<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 20, 1996
REGISTRATION NO. 333-2722
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
ELECTRONIC HAIR STYLING, INC.
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 2844 68-0301547
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Classification Code Number) Identification
incorporation or organization) No.)
</TABLE>
ONE LOVELL AVENUE, MILL VALLEY, CA 94941
(415) 380-8200
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
DON G. HOFF
ELECTRONIC HAIR STYLING, INC.
ONE LOVELL AVENUE
MILL VALLEY, CA 94941
(415) 380-8200
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
------------------------
COPIES TO:
<TABLE>
<S> <C>
GERALD A. EPPNER, ESQ. JOEL I. PAPERNIK, ESQ.
BATTLE FOWLER LLP SQUADRON, ELLENOFF,
Park Avenue Tower PLESENT & SHEINFELD, LLP
75 East 55th Street 551 Fifth Avenue
New York, New York 10022 New York, New York 10176
(212) 856-7000 (212) 661-6500
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE.
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>
Information contained herein is subject to completion or amendment. A
Registration Statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the Registration Statement becomes
effective. This Prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
<PAGE>
SUBJECT TO COMPLETION, DATED MAY 20, 1996
2,600,000 SHARES
[LOGO]
ELECTRONIC HAIR STYLING, INC.
COMMON STOCK
All of the 2,600,000 shares of Common Stock offered hereby are being offered
by Electronic Hair Styling, Inc. (the "Company").
Prior to this Offering, there has been no public market for the Common Stock
of the Company. It is currently anticipated that the initial offering price will
be between $8.00 and $10.00 per share. See "Underwriting" for a discussion of
the factors to be considered in determining the initial offering price. After
the Offering, the Company's current directors, executive officers and principal
stockholders will own approximately 55.3% of the outstanding shares of voting
stock of, and will continue to control, the Company. The Common Stock has been
approved for quotation on the Nasdaq National Market under the symbol "EHST."
FOR A DISCUSSION OF CERTAIN MATERIAL FACTORS THAT SHOULD BE CONSIDERED IN
CONNECTION WITH AN INVESTMENT IN THE COMMON STOCK, SEE "RISK FACTORS" COMMENCING
ON PAGE 6 AND "DILUTION" COMMENCING ON PAGE 14.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<S> <C> <C> <C>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS (1) COMPANY (2)
Per Share......................... $ $ $
Total (3)......................... $ $ $
</TABLE>
(1) Excludes five-year warrants to purchase a number of shares of Common Stock
equal to 7% of the number of shares of Common Stock purchased and sold by
the Underwriters (including over-allotments, if any), at an exercise price
equal to 120% of the initial public offering price. The Company has also
agreed to indemnify the Underwriters against certain liabilities, including
certain liabilities under the Securities Act of 1933, as amended. See
"Underwriting" for a description of the foregoing and certain other
arrangements between the Company and the Underwriters.
(2) Before deducting offering expenses estimated to be approximately $ ,
payable by the Company.
(3) The Company has granted to the Underwriters a 30-day option to purchase up
to 390,000 additional shares of Common Stock solely to cover
over-allotments, if any, on the same terms and conditions as the shares
offered hereby. If such option is exercised in full, the total Price to
Public, Underwriting Discounts and Commissions and Proceeds to Company will
be $ , $ and $ , respectively. See "Underwriting."
------------------------
The shares of Common Stock are offered by the several Underwriters named
herein, subject to receipt and acceptance by them and subject to their right to
reject any order in whole or in part. It is expected that delivery of such
shares will be made at the offices of Rodman & Renshaw, Inc., New York, New
York, on or about , 1996.
------------------------
RODMAN & RENSHAW, INC. SANDS BROTHERS & CO., LTD.
The date of this Prospectus is , 1996.
<PAGE>
[OUTSIDE RIGHT SIDE OF GATEFOLD WITH FIRST FULL PAGE OF ARTWORK]
THIS IS A RENDERING OF AN ELECTRONIC HAIR STYLING DEVICE THAT WOULD UTILIZE
THE COMPANY'S LICENSED TECHNOLOGY. THE RENDERING IS A CONCEPTUAL MODEL THAT
REFLECTS MANAGEMENT'S CURRENT DEVELOPMENT AND ENGINEERING DESIGN OBJECTIVES. THE
COMPANY IS ENGAGED IN EARLY STAGE RESEARCH AND DEVELOPMENT ACTIVITIES RELATING
TO THE REACTION OF HAIR SAMPLES TO ITS TECHNOLOGY AND DOES NOT EXPECT TO
INTRODUCE ITS FIRST PROTOTYPE BEFORE THE SECOND HALF OF 1998 AT THE EARLIEST.
ACTUAL PRODUCTS, IF SUCCESSFULLY DEVELOPED, COULD DIFFER SUBSTANTIALLY FROM
THOSE CURRENTLY ENVISIONED BY THE COMPANY AND NO ASSURANCE CAN BE GIVEN THAT
APPLICATION OF THE TECHNOLOGY WILL RESULT IN ANY COMMERCIALLY VIABLE PRODUCTS.
RISKS ASSOCIATED WITH THE DEVELOPMENT OF THE TECHNOLOGY AND PRODUCTS BASED ON IT
ARE DISCUSSED UNDER THE CAPTION "RISK FACTORS -- RISKS ASSOCIATED WITH
ELECTRONIC CHEMISTRY-TM- PRODUCT DEVELOPMENT."
The Company intends to furnish its stockholders with annual reports
containing financial statements audited by independent accountants and with
quarterly reports containing unaudited summary financial information for each of
the first three quarters of each fiscal year.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK AT
A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET, IN THE
OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME.
PERMASOFT-REGISTERED TRADEMARK-, SALON STYLE-REGISTERED TRADEMARK-,
STYLE-REGISTERED TRADEMARK-, PATIVA-TM-, NUCLEIC A-REGISTERED TRADEMARK-, APPLE
PECTIN-REGISTERED TRADEMARK- AND VITA/E-REGISTERED TRADEMARK- ARE REGISTERED
TRADEMARKS OF THE COMPANY.
<PAGE>
[INSIDE LEFT SIDE OF GATEFOLD (REVERSE SIDE OF
PRIOR PAGE) WITH 2ND PAGE OF ARTWORK; FOUR PICTURES OF MODELS WITH SHAMPOO
BOTTLES]
The Company's brands, well known for quality, are used and sold by salons, and
are purchased by consumers from over 60,000 retain outlets in North America.
<PAGE>
[INSIDE RIGHT SIDE OF GATEFOLD (REVERSE SIDE OF PROSPECTUS COVER PAGE AND
OPPOSITE PROSPECTUS SUMMARY PAGE) WITH 3RD PAGE OF ARTWORK; FOUR PICTURES OF
MODELS WITH SHAMPOO BOTTLES]
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE MORE
DETAILED INFORMATION AND FINANCIAL STATEMENTS AND NOTES THERETO APPEARING
ELSEWHERE IN THIS PROSPECTUS. ALL INFORMATION IN THIS PROSPECTUS GIVES EFFECT TO
THE MERGER, EFFECTIVE ON MARCH 18, 1996, OF ELECTRONIC HAIR STYLING, INC., A
WASHINGTON CORPORATION ("OLD EHS"), WITH AND INTO ITS WHOLLY-OWNED SUBSIDIARY,
ELECTRONIC HAIR STYLING, INC., A DELAWARE CORPORATION (THE "COMPANY"), AND THE
ISSUANCE OF .660 SHARES OF COMMON STOCK OF THE COMPANY IN EXCHANGE FOR EACH
ISSUED AND OUTSTANDING SHARE OF COMMON STOCK OF OLD EHS. THE TERM "COMPANY" AS
USED IN THIS PROSPECTUS INCLUDES THE COMPANY, ITS PREDECESSORS AND ITS LAMAUR
AND EHS LABORATORIES DIVISIONS ("LAMAUR" AND "EHS LABORATORIES," RESPECTIVELY).
UNLESS OTHERWISE INDICATED, ALL SHARE, PER SHARE AND FINANCIAL INFORMATION SET
FORTH HEREIN ASSUMES AN INITIAL PUBLIC OFFERING PRICE OF $9.00 PER SHARE, THE
MIDPOINT OF THE RANGE SET FORTH ON THE COVER PAGE OF THIS PROSPECTUS, AND
ASSUMES NO EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION.
THE COMPANY
The Company develops, formulates, manufactures and markets personal hair
care products, consisting of shampoos, conditioners, hair sprays, permanent wave
products and other styling aids, for both the consumer and professional markets.
These products are distributed through its recently-acquired Lamaur division to
consumer retail outlets, professional salons and specialty shops. The Company's
brand names include PERMASOFT-REGISTERED TRADEMARK-, SALON
STYLE-REGISTERED TRADEMARK-, STYLE-REGISTERED TRADEMARK-, PATIVA-TM-, NUCLEIC
A-REGISTERED TRADEMARK-, APPLE PECTIN-REGISTERED TRADEMARK- and
VITA/E-REGISTERED TRADEMARK-. The Company also contract manufactures a variety
of household cleaning and hair care aerosol sprays and liquid products. The
Company believes its Lamaur division was among the ten largest manufacturers in
the United States in 1995 (based on domestic revenues) in three categories of
hair care products -- shampoos, conditioners and styling aids. The Company's EHS
Laboratories division is engaged in the early stages of research and development
with respect to a new hair styling concept. Based on patented technology
licensed by the Company from an affiliate, the product is intended to combine
electronics and chemicals to style, color and condition hair quickly, without
the damaging side effects often experienced with most chemical-based hair
styling products. The Company had pro forma total net sales, substantially all
in the United States, from its Lamaur division of approximately $117.8 million
in the year ended December 31, 1995.
The Company's objective is to become a leading worldwide developer and
marketer of advanced hair care products through a strategy that combines the
stability provided by Lamaur's established hair care products business, which
the Company intends to return to profitability, and the growth opportunities
available through acquisitions, strategic relationships and the development of
EHS Laboratories' technology. To implement this strategy, the Company has
installed a new senior management team with significant experience in the
personal care products industry. Key features of the Company's turnaround
strategy include emphasizing marketing and sales efforts while maintaining the
Company's strong production base and research capabilities, in addition to
refining the cost-cutting program introduced by prior management. The Company
plans to increase its market share by expanding its national marketing program,
broadening its base of exclusive distributors for its PATIVA-TM- line of
products and increasing sales to Mexico, Canada and other international markets.
Since January 1, 1996, the Company has obtained significant contract
manufacturing orders from new customers, with deliveries commencing in the
second quarter, and intends to continue to increase the level of its contract
manufacturing activities by obtaining additional orders from both existing and
new customers. In addition, the Company intends to explore opportunities for
acquisitions or strategic relationships that may enable it to expand its hair
care products line or diversify its business into other segments of the personal
care market. The Company believes that these initiatives, all of which will
require significant financial resources, will enable the Company to respond
effectively to the competitive factors it faces, which presently include
primarily the need to introduce and promote (i) high-end products in the
professional market, (ii) higher-quality, professional-type products and more
natural products in the retail market, and (iii) line extensions of styling
aids.
In November 1995, the Company acquired Lamaur (previously PCD, the Personal
Care Division of DowBrands L.P.) for an aggregate acquisition cost of
approximately $30.2 million. The assets and operations of Lamaur were purchased
from DowBrands Inc. ("Dow"), an affiliate of The Dow Chemical Company, and
include a modern, automated 438,000 square foot administrative, manufacturing,
warehousing and laboratory facility located on 25 acres in the Minneapolis
metropolitan area. As part of the acquisition purchase price, Dow received an
equity interest in the Company (17.3% after giving effect to this Offering).
Lamaur has been a leading domestic producer and marketer of a broad range of
hair care products for over 60 years and was an independent publicly-traded
company, listed on the New York Stock Exchange, until its acquisition by Dow in
1987.
3
<PAGE>
Worldwide retail sales of hair care products (excluding hair care
appliances) in 1994 were approximately $25.0 billion, of which approximately
$4.5 billion represented sales in North America. It is estimated that by 2000,
worldwide retail sales of hair care products will reach approximately $32.8
billion, with approximately $5.6 billion attributable to sales in North America.
The Company believes that the absence of any fundamental change in the
technology underlying hair care products for several decades, combined with the
substantial global market for hair care products, presents an opportunity for
new technologically oriented products.
The Company is engaged in early stage research and development activities
related to hair styling applications of its licensed proprietary technology,
ELECTRONIC CHEMISTRY-TM-. The technology is based on the belief that structural
and cosmetic changes in hair can be achieved by applying an electromagnetic
signal, accompanied by the application of chemicals and/or mechanical stress.
The Company's objective is to develop products that will apply the technology to
electronically style, color and condition hair quickly and without the damaging
side effects often experienced with the harsh chemicals and heat treatments
associated with most traditional hair care products. Substantial additional
steps will need to be taken before the Company can commercially introduce any
ELECTRONIC CHEMISTRY-TM- products. It does not expect to introduce any prototype
product before the second half of 1998 at the earliest. See "Business--Research
and Development--EHS Laboratories' Technology."
The Company's principal executive offices are located at One Lovell Avenue,
Mill Valley, California 94941. The telephone number at that location is (415)
380-8200, and the fax number at that location
is (415) 380-8170. The Company is a Delaware corporation and the successor by
merger to Old EHS.
THE OFFERING
<TABLE>
<S> <C>
Common Stock Offered by the Company................ 2,600,000 shares
Common Stock to be Outstanding after the
Offering........................................... 5,560,495 shares (1)
Use of Proceeds.................................... To initially repay approximately $8.0
million principal amount of revolving
credit indebtedness incurred in
connection with the November 1995
acquisition of Lamaur and for working
capital and general corporate pur-
poses.
Risk Factors and Dilution.......................... Prospective investors should carefully
consider the matters set forth under
the captions "Risk Factors" and
"Dilution." An investment in the shares
of Common Stock offered hereby involves
a high degree of risk and immediate and
substantial dilution.
Nasdaq National Market Symbol...................... "EHST"
</TABLE>
------------------------
(1) Excludes 2,899,085 shares, consisting of (i) 660,000 shares of Common Stock
reserved for issuance upon conversion of the Company's Series A Convertible
Preferred Stock held by Dow, which must be converted into Common Stock if
the market price of the Common Stock equals or exceeds $21.21 for a period
of 30 consecutive business days, (ii) 503,910 shares of Common Stock
reserved for issuance upon conversion of the Company's Series B Preferred
Stock that will be issued upon the conversion of the Dow Convertible Note in
connection with the consummation of this Offering, (iii) 1,400,925 shares of
Common Stock reserved for future issuance under the Company's stock
incentive plans, (iv) 152,250 shares of Common Stock reserved for issuance
upon exercise of outstanding warrants, and (v) 182,000 shares of Common
Stock reserved for issuance upon exercise of warrants issued to the
Representatives of the Underwriters. See "Underwriting."
4
<PAGE>
SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Set forth below are (i) selected financial data with respect to the
statements of operations of the Company for the period from April 1, 1993
(Inception) to December 31, 1993, for the twelve months ended December 31, 1994,
and 1995, and for the three months ended March 31, 1995 and 1996, and the
balance sheets of the Company at December 31, 1995, and March 31, 1996, (ii)
selected financial data with respect to the unaudited pro forma statement of
operations for the Company for the twelve months ended December 31, 1995,
presenting the combined results of operations of the Company as if the
acquisition of Lamaur was effective as of January 1, 1995, and (iii) selected
financial data with respect to the statements of operations for Lamaur
(previously PCD, the Personal Care Division of DowBrands L.P., an affiliate of
Dow) for each of the four years ended December 31, 1994, and for the period from
January 1, 1995 to November 30, 1995 (the effective date of the acquisition for
financial reporting purposes), and the balance sheets of Lamaur at December 31,
1991, 1992, 1993 and 1994.
FINANCIAL DATA OF THE COMPANY
<TABLE>
<CAPTION>
HISTORICAL THREE
------------------------------------------- MONTHS
YEAR ENDED DECEMBER ENDED
APRIL 1, 1993 31, PRO FORMA MARCH 31,
(INCEPTION) TO ---------------------- YEAR ENDED ---------
DECEMBER 31, 1993 1994 1995 (1) DECEMBER 31, 1995 (2) 1995
------------------- --------- ----------- ---------------------- ---------
<S> <C> <C> <C> <C> <C>
SELECTED STATEMENTS OF OPERATIONS DATA:
Total net sales............................ $ -- $ -- $ 8,070 $ 117,766 $ --
Gross margin............................... -- -- 2,414 46,371 --
Operating loss............................. (1,565) (557) (1,082) (9,759)(3) (93)
Interest expense........................... (40) (59) (300) (1,554) (18)
Net loss................................... $ (1,605) $ (616) $ (1,382) $ (11,212)(3) $ (111)
------- --------- ----------- ---------- ---------
------- --------- ----------- ---------- ---------
Net loss per share......................... $ (.43) $ (.15) $ (.33) $ (2.71) $ (.03)
------- --------- ----------- ---------- ---------
------- --------- ----------- ---------- ---------
Weighted average shares outstanding........ 3,701 4,130 4,130 4,130 4,130
SUPPLEMENTAL PRO FORMA DATA (4):
Net loss................................... $ (10,432)
----------
----------
Net loss per share......................... $ (2.05)
----------
----------
Weighted average shares outstanding........ 5,086
<CAPTION>
1996
---------
<S> <C>
SELECTED STATEMENTS OF OPERATIONS DATA:
Total net sales............................ $ 28,480
Gross margin............................... 10,526
Operating loss............................. (317)
Interest expense........................... (414)
Net loss................................... $ (723)
---------
---------
Net loss per share......................... $ (.18)
---------
---------
Weighted average shares outstanding........ 4,130
SUPPLEMENTAL PRO FORMA DATA (4):
Net loss...................................
Net loss per share.........................
Weighted average shares outstanding........
</TABLE>
<TABLE>
<CAPTION>
AT MARCH 31, 1996
AT DECEMBER 31, 1995 --------------------------
ACTUAL ACTUAL AS ADJUSTED (5)
--------------------- --------- ---------------
<S> <C> <C> <C>
SELECTED BALANCE SHEET DATA:
Working capital............................................................ $ 10,346 $ 9,817 $ 22,674
Total assets............................................................... 42,967 42,806 55,663
Long-term debt, less current portion....................................... 20,350 20,271 7,271
Stockholders' equity....................................................... 6,594 6,048 31,905
</TABLE>
FINANCIAL DATA OF LAMAUR
<TABLE>
<CAPTION>
PERIOD FROM
YEAR ENDED DECEMBER 31, JANUARY 1, 1995
------------------------------------------ THROUGH
1991 1992 1993 1994 NOVEMBER 30, 1995 (6)
--------- --------- --------- --------- ----------------------
<S> <C> <C> <C> <C> <C>
SELECTED STATEMENTS OF OPERATIONS DATA:
Total net sales.......................................... $ 136,946 $ 124,288 $ 112,031 $ 121,277 $ 109,696
Gross margin............................................. 58,075 46,675 40,970 49,542 42,608
Operating expenses....................................... 53,912 56,014 53,851 57,830 42,344
Write-down of assets..................................... -- -- -- 120,100 11,000
Operating income (loss).................................. 4,163 (9,339) (12,881) (128,388) (10,736)
Net loss................................................. $ (3,094) $ (15,722) $ (19,207) $(133,488) $ (12,238)
--------- --------- --------- --------- ----------
--------- --------- --------- --------- ----------
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31,
------------------------------------------
1991 1992 1993 1994
--------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
SELECTED BALANCE SHEET DATA:
Working capital.......................................... $ 17,079 $ 16,517 $ 11,457 $ 16,787
Total assets............................................. 197,380 190,605 180,376 58,021
Net invested capital..................................... 184,265 179,654 169,058 47,493
</TABLE>
<TABLE>
<CAPTION>
PERIOD FROM
YEAR ENDED DECEMBER 31, JANUARY 1, 1995
------------------------------------------ THROUGH
1991 1992 1993 1994 NOVEMBER 30, 1995 (6)
--------- --------- --------- --------- ----------------------
<S> <C> <C> <C> <C> <C>
OTHER FINANCIAL DATA:
Earnings (loss) before interest and non-cash charges
(7).................................................... $ 11,583 $ (2,184) $ (5,174) $ (59) $ 2,375
--------- --------- --------- --------- ----------
--------- --------- --------- --------- ----------
</TABLE>
----------------------------------
(1) Includes the results of operations of Lamaur for the month of December 1995
following its acquisition by the Company.
(2) Pro forma data gives effect to the acquisition of Lamaur as if it had
occurred on January 1, 1995 and is based on available information and
contains certain assumptions and adjustments. See Notes To Unaudited Pro
Forma Combined Statement of Operations on page 15.
