence of Section 2.02(b) is amended and restated to
read as follows:

The obligation of the Company to repay the Revolving Loans shall be evidenced by promissory notes
executed by the Company to each of the Lenders in the form of
Exhibit A attached to the Second
Amendment (as the same may be amended, modified, extended, renewed, supplemented, replaced and/or
restated from time to time and at any time, the “Revolving
Notes”).

          3.
Consent. The Lenders and the Agent hereby consent to the acquisition by the Company of 100%
of the issued and outstanding capital stock of Reynolds Welding Supply Co., a Minnesota
corporation, under and pursuant to that certain Purchase and Sale Agreement dated August 18, 2005,
among the Company, as purchaser, and Michael P. Reynolds, William J. Reynolds, and Thomas J.
Reynolds, as sellers, subject to the conditions that:

(a) the purchase price paid by the Company thereunder shall not exceed $22,000,000.00;

(b) immediately upon consummation of such acquisition, Reynolds Welding Supply Co. and each of its
subsidiaries shall be merged with and into the Company, with the Company as the surviving entity;
and

(c) no Event of Default or Unmatured Event of Default has occurred and is continuing on the New
Acquisition Closing Date of such acquisition.

2

 

The parties agree that the Additional EBITDA Amount attributable to such New Acquisition for the
period of four fiscal quarters ending October 31, 2005, initially shall be $3,222,000.00.

          4.
Representations and Warranties. The Credit Parties jointly and severally represent and
warrant to the Lenders that:

(a) (i) The execution, delivery, and performance of this Amendment by the Credit Parties have been
duly authorized by all necessary corporate action, and do not and will not violate any provision of
any law, rule, regulation, order, judgment, injunction, or writ presently in effect applying to the
Credit Parties, the articles of incorporation, or by-laws of any of the Credit Parties, or result
in a breach of or constitute a default under any material agreement, lease, or instrument to which
any of the Credit Parties is a party or by which any of the Credit Parties or any of the properties
of any of the Credit Parties may be bound or affected; (ii) no authorization, consent, approval,
license, exemption, or filing of a registration with any court or governmental department, agency,
or instrumentality, or any other Person, is or will be necessary for the valid execution, delivery,
or performance by any of the Credit Parties of this Amendment; and (iii) this Amendment is the
legal, valid, and binding obligation of each of the Credit Parties, as a signatory thereto, and is
enforceable against each of the Credit Parties in accordance with its terms.

(b) After giving effect to the amendments contained in this Amendment, the representations
and warranties contained in Article III of the Credit Agreement are and will be true and
correct with the same force and effect as if made on and as of the date of execution of
this Amendment.

(c) After giving effect to the amendments contained in this Amendment, no Default or
Unmatured Default has occurred and is continuing or will exist under the Credit Agreement.

          5. Conditions. The obligation of the Lenders and the Agent to perform this Amendment shall be
subject to full satisfaction of the following conditions precedent:

(a) This Amendment shall have been duly executed by each of the Credit Parties and the
Required Lenders and delivered to the Agent.

(b) The Company shall have executed and delivered to the Agent Revolving Notes
substantially in the form of Exhibit A attached hereto, payable to each Lender and in the
principal sum of such Lender’s Commitment as set forth on Schedule 1.01-a attached to this
Amendment.

(c) The Company shall have paid to the Agent, for the account of the Lenders, an upfront
fee of $15,000.00.

3

 

(d) The Company shall have paid all costs and expenses incurred by the Agent in connection with the
negotiation, preparation, and closing of this Amendment and the other documents and agreements
delivered pursuant hereto, including the reasonable fees and out-of-pocket expenses of Baker &
Daniels, special counsel to the Agent.

(e) The Agent shall have received such additional agreements, documents, and certifications as may
be reasonably requested by the Required Lenders.