(3) Includes an $11.0 million write-down of assets required to adjust the
carrying value of Lamaur to its net realizable value in connection with
Dow's decision to sell Lamaur. Future significant charges are not expected
as all assets and liabilities were recorded at their estimated fair values
at the date of the Company's acquisition of Lamaur.
(4) Reflects the conversion of the Dow Convertible Note into Series B
Convertible Preferred Stock (which will automatically occur upon the
Offering), the issuance of 956,000 shares of Common Stock to fund the
repayment of $8.0 million of debt (as described under "Use of Proceeds"),
and the related inclusion of dividends and reduction of interest expense.
(5) Adjusted to reflect the receipt and application by the Company of estimated
net proceeds from the issuance of 2,600,000 shares and the conversion of the
Dow Convertible Note into 763,500 shares of Series B Convertible Preferred
Stock. See "Use of Proceeds" and "Capitalization."
(6) Results of operations of Lamaur following its acquisition by the Company in
November 1995 are included in the Company's results of operations for the
year ended December 31, 1995.
(7) Consists of net loss before interest expense, depreciation and amortization
and write-down of assets. It is presented to assist in understanding the
Company's operating results and in determining the Company's ability to meet
one of its loan covenants (debt service coverage ratio), calculated by
dividing net income plus depreciation, amortization and current interest, by
current interest plus scheduled repayments of principal of all indebtedness.
In addition, the exclusion of the asset write-downs results in data that
assists in understanding ongoing operating results because the write-downs
were non-recurring charges. However, this data is not intended to represent
cash flow or results of operations in accordance with generally accepted
accounting principles. See the Company's Financial Statements and Notes
thereto appearing elsewhere in this Prospectus.
5
<PAGE>
RISK FACTORS
An investment in the shares of Common Stock offered hereby involves a high
degree of risk and immediate and substantial dilution and should only be made by
persons who can afford a loss of their entire investment. In evaluating an
investment in the Common Stock being offered hereby, investors should consider
carefully, among other matters, the following risk factors, as well as the other
information contained in this Prospectus.
LIMITED OPERATING HISTORY; PRIOR LOSSES
The Company has a limited operating history, having commenced its product
research and development activities in 1993 through its EHS Laboratories
division, and having had no revenues until it completed the recent acquisition
of its Lamaur division in November 1995. The Company incurred a loss of $0.7
million for the three months ended March 31, 1996, compared with a loss of $0.1
million for the three months ended March 31, 1995 and a loss of $1.4 million in
the year ended December 31, 1995, compared with a loss of $0.6 million in the
year ended December 31, 1994, and a loss of $1.6 million in the period from
April 1, 1993 (Inception) to December 31, 1993. As a result of these losses, at
December 31, 1995, the Company had an accumulated deficit of $3.6 million, and
had deferred tax assets of $1.3 million, consisting primarily of net operating
loss carryforwards. Because the Company's Lamaur division experienced cumulative
losses over the last nine years, management believes that it is more likely than
not that sufficient taxable income will not be generated in future periods to
utilize the deferred tax assets. Therefore, at December 31, 1995, a valuation
allowance of $1.3 million was established. Giving effect to the Lamaur
acquisition on a pro forma basis, the Company would have had a net loss in the
year ended December 31, 1995, of approximately $11.2 million, or $2.71 per share
($0.2 million, or $0.05 per share, after excluding the $11.0 million write-down
of assets recorded prior to the acquisition to adjust the carrying value of
Lamaur to its net realizable value). The Company's immediate goal is to return
Lamaur to profitability by the end of 1996. In order to achieve this objective,
the Company believes it will need to increase its share of the retail segment of
the market, in part through an increase in advertising and promotions, and also
increase the number of exclusive distributors for its professional products,
while maintaining its existing distribution network. The costs of expanding the
Company's retail market share are expected to be substantial, both during the
remainder of 1996 and thereafter. There can be no assurance that the Company
will ever achieve profitability in the future or maintain profitability, once
achieved, on a consistent basis. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
LEVERAGE, SUBSTANTIAL DEBT SERVICE, PREFERRED STOCK DIVIDEND REQUIREMENTS, AND
RELATED FINANCIAL AND OPERATING RESTRICTIONS
Following the Offering, the Company will remain leveraged and will continue
to have substantial debt service requirements as well as substantial preferred
stock dividend requirements. At March 31, 1996, the Company had outstanding
approximately $23.0 million of long-term and short-term debt and other
obligations, of which approximately $14.3 million was outstanding under the
Company's credit agreement (the "Norwest Credit Agreement"), with Norwest
Business Credit, Inc., an affiliate of Norwest Bank Minnesota N.A. ("Norwest"),
$5.0 million was outstanding under a convertible subordinated note (the "Dow
Convertible Note") issued to Dow as part of the purchase price of the Lamaur
acquisition, and $2.6 million represented credits toward future product
purchases by Dow. Effective upon the Offering, the Dow Convertible Note will be
converted into 763,500 shares of the Company's Series B Convertible Preferred
Stock, par value $0.01 per share (the "Series B Convertible Preferred Stock"),
which provides for cumulative dividends at the rate of 8.0% per annum, payable
quarterly ($400,000 annually). At March 31, 1996, after giving effect to the
Offering and the application of the proceeds of the Offering, the Company would
have had total indebtedness of approximately $10.0 million, stockholders' equity
of approximately $31.9 million and a ratio of total indebtedness to total equity
of approximately 0.31 to 1. A substantial portion of the Company's cash flow
will be devoted to debt service and preferred stock dividend payments. The
ability of the Company to make required payments of principal, interest and
preferred stock dividends will be largely dependent upon its future performance.
The Company believes, however, that cash flow from operations, together with
other available sources of liquidity, will be adequate to make all required
payments, permit anticipated capital expenditures and fund working capital and
other cash requirements for the next 24 months.
6
<PAGE>
The Norwest Credit Agreement, together with the terms of the Series B
Convertible Preferred Stock, impose operating and financial restrictions on the
Company and require the Company to comply with certain financial covenants
regarding profitability, minimum net worth, leverage and cash flow. Those
restrictions prohibit dividends on common stock and redemption of common or
preferred stock and also affect, among other things, the Company's ability to
incur additional indebtedness, issue stock of subsidiaries, repay indebtedness
prior to its stated maturity, create liens, sell assets or engage in mergers or
acquisitions, make certain capital expenditures, change its management, modify
its compensation plans, and make investments in subsidiaries. These restrictions
may limit the ability of the Company to effect future financing or may otherwise
restrict corporate activities. As of March 31, 1996, the Company was in
compliance with all financial covenants under the Norwest Credit Agreement,
including limitations on losses incurred (the Company having incurred an actual
net loss of $0.7 million, compared with a covenant limiting permitted net losses
to no more than $1.5 million), minimum net worth (actual, inclusive of
subordinated debt, of $11.1 million, compared with a covenant minimum of $8.3
million), and leverage (actual ratio of 3.03 to 1.0, compared with a covenant
maximum of 4.39 to 1.0). The Norwest Credit Agreement also provides for a debt
service coverage ratio of at least 1.2 to 1.0 for the year ended December 31,
1996. Giving effect to the Lamaur acquisition on a pro forma basis as if it had
occurred on January 1, 1995, but excluding the $11.0 million write-down of
assets recorded prior to the acquisition, and after giving effect to the
Offering and the application of the proceeds therefrom as if the Offering had
occurred on May 31, 1995, the Company would have had a debt service coverage
ratio of approximately 1.5 to 1.0 for the year ended December 31, 1995. The
Company incurred a net loss of approximately $0.7 million in the three months
ended March 31, 1996, a level consistent with the Company's operating plan.
However, if the Company is unable to achieve management's plans and improve
operating results at Lamaur during the remainder of 1996, or obtain additional
financing, the Company could be in default at the end of 1996 under the Norwest
Credit Agreement. In addition, the Company has pledged substantially all of its
assets to the Company's lenders. In the event of a default under the Norwest
Credit Agreement, the Company's lenders could foreclose on those assets. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources" and "Description of Capital Stock
-- Convertible Preferred Stock."
RECENT MAJOR ACQUISITION AND POSSIBLE ADVERSE EFFECTS ON FUTURE RESULTS OF
OPERATIONS
In November 1995 the Company acquired the operations and assets of Lamaur
from Dow for approximately $30.2 million. The purchase price was allocated to
the acquired assets and liabilities based on their estimated fair values.
Principally as a result of charges taken by Dow of $120.1 million in 1994 and
$11.0 million in 1995 in connection with Dow's decision in early 1994 to sell
Lamaur, the operations of Lamaur incurred a net loss of $133.5 million for the
year ended December 31, 1994 and a net loss of $12.2 million for the period from
January 1, 1995 to November 30, 1995. Dow acquired Lamaur, which was a public
company, in 1987 and recorded substantial goodwill which represented the excess
of the purchase price over the estimated fair value of the net assets acquired.
Due to a decline in the market share of Lamaur's products, the value of Lamaur
decreased significantly subsequent to the acquisition by Dow. As a result, the
charges recorded by Dow in 1994 and 1995 were required to adjust the carrying
value of Lamaur to its net realizable value. Future significant charges are not
expected as all assets and liabilities of Lamaur were recorded at their
estimated fair values at the date of the Company's acquisition of Lamaur (which,
for property, plant and equipment, was based on independent appraisals). See
Note 1 of the Financial Statements of Lamaur included elsewhere in this
Prospectus for a description of the acquisition of Lamaur by the Company and the
allocation of the purchase price. On a pro forma basis, as if the Lamaur
acquisition had been effected on January 1, 1995, and including all adjustments
which the Company considers necessary for a fair presentation in accordance with
generally accepted accounting principles, the Company would have had a net loss
for the year ended December 31, 1995 of approximately $11.2 million ($2.71 per
share) ($0.2 million ($0.05 per share) after excluding the $11.0 million
write-down of assets described above), as compared with its actual net loss of
approximately $1.4 million ($0.33 per share) for the period. Such pro forma
financial information is based, in significant part, upon unaudited information
with respect to the results of operations of Lamaur that was provided to the
Company by Dow and has not been verified by the Company. See "Unaudited Pro
Forma Financial Information."
Future actions by the Company may result in changes to Lamaur's operations.
Actual revenues during 1996 may be less than the pro forma revenues for the year
ended December 31, 1995, in part as a result of the cost-cutting program
initiated earlier in 1995 that Lamaur's new management intends to continue and
refine. The effects of any future changes in Lamaur's product manufacturing
operations or marketing cannot be determined at this time and are not reflected
in the pro forma financial statements included elsewhere in this Prospectus.
Although the Company has identified areas in which future reductions in
operating expenses may
7
<PAGE>
be feasible and anticipates reducing operating expenses in the near future,
there can be no assurance that any such reductions can or will be effected.
There can be no assurance that the present and future efforts of the Company's
new management team to reduce operating expenses of Lamaur will be successful in
the near term, or that the Company will be able to reduce those costs and
expenses without materially and adversely affecting product sales or impairing
its ability to maintain or expand its share of the market. If the Company is
unsuccessful in its effort to achieve and maintain profitable operations at
Lamaur, the Company's business and results of operations would be materially and
adversely affected. Continued losses at Lamaur would have a material adverse
effect on the Company's financial condition and on its ability to compete
effectively in the markets for its products and on its EHS Laboratories
division's ability to continue its planned research and development activities.
See "Unaudited Pro Forma Financial Information" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
DEPENDENCE ON MANAGEMENT
The Company's future success and profitability is substantially dependent
upon the performance of its senior executives. Only one of the Company's senior
executives has an employment agreement with the Company, although all of the
Company's senior executives have been granted options to purchase shares of
Common Stock, of which a significant proportion are not vested. The loss of one
or more of its senior executives could have a material adverse effect on the
Company. Moreover, the Company does not maintain key-man life insurance on any
of its executives. In addition, Mr. Don G. Hoff, the Company's founder, chairman
and chief executive officer, served as Chairman of the Board and Chief Executive
Officer of AT&E Corporation ("AT&E"), a company engaged in telecommunications
research and development, from 1974 to 1991. Mr. Hoff resigned from all his
managerial positions with AT&E in April 1991. Subsequently, in July 1991, AT&E
filed for reorganization under Chapter 11 of the Bankruptcy Code. Another
officer of the Company served as an officer of AT&E from December 1984 to April
1991. See "Management."
NEED FOR FUTURE CAPITAL
Through late 1995, the Company financed all of its working and other capital
requirements from equity infusions and borrowings from certain of its
stockholders. Future growth will be dependent, in part, upon the capital
resources available to the Company from time to time. In connection with the
Lamaur acquisition, the Company obtained from Norwest a $20.0 million credit
facility. The facility consists of a $6.0 million 36-month term loan and a $14.0
million working line of credit (the "Norwest Credit Line"). The full amount of
the term loan and approximately $8.6 million of the revolving credit facility
had been drawn upon as of March 31, 1996. Approximately $8.0 million of the
amount drawn under the Norwest Credit Line will be repaid with the proceeds of
the Offering. The Company's ability to draw upon the Norwest Credit Line will be
dependent in part on the quality and size of the Company's trade receivables and
inventory. The Company believes that internally generated funds, amounts made
available to it under the Norwest Credit Line and cash on hand, together with
the net proceeds of this Offering, should satisfy its anticipated capital needs
for the next 24 months. However, there can be no assurance that those funds will
be sufficient to support the Company's business strategy or that, if additional
financing is required, it will be available in amounts and on terms satisfactory
to the Company, if at all. Furthermore, the Norwest Credit Agreement bears
interest at variable rates and, accordingly, increases in applicable base rates
will adversely affect the Company's cost of capital. See "Use of Proceeds" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
COMPETITION
The personal hair care products business is highly competitive. The Company
competes in its market against several larger multi-national companies, all of
which have substantially greater financial and other resources than those of the
Company. Principal competitors of the Retail Division include The Procter &
Gamble Company, Unilever N.V. (Helene Curtis), Bristol-Myers Squibb Company
(Clairol), L'Oreal S.A. (Cosmair) and Alberto-Culver Company, and those of the
Salon Division include Bristol-Myers Squibb Company (Clairol and Matrix),
Nexxus, and Wella AG (Redken). Competitive conditions in the industry have
adversely affected profit margins. In addition, there has been a growing
consumer demand for greater convenience and performance. In part as a result of
these factors, the industry has been experiencing a consolidation (the Company
believes that currently, five companies account for approximately 60% of
worldwide sales in the hair care products industry) and a globalization in the
activities of its members.
8
<PAGE>
Competitive market conditions could materially and adversely affect the
Company's results of operations if it were required to reduce product prices to
remain competitive or experienced decreased sales volume. The Company plans to
increase retail sales in Mexico and Canada during the remainder of 1996 and in
1997, and is considering expansion into other international markets. Expanding
the Company's share of the Mexican, Canadian and other international markets
will require the Company to address competitive factors similar to those it
faces in the United States as well as comply with any local regulatory
requirements. See "Business -- Competition."
DEPENDENCE ON SIGNIFICANT CUSTOMERS
Certain customers are material to the business and operations of the
Company. DowBrands Home Care Division ("DowBrands") and Wal-Mart Stores, Inc.
("Wal-Mart") each accounted for approximately 18% of the Company's pro forma
total net sales for 1995. The Company currently maintains more than 1,800 active
customer accounts and no customer other than DowBrands and Wal-Mart accounted
for more than 10% of Lamaur's sales in any of the last three years. Nonetheless,
the loss of sales to DowBrands, Wal-Mart or other significant customers could
have a material adverse effect on the business and operations of the Company.
The Company has no contractual obligations from any customers (including
DowBrands) to make continuing purchases from Lamaur, although DowBrands has
agreed to purchase all of its future requirements for certain products from the
Company for a two-year period ending in November 1997. As part of this agreement
and in connection with the acquisition, Dow agreed to accept $3.0 million of
credits to be applied towards purchases of finished products in eight equal
quarterly installments of $375,000 commencing February 1996. See "Business --
Marketing and Distribution" and "-- Manufacturing and Supply".
RELIANCE ON MANUFACTURING FACILITIES
The Company manufactures substantially all of its products at its facility
in Fridley, Minnesota. The Company's manufacturing operations use certain custom
designed equipment which, if damaged or otherwise rendered inoperable or
unavailable, could result in the disruption of the Company's manufacturing
operations. The Company seeks to protect against this risk by maintaining
substantial spare parts and an internal maintenance shop capable of servicing
and rebuilding all in-house manufacturing equipment. The Company also believes
that there are several readily available external sources to repair or replace
any of this equipment should that be necessary. The Company also maintains
multiple compounding areas, filling lines and packaging facilities. Any extended
interruption of operations at the Company's manufacturing facility would,
however, have a material adverse effect on the business of the Company. See
"Business -- Manufacturing and Supply."
DEPENDENCE ON TRADEMARKS FOR CURRENT AND FUTURE MARKETS
The market for the Company's products is significantly dependent upon the
goodwill engendered by its trademarks and trade names. Trademark protection is
therefore material to the Company's business. Although a number of the Company's
trademarks and trade names are registered in the United States, there can be no
assurance that the Company will be successful in asserting trademark or trade
name protection for its significant marks and names in the United States or
other markets, and the costs to the Company of such efforts may be substantial.
See "Business -- Patents and Trademarks."
RAPID TECHNOLOGICAL CHANGE AND NEW PRODUCT DEVELOPMENT
The Company's ability to anticipate changes in technologies, markets and
industry trends and to successfully develop and introduce new and enhanced
products on a timely basis will be a critical factor in its ability to grow and
remain competitive. There can be no assurance that new products will be
completed or that such products can be marketed successfully. In addition, the
anticipated development schedules for new or improved products are inherently
difficult to predict and are subject to change as a result of shifting
priorities in response to customers' requirements and competitors' new product
introductions. Moreover, the Company expects that its EHS Laboratories division
will devote substantial resources to research and development efforts, including
expenditures aggregating approximately $2.0 million over approximately the next
three years. The costs of such efforts are likely to be expensed as they are
incurred, notwithstanding that the benefits, if any, from such efforts (in the
form of increased revenues or decreased product costs) may not be reflected
until subsequent periods. See "Business -- Marketing and Distribution" and "--
Research and Development."
9
<PAGE>
RISKS ASSOCIATED WITH ELECTRONIC CHEMISTRY-TM- PRODUCT DEVELOPMENT
EMERGING TECHNOLOGY AND MARKET; SUBSTANTIAL RISK OF UNCERTAIN MARKET
ACCEPTANCE. The Company is engaged in early research and development of hair
styling applications of an electronics-based technology. As with any new
technology, there is the substantial risk that products based on the technology
will not be successfully developed or that if developed, that the marketplace
may not accept the potential benefits of the technology. The Company expects to
incur substantial expenses as it continues its research activities and, if they
are successful, to develop new products and penetrate new markets. The Company
does not expect to introduce any prototype product before the second half of
1998 at the earliest, and any Company electronics-based product introduced to
the market will not obtain name recognition until some time after the Company's
initial marketing efforts, if at all. Market acceptance of the Company's
products will depend, in large part, upon the pricing of the products and the
ability of the Company to demonstrate the advantages of its products over
competing methodologies and products. There can be no assurance that the Company
will be able to market its technology successfully or that any of the Company's
future electronics-based products will be accepted in the marketplace.
NEED FOR THIRD-PARTY ASSISTANCE. Substantial additional steps will need to
be taken before the Company can commercially introduce its ELECTRONIC
CHEMISTRY-TM- products. The Company anticipates that some of these steps will be
undertaken by the Company and some, including continuing hair morphology and
other research, will be undertaken pursuant to agreements or arrangments with
third parties. In 1994, the Company entered into a technical assistance
agreement with Samsung Electronics Co., Ltd. ("Samsung") pursuant to which
Samsung will have the opportunity (but not the obligation) to participate with
the Company in developing the electronic components and overall design of the
Company's hair styling products; however, Samsung has not participated in such
development to date or provided any revenues or financing to the Company. There
can be no assurance that Samsung will pursue or be successful in any such
development efforts, nor can there be any assurance that Samsung will extend the
term of its agreement with the Company beyond 1996. Moreover, a similar
arrangement may be required by the Company with one or more companies engaged in
the chemical products industry to develop certain chemical components of the
Company's planned hair styling product, and there can be no assurance that any
such arrangement will be entered into or, if entered into, will be successful.
The Company's inability, for technological, financial or other reasons, to
develop and sell products that are technologically competitive, responsive to
customer needs and competitively priced could have a material adverse effect on
its business.
REGULATORY RISKS. The development and initial marketing of the Company's
ELECTRONIC CHEMISTRY-TM- products will require adherence to Federal
Communications Commission ("FCC") standards regarding electromagnetic signals,
and is likely also to require Food and Drug Administration ("FDA") and other FCC
review and approval. The process of obtaining and maintaining such regulatory
approvals is not expected to commence until after a suitable prototype product
is available, may be lengthy, expensive and uncertain, and is likely to require
animal trials (as is customary in the personal hair care products business) and,
possibly, human trials. Moreover, the Company is unable to predict the nature
of, or time that will be required to obtain, regulatory approvals, and there can
be no assurance that new standards relating to the sale of electromagnetic
signal-emitting devices for use in close proximity to the human body will not be
adopted prior to or after the Company introduces its new products, and any such
standards might require redesign or even abandonment of the product. A delay in
obtaining regulatory approvals, or the unavailability of such approvals, could
have an adverse effect on the Company's strategic plans.
PRODUCT LIABILITY RISKS. Even if regulatory approvals are obtained and
product marketing and sales commence, there can be no assurance that the Company
will not encounter private party lawsuits alleging defects or harmful effects
from the Company's hair styling appliance products. The cost of defending or
settling such claims may be high, and insurance against such claims may not be
available, or may be prohibitive in cost.
DEPENDENCE ON LICENSED PATENT. The Company has obtained an exclusive
license to use for cosmetic hair care applications one United States patent that
it believes provides significant protection for its proprietary technology.
However, there can be no assurance that such patent or any other patents that
may be granted will be enforceable or provide the Company with meaningful
protection from competitors. Moreover, if a competitor were to infringe the
Company's licensor's patent, the costs of enforcing the
10
<PAGE>
Company's licensed patent rights may be substantial or even prohibitive. There
can also be no assurance that the Company's future products will not infringe
the patent rights of others or that it will not be forced to expend substantial
funds to defend against infringement claims of, or to obtain licenses from,
third parties. See "Business -- Patents and Trademarks."
QUARTERLY FLUCTUATIONS IN OPERATING RESULTS
The Company's operating results may vary significantly from quarter to
quarter, in part because of the costs associated with changes in the Company's
mix of product sales and promotions, changes in consumer buying patterns,
aggressive competition, and the timing of, and costs related to, any future
acquisitions. The Company's operating results for any particular quarter are not
necessarily indicative of any future results. The uncertainties associated with
new product introduction and market trends may limit management's ability to
accurately forecast short-term results of operations. In addition, the Company
generally has a relatively low backlog of orders at any one time, and most of
any backlog that exists is generally delivered within five to 10 days of receipt
of an order. Fluctuations caused by variations in quarterly operating results or
the Company's failure to meet analysts' projections or public expectations as to
results may adversely affect the market price of the Common Stock.
CONTROL BY EXISTING STOCKHOLDERS; ANTI-TAKEOVER PROVISIONS
After the Offering, the Company's present stockholders, consisting primarily
of senior management, members of its chairman's family, and Dow, will own
approximately 61% of the outstanding shares of voting stock (approximately 58%
if the Underwriters' over-allotment option is exercised in full). Consequently,
the present stockholders will have the ability to elect all of the Company's
directors and to control the outcome of all other issues submitted to the
Company's stockholders. Certain provisions of Delaware law applicable to the
Company may also discourage third-party attempts to acquire control. See
"Principal Stockholders" and "Description of Capital Stock."
IMMEDIATE AND SUBSTANTIAL DILUTION
Purchasers of the shares of Common Stock offered hereby will incur an
immediate dilution in net tangible book value per share of Common Stock of $5.96
per share ($4.26 per share assuming conversion of the Company's preferred
stock). See "Dilution."
SHARES ELIGIBLE FOR FUTURE SALE
Future sales of shares of Common Stock by existing stockholders pursuant to
Rule 144 ("Rule 144") promulgated under the Securities Act of 1933, as amended
(the "Securities Act"), or otherwise, could have an adverse effect on the price
of the shares of Common Stock. Upon consummation of this Offering, the Company
will have outstanding 5,560,495 shares of Common Stock, plus the 1,163,910
shares of Common Stock which may be issued upon conversion of preferred stock.
The 2,600,000 shares of Common Stock offered hereby (2,990,000 if the
Underwriters' over-allotment option is exercised in full) will be freely
transferable without restriction or further registration under the Securities
Act. The remaining 2,960,495 outstanding shares of Common Stock, and the
1,163,910 shares of Common Stock which may be issued upon conversion of the
Series A Convertible Preferred Stock and Series B Convertible Preferred Stock
(collectively, the "Convertible Preferred Stock"), will be "restricted
securities," as that term is defined in Rule 144, and may only be sold pursuant
to a registration statement under the Securities Act or an applicable exemption
from registration thereunder, including exemptions provided by Rule 144. In
addition, the Company has contractually granted its existing stockholders
certain registration rights. No prediction can be made as to the effect that
future sales of Common Stock, or the availability of shares of Common Stock for
future sales, will have on the market price of the Common Stock prevailing from
time to time. Sales of substantial amounts of Common Stock, or the perception
that such sales could occur, could adversely affect prevailing market prices for
the Common Stock. The Company has agreed not to issue, and its principal
stockholders, as well as all holders of outstanding securities exchangeable for
or convertible into Common Stock, have agreed (i) not to, directly or
indirectly, issue, agree or offer to sell, sell, grant an option for the
purchase or sale of, assign, transfer, pledge, hypothecate, distribute or
otherwise encumber or dispose of, any shares of Common Stock or other equity
securities of the Company or other securities convertible into or exercisable
for such shares of Common Stock or other equity securities for six months from
the date of this Prospectus without the prior written consent of the Company and
the Representative of the Underwriters, and (ii) not to register any shares held
by them for a period of six months from the date of this Prospectus. See "Shares
Eligible for Future Sale."
11
<PAGE>
ABSENCE OF PRIOR PUBLIC MARKET
Prior to the Offering, there has been no public market for the Common Stock
and there can be no assurance that an active public market for the Common Stock
will develop or continue after the Offering. The initial public offering price
per share of Common Stock has been determined by negotiation between the Company
and the Representatives of the Underwriters and does not necessarily bear any
relationship to the Company's assets, book value, revenues or other established
criteria of value, and should not be considered indicative of the price at which
the Common Stock will trade after completion of the Offering. There can be no
assurance that the market price of the Common Stock will not decline below the
initial public offering price. See "Underwriting."
POSSIBLE VOLATILITY OF STOCK PRICE
Trading volume and prices for the Common Stock could be subject to wide
fluctuations in response to quarterly variations in operations, results,
announcements with respect to sales and earnings, as well as technological
innovations, and new product developments and other events or factors, which
cannot be foreseen or predicted by the Company, including the sale or attempted
sale of a large amount of securities in the public market, the registration for
resale (which is expected to occur approximately six months after the date of
this Prospectus) of the shares issuable upon conversion of the Convertible
Preferred Stock, and the effect on the Company's earnings of existing or future
equity-based compensation awards to management. See "Management -- Executive
Compensation."
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 2,600,000 shares of
Common Stock offered hereby are estimated to be $20.9 million ($24.1 million if
the Underwriters' over-allotment option is exercised in full), after deducting
the underwriting discount and expenses of the Offering payable by the Company.
The Company intends to use approximately $8.0 million of the net proceeds
initially to reduce the indebtedness outstanding under its revolving line of
credit incurred in connection with the acquisition of Lamaur on November 16,
1995. The indebtedness expected to be repaid currently bears interest at the
annual rate of 9.75%, which is 1.25% over Norwest's current base rate. The
Company may from time to time increase its borrowings under its revolving line
of credit, as needed for its working capital and general corporate requirements.
The remaining net proceeds from this Offering (including any proceeds received
from the exercise of the over-allotment option) are expected to be utilized for
general corporate purposes, including principally expanding Lamaur's marketing
efforts by introducing new products (approximately $4.5 million), supporting EHS
Laboratories' ongoing research and development activities directed towards the
completion of its first protoype advanced hair styling products (approximately
$2.0 million), and the restaging of certain existing products (approximately
$1.0 million). The balance will be used for working capital.
The amounts and timing of actual expenditures will depend upon numerous
factors, including, primarily, the progress of the Company's research and
development programs, product marketing strategies and the competitive
environment. Additionally, it is the Company's policy regularly to review
potential opportunities to acquire, or enter into joint venture or licensing
relationships with respect to, products and businesses compatible with its
existing business. The Company may, therefore, use a portion of the net proceeds
to make such acquisitions or to fund such joint ventures, although the Company
does not have any arrangements with respect thereto other than its agreement
with Samsung. See "Business -- Research and Development -- EHS Laboratories'
Technology."
The Company believes that the net proceeds of this Offering together with
cash flow from operations and existing credit facilities will be sufficient to
finance its working and other capital requirements for a period of approximately
24 months from the date of this Prospectus. Pending the aforementioned uses, the
net proceeds from this Offering will be invested in interest bearing government
securities or short-term, investment grade securities.
12
<PAGE>
DIVIDEND POLICY
Pursuant to the terms of the Series B Convertible Preferred Stock, the
holders of Series B Convertible Preferred Stock, in preference to the holders of
the Company's Common Stock, are entitled to receive cumulative cash dividends at
the rate of 8.0% per annum, payable quarterly ($400,000 annually). Dividends are
payable with respect to the Series A Convertible Preferred Stock only to the
extent (on an as-converted basis) that dividends are declared payable on the
Common Stock.
The Company does not anticipate paying any dividends on its Common Stock in
the foreseeable future. The payment of future dividends will depend on the
evaluation by the Company's Board of Directors of such factors as it deems
relevant at the time. Currently, the Board of Directors believes that all of the
Company's earnings, if any, should be retained for the development of the
Company's business. In addition, payment of dividends on the Common Stock is
prohibited by the terms of the Norwest Credit Agreement and is restricted by the
terms of its Convertible Preferred Stock. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."
CAPITALIZATION
The following table sets forth the capitalization of the Company at March
31, 1996, and as adjusted as of that date to reflect the issuance and sale by
the Company of the 2,600,000 shares of Common Stock offered hereby at an assumed
initial public offering price of $9.00 per share, the application of the
estimated net proceeds from this Offering in the manner set forth under the
caption "Use of Proceeds," and the conversion of the Dow Convertible Note into
763,500 shares of Series B Convertible Preferred Stock.
<TABLE>
<CAPTION>
AT MARCH 31, 1996
----------------------
ACTUAL AS ADJUSTED
--------- -----------
(IN THOUSANDS)
<S> <C> <C>
Short-term borrowings and credits, including current portion of long-term debt............ $ 2,700 $ 2,700
--------- -----------
--------- -----------
Long-term debt, including related party debt and credits.................................. 20,271 7,271
Stockholders' equity:
Common stock, $.01 par value, 12,000,000 shares authorized; 2,960,495 shares issued and
outstanding, actual, 5,560,495 shares issued and outstanding, as adjusted (1).......... 30 56
Convertible Preferred Stock, $.01 par value, 4,000,000 shares authorized; 1,000,000
shares of Series A issued and outstanding, actual and as adjusted...................... 8,500 8,500
763,500 shares of Series B issued and outstanding, as adjusted (2)..................... -- 5,000
Additional paid-in capital.............................................................. 1,894 22,725
Stock subscriptions receivable.......................................................... (50) (50)
Accumulated deficit..................................................................... (4,326) (4,326)
--------- -----------
Total stockholders' equity................................................................ 6,048 31,905
--------- -----------
Total capitalization.................................................................. $ 26,319 $ 39,176
--------- -----------
--------- -----------
</TABLE>
------------------------
(1) Excludes 2,899,085 shares, consisting of (i) 660,000 shares of Common Stock
reserved for issuance upon conversion of the Company's Series A Convertible
Preferred Stock held by Dow, which must be converted into Common Stock if
the market price of the Common Stock equals or exceeds $21.21 for a period
of 30 consecutive business days, (ii) 503,910 shares of Common Stock
reserved for issuance upon conversion of the Company's Series B Preferred
Stock that will be issued upon the conversion of the Dow Convertible Note in
connection with the consummation of this Offering, (iii) 1,400,925 shares of
Common Stock reserved for future issuance under the Company's stock
incentive plans, (iv) 152,250 shares of Common Stock reserved for issuance
upon exercise of outstanding warrants, and (v) 182,000 shares of Common
Stock reserved for issuance upon exercise of warrants issued to the
Representatives of the Underwriters. See "Underwriting."
(2) See "Description of Capital Stock -- Convertible Preferred Stock."
13
<PAGE>
DILUTION
The net tangible book value (deficiency) of the Company's Common Stock at
March 31, 1996, was ($4.0 million), or ($1.33) per share of Common Stock ($6.0
million, or $1.67 per share of Common Stock, if the Series A Convertible
Preferred Stock is assumed to have been converted into shares of Common Stock).
"Net tangible book value (deficiency)" per share is equal to the total tangible
assets of the Company reduced by the Company's total liabilities and by the
liquidation preference on outstanding Convertible Preferred Stock, divided by
the number of shares of Common Stock outstanding. After giving effect to the
estimated net proceeds from sale of the 2,600,000 shares of Common Stock offered
hereby (based on the initial public offering price of $9.00 per share), the net
tangible book value of the Company at March 31, 1996, would have been $16.9
million, or $3.04 per share ($31.9 million, or $4.74 per share of Common Stock,
if the Convertible Preferred Stock is assumed to have been converted into shares
of Common Stock) representing an immediate increase in net tangible book value
of $4.37 per share to existing stockholders ($3.07 assuming conversion of the
Convertible Preferred Stock) and an immediate dilution in net tangible book
value of $5.96 per share, or 66.2% ($4.26 per share, or 47.3%, assuming
conversion of the Convertible Preferred Stock) to investors purchasing shares at
the assumed initial public offering price ("New Investors"). The following table
illustrates the per share dilution to New Investors (assuming no conversion of
the Convertible Preferred Stock):
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share.............................. $ 9.00
Net tangible deficiency per share before this Offering....................... $ (1.33)
Increase in net tangible book value per share attributable to New
Investors................................................................... 4.37
---------
As adjusted, net tangible book value per share as of March 31, 1996, after
this Offering............................................................... 3.04
---------
Dilution in net tangible book value to New Investors......................... $ 5.96
---------
---------
</TABLE>
If the Underwriters' over-allotment option is exercised in full, the net
tangible book value per share of Common Stock after this Offering would be $3.39
per share ($4.94 per share assuming conversion of the Convertible Preferred
Stock), which would result in dilution to new investors in this Offering of
$5.61 (or 62.3%) ($4.06, or 45.1%, assuming conversion of the Convertible
Preferred Stock) per share of Common Stock.
The following table summarizes at March 31, 1996, the total consideration
paid and the average price paid per share of Common Stock by the existing
stockholders (assuming no conversion of the Series A Convertible Preferred
Stock) and the New Investors who purchase pursuant to this Offering (before
deducting the underwriting discount and the other offering expenses payable by
the Company):
<TABLE>
<CAPTION>
COMMON STOCK ACQUIRED
TOTAL CONSIDERATION AVERAGE
------------------------ ---------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
----------- ----------- --------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Existing stockholders.......................................... 2,960 53.2% $ 1,046 4.3% $ .35(1)
New Investors.................................................. 2,600 46.8 23,400 95.7 9.00
----- ----- --------- -----
Total........................................................ 5,560 100.0% $ 24,446 100.0%
----- ----- --------- -----
----- ----- --------- -----
</TABLE>
(1) Assuming conversion of the Series A Convertible Preferred Stock, average
price per share would be $2.64.
14
<PAGE>
UNAUDITED PRO FORMA FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The following unaudited pro forma financial information (the "Unaudited Pro
Forma Financial Information") is based on the historical financial statements of
the Company included elsewhere in this Prospectus and has been prepared to
illustrate the effect of the acquisition of Lamaur (previously PCD, the Personal
Care Division of Dow Brands L.P., an affiliate of Dow). The Unaudited Pro Forma
Financial Information and accompanying notes are based upon and should be read
in conjunction with the financial statements and the notes thereto of the
Company and Lamaur included elsewhere in this Prospectus.
The pro forma combined statement of operations for the year ended December
31, 1995 gives effect to the acquisition of Lamaur as if it had occurred on
January 1, 1995. The Unaudited Pro Forma Financial Information is not
necessarily indicative of either future results of operations or the results
that might have occurred if the foregoing transaction had been consummated on
the indicated date.
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
PRO FORMA
LAMAUR HISTORICAL ADJUSTMENTS
COMPANY (THROUGH INCREASE PRO FORMA
HISTORICAL NOVEMBER 30, 1995) (DECREASE) COMBINED
---------- ------------------ -------------- -----------
<S> <C> <C> <C> <C>
Total net sales......................... $ 8,070 $109,696 $ -- $117,766
Cost of goods sold...................... 5,656 67,088 (1,349)(1) 71,395
---------- -------- -------------- -----------
Gross margin............................ 2,414 42,608 1,349 46,371
Operating expenses...................... 3,496 42,344 (710)(2) 45,130
Write-down of assets.................... -- 11,000 -- 11,000
---------- -------- -------------- -----------
Operating loss.......................... (1,082) (10,736) 2,059 (9,759)
Other
Interest expense from Dow............. -- (1,603) 1,603(3) --
Interest expense...................... (300) -- (1,254)(4) (1,554)
Other income.......................... -- 101 -- 101
---------- -------- -------------- -----------
Net loss................................ $(1,382) $(12,238) $ 2,408 $(11,212)(5)
---------- -------- -------------- -----------
---------- -------- -------------- -----------
Net loss per share...................... $ (.33) $ (2.71)
---------- -----------
---------- -----------
Weighted average shares outstanding
(6).................................... 4,130 4,130
Supplemental pro forma data (7):
Net loss.............................. $(10,432)
-----------
-----------
Net loss per share.................... $ (2.05)
-----------
-----------
Weighted average shares outstanding
(6).................................. 5,086
</TABLE>
NOTES TO UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
(1) Includes a reduction in depreciation of $315,000 to reflect the Company's
basis in property, plant and equipment, a reduction in employee benefits
expenses as a result of the elimination of postretirement benefits and
401(k) matching contributions of $874,000, and a reduction in the Company's
vacation benefits of $160,000.
(2) Includes a reduction in depreciation of $35,000 to reflect the Company's
basis in property, plant and equipment, a reduction in employee benefits
expenses as a result of the elimination of postretirement benefits and
401(k) matching contributions of $570,000, and the reduction in the
Company's vacation benefits of $105,000. Lamaur historical depreciation
expense reflects the impact of the write-down of assets.
(3) Interest expense from Dow has been eliminated as this represented a charge
on Dow's net investment in Lamaur.
(4) Represents interest expense on debt incurred in conjunction with the
Company's acquisition of Lamaur and estimated average borrowings during the
year. Interest expense was computed at rates ranging from 9.75% to 10.0%
(based on a prime rate of 8.5%).
(5) Includes an $11.0 million write-down of assets required to adjust the
carrying value of Lamaur to its net realizable value in connection with
Dow's decision to sell Lamaur. Future significant charges are not expected
as all assets and liabilities were recorded at their estimated fair values
at the date of the Company's acquisition of Lamaur.
(6) In accordance with the rules of the Securities and Exchange Commission, all
common stock equivalents of the Company issued within one year of this
initial public offering have been considered as outstanding since the
inception of the Company using the treasury stock method (assuming a market
price of $9.00) even though they are anti-dilutive in loss periods. Common
stock equivalents issued prior to one year of this initial public offering
are excluded in loss periods as they are anti-dilutive.
(7) Reflects the conversion of the Dow Convertible Note into Series B
Convertible Preferred Stock (which will automatically occur upon the
Offering), the issuance of 956,000 shares of Common Stock to fund the
repayment of $8.0 million of debt (as described under "Use of Proceeds"),
and the related inclusion of dividends and reduction of interest expense.
15
<PAGE>
SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Set forth below is selected financial data with respect to the statements of
operations of the Company for the period from April 1, 1993 (Inception) to
December 31, 1993, and for the twelve months ended December 31, 1994, and 1995,
and the balance sheets of the Company at December 31, 1993, 1994 and 1995. Such
data was derived from the Company's audited financial statements, certain of
which are included elsewhere in this Prospectus. Also set forth below is
selected financial data for the three months ended March 31, 1995 and 1996 and
as of March 31, 1996, which is derived from the unaudited financial statements
of the Company and includes, in the opinion of management, all adjustments
(consisting only of normal recurring adjustments) necessary to present fairly
the financial position and results of operations of the Company for such
periods. The results of operations for the three months ended March 31, 1995 and
1996 are not necessarily indicative of results for a full fiscal year. In
addition, set forth below is selected financial data with respect to the pro
forma statement of operations for the Company for the twelve months ended
December 31, 1995. Such data presents the combined results of operations of the
Company as if the acquisition of Lamaur was effective as of January 1, 1995.