          6. Guarantor Consent/Affirmation. VNGI and VNGDI, in their respective capacities as a
Guarantor under the Guaranties, by their execution of this Amendment, expressly consent to the
execution, delivery and performance by the Company and the Agent of this Amendment, and agree that
neither the provisions of this Amendment nor any action taken or not taken in accordance with the
terms of this Amendment shall constitute a termination, extinguishment, release, or discharge of
any of their respective guaranty obligations or provide a defense, set off, or counter claim to any
of them with respect to any of their respective guaranty obligations under any of the Guaranties or
other Loan Documents. VNGI and VNDGI each affirms to the Lenders and the Agent that its Guaranty
remains in full force and effect and is its valid and binding obligation.

          7. Binding on Successors and Assigns. All of the terms and provisions of this Amendment shall
be binding upon and inure to the benefit of the Credit Parties, the Lenders, the Agent, and their
respective successors and assigns and legal representatives.

          8. Governing Law/Entire Agreement/Survival. This Amendment is a contract made under, and
shall be governed by and construed in accordance with, the laws of the State of Indiana applicable
to contracts made and to be performed entirely within such state and without giving effect to the
choice or conflicts of laws principles of any jurisdiction. This Amendment constitutes and
expresses the entire understanding between the parties with respect to the subject matter hereof,
and supersedes all prior agreements and understandings, commitments, inducements, or conditions,
whether expressed or implied, oral or written, with respect thereto. All covenants, agreements,
undertakings, representations, and warranties made in this Amendment shall survive the execution
and delivery of this Amendment, and shall not be affected by any investigation made by any person.
The Credit Agreement, as amended hereby, remains in full force and effect in accordance with its
terms and provisions.

          9. Further Agreements and Acknowledgments. The Credit Parties hereby further acknowledge and
agree that:

(a) neither the provisions of this Amendment nor any actions taken or not taken pursuant to or in
reliance upon the terms of this Amendment shall constitute a novation of any of the Loan Documents,
all of which remain in full force and effect in accordance with their respective terms, as amended
to date; and

(b) neither this Amendment, nor any action taken by the Lenders or the Agent pursuant to this
Amendment, shall impair, prejudice, or in any other manner affect the

4

 

rights of the Lenders with respect to any Collateral or other security which now or
hereafter secures payment or performance of the Obligations or any part thereof, or
establish or be deemed to establish any precedent or course of dealing with respect to any
matter.

          10. Counterparts. This Amendment may be executed, by original or facsimile signatures, in two
or more counterparts, each of which shall constitute an original, but all of which shall constitute
one agreement.

          IN WITNESS WHEREOF, the Credit Parties, the Required Lenders and the Agent have caused this
Amendment to be duly executed and delivered by their respective authorized signatories as of the
date first set forth above.

	 	 	 	 	 	 	 
	 	 	VALLEY NATIONAL GASES, INC.,  
	 	 	a West Virginia corporation
	 
	 	 	 	 	 	 
	 

	 	By:	 	 	 	 
	 

	 	 	 	 	 	 
	 
	 	 	 	 	 	 
	 

	 	 	 	 	 	 
	 
	 	 	 	 	 	 
	 	 	VALLEY NATIONAL GASES INCORPORATED
	 	 	a Pennsylvania corporation
	 
	 	 	 	 	 	 
	 

	 	By:	 	 	 	 
	 

	 	 	 	 	 	 
	 
	 	 	 	 	 	 
	 

	 	 	 	 	 	 
	 
	 	 	 	 	 	 
	 	 	VALLEY NATIONAL GASES DELAWARE,
	 	 	INC., a Delaware corporation
	 
	 	 	 	 	 	 
	 

	 	By:	 	 	 	 
	 

	 	 	 	 	 	 
	 
	 	 	 	 	 	 
	 

	 	 	 	 	 	 

5

 

	 	 	 	 	 	 	 	 	 
	 	 	JPMORGAN CHASE BANK, N.A., as Lender and as Agent	 	 
	 
	 	 	 	 	 	 	 	 
	 

	 	By:	 	 	 	 	 	 
	 	 	 	 	 	 	 
	 
	 	 	 	 	 	 	 	 
	 	 	Printed:	 	 
	 

	 	 	 	 	 	 	 	 
	 