Such data was derived from the unaudited pro forma combined financial statements
included on page 15 in this Prospectus and are qualified by reference to such
pro forma financial statements. The pro forma combined financial data includes
all adjustments which the Company considers necessary for a fair presentation,
in accordance with generally accepted accounting principles, of its results of
operations for that period. The pro forma combined financial data does not
purport to represent what the Company's results of operations would actually
have been had the acquisition in fact occurred on the indicated date or to
project the Company's results of operations for any future date or period.
In addition, included below is selected financial data with respect to the
statements of operations for Lamaur for each of the four years ended December
31, 1994, and for the period from January 1, 1995 to November 30, 1995 (the
effective date of the acquisition for financial reporting purposes), and the
balance sheets of Lamaur at December 31, 1991, 1992, 1993 and 1994. Such data
were derived from the Lamaur financial statements (previously, PCD, the Personal
Care Division of DowBrands L.P., an affiliate of Dow), certain of which are
included herein.
FINANCIAL DATA OF THE COMPANY
<TABLE>
<CAPTION>
HISTORICAL
---------------------------------------
YEAR ENDED DECEMBER THREE MONTHS ENDED
APRIL 1, 1993 31, PRO FORMA YEAR MARCH 31,
(INCEPTION) TO -------------------- ENDED DECEMBER --------------------
DECEMBER 31, 1993 1994 1995 (1) 31, 1995 1995 1996
----------------- --------- --------- ----------------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
SELECTED STATEMENTS OF OPERATIONS
DATA:
Total net sales................... $ -- $ -- $ 8,070 $ 117,766 $ -- $ 28,480
Cost of goods sold................ -- -- 5,656 71,395 -- 17,954
------- --------- --------- -------- --------- ---------
Gross margin...................... -- -- 2,414 46,371 -- 10,526
Operating expenses................ 1,565 557 3,496 45,130 93 10,843
Write-down of assets.............. -- -- -- 11,000 -- --
------- --------- --------- -------- --------- ---------
Operating loss.................... (1,565) (557) (1,082) (9,759) (93) (317)
Interest expense.................. (40) (59) (300) (1,554) (18) (414)
Other income...................... -- -- -- 101 -- 8
------- --------- --------- -------- --------- ---------
Net loss.......................... $ (1,605) $ (616) $ (1,382) $ (11,212)(2) $ (111) $ (723)
------- --------- --------- -------- --------- ---------
------- --------- --------- -------- --------- ---------
Net loss per share................ $ (.43) $ (.15) $ (.33) $ (2.71) $ (.03) $ (.18)
------- --------- --------- -------- --------- ---------
------- --------- --------- -------- --------- ---------
Weighted average shares
outstanding (3).................. 3,701 4,130 4,130 4,130 4,130 4,130
SUPPLEMENTAL PRO FORMA DATA (4):
Net loss.......................... $ (10,432)
--------
--------
Net loss per share................ $ (2.05)
--------
--------
Weighted average shares
outstanding (3).................. 5,086
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31,
-------------------------------
1993 1994 1995
--------- --------- --------- AT MARCH 31,
1996
-------------
<S> <C> <C> <C> <C>
SELECTED BALANCE SHEET DATA:
Working capital (deficit).......................................... $ (27) $ (466) $ 10,346 $ 9,817
Total assets....................................................... 134 6 42,967 42,806
Long-term debt, less current portion............................... 1,000 1,000 20,350 20,271
Stockholders' equity (deficit)..................................... (1,057) (1,462) 6,594 6,048
</TABLE>
16
<PAGE>
FINANCIAL DATA OF LAMAUR
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, PERIOD FROM JANUARY
------------------------------------------- 1, 1995 THROUGH
1991 1992 1993 1994 NOVEMBER 30, 1995(5)
--------- --------- --------- ---------- --------------------
<S> <C> <C> <C> <C> <C>
SELECTED STATEMENTS OF OPERATIONS DATA:
Total net sales........................... $ 136,946 $ 124,288 $ 112,031 $ 121,277 $ 109,696
Cost of goods sold........................ 78,871 77,613 71,061 71,735 67,088
--------- --------- --------- ---------- --------
Gross margin.............................. 58,075 46,675 40,970 49,542 42,608
Operating expenses........................ 53,912 56,014 53,851 57,830 42,344
Write-down of assets...................... -- -- -- 120,100 11,000
--------- --------- --------- ---------- --------
Operating income (loss)................... 4,163 (9,339) (12,881) (128,388) (10,736)
Interest expense from Dow................. (7,550) (6,055) (6,643) (5,805) (1,603)
Other income (expense), net............... 293 (328) 317 705 101
--------- --------- --------- ---------- --------
Net loss.................................. $ (3,094) $ (15,722) $ (19,207) $ (133,488) $ (12,238)
--------- --------- --------- ---------- --------
--------- --------- --------- ---------- --------
<CAPTION>
AT DECEMBER 31,
-------------------------------------------
1991 1992 1993 1994
--------- --------- --------- ----------
<S> <C> <C> <C> <C> <C>
SELECTED BALANCE SHEET DATA:
Working capital........................... $ 17,079 $ 16,517 $ 11,457 $ 16,787
Total assets.............................. 197,380 190,605 180,376 58,021
Net invested capital...................... 184,265 179,654 169,058 47,493
<CAPTION>
YEAR ENDED DECEMBER 31, PERIOD FROM JANUARY
------------------------------------------- 1, 1995 THROUGH
1991 1992 1993 1994 NOVEMBER 30, 1995(5)
--------- --------- --------- ---------- --------------------
<S> <C> <C> <C> <C> <C>
OTHER FINANCIAL DATA:
Earnings (loss) before interest and non-
cash charges (6)......................... $ 11,583 $ (2,184) $ (5,174) $ (59) $ 2,375
--------- --------- --------- ---------- --------
--------- --------- --------- ---------- --------
</TABLE>
--------------------------
(1) Includes the results of operations of Lamaur for the month of December 1995
following its acquisition by the Company.
(2) Includes an $11.0 million write-down of assets required to adjust the
carrying value of Lamaur to its net realizable value in connection with
Dow's decision to sell Lamaur. Future significant charges are not expected
as assets and liabilities were recorded at their estimated fair values at
the date of the Company's acquisition of Lamaur.
(3) In accordance with the rules of the Securities and Exchange Commission, all
common stock equivalents of the Company issued within one year of this
initial public offering have been considered as outstanding since the
inception of the Company using the treasury stock method (assuming a market
price of $9.00) even though they are anti-dilutive in loss periods. Common
stock equivalents issued prior to one year of this initial public offering
are excluded in loss periods as they are anti-dilutive.
(4) Reflects the conversion of the Dow Convertible Note into Series B
Convertible Preferred Stock (which will automatically occur upon
consummation of the Offering), the issuance of 956,000 shares of Common
Stock to fund the repayment of $8.0 million of debt (as described under "Use
of Proceeds"), and the related inclusion of dividends and reduction of
interest expense.
(5) Results of operations of Lamaur following its acquisition by the Company in
November 1995 are included in the results of operations of the Company for
the year ended December 31, 1995.
(6) Consists of net loss before interest expense, depreciation and amortization
and write-down of assets. It is presented to assist in understanding the
Company's operating results and in determining the Company's ability to meet
one of its loan covenants (debt service coverage ratio), calculated by
dividing net income plus depreciation, amortization and current interest, by
current interest plus scheduled repayments of principal of all indebtedness.
In addition, the exclusion of the asset write-downs results in data that
assists in understanding ongoing operating results because the write-downs
were non-recurring charges. However, this data is not intended to represent
cash flow or results of operations in accordance with generally accepted
accounting principles. See the Company's Financial Statements and Notes
thereto appearing elsewhere in this Prospectus.
17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
Selected Financial Data, the Unaudited Pro Forma Financial Information and the
financial statements and related notes thereto appearing elsewhere in this
Prospectus.
PRO FORMA AND HISTORICAL RESULTS OF OPERATIONS
The following table sets forth pro forma statements of operations
information in dollars and as a percentage of total net sales for each of the
two years ended December 31, 1995, and the three months ended March 31, 1995,
and historical statement of operations information in dollars and as a
percentage of total net sales for the three months ended March 31, 1996. The pro
forma information gives effect to the acquisition of Lamaur as if it had
occurred at the beginning of each period presented. The pro forma information is
not necessarily indicative of either future results of operations or results
that might have occurred if the acquisition had been consummated at the
beginning of each of the indicated periods.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, THREE MONTHS ENDED MARCH 31,
------------------------------------ -----------------------------------
PRO FORMA PRO FORMA PRO FORMA HISTORICAL
1994 1995 1995 1996
----------------- ---------------- ---------------- ----------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total net sales.......... $ 121,277 100.0% $117,766 100.0% $ 31,653 100.0% $ 28,480 100.0%
Cost of goods sold....... 69,764 57.5 71,395 60.6 19,554 61.8 17,954 63.0
--------- ------ -------- ----- -------- ----- -------- -----
Gross margin............. 51,513 42.5 46,371 39.4 12,099 38.2 10,526 37.0
Operating expenses....... 54,600 45.0 45,130 38.3 10,742 33.9 10,843 38.1
Write-down of assets..... 120,100 99.0 11,000 9.4 11,000 34.7 -- --
--------- ------ -------- ----- -------- ----- -------- -----
Operating loss........... (123,187) (101.5) (9,759) (8.3) (9,643) (30.4) (317) (1.1)
Other income (expense):
Interest expense..... (2,374) (2.0) (1,554) (1.3) (410) (1.3) (414) (1.4)
Other income......... 705 .6 101 -- 39 .1 8 --
--------- ------ -------- ----- -------- ----- -------- -----
Net loss................. $(124,856) (102.9)% $(11,212) (9.6)% $(10,014) (31.6)% $ (723) (2.5)%
--------- ------ -------- ----- -------- ----- -------- -----
--------- ------ -------- ----- -------- ----- -------- -----
</TABLE>
THREE MONTHS ENDED MARCH 31, 1996 (HISTORICAL) COMPARED TO THREE MONTHS ENDED
MARCH 31, 1995 (PRO FORMA)
Total net sales for the quarter ended March 31, 1996, were $28.5 million,
compared with pro forma sales of $31.7 million for the same period in the prior
year, a decline of 10.1%. Although the STYLE-Registered Trademark- line
experienced an increase in sales during the first quarter of 1996, this increase
was more than offset by decreases in PERMASOFT-Registered Trademark- sales and
contract manufacturing revenues. The new Lamaur management team believes that
the decline in PERMASOFT-REGISTERED TRADEMARK- sales is the result of an
unsuccessful 1994 marketing effort in which the PERMASOFT-REGISTERED TRADEMARK-
product line was reformulated and repackaged, causing confusion among customers.
This confusion, together with the substantial reduction in advertising support
for PERMASOFT-REGISTERED TRADEMARK- after the first quarter of 1995 and a change
in consumer preferences that resulted in a reduction in perm incidence, was
responsible for the decline in PERMASOFT-REGISTERED TRADEMARK- sales in 1995,
which has continued into 1996. Lamaur's new management has developed a strategy
intended to reverse the decline in PERMASOFT-REGISTERED TRADEMARK- sales that
includes increased advertising and an expanded focus on customers with
color-treated hair, a growing market segment. The higher contract manufacturing
revenues in the 1995 period compared to the 1996 period reflected significant
revenues from a one-time manufacturing project the Company performed for
DowBrands in 1995 while a new DowBrands plant was coming on-line. In addition,
1995 first quarter results reflected a significant order for a new product
launch by a contract customer.
Gross margin for the quarter ended March 31, 1996, decreased by $1.6
million, or 13.0%, as compared with pro forma gross margin for the same period
in 1995. Gross margin as a percentage of net sales was 37.0% for the first
quarter of 1996, as compared with pro forma gross margin of 38.2% during the
same period in 1995. The decrease in gross margin percentage in 1996 was due to
a change in product sales mix to lower margin products as a result of an
increase in sales of the lower margin STYLE-Registered Trademark- line and a
decrease in
18
<PAGE>
consumer retail purchases of the higher margin PERMASOFT-Registered Trademark-
product line. The Company believes its gross margin percentage in 1996 will be
comparable to the 1995 full year pro forma gross margin percentage as a result
of its emphasis on higher margin products such as SALON
STYLE-Registered Trademark-, the development of the Company's strategy to
reverse the decline in sales of PERMASOFT-Registered Trademark-, the Company's
highest margin product, and the Company's efforts to reduce raw material and
packaging costs.
Operating expenses of $10.8 million for the quarter ended March 31, 1996,
were relatively unchanged from the pro forma operating expenses of $10.7 million
for the same period in 1995. Operating expenses for the quarter ended March 31,
1996 reflect $0.5 million in marketing expenses for the aforementioned
PERMASOFT-REGISTERED TRADEMARK- advertising campaign as well as an increase of
approximately $0.2 million in allowances for doubtful accounts as a result of a
bankruptcy filing by a contract manufacturing customer. The Company expects that
increased marketing activities will result in substantial additional marketing
support expenses in the next two years, while the results of those activities,
if they are successful, may not result in proportional revenue increases in
those same period.
The $11.0 million write-down of assets by Dow in the first quarter of 1995
reflected a further adjustment in the carrying value of Lamaur to its net
realizable value in connection with Dow's decision to sell Lamaur. Future
significant changes are not expected as all assets and liabilities were recorded
at their estimated fair values at the date of the Company's acquisition of
Lamaur.
As a result of the foregoing factors, the operating loss for the quarter
ended March 31, 1996 was $0.3 million, compared with a pro forma operating loss
of $9.6 million in the same period in 1995. Excluding the asset write-down, pro
forma operating profit for the quarter ended March 31, 1995 would have been $1.4
million.
Interest expense was $0.4 million for each of the quarters ended March 31,
1996 and 1995.
As a result of the foregoing factors, the net loss for the three months
ended March 31, 1996 was $0.7 million, compared to a pro forma net loss for the
three months ended March 31, 1995 of $10.0 million.
YEAR ENDED DECEMBER 31, 1995 (PRO FORMA) COMPARED TO YEAR ENDED DECEMBER 31,
1994 (PRO FORMA)
Total net sales on a pro forma basis of $117.8 million for 1995 declined
2.9% compared to $121.3 million in 1994. Although the SALON
STYLE-Registered Trademark- product line and contract manufacturing experienced
sales growth, these increases were more than offset by decreases in the
PERMASOFT-Registered Trademark- and STYLE-Registered Trademark- product lines.
The decrease in PERMASOFT-REGISTERED TRADEMARK- sales in 1995 followed moderate
sales increases in 1994 after a heavily funded marketing campaign. As part of
that 1994 marketing effort, the PERMASOFT-REGISTERED TRADEMARK- product line was
reformulated and repackaged. However, in the view of the new Lamaur management
team, the reformulation and repackaging caused confusion among customers, which,
together with the substantial reduction in advertising support for
PERMASOFT-REGISTERED TRADEMARK- after the first quarter of 1995 and a change in
consumer preferences that resulted in a reduction in perm incidence, was
responsible for the decline in PERMASOFT-REGISTERED TRADEMARK- sales in 1995. As
a result, Lamaur's new management has developed a strategy intended to reverse
the decline in PERMASOFT-REGISTERED TRADEMARK- sales that includes increased
advertising and expanding its focus to customers with color-treated hair, a
growing market segment. Included in contract manufacturing were sales to
DowBrands, which increased by $2.2 million, or 11.3%. Sales to DowBrands
represented 18.2% of pro forma total net sales for 1995 compared to 15.9% in
1994.
Pro forma gross margin for 1995 decreased by $5.1 million as compared with
1994, or 10.0%. Gross margin as a percentage of pro forma total net sales was
39.4% in 1995, as compared with 42.5% in 1994. The decrease in gross margin
percentage was due to a change in product sales mix to lower-margin products, as
a result of a decrease in consumer retail purchases of the higher margin
PERMASOFT-Registered Trademark- product line, and increases in lower margin
contract manufacturing, as well as a greater emphasis on promotional activities,
which resulted in higher product costs. The decrease in gross margins was
partially offset by the higher margins provided by SALON
STYLE-Registered Trademark-, as well as a reduction of direct labor employee
benefit expenses in 1995 as a result of pro forma adjustments in the amount of
$874,000, related to the elimination of postretirement benefits and 401(k)
matching contributions, and $160,000, related to the reduction in the Company's
vacation benefits. The pro forma adjustments were made to reflect the Company's
decision to eliminate or reduce
19
<PAGE>
those benefits. Comparable adjustments are not included in the 1994 pro forma
gross margin. See note (1) in Notes To Unaudited Pro Forma Combined Statement of
Operations on page 15. The Company expects its gross margin percentage in 1996
to be comparable to the 1995 pro forma gross margin percentage as a result of
its emphasis on higher margin products such as SALON
STYLE-Registered Trademark-, the development of the Company's strategy to
reverse the decline in sales of PERMASOFT-Registered Trademark-, the Company's
highest margin product, and the Company's efforts to reduce raw material and
packaging costs.
Operating expenses on a pro forma basis for 1995 decreased to $45.1 million,
or 38.3% of pro forma total net sales, as compared to $54.6 million or 45.0% of
pro forma total net sales in 1994. The decrease was principally due to a
reduction in marketing expenses in 1995 from 1994 levels, which had been
increased in 1994 for the PERMASOFT-Registered Trademark- marketing campaign and
the introduction of a new product line, SALON STYLE-Registered Trademark-.
Operating expenses on a pro forma basis also decreased because of the reduction
in 1995 employee benefit expenses as a result of pro forma adjustments made by
the Company in the amount of $570,000 related to the elimination of
postretirement benefits and 401(k) matching contributions, and $105,000 related
to the reduction in the Company's vacation benefits. The pro forma adjustments
were made to reflect the Company's decision to eliminate or reduce those
benefits. Comparable adjustments are not included in the 1994 pro forma
operating expenses. See note (2) in Notes To Unaudited Pro Forma Combined
Statement of Operations on page 15.
The $120.1 million write-down of assets by Dow in 1994 was required to
adjust the carrying value of Lamaur to its net realizable value in connection
with Dow's decision to sell Lamaur. An additional write-down of $11.0 million
was recorded in 1995. Future significant charges are not expected as all assets
and liabilities were recorded at their estimated fair values at the date of the
Company's acquisition of Lamaur.
As a result of the foregoing factors, the pro forma operating loss for 1995
was $9.8 million, compared with the 1994 pro forma operating loss of $123.2
million. Excluding the asset write-down, pro forma operating income would have
been $1.2 million in 1995 and pro forma operating loss would have been $3.1
million in 1994.
Pro forma interest expense, which was $1.6 million for 1995, compared with
$2.4 million in 1994, represents interest on the indebtedness incurred in
connection with the Company's acquisition of Lamaur and expected average
borrowings during the periods.
As a result of the foregoing factors, the pro forma net loss for 1995 was
$11.2 million, compared with the 1994 pro forma net loss of $124.9 million.
HISTORICAL RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993 AND THREE MONTHS ENDED MARCH 31,
1996 AND 1995 FOR THE COMPANY
The Company was in a development stage and had no revenues until it
completed the acquisition of Lamaur in November 1995. Operating expenses of
$10.8 million were incurred in the three months ended March 31, 1996, compared
with $0.1 million in the three months ended March 31, 1995, and operating
expenses of $3.5 million were incurred in the year ended December 31, 1995,
compared with $0.6 million in the year ended December 31, 1994, and $1.6 million
in the period from April 1, 1993 (Inception) to December 31, 1993. The higher
operating expenses for 1995 and the first quarter of 1996 primarily reflect the
inclusion of Lamaur's operating expenses after its acquisition in late 1995.
Prior to the Lamaur acquisition, the Company's operating expenses were comprised
of marketing, administrative and other operating expenses incurred to support
the Company's technology development and research activities. The higher level
of expense in 1993 reflected a $1.0 million fee to Intertec Ltd., a limited
partnership controlled by the Company's Chairman of the Board, Chief Executive
Officer and principal stockholder, in consideration of the grant of an exclusive
license to use certain patented technology for cosmetic hair care applications.
See "Business -- Research and Development -- EHS Laboratories Technology." As a
result of the foregoing factors, the Company incurred a loss of $0.7 million in
the first quarter of 1996, compared with a
20
<PAGE>
loss of $0.1 million in the first quarter of 1995, and a loss of $1.4 million in
the year ended December 31, 1995, compared with a loss of $0.6 million in the
year ended December 31, 1994, and a loss of $1.6 million in the period from
April 1, 1993 (Inception) to December 31, 1993.
YEAR ENDED DECEMBER 31, 1994 COMPARED TO YEAR ENDED DECEMBER 31, 1993 FOR
LAMAUR
Total net sales for 1994 increased to $121.3 million from $112.0 million for
1993, an increase of $9.3 million, or 8.3%. This was attributable to the
increase in unit sales of PERMASOFT-Registered Trademark-, the introduction of a
new product line, SALON STYLE-Registered Trademark- and the increase in sales
volume of contract manufacturing as a result of increased orders from both
DowBrands and other customers. These increases were partially offset by
decreases in the net sales of Lamaur's Salon Division and the
STYLE-Registered Trademark- product line. The STYLE-Registered Trademark- line
experienced a sales decline in 1994 as a result of its competitors introducing
new products and increasing promotional activities in the price-value segment of
the market. Included in contract manufacturing sales were sales to DowBrands,
which increased by $2.7 million, or 16.0%. Sales to DowBrands represented 15.9%
of total net sales for 1994, compared to 14.8% in 1993.
Gross margins for 1994 increased by $8.6 million over 1993, or 20.9%, as a
result of increased sales volume. Gross margin as a percentage of total net
sales was 40.9% in 1994, as compared with 36.6% in 1993. This improvement
reflected an improved product mix toward higher margin products, resulting from
the introduction of SALON STYLE-Registered Trademark- and the positive effect of
an advertising campaign for PERMASOFT-Registered Trademark-. In addition, Lamaur
realized a full year of benefit from its cost reduction program implemented in
the latter part of 1993.
Operating expenses increased to $57.8 million or 47.7% of total net sales in
1994, compared to $53.9 million, or 48.1% in 1993. This was attributable to
increased marketing dollars for the advertising campaign to support the
PERMASOFT-REGISTERED TRADEMARK- reformulation and repackaging and the
introduction of SALON STYLE-Registered Trademark-. These increases were
partially offset by the benefits realized from the cost reduction program
described above.
The $120.1 million write-down of assets by Dow in 1994 was required to
adjust the carrying value of Lamaur to its net realizable value in connection
with Dow's decision to sell Lamaur. Dow acquired Lamaur, which was a public
company, in 1987 and recorded substantial goodwill, which represented the excess
of the purchase price over the fair value of the net assets acquired. Due to a
decline in market share of Lamaur's products, the value of Lamaur decreased
significantly subsequent to the acquisition by Dow, resulting in the charge
described above.
As a result of the foregoing factors, the operating loss for 1994 was $128.4
million compared with the 1993 operating loss of $12.9 million. Excluding the
asset write-down, the 1994 operating loss would have been $8.3 million.
Interest expense was $5.8 million for 1994, compared with $6.6 million in
1993. Lamaur's capital requirements were funded by Dow and Lamaur was charged
interest based upon its working capital. In addition, Lamaur was charged
interest by Dow for an amount related to the financing of Dow's purchase of
Lamaur.
As a result of the foregoing factors, the net loss for 1994 was $133.5
million, compared with the 1993 net loss of $19.2 million.
LIQUIDITY AND CAPITAL RESOURCES
Through late 1995, the Company financed all of its working and other capital
requirements from equity infusions and borrowings from certain of its
stockholders.
As a result of the Lamaur acquisition, the Company is leveraged and has
substantial debt service requirements and, following the Offering, will have
substantial preferred stock dividend requirements. At March 31, 1996, the
Company had approximately $23.0 million outstanding in long-term and short-term
debt, including approximately $14.3 million outstanding under the Norwest Credit
Agreement, $5.0 million outstanding under the Dow Convertible Note as part of
the purchase price of Lamaur, and $2.6 million
21
<PAGE>
representing credits accepted by Dow in connection with the acquisition to be
credited in quarterly installments toward future product purchases by Dow over a
two-year period. A substantial portion of the Company's cash flow will be
required for debt service and preferred stock dividend requirements. The
Company's principal sources of funds are borrowings under the Norwest Credit
Agreement.
The Norwest Credit Agreement is for three years, commencing November 1995,
and provides for a working capital line up to $14.0 million and a term loan of
$6.0 million which is amortized over five years with estimated annual principal
installments of $1.2 million. The working capital balances and term loan are
payable in full in November 1998. The interest rates on these loans are variable
and are tied to Norwest Bank's base rate. The working capital line and term loan
with Norwest are secured by all of the assets of the Company and impose certain
operating and financial restrictions such as minimum income requirements,
minimum net worth and debt service and leverage ratios (as defined in the
Norwest Credit Agreement). Such restrictions will affect the Company's ability
to incur additional indebtedness and will limit the amount of capital
expenditures. See "Risk Factors -- Leverage, Substantial Debt Service, Preferred
Stock Dividend Requirements and Related Financial and Operating Restrictions."
Upon the Offering, the Dow Convertible Note will be converted into 763,500
shares of Series B Convertible Preferred Stock, the holders of which are
entitled to dividends ($400,000 annually) which will accrue whether or not
declared and will be cumulative to the extent not paid.
The Company has had no significant capital expenditures since its date of
inception. Capital expenditures for Lamaur were approximately $1.1 million, $0.9
million and $2.5 million for the years ended December 31, 1995, 1994 and 1993,
respectively. The Company's capital expenditures for 1996 are anticipated to be
approximately $1.5 million.
Accounts receivable at March 31, 1996 increased $3.4 million from December
31, 1995, principally due to higher sales in March 1996 compared to December
1995.
At December 31, 1995, the Company had deferred tax assets of $1.3 million,
consisting primarily of net operating loss carryforwards. Because the Company's
Lamaur division experienced cumulative losses over the last nine years,
management believes that it is more likely than not that sufficient taxable
income will not be generated in future periods to utilize the deferred tax
assets. Therefore, at December 31, 1995 a valuation allowance of $1.3 million
was established.
The Company intends to use $8.0 million of the net proceeds of this Offering
to reduce the indebtedness outstanding under the Norwest Credit Agreement. The
indebtedness expected to be repaid currently bears interest at the annual rate
of 9.75%, which is 1.25% over Norwest's current base rate. The Company may from
time to time increase its borrowings under its revolving line of credit, as
needed for its working capital and general corporate requirements. The remaining
net proceeds from this Offering (including any proceeds received from the
exercise of the over-allotment option) are expected to be utilized for general
corporate purposes, including principally expanding Lamaur's marketing efforts
by introducing new products (approximately $4.5 million), supporting EHS
Laboratories' ongoing research and development activities directed towards the
completion of its first prototype advanced hair styling products (approximately
$2.0 million), and the restaging of certain existing products (approximately
$1.0 million). The balance will be used for working capital.
Management believes that the Company's cash on hand, anticipated cash flow
from operations and the amounts available to the Company under the Norwest
Credit Agreement will be sufficient for its working capital, capital
expenditures and debt service and preferred stock requirements for at least the
next 24 months. See "Use of Proceeds."
22
<PAGE>
BUSINESS
OVERVIEW
The Company develops, formulates, manufactures and markets personal hair
care products, consisting of shampoos, conditioners, hair sprays, permanent wave
products and other styling aids, for both the consumer and professional hair
care markets. These products are distributed through its recently-acquired
Lamaur division to consumer retail outlets, professional salons and specialty
shops. The Company also contract manufactures a variety of aerosol sprays and
other products. The Company believes its Lamaur division was among the ten
largest manufacturers in the United States in 1995 (based on domestic revenues)
in three categories of hair care products -- shampoos, conditioners and styling
aids. The Company's EHS Laboratories division is engaged in the early stages of
research and development with respect to a new hair styling concept. Based on
patented technology licensed by the Company from an affiliate, the product is
intended to combine electronics and chemicals to style, color and condition hair
quickly, without the damaging side effects often experienced with most
chemical-based hair styling products.
In November 1995, the Company acquired Lamaur for an aggregate acquisition
cost of approximately $30.2 million, of which approximately $13.7 million was
paid in cash, $8.5 million in Series A Convertible Preferred Stock, $5.0 million
in the form of the Dow Convertible Note, and $3.0 million in credits toward
future product purchases by Dow. The assets and operations of Lamaur had
previously constituted the Personal Care Division of Dow. Through the issuance
of the Convertible Preferred Stock, Dow received an equity interest in the
Company (17.3% after giving effect to this Offering). Lamaur has been a leading
domestic producer and marketer of a broad range of hair care products for over
60 years and was an independent publicly-traded company, listed on the New York
Stock Exchange, until its acquisition by Dow in 1987 for approximately $183.0
million. The purchase price paid by Dow in 1987 reflected Lamaur's market
valuation at the time and the existence of a competing bid. The Company's
management believes that the subsequent decline in Lamaur's value was caused by
Dow's decision to shift Lamaur from its traditional marketing-driven operations
to one based on Dow's chemical research and development capabilities.
Lamaur is a leading domestic producer and marketer of a broad range of hair
care products. Its product lines are sold through consumer retail outlets by its
retail division (the "Retail Division") under the premium-priced
PERMASOFT-Registered Trademark-, mid-priced SALON STYLE-Registered Trademark-
and value-priced STYLE-Registered Trademark- brand names. Each line contains a
wide assortment of shampoos, conditioners and styling products positioned
towards distinct consumer segments. In addition, a full line of high quality,
premium-priced products including shampoos, conditioners, hair sprays, perms and
a variety of styling aids are sold to the professional salon and specialty shops
market by its salon division (the "Salon Division") under the NUCLEIC
A-Registered Trademark-, APPLE PECTIN-Registered Trademark- and
VITA/E-Registered Trademark- brand names and the recently introduced PATIVA-TM-
brand name. Sales by the Retail Division, which historically have accounted for
between 62% and 70% of Lamaur's total revenues, are made to mass merchandisers,
food stores, drug stores and others by a combination of the Company's direct
sales force and a network of independent brokers. Sales by the Salon Division to
the professional market, including sales to distributors who then sell to
professional salons and specialty outlets, are made directly by the in-house
sales force, and historically have accounted for between 14% and 17% of Lamaur's
total sales. Lamaur also manufactures certain products, principally aerosol
sprays, on a contract basis for third parties. Those activities generally have
accounted for approximately 16% to 23% of Lamaur's sales and generate lower
margins than its other sales.
The Company is engaged through its EHS Laboratories division in technology
development and research activities related to hair styling applications of the
Company's licensed proprietary technology. The Company's objective is to develop
products that will apply the Company's technology to electronically style, color
and condition hair quickly, and without the often damaging side effects
experienced with the harsh chemicals and heat treatments associated with most
traditional hair care products. The Company has internally conducted preliminary
laboratory tests involving the reaction of human hair to electromagnetic signals
and has assisted its affiliated licensor in obtaining a United States patent
that the Company believes provides broad coverage, and hence significant
protection, for its licensed proprietary technology. The Company does not expect
to introduce any prototype product before the second half of 1998 at the
earliest.
23
<PAGE>
To date, the Company's activities have included market research, such as
obtaining and reviewing material and data describing market size and
demographics of hair care products markets throughout the world and current and
future competitive trends, as well as communicating with various companies
engaged in the hair care products industry. The Company's business strategy in
part reflects the results of this market research. The Company also introduced
its licensed proprietary technology and development strategy to selected
companies in the hair care industry to form a foundation for possible future
cooperative efforts. Substantial additional steps will need to be taken before
the Company can commercially introduce any ELECTRONIC CHEMISTRY-TM- products.
The Company anticipates that some of these steps will be taken internally and
some will be undertaken pursuant to relationships with third parties.
INDUSTRY OVERVIEW
Worldwide retail sales of hair care products (excluding hair care
appliances) in 1994 were approximately $25.0 billion, of which approximately
$4.5 billion represented sales in North America. It is estimated that by 2000,
worldwide retail sales of hair care products will reach approximately $32.8
billion, with approximately $5.6 billion attributable to sales in North America.
There have been changes in consumers' buying patterns toward higher priced
shampoos and conditioners and specialty niche products. In addition, the cost of
goods sold in the hair care products market has been rising steadily for several
years; however, intense competition has prevented manufacturers and distributors
from passing those increases on to customers. The result has been an erosion in
profit margins among the industry's competitors generally, although this effect
has been less pronounced in certain market niches that are characterized by
premium pricing and fewer competitors. Consequently, the hair care industry,
despite its size and growth, has been experiencing both a consolidation in the
number of competitors and a globalization in the marketing efforts of the
remaining competitors. The Company believes that, currently, five companies
(Unilever N.V., The Procter & Gamble Company, Alberto-Culver Company, The
Gillette Company and Johnson & Johnson) account for approximately 60% of
worldwide sales in the hair care products industry.
STRATEGY
The Company believes the most significant trends currently affecting the
hair care industry that will continue to influence its competitive planning for
both the retail and professional segments of the market are an increase in the
marketing impact of certain types of consumer retail outlets, particularly mass
merchandisers and changes in consumers' buying patterns towards higher priced
shampoos and conditioners and specialty niche products. Competition in the
professional segment of the market is also influenced by a company's ability to
maintain a clear separation of brands between those directed at the professional
market and those directed at the consumer retail market, and substantial contact
with and service to the professional customer. Among the competitive factors the
Company faces are the need to introduce and promote (i) high-end products in the
professional market, (ii) both higher-quality, professional-type products and
more natural products in the retail market, and (iii) line extensions of styling
aids.
The Company's objective is to become a leading worldwide developer and
marketer of advanced hair care products through a strategy that combines the
stability provided by Lamaur's established hair care products business, which
the Company intends to return to profitability, and the growth opportunities
available through acquisitions, strategic relationships and the development of
EHS Laboratories' technology. To implement this strategy, the Company has
installed a new senior management team with significant experience in the
personal care products industry. Key features of the Company's strategy include
emphasizing marketing and sales efforts while maintaining the Company's strong
production base and research capabilities, in addition to refining the
cost-cutting program introduced by prior management. The Company plans to
increase its market share by expanding its national marketing program,
broadening its base of exclusive professional market distributors for its
PATIVA-TM- line of products, and increasing sales to Mexico, Canada and other
international markets. Since January 1, 1996, the Company has obtained
significant contract manufacturing orders from new customers, with deliveries
commencing in the second quarter, and intends to continue to increase the level
of its contract manufacturing activities by obtaining additional orders from
both existing and new customers. In
24
<PAGE>
addition, the Company intends to explore opportunities for acquisitions or
strategic relationships that may enable it to expand its hair care products line
or diversify its business into other segments of the personal care market.
Lamaur experienced 30 consecutive years of profitable operations immediately
prior to its acquisition by Dow in 1987. Although Lamaur experienced net losses
in each year since becoming a division of Dow in 1987, it experienced operating
earnings (before reflecting interest to Dow, goodwill charges and taxes) in
fiscal years 1989, 1990 and 1991. The Company's immediate goal is to return
Lamaur to profitability by the end of 1996. In order to achieve this objective,
the Company will return the principal focus of Lamaur's operations to sales and
marketing. In that regard, the Company believes it will need to increase its
share of the retail segment of the market, in part through an increase in
advertising and promotions, and also increase the number of exclusive
distributors for its professional products, while maintaining its existing
network of distributors. The costs of expanding the Company's retail market
share are expected to be substantial, both during the remainder of 1996 and
thereafter.
PRODUCTS
The Company formulates and manufactures a broad range of hair care product
lines, consisting of approximately 90 products, marketed under several distinct
brand names. Product lines sold through consumer retail outlets include
PERMASOFT-Registered Trademark-, SALON STYLE-Registered Trademark-, and
STYLE-Registered Trademark- brand names that are widely recognized by retailers
and consumers. Each line contains a broad assortment of shampoos, conditioners
and styling products and is positioned towards a distinct consumer segment.
Product lines used by stylists and sold by salons and beauty supply stores
throughout the United States and in Canada include shampoos, conditioners, hair
sprays, perms and a variety of styling aids sold under the PATIVA-TM-, NUCLEIC
A-Registered Trademark-, APPLE PECTIN-Registered Trademark- and
VITA/E-Registered Trademark- brand names. In addition, Lamaur also manufactures
products, principally aerosol sprays, under contract for third parties.
The following table sets forth the Company's principal brands and products
sold within each brand:
RETAIL BRANDS
<TABLE>
<CAPTION>
BRAND SHAMPOOS AND CONDITIONERS STYLING AIDS AND PERMS
-------------------------------------- ---------------------------------------- ----------------------------------------
<S> <C> <C>
PERMASOFT-Registered Trademark-....... Revitalizing Shampoo, Moisturizing Hair Sprays (aerosol and nonaerosol),
Shampoo, Extra Body Shampoo, Shampoo Mousse, Gel, Frizz Control Cream, Shine
Plus Conditioner, Revitalizing Treatment, Conditioning Foam,
Conditioner, Moisturizing Conditioner, Revitalizing Spray
Extra Body Conditioner, Deep
Reconditioning Treatment, Moisturizing
Mist Conditioner
SALON STYLE-Registered Trademark-..... Moisture Potion-Registered Trademark- Hair Sprays (aerosol and nonaerosol),
Shampoo, Therapy Shampoo, Strengthening Spray Gel, Vitafixx-TM- Spritz, Body
Shampoo, NutriShine Shampoo, Hydration Boost-Registered Trademark- Mousse,
Conditioning Shampoo, Botanical Defrizz 'N Shine-Registered Trademark-
Reconstructing Conditioner, Moisture Hydrating Cream
Potion-Registered Trademark-
Conditioner, Detangling Conditioner, Pro
Mist Leave-On Conditioner, Hydro
Balanced Hair Masque
STYLE-Registered Trademark-........... Moisturizing Shampoo, Extra Body Hair Sprays (aerosol and non-aerosol),
Shampoo, Regular Shampoo, Strawberry Gel, Mousse, Dry
Shampoo, Nourishing Shampoo, Coconut & Style-Registered Trademark- Hair Spray
Papaya Shampoo, Moisturizing for Men (aerosol)
Conditioner, Extra Body Conditioner,
Regular Conditioner, Strawberry
Conditioner, Deep Conditioning
Conditioner, Coconut & Papaya
Conditioner
</TABLE>
25
<PAGE>
<TABLE>
<CAPTION>
SALON BRANDS
BRAND SHAMPOOS AND CONDITIONERS STYLING AIDS AND PERMS
-------------------------------------- ---------------------------------------- ----------------------------------------
<S> <C> <C>
PATIVA-TM-............................ Curl Cleanse-Moisturizing Shampoo, Mousse, Spritz, Design Creme,
Revitalizing Volumizing Conditioner Alternative Wave (Normal), Alternative
Wave (Tinted), Sprae Concentrate Hair
Spray
NUCLEIC A-Registered Trademark-....... Body Plus-Registered Trademark- Shampoo, Botanical-TM- Hair Spray, Gel
Proteplex-Registered Trademark- Shampoos
and Conditioner
APPLE PECTIN-Registered Trademark-.... Shampoo and Conditioner, Moisturizing Moisturizing Hair Spray, Acid Perm,
Shampoo, ScentSates-TM- Shampoos and Apple Pectin Plus-Registered Trademark-
Conditioners, Apple Pectin Perm, Ten-Minute Wave, Ultra Hold
Plus-Registered Trademark- Shampoo and Mousse, Styling Creme
Conditioner in One
VITA/E-Registered Trademark-.......... Shampoo, Conditioners Perm, Hair Spray, Ultrahold Hair Spray,
Unscented Hair Spray, Maximum Hold Hair
Spray, Ultra-hold Concentrate Hair Spray
Other Salon Products.................. Natural Man-TM- Conditioning Shampoo, Natural Man-TM- Styling Creme, Natural
Bone Marrow-Registered Trademark- Man-TM- Hair Spray, Natural
Conditioners Woman-Registered Trademark- Hair Spray,
CO-A-Registered Trademark- Perm, CO-A
Kinetics-Registered Trademark- Perm,
Lamaur Inception-Registered Trademark-
Thio-Free Perm,
Strata-Registered Trademark- Perm, Gamma
pHactor-Registered Trademark- Wave Set
and Concentrate,
Beauti-Lac-Registered Trademark- Hair
Spray, Stylac-Registered Trademark- Hair
Spray, Sprayage-Registered Trademark-
Hair Spray, Body Plus Mousse,
Axiom-Registered Trademark- Perm, Body
for Sure-Registered Trademark- Perm
</TABLE>
PERMASOFT-Registered Trademark-, which is the Company's "high-end" retail
product line, was developed to meet the needs of a large segment of consumers
who use permanent wave products. As a result of a lower incidence of perm usage
(a decline in usage among women from approximately 54% in 1990 to approximately
34% in 1994) and competition from others developing products for this market
segment, PERMASOFT-Registered Trademark- sales have declined 46% from 1991 to
1995. The Company has developed a strategy intended to reverse the decline in
PERMASOFT-Registered Trademark- sales which includes increased advertising and
expanding the product line's focus to customers with color-treated hair, a
growing market segment.
SALON STYLE-Registered Trademark- was launched in 1994 as a line of
"mid-priced" shampoos and conditioners positioned as "Salon Quality at a
Fraction of the Price." The line was successfully extended in late 1994 with the
addition of styling products.
STYLE-Registered Trademark- is the Company's "value priced" brand, intended
for use by the entire family. The brand has shown a significant turnaround the
last six months of 1995, with unit sales increasing by 47% compared with the
comparable period in 1994, after four years of declining sales.