	 	 	 	 	 	 	 	 
	 

	 	Title:	 	 	 	 	 	 
	 	 	 	 	 	 	 

6

 

	 	 	 	 	 	 	 	 	 
	 	 	NATIONAL CITY BANK	 	 
	 
	 	 	 	 	 	 	 	 
	 

	 	By:	 	 	 	 	 	 
	 	 	 	 	 	 
	 
	 	 	 	 	 	 	 	 
	 

	 	Printed:	 	 	 	 
	 

	 	 	 	 	 	 	 
	 
	 	 	 	 	 	 	 	 
	 

	 	Title:	 	 	 	 	 	 
	 	 	 	 	 	 	 

7

 

	 	 	 	 	 	 	 	 	 
	 	 	FIFTH THIRD BANK	 	 
	 
	 	 	 	 	 	 	 	 
	 

	 	By:	 	 	 	 	 	 
	 	 	 	 	 	 
	 
	 	 	 	 	 	 	 	 
	 	 	Printed:	 	 
	 

	 	 	 	 	 	 	 	 
	 
	 	 	 	 	 	 	 	 
	 

	 	Title:	 	 	 	 	 	 
	 	 	 	 	 	 	 

8

 

	 	 	 	 	 	 	 	 	 
	 	 	LASALLE BANK NATIONAL ASSOCIATION	 	 
	 
	 	 	 	 	 	 	 	 
	 

	 	By:	 	 	 	 	 	 
	 	 	 	 	 	 
	 
	 	 	 	 	 	 	 	 
	 	 	Printed:	 	 
	 

	 	 	 	 	 	 	 	 
	 
	 	 	 	 	 	 	 	 
	 

	 	Title:	 	 	 	 	 	 
	 	 	 	 	 	 	 

9

 

EXHIBIT A

FIFTH AMENDED AND RESTATED REVOLVING NOTE

	 	 	 
	U.S. $                                        

	 	October                    , 2005

          FOR VALUE RECEIVED, on or before April 30, 2009, VALLEY NATIONAL GASES, INC., a West Virginia
corporation (“Maker”), unconditionally promises to pay to the order of                                         
(“Lender”), at 111 Monument Circle, Mail Code IN1-0046, P.O. Box 7700, Indianapolis, Indiana 46277,
Indianapolis, Indiana 46277-0119, the principal sum of                                                 Dollars
($                     ), or so much of such amount as may be disbursed by Lender as part of the Advances on
the Revolving Loans under the terms of the Credit Agreement (as hereinafter defined), together with
interest thereon at the rates as provided in the Credit Agreement. Capitalized terms used herein
but not defined herein shall have the meaning ascribed thereto in the Credit Agreement.

          Maker, Valley National Gases Incorporated, a Pennsylvania corporation, Valley National Gases
Delaware, Inc., Lender, other Lenders and JPMorgan Chase Bank, N.A. (successor by merger to Bank
One, N.A. (Main Office Chicago)), as Administrative Agent, have executed a Third Amended and
Restated Credit Agreement, dated as of April 30, 2004 (as the same hereafter may be amended and/or
restated from time to time, the “Credit Agreement”). This Fifth Amended and Restated Revolving Note
(this “Note”) is one of the “Revolving Notes” referred to in the Credit Agreement, to which
reference is made for the conditions and procedures under which advances, payments, readvances, and
repayments may be made prior to the maturity of this Note, for the terms upon which Maker may make
prepayments from time to time and at any time prior to the maturity of this Note and the terms of
any prepayment premiums or penalties which may be due and payable in connection therewith, and for
the terms and conditions upon which the maturity of this Note may be accelerated and the unpaid
balance of principal and accrued interest thereon declared immediately due and payable. This Note
and the other Revolving Notes amend, and as amended, restate, and replace those certain Fourth
Amended and Restated Revolving Notes executed by Maker, dated as of April 30, 2004.

          Interest accruing on the principal balance of this Note outstanding from time to time shall be
due and payable by Maker on such dates and in accordance with the terms of the Credit Agreement.
All amounts paid on this Note shall be applied in accordance with the terms of the Credit
Agreement.