PATIVA-TM- is a line of professional salon products anchored by an
innovative wave technology that eliminates the neutralizer step. Launched in
March 1995, this line provides the Salon Division with a "higher-end" brand.
26
<PAGE>
The following table sets forth certain information concerning the Company's
net sales by division in each of the last five fiscal years:
<TABLE>
<CAPTION>
NET SALES BY DIVISION FOR YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------------------------------------
1991 1992 1993 1994 1995
-------------------- -------------------- -------------------- -------------------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Retail.................. $ 95,734 69.7% $ 85,076 68.4% $ 74,215 66.2% $ 80,669 66.5% $ 73,256
Salon................... 20,183 14.7 18,231 14.7 18,465 16.5 16,928 14.0 16,947
Contract
Manufacturing (1)...... 21,377 15.6 20,981 16.9 19,351 17.3 23,680 19.5 27,563
--------- --------- --------- --------- --------- --------- --------- --------- ---------
Total............... $ 137,294 100.0% $ 124,288 100.0% $ 112,031 100.0% $ 121,277 100.0% $ 117,766
--------- --------- --------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- --------- --------- ---------
<CAPTION>
<S> <C>
Retail.................. 62.2%
Salon................... 14.4
Contract
Manufacturing (1)...... 23.4
---------
Total............... 100.0%
---------
---------
</TABLE>
------------------------------
(1) Contract manufacturing sales included sales to DowBrands of $15.3 million,
$18.1 million, $16.6 million, $19.3 million, and $21.4 million in each of
the years ended December 31, 1991, 1992, 1993, 1994 and 1995, respectively.
MARKETING AND DISTRIBUTION
The Company's consumer retail sales are made to mass merchandisers, food
stores, drug stores and other retail outlets, as well as to wholesalers who
service retail outlets, resulting in the Company's products being sold in more
than 60,000 retail outlets in North America. Sales for the Retail Division are
carried out through a combination of the Company's own sales force and
independent brokers. Salon Division products are distributed to professional
salons and specialty shops through a network of independent distributors served
by the Company's sales force.
The Company currently maintains more than 1,800 active customer accounts and
no customer other than DowBrands and Wal-Mart accounted for more than 10% of
Lamaur's total net sales in any of the last three years. DowBrands accounted for
15%, 16% and 18% of Lamaur's total net sales in each of 1993, 1994 and 1995,
respectively, and Wal-Mart accounted for 19%, 18% and 18% of Lamaur's total net
sales in each of 1993, 1994 and 1995, respectively. The loss of sales to
DowBrands, Wal-Mart or other significant customers could have a material adverse
effect on the business and operations of the Company. There are no contractual
obligations from any customers (including DowBrands) to make continuing
purchases from the Company, although DowBrands has agreed to purchase all of its
future requirements for certain products from the Company for a two-year period.
The Company believes that growth in its business is achieved in part by
gaining market share at the expense of competitors. Accordingly, the Company
promotes sales of its products utilizing substantial advertising, consumer
promotions and merchandising support programs. During the years ended December
31, 1993, 1994 and 1995, Lamaur's marketing support expense was approximately
$23.8 million, $31.4 million and $23.8 million, respectively. The Company's
strategy contemplates a more aggressive marketing program under the direction of
its new management. The Company's marketing activities include direct and
cooperative advertising, consumer and trade promotions and, with respect to the
Salon Division, training programs, distribution and promotional sales and
promotional seminars. Management believes it can broaden its base of exclusive
distributors for its PATIVA-TM- line of products, and thereby increase Salon
Division revenues and the Company's profitability, without adversely affecting
its existing network of distributors.The Company also invests in research and
development for new products, in product line extensions of its established
brand names and in periodic restaging of established products.
The Company believes there is substantial customer recognition for its major
brand names and that consumer loyalty positively affects sales. Consequently, it
seeks to maintain its brand name recognition through (i) national and local
television, print and radio advertising, (ii) promotions and coupons, and (iii)
continually reviewing and improving its products and packaging. The Company
believes the expenditures associated with those activities, which are expensed
in the period in which they are incurred, provide long term benefits to the
Company to the extent they sustain or extend consumer awareness of its products.
Furthermore, the Company believes that increased advertising for one brand name
or product often enhances consumer recognition of its other products.
27
<PAGE>
In view of the intensely competitive nature of the personal hair care
products industry, new product introductions require proportionally higher costs
relative to sales than expenditures for well-established products during the
introductory period. While those expenditures materially impact results of
operations in the particular period in which they are incurred, they assist in
the Company's growth beyond that period if the new product is ultimately
successful.
The Company anticipates incurring increased expenditures in connection with
its marketing activities in the next two years, and expects to utilize a
substantial portion of the net proceeds of this Offering to fund those
activities. See "Use of Proceeds." These activities include (i) expanding its
product mix by introducing new products, (ii) restaging certain other existing
products, and (iii) enhancing the Company's marketing efforts, particularly in
connection with its commencement of activities outside the United States. The
Company plans to increase retail sales in Mexico and Canada during the remainder
of 1996 and in 1997, and is considering expansion into other international
markets. Expanding the Company's international market share in Mexico, Canada
and elsewhere will require the Company to address competitive factors similar to
those it faces in the United States, as well as to comply with any local
regulatory requirements. See "Business -- Competition."
RESEARCH AND DEVELOPMENT
The Company continuously engages in the development of new products and
improvements to its existing formulations and maintains extensive laboratory
facilities for those purposes. Lamaur relies principally on the experience of
its staff in connection with formulating new products. In accordance with new
management's strategy, the Company's research and technical staff of
approximately 28 persons works closely with the Company's sales and marketing
groups to discern changes in consumer tastes and new product developments in the
industry. The Company believes its research and development efforts are enhanced
materially by the availability of its on-site salon, which is fully equipped to
permit the testing of new products and improvements in conditions that simulate
those actually encountered by consumers. The Company maintains extensive
laboratory, quality assurance and quality control facilities. Examples of
products recently developed by Lamaur include (i) the SALON
STYLE-Registered Trademark- product line, a complete consumer-oriented line of
hair care products introduced in 1994 for consumers desiring salon quality at a
fraction of the price, and (ii) PATIVA-TM- for the professional salon and
specialty market, introduced in 1995.
EHS LABORATORIES' TECHNOLOGY
The Company believes that the absence of any fundamental change in the
technology underlying hair care products for several decades, combined with the
substantial global market for hair care products, presents an opportunity for
new technologically oriented products. In the Company's view, electronically
controlled and managed hair styling products that use chemicals and provide
quick and convenient application can gain widespread consumer acceptance if they
are successfully developed and properly marketed. The Company's strategy is to
develop a line of advanced hair styling products and, if it is successful in
doing so, eventually to compete significantly on that basis. There can be no
assurance, however, that the Company will be able to develop such advanced hair
styling products or, if it does, that they will be commercially successful. See
"Risk Factors -- Risks Associated with ELECTRONIC CHEMISTRY-TM- Product
Development."
The Company's current objective is to develop electronic appliances based on
EHS Laboratories' licensed proprietary technology that will permit users to
style, color and condition their hair, on a "temporary" or "permanent" basis,
without the often damaging side effects experienced with the harsh chemicals and
heat treatments associated with most traditional hair care products. The harsh
chemicals currently used in such products are in a family of compounds known as
mercaptans, which are often damaging to human hair and skin. The Company's
proposed ELECTRONIC CHEMISTRY-TM- appliances are expected to use low
concentrations of a family of alcohol-based compounds that are generally known
not to adversely affect human hair and skin. Although the Company intends to
develop applications of its technology that will perform the same basic
processes as have been applied for many years to the treatment of hair by
traditional methods, the Company believes products utilizing its technology, if
successfully developed, will perform these processes more quickly and safely
than traditional products. EHS Laboratories' proprietary technology is based
upon the fact that (i) the chemical and physical properties of protein chains
and certain molecular bonds are
28
<PAGE>
instantly altered in the presence of an electromagnetic signal delivered at
specific resonance frequencies (the frequencies being determined by the
particular type of molecular bond being treated and the substances in which
those molecules are located), and (ii) the alterations stop instantly when the
electronic signal stops. The applying of an electromagnetic signal is expected
to be accompanied by the application of chemicals and/or mechanical stress to
effect the desired structural or cosmetic changes in the hair. The Company
refers to its technology as "Resonance Frequency Transfer" ("RFT") technology.
The Company anticipates that, if it is successful in achieving its current
development and engineering design objectives, its principal product will be an
electronic appliance that will include three basic components. The first
component will be a control module that will contain the power source,
microprocessor and control software responsible for inducing and managing the
electronic signal and chemical delivery systems. The second component will be a
delivery system that will contain both a liquid cartridge holder and a liquid
dispersion system. The third component is expected to consist of disposable and
replaceable cartridges, each of which would contain consumable chemical styling,
coloring and conditioning agents. No determination as to the manufacturing
source for the appliance has been made, nor is one expected to be selected for
some time.
EHS Laboratories' activities have been primarily directed towards conducting
early-stage research with respect to the reaction of hair samples to
electromagnetic signals. Substantial additional research and development will be
required before any prototype product containing its licensed technology could
be delivered, and the Company believes that the earliest any prototype product
might be introduced would be the second half of 1998, at the earliest. These
steps will include research, development and design of the electronic and
chemical components, developing a functional prototype, product engineering,
obtaining any required regulatory approvals, field trials, and, if all of the
foregoing are successfully completed, manufacturing and distribution.
The timing of introduction of its first commercial product will depend on
the time required to obtain any required regulatory approvals. See "Business --
Government Regulation." The wide range of research, development and design
activities that remain to be undertaken include continuing basic research
regarding hair morphology (form and structure) and its reaction to
electromagnetic signals at various frequencies, research concerning the
application of chemicals to hair treated by RFT technology, the development of
the control module, the delivery system, the cartridges and their related
electronic and mechanical controls, circuitry, software and interfaces, and the
overall design of the appliance. The Company expects to conduct certain of those
activities directly. Other activities will be conducted by firms with whom the
Company will seek joint venture or other strategic alliances or licensing
arrangements. The Company has entered into a technical assistance program with
Samsung pursuant to which Samsung may elect (but is not obligated) to
participate with the Company in joint development of specialized components and
production prototypes of the control modules and delivery systems, as well as
the initial design of the appliance.
The agreement with Samsung provides for the Company to share the results of
its research and development program with Samsung, for Samsung to evaluate the
Company's technical development program on the basis of determining the ability
to manufacture components and end user products, and for Samsung to participate
in periodic technical reviews. Upon completion and delivery of a functional
prototype by the Company which is approved by Samsung's engineers, Samsung may
elect to produce five samples for field testing by the Company. During the term
of the Agreement, Samsung has the exclusive right to enter into a license
agreement for the manufacture of the Company's products. If Samsung requests
that a manufacturing license arrangement be developed, the Company and Samsung
have agreed to negotiate the terms of the license in good faith. Unless Samsung
is then fabricating five samples or the parties are then negotiating the terms
of the license arrangement, the agreement and Samsung's exclusive right to enter
into a license agreement may be terminated by either party on 30-days' notice,
and will terminate in September 1996. The Company anticipates extending the
agreement beyond September 1996 on the same terms as presently in effect.
The Company believes that its agreement with Samsung has and will continue
to provide a framework for discussing and guiding the initial design,
development and testing of the appliance and its components,
29
<PAGE>
and is consistent, at this early stage of development, with its strategy of
licensing to third parties certain aspects of product design and development. As
the Company is not obligated to continue with Samsung should it not exercise its
right of first refusal, the Company believes its current arrangement with
Samsung will not discourage other potential parties from dealing with the
Company, although there can be no assurance in that regard. The Company believes
that it will also seek strategic relationships with up to three established
chemical products concerns for the purpose of developing suitable chemical hair
treatment liquids that can be utilized in the application of its RFT technology.
EHS Laboratories has conducted most of its research and development
activities to date through internal laboratory testing and independent
consultants, principally SRI International. The Company expects that hair
morphology research will continue to be conducted by the Company in conjunction
with TRI/ Princeton, an industry-funded and sponsored laboratory facility
engaged in research projects relating to certain materials and their
characteristics. The Company intends to perform additional research and
development work in connection with the RFT technology at its Fridley, Minnesota
laboratories, although it expects it will continue to utilize outside consulting
and laboratory services to conduct research and development activities. The
Company anticipates expending an additional $2.0 million on EHS Laboratories
research and development activities over approximately the next three years.
MANUFACTURING AND SUPPLY
LAMAUR OPERATIONS. All the Company's manufacturing, packaging and
warehousing operations are located in a 438,000 square foot facility in Fridley,
Minnesota. See "Business -- Properties."
The production area comprises 135,000 square feet and includes formula
compounding areas, quality control laboratories, multiple fully-automated, high
speed aerosol and liquid filling lines and state-of-the-art packaging
facilities. The compounding or mixing department utilizes a combination of
manual and fully-automated batch processing systems. A portion of the aerosol
batching is controlled by an automated computer-driven blending system which has
significantly improved efficiencies and product integrity. The high speed
fully-automated packaging equipment used for both liquid filling and aerosol
lines runs at speeds of up to 300 containers per minute. The Company believes it
is an industry leader in fully automating its production facilities. The Company
has substantial excess production capacity, which it currently intends to
utilize in connection with any expansion of its contract manufacturing
activities.
The Company maintains a strict internal control system to monitor the
quality of its products. The quality control laboratory is well equipped and
capable of conducting both micro and analytical testing. The Company also
maintains product liability insurance at levels it believes to be adequate.
Raw materials used by the Company are principally alcohol, surfactants,
fragrances, propellants and a wide variety of packaging materials and compounds
including containers such as aerosol cans, cardboard boxes and plastic
containers, container caps, tops, valves and labels, all of which are purchased
from outside sources. The Company's principal raw materials and packaging
components are available from several domestic suppliers and it is not dependent
on the availability of supplies from any single source. While at times the hair
care industry has experienced a shortage of raw materials of the types essential
to the Company's business, because the Company has long-established supplier
relationships and has developed alternative raw material substitutes, it does
not anticipate any difficulty in obtaining adequate supplies of raw materials to
meet its needs. Similarly, while the industry has from time to time experienced
raw material cost increases, the Company believes it has been and remains able
to purchase its requirements at competitive prices from sources that are readily
available in the vicinity of the Fridley, Minnesota, facility.
The Company uses tank railcars to transport certain high volume raw
materials. Trucks are used to transfer smaller volume raw material requirements
as well as packaging components such as aerosol cans, plastic bottles and caps,
and cardboard shipping containers. A separate tank farm for above-ground bulk
storage of chemicals and aerosol propellants is located adjacent to the plant.
The Company maintains inventory of raw materials and packaging materials as
well as certain finished goods in its on-site warehouse that comprises 265,000
square feet. Finished inventory generally is warehoused for distribution
throughout the United States at the Company's plant, but products produced for
30
<PAGE>
third parties are immediately released to third party warehouses and do not
remain on the Fridley site as inventory. As many as twelve over-the-road truck
trailers can be loaded and unloaded in the plant's warehousing and shipping area
at one time.
CONTRACT MANUFACTURING. Contract manufacturing of household cleaning and
hair care aerosol sprays and liquid products for others, particularly with
respect to the production of aerosol spray products utilizing the Company's
automated high speed production lines, has contributed 17% or more to Lamaur's
sales in each of the last three years. Since the beginning of 1996, the Company
has obtained significant new contract manufacturing orders from new customers,
with deliveries commencing in the second quarter of 1996. From January 1, 1996,
through May 1, 1996, the Company had received contract manufacturing orders
aggregating approximately $14.68 million, of which approximately $500,000
represented orders from two new customers, compared with contract manufacturing
orders received aggregating approximately $13.80 million, of which none
represented new customer orders, in the comparable period in 1995. The Company
recognizes revenues from such orders only upon shipment, and there can be no
assurance when or if all of the orders received in early 1996 will result in
revenue. In connection with the Lamaur acquisition in November 1995, the Company
and DowBrands entered into a two-year agreement (with two additional one-year
extensions at Dow's election) pursuant to which the Company will continue to
serve as DowBrands' sole supplier of certain household cleaning products,
subject to the Company maintaining competitive pricing and delivery schedules.
The Company believes the terms of that agreement are no less favorable to the
Company than those that could be obtained from unaffiliated third parties.
GOVERNMENT REGULATION
The Company's manufacturing and packaging operations are subject to a wide
range of federal, state and local regulations. These regulations include the
applicable cosmetic purity and labeling requirements prescribed by the federal
Food, Drug and Cosmetic Act, the applicable labeling provisions of the Fair
Packaging and Labeling Act, the discharge, handling and disposal of hazardous
wastes regulations contained in applicable environmental laws, and the plant and
laboratory safety requirements of various applicable occupational safety and
health laws. Existing and future aerosol-based products are also expected to be
subject to state and, possibly, federal standards relating to permissible levels
of volatile organic compounds. The Company does not expect that compliance with
those standards will adversely affect its revenues or costs. The Company is also
subject to federal regulations concerning the content of Lamaur's advertising,
trade practices and certain other matters.
A Phase I environmental assessment of the Fridley facility was performed in
late 1995. No environmental pollution was identified. The Company is not aware
of any environmental pollution or liabilities arising out of any past or present
activities of either Lamaur or the Company. Additionally, DowBrands Inc. has
agreed, for a period of eight years (but only until May 15, 1996, with respect
to asbestos related matters, if any) to indemnify the Company against
environmental liabilities in excess of $150,000 arising at the Fridley facility
from events that occurred prior to the Company's acquisition of Lamaur.
The development and initial marketing of the Company's ELECTRONIC
CHEMISTRY-TM- products will require careful adherence to Federal Communications
Commission ("FCC") standards regarding electromagnetic signals, and is likely
also to require Food and Drug Administration ("FDA") and other FCC review and
approval. The process of obtaining FDA and FCC approvals is not expected to
commence until after a suitable prototype product is available, and the process
of obtaining and maintaining such regulatory approvals may be lengthy, expensive
and uncertain, and is likely to require at least animal trials. Moreover, the
Company is unable to predict the nature of, or time that will be required to
obtain, regulatory approvals, and there can be no assurance that new standards
relating to the sale of electromagnetic signal-emitting devices for use in close
proximity to the human body will not be adopted prior to or after the Company
introduces its new products, and any such standards might require redesign or
even abandonment of the product. A delay in obtaining regulatory approvals, or
the unavailability of such approvals, could have an adverse effect on the
Company's strategic plans.
The Company believes it has complied in all material respects with regard to
governmental regulations applicable to it. To date, those regulations have not
materially restricted or impeded the Company's operations.
31
<PAGE>
PATENTS AND TRADEMARKS
LAMAUR. The Company markets its Lamaur products under a number of
trademarks and trade names that are registered in the United States and several
foreign countries. The Company will seek to register significant marks and names
in other foreign countries when it enters them. Principal trademarks of the
Retail Division include PERMASOFT-REGISTERED TRADEMARK-, SALON
STYLE-REGISTERED TRADEMARK- and STYLE-REGISTERED TRADEMARK-. The Salon Division
trademarks include PATIVA-TM-, NUCLEIC A-Registered Trademark-, APPLE
PECTIN-Registered Trademark- and VITA/E-Registered Trademark-. The Company
believes its position in the marketplace is significantly dependent upon the
goodwill engendered by its trademarks and trade names, and therefore considers
trademark protection to be material to its business. Although Lamaur owns
certain patents, its business is not materially dependent upon any patent,
license, franchise or concession, whether owned by or licensed to the Company.
EHS LABORATORIES. The Company believes that protection of its proprietary
technology (which includes certain technology licensed from an affiliate) and
know-how is critical to the development of EHS Laboratories' business. It seeks
to protect its interests through a combination of patent protection and
confidentiality agreements with all EHS Laboratories employees, as well as by
limiting the availability of certain critical information to a small number of
key employees. The Company intends to pursue a vigorous patent application
program in the United States. To date, it has obtained the rights, pursuant to
an exclusive license, to cosmetic hair care applications of the RFT technology
reflected in a United States patent (No. 5,395,490, issued to Messrs. Don Hoff
and Joseph Stiley in March 1995, and expiring in March 2012), that it believes
is important to the protection of the core technology underlying EHS
Laboratories' activities. See "Certain Transactions." The Company believes that
the patent, which contains claims relating to the method of applying electronic
signals at frequencies determined by the natural characteristics of a material
in order to alter certain molecular bonds in that material, provides broad
coverage, and hence significant protection, for its proprietary technology;
however, there can be no assurance that this will be the case. Moreover, the
Company currently has no patent protection for its technology outside the United
States, and may be unable to obtain even limited protection for its proprietary
technology in foreign countries. See "Risk Factors -- Risks Associated with
ELECTRONIC CHEMISTRY-TM- Product Development."
The Company will pay a royalty to its affiliated licensor equal to (i) 1.0%
of the Company's proceeds from any direct sales made by the Company of products,
instruments or components using, or derived from, the technology, and (ii) 1.0%
of the "revenue base" of the Company's sub-licensees. The "revenue base" is the
proceeds received by the sub-licensees for their sales of products using the RFT
technology. This royalty declines in steps as the revenue base increases,
ultimately declining to 0.4% when cumulative sales from all products using the
RFT technology reach $10.0 billion. The Company has no sub-licenses as of the
date of this Prospectus, and there can be no assurance it will enter into any
sub-license on terms favorable to the Company.
The license may be terminated by the licensor upon certain events of default
caused by the Company, including, among others, the Company's (i) failure to
make timely payment of the required royalty payment, (ii) invalid sub-licensing
of the license, and (iii) failure to continue as a going concern or filing a
bankruptcy petition. Upon termination of the license, all licenses and rights
granted to the Company cease to exist. Any valid sub-licensees, however, will
continue to have their rights recognized after termination of the license. The
license agreement summarized above has been filed with the Securities and
Exchange Commission as an exhibit to the Registration Statement of which this
Prospectus is a part, and reference should be made thereto for more complete
information with respect thereto.
The Company believes that its current and anticipated business does not and
will not infringe on any patent owned by others.
COMPETITION
The markets for Lamaur's products are intensely competitive and sensitive to
changing consumer needs and preferences. They are characterized by frequent
introductions of competitive products, often accompanied by major advertising
and promotional activities, which can significantly affect sales and earnings of
the sponsor of the product and its competitors. Among the competitive factors
the Company faces are the need to introduce and promote (i) high-end products in
the professional market, (ii) both higher-quality, professional-type products
and more natural products in the retail market, and (iii) line extensions of
styling aids.
32
<PAGE>
The Company competes primarily on the basis of product quality, price,
marketing and brand name recognition. As a result of competitive conditions in
the industry, which have adversely affected profit margins, and growing consumer
demand for greater product convenience and performance, the industry has been
experiencing a consolidation (the Company believes that currently, five
companies account for approximately 60% of worldwide sales in the hair care
products industry) and a globalization in the activities of its members. The
hair care products market is dominated by large, multi-national corporations,
all of which compete with the Company and have greater financial and other
resources than those of the Company. The Company believes its Lamaur division
was among the ten largest manufacturers in the United States in 1995 (on the
basis of domestic revenues) of three categories of hair care products --
shampoos, conditioners and styling aids. Principal competitors of the Retail
Division include The Procter & Gamble Company, Unilever N.V. (Helene Curtis),
Bristol-Myers Squibb Company (Clairol), L'Oreal S.A. (Cosmair) and
Alberto-Culver Company, and those of the Salon Division include Bristol-Myers
Squibb Company (Clairol and Matrix), Nexxus, and Wella AG (Redken).
PERSONNEL
The Company employed approximately 336 persons at Lamaur as of March 31,
1996, consisting of approximately 33 administrative employees; 28 persons
engaged in laboratory and other testing and scientific activities; 140
production employees; 47 sales and marketing employees, including 22 persons
located in various regional centers and other locations outside Fridley,
Minnesota; 35 warehousing and receiving personnel; and 53 maintenance and
clerical workers. The Company also employed six persons as of March 31, 1996 at
its Mill Valley, California headquarters consisting of four Company executive
officers and two persons engaged in both EHS Laboratories' activities and
general Company business. None of the Company's employees is a member of a labor
union. The Company considers its relationship with its employees to be good.
PROPERTIES
The Company owns its facility in Fridley, Minnesota, near Minneapolis. This
facility contains administrative, laboratory, production and warehousing areas.
The 438,000 square foot, primarily single story, air conditioned plant is
located on a 25 acre site, and includes an approximately 38,000 square foot, two
story office center that houses the administrative staff, research laboratories,
computer services and the test salon. The Company believes the facility, which
was constructed in 1969 and improved during the 1980s at a total cost in excess
of $60 million, is well maintained and adequate for its contemplated needs. The
Company has substantial excess production capacity, which it currently intends
to utilize in connection with any expansion of its contract manufacturing
activities.
The Company leases its 4,000 square foot office facility in Mill Valley,
California, near San Francisco, from an affiliate. See "Certain Transactions."
RECENT ACQUISITION OF LAMAUR
Lamaur was acquired by the Company from Dow effective as of November 16,
1995, for an aggregate acquisition cost of approximately $30.2 million, pursuant
to an agreement that provided for the payment of aggregate consideration to Dow
of $28.8 million, of which $12.3 million was payable in cash, $3.0 million
represented credits accepted by Dow in connection with the acquisition to be
credited toward future product purchases by Dow over a two-year period, and the
balance by the issuance to Dow of 1,000,000 shares of the Company's Series A
Convertible Preferred Stock, and the $5.0 million Dow Convertible Note, which
note will be converted into 763,500 shares of Series B Convertible Preferred
Stock upon the Offering. The Convertible Preferred Stock is convertible into an
aggregate of 1,163,910 shares of Common Stock of the Company. As of November 16,
1995, the Company entered into a credit agreement with Norwest pursuant to which
the Company borrowed the cash portion of the purchase price payable to Dow. A
portion of that borrowing is being repaid with part of the net proceeds of this
Offering. See "Use of Proceeds."
33
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth information regarding the Company's directors
and officers.
<TABLE>
<CAPTION>
NAME AGE POSITION
------------------------------- --- ------------------------------------------------------------------------
<S> <C> <C>
Don G. Hoff.................... 60 Chairman of the Board of Directors and Chief Executive Officer of the
Company
Dominic J. LaRosa.............. 53 President and Chief Executive Officer of the Lamaur Division and a
Director of the Company
John D. Hellmann............... 46 Vice President -- Finance and Chief Financial Officer of the Company
Donald E. Porter............... 56 Vice President -- Corporate Development and Investor Relations of the
Company
Richard T. Loda................ 47 Vice President -- Science and Technology, EHS Laboratories
William M. Boswell............. 53 Vice President -- Sales, Retail Division of Lamaur
Michele L. Redmon.............. 40 Vice President -- Marketing, Retail Division of Lamaur
Ronald Williams................ 52 Vice President -- Operations of Lamaur
John G. Hewson................. 45 Vice President -- Business Development, Planning and Administration of
Lamaur
Patrick T. Parenty............. 37 Vice President -- Sales, Salon Division of Lamaur
Harold M. Copperman............ 64 Director
Paul E. Dean................... 58 Director
Gerald A. Eppner............... 57 Director
Perry D. Hoff.................. 36 Director
Joseph F. Stiley, III.......... 56 Director
</TABLE>
The business experience, principal occupations and employment, as well as
the periods of service, of each of the directors and executive officers of the
Company during at least the last five years are set forth below.
DON G. HOFF is the founder of the Company and has served as its Chairman of
the Board and Chief Executive Officer since its formation in 1993. Mr. Hoff has
also served as Chairman and Chief Executive Officer of Intertec Ltd., a private
investment company specializing in technology, since 1975. From 1974 to 1991 he
served as Chairman of the Board and Chief Executive Officer of AT&E Corporation
("AT&E"), a company engaged in telecommunications research and development. See
"Risk Factors -- Dependence on Management." Mr. Hoff serves as a Director for a
number of mutual funds with major financial institutions. He is currently
Chairman of Baring's Asia Pacific Fund and has been a Director of the fund since
1991. He also serves as a Director of Prudential Global Fund (since 1984);
Trustee of Prudential U.S. Government Fund (since 1986); Director of Prudential
Short-Term Global Income Fund (since 1990); Director of Prudential Pacific
Growth Fund (since 1992); and Director of Barings Greater China Fund (since
1992). Mr. Hoff spends the majority of his time on the business of the Company.
DOMINIC J. LAROSA joined the Company as a director in September 1995, has
been President and Chief Executive Officer of the Lamaur Division since November
1995, and is a member of the Audit Committee. From 1993 to 1995, Mr. LaRosa was
the founding President and Chief Executive Officer of J.B. Williams Company,
Inc., a personal care products company. From 1982 to 1992, he held senior
management positions at Colgate Palmolive/The Mennen Company, including
President and CEO of the Aromatic Industries Division (1989-1992), General
Manager of the Personal Care Division (1987-1989) and Vice President --
Marketing (1982-1987). Mr. LaRosa served as Marketing Director of Bristol-Myers
Company, Drackett Products Division from 1979-1982, and held marketing director
and product manager positions at Sterling Drug Company, Lehn & Fink Division
from 1971 to 1979. Mr. LaRosa serves on the Board of Directors of Marietta
Corporation.
34
<PAGE>
JOHN D. HELLMANN joined the Company as Vice President -- Finance and Chief
Financial Officer in September 1995. Prior to that, for more than nine years, he
served in various capacities, including as General Manager with Liberty
Electronics, a manufacturer of computer equipment. From 1976 to September 1985,
Mr. Hellmann served as Chief Financial Officer of Inmar Corporation (d/b/a ACA
Joe, Topps and Trowsers). Mr. Hellmann is a certified public accountant.
DONALD E. PORTER joined the Company as Vice President in April 1993. Prior
to that, he had been a Vice President of Intertec Ltd. since April 1991. From
December 1984 to April 1991, Mr. Porter served at AT&E in various executive
capacities, including strategic planning and global licensing for AT&E, and as
General Manager and Vice President, Sales and Marketing of AT&E Systems, a
division of AT&E. See "Risk Factors--Dependence on Management." Prior to
December 1984, Mr. Porter was a Founder and Vice President of Sales and
Marketing for Genesis Electronics Corporation, a pioneering firm in the voice
mail industry. Mr. Porter has also held senior executive positions with Harris
Corporation and ITT Corporation.
RICHARD T. LODA rejoined the Company in March 1996 as Vice President --
Science and Technology, having held the position from February 1994 to July
1994. From 1990 until joining the Company, Dr. Loda was a scientific Program
Manager for the Advanced Research Projects Agency, managing research and
development programs related to electrochemical power sources, environmental
sciences and materials chemistry. He was a Research Staff Scientist at the
Institute for Defense Analyses from 1987 to 1990 and an Associate Scientist at
Applied Research Corporation from 1985 to 1987. Dr. Loda holds a Ph.D in
Physical Chemistry from Wesleyan University and was a National Institutes of
Health Postdoctoral Fellow at the University of Oregon.
WILLIAM M. BOSWELL joined the Company as Vice President -- Sales, Retail
Division of Lamaur in November 1995. From 1994 until the time he joined the
Company, Mr. Boswell was Senior Vice President -- Sales of Revlon, Inc., where
he managed a 150-person sales force, including brokers, for its Beauty Care
Division. From 1983 to 1993, he held various senior management sales positions
at Colgate Palmolive/The Mennen Company, including Vice President -- Sales
(Colgate Palmolive Canada), managing sales of $280 million, and Vice President
-- Sales (Mennen), responsible for all sales functions within Mennen USA. From
1967 to 1982, Mr. Boswell performed various sales functions at Bristol-Myers
Company, Drackett Products Division, including Vice President -- Sales, Broker
Division (1979-1982) and Vice President -- Sales, Non-Food Division (1982).
MICHELE L. REDMON joined the Company as Vice President -- Marketing, Retail
Division of Lamaur in November 1995. Prior to joining the Company, she served as
Group Product Manager at Alberto-Culver Company, and was responsible for several
hair care and other product lines which generated over $100 million in revenue.
She successfully launched Alberto VO5 Naturals and provided the strategic plans
to profitably build sales through new product and restaging activities. Prior to
that, Ms. Redmon held various marketing manager positions at Colgate
Palmolive/The Mennen Company, where she improved total revenue and margins in
several personal care product lines. Ms. Redmon worked at the Regina Company
from 1987 to 1988 as Product Manager, where she managed the launch of a new
vacuum cleaner appliance. From 1978 to 1986, Ms. Redmon held various sales and
product manager positions at the Safety Razor Division of The Gillette Company.
RONALD WILLIAMS joined the Company as Vice President -- Operations of Lamaur
in November 1995. From 1994 until the time he joined the Company, Mr. Williams
was Executive Vice President of Snowblade Corporation, a recreational equipment
manufacturer. From 1993 to 1994 he served as Vice President -- USA Operations of
the J.B. Williams Company, Inc. during its start-up phase. From 1972 to 1992, he
held various operations and manufacturing management positions at Colgate
Palmolive/The Mennen Company, including: Vice President International Operations
(1989-1992) overseeing operations of Mennen's subsidiaries in Canada, Mexico,
and certain other countries, and of its licensees worldwide; Director of
International Operations (1986-1989); and Director of Engineering, International
(1982-1986).
JOHN G. HEWSON joined the Company as Vice President -- Business Development,
Planning and Administration of Lamaur in November 1995. From 1991 to 1995, he
was Director of Materials Management for DowBrands Personal Care Division. He
was named Vice President -- Manufacturing Services,
35
<PAGE>
DowBrands Personal Care Division in April of 1995. Prior to that, he was
Director of Purchasing and Packaging Engineering at DowBrands from 1987 to 1991.
Before joining DowBrands, Mr. Hewson held various positions, including Corporate
Director of Purchasing, Carter Hawley, Hale Inc. (1987), Assistant Director of
Materials Management (1983-1986) and International Purchasing Manager
(1982-1983) for Richardson-Vicks, Inc., Purchasing Manager for Alberto-Culver
Company (1980-1982) and Buyer for The Procter & Gamble Company (1975-1980).
PATRICK T. PARENTY joined the Company as Vice President -- Sales, Salon
Division of Lamaur in November 1995. Prior to joining the Company, Mr. Parenty
was, since 1993, Vice President, Salon Division of Lamaur Inc. Mr. Parenty
joined Lamaur Inc. in April 1983 as a territory manager for the Nucleic A
Division. He has held a variety of other positions with Lamaur/DowBrands
Personal Care Division, including Vice President -- Sales, Salon Division
(1990), National Sales Director for Nucleic A Division (1988) and Regional
Manager for Lamaur Division (1985).
HAROLD M. COPPERMAN has been a Director of the Company since September 1995
and is Chairman of the Compensation Committee. Mr. Copperman is Vice Chairman of
Impulse Telecommunications Corporation, a position he has held since 1990. Prior
to 1990, he held chief executive and senior management positions in strategic
relations, business development, marketing and operations with multinational
organizations as well as start-up entrepreneurial ventures. These include
Electronic Data System Corporation (1987 - 1990) and Advanced Business
Communications, Inc. (1983 - 1987). Mr. Copperman's experience in high
technology global business environments also includes senior executive positions
with Northern Telecom Ltd., Stromberg Carlson Corporation and ITT Corporation.
PAUL E. DEAN has been a Director of the Company since September 1995 and is
a member of the Audit Committee. Prior to his retirement in August 1993, Mr.
Dean was associated with The Dow Chemical Company for over 30 years. Immediately
prior to retiring and since 1991, Mr. Dean was the Director of Corporate New
Ventures at Dow, responsible for managing new technology and related business
development programs. From 1987 to 1991, he was Michigan Director of Research
and Development, and prior to that, he held various management positions in
technical service and development and in research and manufacturing, with a
focus on commercialization of new products.
GERALD A. EPPNER has been a Director of the Company since April 1993 and is
Chairman of the Audit Committee and a member of the Compensation Committee. He
has been a partner in the New York law firm of Battle Fowler LLP, legal counsel
to the Company since February 1993, specializing in domestic and international
corporate and securities law matters. Prior to February 1993, Mr. Eppner was a
partner in the New York law firm of Reid & Priest.
PERRY D. HOFF has been a Director of the Company since April 1993. He has
been a Director and Vice President of Operations of Innovative Capital
Management, Inc., a private investment company, affiliated with Intertec
Holdings, L.P., since 1980, and has also been the President and a Director of
Intertec Holdings, Inc. since 1990. From 1978 to 1981 he was the Director of
Research for Aquanautics, Inc. Perry D. Hoff is the son of Don G. Hoff.
JOSEPH F. STILEY, III joined the Board in March of 1994 and is a member of
the Compensation Committee. Prior to that date and from April of 1993, Mr.
Stiley was Vice President of the Company, responsible for research and
development. From December 1987 to 1993, Mr. Stiley was a consultant to high
technology companies, including Intertec Ltd. From 1984 to 1987, Mr. Stiley
served as Executive Vice President of AT&E. From 1977 to 1983, he held key
executive positions with several publicly owned companies, including a strategic
business unit of General Telephone and Electronics and Digital Broadcasting
Corporation. Mr. Stiley has consulted to the governments of Canada and France,
other European and domestic corporations, and has participated in the
development of international standards for communications.
All Directors hold office until the next annual meeting of stockholders and
the election and qualification of their successors.
36
<PAGE>
ADVISORY BOARD
The Chairman of the Board, with the Board's approval, has established an
advisory board to provide expertise and advice to the Company in several areas.
Currently, this advisory board consists of:
NICHOLAS J. CAPUTO is an independent financial services consultant. From
1993 to 1994, he was Senior Vice President of Global Strategies Group, Inc., an
institutional financial services and securities trading company. From 1984 to
1993, Mr. Caputo was President of NVS, a company which specialized in advising
on securities trading clearance. Prior to 1984, Mr. Caputo was an executive with
Bank of America, most recently as President of the BankAmerica Trust Company of
New York.
WALLACE R. JOHNSON, recently retired, had been a senior executive of the
Personal Care Division of DowBrands since 1988, serving since 1993 as Vice
President and General Manager. Mr. Johnson originally joined Lamaur in 1964 when
it was independently owned as Lamaur, Inc. From 1979 to 1987 he was a member of
the Board of Directors of Lamaur and held various management positions,
including Senior Vice President of Finance.
DAVID A. ROSEN is an independent management consultant, specializing in
financial, administrative and operational management. Mr. Rosen provided
financial consulting services to the Company in connection with its acquisition
of Lamaur. From 1992 to 1994, Mr. Rosen was Chief Financial Officer of RESNA
Industries, Inc., an environmental services company with $30 million in annual
sales. Prior thereto he held financial and administrative management positions
in a number of companies, including Johnson Controls, Inc. (1990-1992), Cannon
Constructors, Inc. (1988-1990), and the Beckett Group (1981-1988).
COMMITTEES OF THE BOARD OF DIRECTORS
The Audit Committee, established in April 1993, currently consists of
Messrs. Eppner (Chairman), Dean and LaRosa. The functions of the Audit Committee
are to recommend annually to the Board of Directors the appointment of the
independent public accountants of the Company, review the scope of their annual
audit and other services they are asked to perform, review the report on the
Company's financial statements following the audit, review the accounting and
financial policies of the Company and review management's procedures and
policies with respect to the Company's internal accounting controls.
The Compensation Committee, also established in April 1993, currently
consists of Messrs. Copperman (Chairman), Eppner and Stiley. The functions of
the Compensation Committee are to review and approve salaries, benefits and
bonuses for all executive officers of the Company, and to review and recommend
to the Board of Directors matters relating to employee compensation and employee
benefit plans. The Compensation Committee also administers the Company's stock
option plans. See "Management -- Equity Compensation Plans."
37
<PAGE>
EXECUTIVE COMPENSATION
The table below summarizes the compensation received by the Company's Chief
Executive Officer and the four most highly compensated executive officers
(collectively, the "named executive officers") for each of the Company's last
three completed fiscal years.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION NUMBER OF
----------------------------------- SECURITIES
OTHER ANNUAL UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY (1) BONUS COMPENSATION OPTIONS COMPENSATION (2)
----------------------------------- ---- ----------- ------- ------------ ---------- -----------------
<S> <C> <C> <C> <C> <C> <C>
Don G. Hoff ....................... 1995 $31,730 $ -- $ -- 234,300(3) $110,000
Chairman and Chief Executive 1994 -- -- -- -- 140,000
Officer 1993 -- -- -- -- 105,000
Dominic J. LaRosa ................. 1995 15,384 -- 4,371 132,000(4) 52,750
President and CEO, Lamaur 1994 -- -- -- -- --
1993 -- -- -- -- --
William M. Boswell ................ 1995 11,538 -- 4,371 39,600(4) 19,750
Vice President--Sales, Retail 1994 -- -- -- -- --
Division of Lamaur 1993 -- -- -- -- --
Michele L. Redmon ................. 1995 9,230 -- 7,840 19,800(4) 13,875
Vice President--Marketing, Retail 1994 -- -- -- -- --
Division of Lamaur 1993 -- -- -- -- --
Donald E. Porter .................. 1995 57,692 10,000 15,000 -- 22,500
Vice President--Corporate 1994 48,000 -- -- 13,200(3) 24,000
Development and Investor Relations 1993 36,000 -- -- 23,100(3) 24,000
</TABLE>
------------------------
(1) Commencing November 16, 1995, Messrs. Hoff, LaRosa, Boswell and Porter and
Ms. Redmon will receive annual compensation of $250,000, $200,000, $150,000,
$100,000 and $120,000, respectively.