          If any installment of interest due under the terms of this Note falls due on a day which is
not a Business Day, the due date shall be extended to the next succeeding Business Day and interest
will be payable at the applicable rate for the period of such extension.

          All amounts payable under this Note shall be payable without relief from valuation and
appraisement laws, and with all collection costs and attorneys’ fees.

 

 

          The holder of this Note, at its option, may make extensions of time for payment of the
indebtedness evidenced by this Note, or approve reductions of the payments thereon, release of any
collateral securing payment of such indebtedness or accept a renewal note or notes therefor, all
without notice to Maker or any endorser(s) and Maker and all endorsers hereby severally consent to
any such extensions, reductions, releases, and renewals, all without notice, and agree that any
such action shall not release or discharge any of them from any liability hereunder. Maker and
endorser(s), jointly and severally, waive demand, presentment for payment, protest, notice of
protest, and notice of nonpayment or dishonor of this Note and each of them consents to all
extensions of the time of payment thereof.

          MAKER AND LENDER (BY ITS ACCEPTANCE HEREOF) HEREBY VOLUNTARILY, KNOWINGLY, IRREVOCABLY AND
UNCONDITIONALLY WAIVE ANY RIGHT TO HAVE A JURY PARTICIPATE IN RESOLVING ANY DISPUTE (WHETHER BASED
UPON CONTRACT, TORT OR OTHERWISE) BETWEEN OR AMONG MAKER AND LENDER ARISING OUT OF OR IN ANY WAY
RELATED TO THIS NOTE OR ANY OTHER LOAN DOCUMENT. THIS PROVISION IS A MATERIAL INDUCEMENT TO LENDER
TO PROVIDE THE FINANCING DESCRIBED HEREIN OR IN THE LOAN DOCUMENTS. THE VALIDITY, INTERPRETATION
AND ENFORCEMENT OF THIS NOTE SHALL BE GOVERNED BY THE INTERNAL LAWS OF THE STATE OF INDIANA WITHOUT
REGARD TO ITS CHOICE OR CONFLICTS OF LAWS PROVISIONS. MAKER AGREES THAT THE COURTS OF THE STATE OF
INDIANA LOCATED IN INDIANAPOLIS, INDIANA, AND THE FEDERAL COURTS LOCATED IN THE SOUTHERN DISTRICT
OF INDIANA, MARION COUNTY, HAVE EXCLUSIVE JURISDICTION OVER ANY AND ALL ACTIONS AND PROCEEDINGS
INVOLVING THIS NOTE OR ANY OTHER AGREEMENT MADE IN CONNECTION HEREWITH AND MAKER HEREBY IRREVOCABLY
AND UNCONDITIONALLY AGREES TO SUBMIT TO THE JURISDICTION OF SUCH COURTS FOR PURPOSES OF ANY SUCH
ACTION OR PROCEEDING. MAKER HEREBY IRREVOCABLY AND UNCONDITIONALLY WAIVES ANY OBJECTION THAT IT
MAY NOW OR HEREAFTER HAVE TO THE VENUE OF ANY SUCH ACTION OR PROCEEDING, INCLUDING ANY CLAIM THAT
SUCH COURT IS AN INCONVENIENT FORUM, AND CONSENTS TO SERVICE OF PROCESS PROVIDED THE SAME IS IN
ACCORDANCE WITH THE TERMS HEREOF. FINAL JUDGMENT IN ANY SUCH PROCEEDING AFTER ALL APPEALS HAVE BEEN
EXHAUSTED OR WAIVED SHALL BE CONCLUSIVE AND MAY BE ENFORCED IN OTHER JURISDICTIONS BY SUIT ON THE
JUDGMENT OR AS OTHERWISE PROVIDED BY LAW.

          Executed and delivered as of the                      day of October, 2005.

	 	 	 	 	 	 	 	 	 
	 	 	VALLEY NATIONAL GASES, INC.	 	 
	 
	 	 	 	 	 	 	 	 
	 

	 	By:	 	 	 	 	 	 
	 	 	 	 	 	 	 
	 	 	Printed:	 	 	 	 
	 

	 	 	 	 	 	 	 	 
	 

	 	Title:	 	 	 	 	 
	 	 	 	 	 	 	 

2

 

Schedule 1.01-a

	 	 	 	 	 
	Lender	 	Commitment	 	Commitment Percentage
	JPMorgan Chase Bank, N.A.

	 	$36,300,000
	 	40.33 %
	National City Bank

	 	$26,700,000
	 	29.66 %
	Fifth Third Bank

	 	$15,000,000
	 	16.66 %
	LaSalle Bank National Association

	 	$12,000,000
	 	13.33 %

 

 

PRICING SCHEDULE

	 	 	 	 	 	 	 	 	 
	APPLICABLE	 	LEVEL I	 	LEVEL II	 	LEVEL III	 	LEVEL IV
	MARGIN	 	STATUS	 	STATUS	 	STATUS	 	STATUS
	 
	Eurodollar Rate
	 	 1.00 %	 	 1.25 %	 	   1.50 %	 	 1.875 %
	Floating Rate
	 	 0.0 %	 	 0.0 %	 	 0.0 %	 	 0.0 %

	 	 	 	 	 	 	 	 	 
	 	 	LEVEL I	 	LEVEL II	 	LEVEL III	 	LEVEL IV
	 	 	STATUS	 	STATUS	 	STATUS	 	STATUS
	 
	Applicable Fee Rate
	 	 0.125 %	 	 0.125 %	 	 0.125 %	 	   0.25 %
	Applicable
L/C Fee Rate
	 	1.0  %	 	 1.25 %	 	 1.50  %	 	 1.875 %

     For the purposes of this Schedule, the following terms have the following meanings, subject to
the final paragraph of this Schedule:

          “Financials” means the annual or quarterly financial statements of the Company delivered
pursuant to Section 5.01(b)(1) or (3).

          “Level I Status” exists at any date if, as of the last day of the fiscal quarter of the
Company referred to in the most recent Financials, the Ratio of Total Funded Debt to EBITDA is less
than 2.00 to 1.00.

          “Level II Status” exists at any date if, as of the last day of the fiscal quarter of the
Company referred to in the most recent Financials, (i) the Company has not qualified for Level I
Status and (ii) the Ratio of Total Funded Debt to EBITDA is less than 2.50 to 1.00.

          “Level III Status” exists at any date if, as of the last day of the fiscal quarter of the
Company referred to in the most recent Financials, (i) the Company has not qualified for Level I
Status or Level II Status and (ii) the Ratio of Total Funded Debt to EBITDA is less than 3.00 to
1.00.

          “Level IV Status” exists at any date if the Company has not qualified for Level I Status,
Level II Status or Level III Status.

          “Status” means either Level I Status, Level II Status, Level III Status or Level IV Status.

          The Applicable Margin, Applicable Fee Rate, and Applicable L/C Fee Rate shall be determined in
accordance with the foregoing table based on the Company’s Status as reflected in the most recent
Financials; provided that from and after the New
Acquisition Closing Date of the Reynolds Acquisition, Level I Status shall be deemed to exist
until the date on which the Applicable Margin, Applicable Fee Rate, and Applicable L/C Fee Rate are
subject to adjustment based on the Financials for the fiscal quarter ending March 31, 2006
(subject, however, to the

 

 

last sentence of this paragraph). Adjustments, if any, to the Applicable Margin, Applicable Fee
Rate, and Applicable L/C Fee Rate shall be effective five Business Days after the Agent has
received the applicable Financials. If the Company fails to deliver the Financials to the Agent at
the time required pursuant to Section 5.01(b), then the Applicable Margin, Applicable Fee Rate, and
Applicable L/C Fee Rate shall be the highest Applicable Margin, Applicable Fee Rate, and Applicable
L/C Fee Rate set forth in the foregoing table until five days after such Financials are so
delivered.

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