(2) Amounts listed represent non-cash credits granted in lieu of annual salary.
These amounts can be used toward 80% of the exercise price of vested
options. In addition, Messrs. LaRosa, Boswell, Porter and Ms. Redmon will
accrue during the next 12 months non-cash credits of $50,000, $30,000,
$20,000 and $15,000, respectively, that also can be used toward 80% of the
exercise price of vested options.
(3) All fully vested.
(4) 25% are vested; the remainder vest ratably over three years.
38
<PAGE>
The following table sets forth the individual grants of stock options made
during the fiscal year ended December 31, 1995 to each of the named executive
officers.
OPTION GRANTS IN FISCAL YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL
PERCENT OF RATES OF STOCK PRICE
NUMBER OF TOTAL OPTIONS APPRECIATION FOR
SECURITIES GRANTED TO EXERCISE OPTION TERM (3)
UNDERLYING EMPLOYEES IN PRICE PER EXPIRATION ----------------------
NAME OPTIONS FISCAL YEAR SHARE DATE 5% 10%
------------------------------------- ------------ ------------- ----------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Don G. Hoff.......................... 217,932(1) 38.6% $ 1.52 12/31/02 $ 134,855 $ 314,269
16,368(1) 2.9 3.03 12/31/02 20,190 47,052
Dominic J. LaRosa.................... 132,000(2) 23.4 3.03 12/31/02 162,824 379,449
William M. Boswell................... 39,600(2) 7.0 6.06 12/31/02 97,694 227,669
Michele L. Redmon.................... 19,800(2) 3.5 6.06 12/31/02 48,847 113,835
Donald E. Porter..................... -- -- -- -- -- --
</TABLE>
------------------------
(1) All fully vested.
(2) 25% vested; the remainder vest ratably over three years.
(3) The potential realizable value through the expiration date of the options
has been determined on the basis of the fair market value of the shares at
the time the options were granted, compounded annually over the seven year
term of the option, net of exercise price. These values have been determined
based upon assumed rates of appreciation and are not intended to forecast
the possible future appreciation, if any, of the price or value of the
Company's Common Stock.
The following table sets forth the number of exercisable or vested and
unexercisable or unvested options during the fiscal year ended December 31, 1995
held by each of the named executive officers and the year-end value of such
unexercised options.
AGGREGATED OPTION EXERCISES IN THE LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES (1)
<TABLE>
<CAPTION>
NUMBER OF SECURITIES UNDERLYING VALUE OF UNEXERCISED IN-THE-
UNEXERCISED OPTIONS AT FISCAL MONEY OPTIONS AT FISCAL
YEAR-END YEAR-END
NAME EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE ($)
------------------------------------------- ------------------------------------ -------------------------------
<S> <C> <C>
Don G. Hoff................................ 234,300/0 1,039,000/0
Dominic J. LaRosa.......................... 33,000/99,000 99,990/300,024
William M. Boswell......................... 9,900/29,700 0/0
Michele L. Redmon.......................... 4,950/14,850 0/0
Donald E. Porter........................... 36,300/0 164,802/0
</TABLE>
------------------------
(1) No options were exercised during the fiscal year ended December 31, 1995.
From the inception of the Company through November 16, 1995, Don G. Hoff,
the Company's Chairman and Chief Executive Officer, did not receive any cash
compensation. In recognition of Mr. Hoff's agreement to forego receiving any
salary since the Company's inception, the Company's Board of Directors in
November 1995 approved the grant to Mr. Hoff of $355,000 in non-cash credits,
representing his accrued salary from the Company's inception through October
1995, that can be used toward 80% of the exercise price of granted options.
39
<PAGE>
EMPLOYMENT AGREEMENT WITH DON G. HOFF
In November 1995 the disinterested members of the Board of Directors
approved an Employment Agreement with Don G. Hoff, Chairman and Chief Executive
Officer, originally entered into as of June 1, 1994, and modified as of November
6, 1995, and which took effect immediately following the closing of the Lamaur
acquisition on November 16, 1995. The Employment Agreement provides for Mr.
Hoff's continued employment as Chief Executive Officer of the Company for a term
ending on December 31, 1998 (the "term of employment"), reporting to the
Company's Board of Directors, and devoting so much of his business time to the
affairs of the Company as the Board requires. The Employment Agreement provides
that Mr. Hoff's salary as Chief Executive Officer (which is $250,000 annually,
commencing on November 16, 1995) may not be decreased without his consent. In
the event Mr. Hoff is unable to perform his duties as Chief Executive Officer
because of a disability, he shall be entitled to his full base salary for a
period of twelve months from the date of disability and 50% of such base salary
for twelve additional months. In addition, the Employment Agreement provides
that Mr. Hoff will continue to be nominated for election as a director of the
Company at each annual meeting of stockholders and be appointed as Chairman of
the Board for so long as he serves as the Company's Chief Executive Officer.
Under the Employment Agreement, Mr. Hoff shall be required during the term
of employment and for one year thereafter not to engage in any activity
competitive with the Company or any of its subsidiaries or affiliates (except
that he may own up to 5% of the voting stock of any publicly held corporation).
Mr. Hoff is also required to assign to the Company all inventions, discoveries,
know-how or other proprietary technology relating to hair care which he
hereafter conceives, reduces to practice or otherwise creates during the term of
employment.
If, prior to the expiration of the term of employment, Mr. Hoff is
discharged by the Company without Cause (which is defined to mean a discharge of
Mr. Hoff for any reason other than conviction of Mr. Hoff of a felony or a
disability or a discharge as the result of a material breach of any other
provision of the Employment Agreement by the Company which Mr. Hoff elects to
treat as a discharge without Cause, including but not limited to certain events
which would constitute a "change in control" of the Company, as defined in the
Employment Agreement, without Mr. Hoff's written consent), Mr. Hoff will be
entitled to all benefits under the Employment Agreement as if he had continued
to be employed during the full term of employment. In addition, if there is a
discharge without Cause (i) in lieu of further salary payments under the
Employment Agreement, Mr. Hoff will be entitled to receive within three days
after the date of discharge, an amount equal to the sum of the discounted
present value of the base salary to which he would have been entitled under the
Employment Agreement from the date of discharge through December 31, 1998
(assuming a 5% yearly increase in his base salary for each remaining calendar
year during the term of employment), and (ii) all options previously granted to
Mr. Hoff, to the extent not then vested or exercisable, shall become immediately
vested and exercisable in full.
40
<PAGE>
THE 1996 STOCK INCENTIVE PLAN
The 1996 Stock Incentive Plan was adopted by the Board of Directors on March
14, 1996, and approved by stockholders on May 15, 1996. The 1996 Stock Incentive
Plan provides for the granting of options, stock appreciation rights and
restricted stock (collectively, "Awards") to employees and directors of the
Company and its subsidiaries and to consultants and advisors who are compensated
by the Company or its subsidiaries (collectively, "Participants"). Directors who
are not employees and members of Advisory Boards established by the Company are
not permitted to participate in the 1996 Stock Incentive Plan. The class of
Participants currently is approximately 350 persons.
The principal provisions of the 1996 Stock Incentive Plan are summarized
below. The following summary of the material provisions of the 1996 Stock
Incentive Plan does not purport to be complete and is qualified in its entirety
by the terms of the 1996 Stock Incentive Plan, a complete copy of which is
attached as an exhibit to the Registration Statement of which this Prospectus is
a part.
The 1996 Stock Incentive Plan will be administered by a "Committee"
(currently the Compensation Committee) which is composed of at least two
directors of the Company, each of whom is a "disinterested person" within the
meaning of Rule 16b-3 promulgated under Section 16(b) ("Rule 16b-3") of the
Securities Exchange Act of 1934, as amended (the "Exchange Act") and an "outside
director" within the meaning of regulations promulgated under Section 162(m) of
the Internal Revenue Code of 1986, as amended ("Code"). Pursuant to the 1996
Stock Incentive Plan, the Committee will select Participants to whom Awards will
be granted and determine the type, size, terms and conditions of Awards,
including the per share purchase price and vesting provisions of options and the
restrictions relating to Restricted Stock. The Committee will also administer,
construe and interpret the 1996 Stock Incentive Plan.
An aggregate of 1,250,000 shares of Common Stock of the Company may be
issued or transferred pursuant to the 1996 Stock Incentive Plan; however, not
more than 50% of the allotted number of shares of Common Stock in the aggregate
may be made the subject of restricted stock Awards and no Participant may
receive more than 500,000 shares during the term of the Plan in respect of
Awards.
The Committee may grant to Participants options to purchase shares. Subject
to the provisions of the Code, options may either be incentive stock options
(within the meaning of Section 422 of the Code) or nonqualified stock options.
The per share purchase price (i.e., the "exercise price") under each option
shall be established by the Committee at the time the option is granted. The per
share exercise price of an option shall not be less than 100% in the case of
incentive stock options and 85% in the case of nonqualified stock options, of
the fair market value of a share on the date the option is granted (110% in the
case of an incentive stock option granted to a ten-percent stockholder). Options
will be exercisable at such times and in such installments as determined by the
Committee; provided, however, options generally shall not be exercisable more
than 90 days following termination of employment (12 months in the event of a
termination due a death or disability). The Committee may accelerate the
exercisability of any option at any time. Each option granted pursuant to the
1996 Stock Incentive Plan shall be for such term as determined by the Committee,
provided, however, that no option shall be exercisable after the expiration of
ten years from its grant date (five years in the case of an incentive stock
option granted to a ten-percent stockholder). The agreement evidencing the
option grant shall set forth the terms and conditions applicable to such option
upon a termination or change in the employment status of the Participant as
determined by the Committee.
OPTIONS. Options are not transferable by the Participant other than by will
or the laws of descent and distribution and may be exercised during the
Participant's lifetime only by the Participant or the Participant's guardian or
legal representative. The purchase price for shares acquired pursuant to the
exercise of an option must be paid (i) in cash, (ii) by utilizing non-cash
credits (for up to 80% of the purchase price), (iii) by transferring shares to
the Company, or (iv) a combination of the foregoing, upon such terms and
conditions as determined by the Committee. Notwithstanding the foregoing, the
Committee may establish cashless exercise procedures which provide for the
simultaneous exercise of an option and sale of the underlying share of Common
Stock. Upon a change in control of the Company (as defined in the 1996 Stock
Incentive Plan), all options outstanding under the 1996 Stock Incentive Plan
will become immediately and fully exercisable and the Participant may, to the
extent set forth in the option agreement, during the sixty-day
41
<PAGE>
period following the change in control surrender for cancellation any option (or
portion thereof) for a cash payment or an amount of stock of the Company (or its
successor) in respect of each share covered by the option, or portion thereof
surrendered, with a value equal to the excess, if any, of (i) the fair market
value, on the date preceding the date of surrender, of the shares subject to the
option (or any portion thereof) surrendered over (ii) the aggregate purchase
price for such shares under the option or portion thereof surrendered. In the
case of an option granted within six months prior to a change in control to any
Participant who may be subject to liability under Section 16(b) of the Exchange
Act, such Participant shall be entitled to surrender for cancellation his or her
option during the sixty-day period commencing upon the expiration of six months
after the date of grant of such option.
STOCK APPRECIATION RIGHTS. The 1996 Stock Incentive Plan permits the
granting of stock appreciation rights to Participants in connection with an
option or as a freestanding right. A stock appreciation right permits the
Participant to receive, upon exercise, cash and/or shares, at the discretion of
the Committee, equal in value to an amount determined by multiplying (i) the
excess, if any, of (x) for those granted in connection with an option, the per
share fair market value on the date preceding the exercise date over the per
share purchase price under the related option, or (y) for those not granted in
connection with an option, the per share fair market value on the date preceding
the exercise date over the per share fair market value on the grant date of the
stock appreciation right by (ii) the number of shares as to which such stock
appreciation right is being exercised.
Stock appreciation rights granted in connection with an option cover the
same shares as those covered by such option and are generally subject to the
same terms. Freestanding stock appreciation rights shall be granted on such
terms and conditions as shall be determined by the Committee, but shall not have
a term of greater than ten years. No stock appreciation right is exercisable
prior to the date six months after it is granted. Upon a change in control, all
stock appreciation rights become immediately and fully exercisable.
RESTRICTED STOCK. The terms of a restricted stock Award, including the
restrictions placed on such shares and the time or times at which such
restrictions will lapse, shall be determined by the Committee at the time the
Award is made. The Committee may determine at the time an Award of restricted
stock is granted that dividends paid on such restricted stock may be paid to the
Participant or deferred and, if deferred, whether such dividends will be
reinvested in shares of Common Stock. Deferred dividends (together with any
interest accrued thereon) will be paid upon the lapsing of restrictions on
shares of restricted stock or forfeited upon the forfeiture of shares of
restricted stock. The agreements evidencing Awards of restricted stock shall set
forth the terms and conditions of such Awards upon a Participant's termination
of employment. The extent, if any, to which the restrictions on shares of
restricted stock shall lapse upon a change in control will be determined by the
Committee at the time of the grant of the Award of restricted stock and set
forth in the Agreement evidencing the Award.
OTHER TERMS OF THE PLAN. The 1996 Stock Incentive Plan provides (subject to
certain restrictions in the case of Participants who may be subject to liability
under Section 16(b) of the Exchange Act) that in satisfaction of the federal,
state and local income taxes and other amounts as may be required by law to be
withheld (the "Withholding Taxes") with respect to an option or Award, the
Participant may make a written election, which may be accepted or rejected in
the discretion of the Committee, to have withheld a portion of the shares
issuable to him or her having an aggregate fair market value equal to the
Withholding Taxes.
The Committee shall have the authority at the time a grant of options or an
Award is made to award designated Participants tax bonuses that shall be paid on
the exercise of such options or payment of such Awards. The Committee shall have
full authority to determine the amount of any such tax bonus and the terms and
conditions affecting the vesting and payment thereof.
The 1996 Stock Incentive Plan will terminate on the day preceding the tenth
anniversary of its effective date. The Board may terminate or amend the 1996
Stock Incentive Plan at any time, except that (i) no such amendment or
termination may adversely affect outstanding Awards, and (ii) to the extent
necessary to maintain the 1996 Stock Incentive Plan's status under Rule 16b-3,
no amendment will be effective unless approved by stockholders.
42
<PAGE>
PRIOR STOCK PLANS. The Company's predecessor, Old EHS, had maintained the
1993 Long-Term Incentive Plan, the Senior Management Incentive Plan and the 1995
Incentive Plan (collectively, the "Prior Stock Plans") which provided for one or
more of the following awards: options, incentive stock rights, stock
appreciation rights, limited stock appreciation rights and restricted stock
purchases. As of February 29, 1996, options to purchase a total of 788,700
shares had been issued under the Prior Stock Plans ("Prior Plan Options"). No
other awards were granted under the Prior Stock Plans.
In connection with the merger of Old EHS with and into the Company, the
Prior Plan Options were assumed by the Company and issued under the 1996 Stock
Incentive Plan, and the Prior Stock Plans were terminated. The Prior Plan
Options, as issued under the 1996 Stock Incentive Plan (with no change in
vesting, expiration date or other principal terms and conditions of the
outstanding option agreements, other than price per share and the number of
shares, which changed as a result of the exchange ratio associated with the
merger of Old EHS and the Company), are subject to and governed by the terms and
conditions of the 1996 Stock Incentive Plan.
FEDERAL INCOME TAX CONSEQUENCES RELATING TO OPTION
In general, a Participant will not recognize taxable income upon grant or
exercise of an incentive stock option and the Company will not be entitled to
any business expense deduction with respect to the grant or exercise of an
incentive stock option. (However, upon the exercise of an incentive stock
option, the excess of the fair market value on the date of the exercise of the
shares received over the exercise price of shares will be treated as an
adjustment to alternative minimum taxable income). In order for the exercise of
an incentive stock option to qualify for the foregoing tax treatment, the
Participant generally must be an employee of the Company or a subsidiary from
the date the incentive stock option is granted through the date three months
before the date of exercise, except in the case of death or disability, where
special rules apply.
If the Participant has held the shares acquired upon exercise of an
incentive stock option for at least two years after the date of grant and for at
least one year after the date of exercise, upon disposition of the shares by the
Participant, the difference, if any, between the sale price of the shares and
the exercise price of the option will be treated as long-term capital gain or
loss. If the Participant does not satisfy these holding period requirements, the
Participant will recognize ordinary income at the time of the disposition of the
shares, generally in an amount equal to the excess of the fair market value of
the shares at the time the option was exercised over the exercise price of the
option. The balance of gain realized, if any, will be long-term or short-term
capital gain, depending on whether or not the shares were sold more than one
year after the option was exercised. If the Participant sells the shares prior
to the satisfaction of the holding period requirements but at a price below the
fair market value of the shares at the time the option was exercised, the amount
of ordinary income will be limited to the excess of the amount realized on the
sale over the exercise price of the option. Subject to the discussion below with
respect to Section 162(m) of the Code, the Company will be allowed a business
expense deduction to the extent the Participant recognizes ordinary income.
In general, a Participant to whom a nonqualified stock option is granted
will recognize no income at the time of the grant of the option. Upon exercise
of a nonqualified stock option, a Participant will recognize ordinary income in
an amount equal to the amount by which the fair market value of the shares on
the date of exercise exceeds the exercise price of the option (special rules may
apply in the case of a Participant who is subject to Section 16(b) of the
Exchange Act). Subject to the discussion below with respect to Section 162(m) of
the Code, the Company will be entitled to a business expense deduction in the
same amount and at the same time as the Participant recognizes ordinary income.
Section 162(m) of the Code and the regulations proposed thereunder generally
would disallow the Company a federal income tax deduction for compensation paid
to the chief executive officer and the four other most highly compensated
executive officers to the extent such compensation paid to any of such
individuals exceeds one million dollars in any year. Section 162(m) generally
does not disallow a deduction for payments of qualified "performance-based
compensation" the material terms of which have been approved by stockholders. In
addition, Section 162(m) does not apply for a specified period to certain plans
maintained by a corporation before the initial public offering of its securities
if the material terms of the
43
<PAGE>
plans are disclosed in the prospectus. The Company intends that compensation
attributable to options and stock appreciation rights granted under the 1996
Stock Incentive Plan will be qualified "performance-based compensation" or
exempt from Section 162(m).
STOCK OPTION PLAN FOR NON-EMPLOYEE DIRECTORS AND ADVISORY BOARD MEMBERS
The Stock Option Plan for Non-Employee Directors and Advisory Board Members
(the "Director Plan") was adopted by the Board of Directors and approved by the
shareholders on April 29, 1993, and amended on May 4, 1994. In connection with
the merger of Old EHS with and into the Company, the Director Plan and the
options outstanding under the Director Plan were assumed by the Company. The
Director Plan was further amended on March 14, 1996 and, as so amended, was
approved by the Company's stockholders on May 15, 1996.
The principal provisions of the Director Plan are summarized below. The
following summary of the material provisions of the Director Plan does not
purport to be complete and is qualified in its entirety by the terms of the
Director Plan, a complete copy of which is attached as an exhibit to the
Registration Statement of which this Prospectus is a part.
The Director Plan, as amended, provides for the grant of options for the
purchase of up to 150,000 shares of Common Stock of the Company to non-employee
directors of the Company and members of Advisory Boards established by the
Company. Currently, approximately 10 persons are eligible for grants of options
under the Director Plan. No director may be granted options with respect to more
than 75,000 shares during the term of this Plan. The Director Plan will be
administered by a "Committee" (currently the Compensation Committee) which is
composed of at least two directors of the Company, each of whom is a
"disinterested person" within the meaning of Rule 16b-3.
Under the terms of the Plan, each non-employee director, on commencement of
office will receive an option to purchase 6,600 shares of Common Stock upon the
date of election. In addition, on the date of the Company's annual meeting of
shareholders, each non-employee director continuing in office will receive an
option to purchase 3,300 shares of Common Stock. The exercise price per share
for all options granted under the Director Plan will be equal to the market
price of the Common Stock as of the date of grant and may be paid (i) in cash,
(ii) by transferring shares to the Company, or (iii) a combination of the
foregoing. Options may not be assigned or transferred except by will or by the
laws of descent and distribution. Options become exercisable in full beginning
one year after their date of grant and are exercisable only while the director
is serving as a director of the Company or within 180 days after the Participant
ceases to serve as a director of the Company (except that if a director dies or
becomes disabled while he or she is serving as a director of the Company, the
option is exercisable for a period of 12 months from the date of death or
disability). However, upon a change in control of the Company, options become
immediately and fully exercisable. Options expire, to the extent not exercised,
10 years from the date of grant.
The Director Plan also authorizes the issuance of options to individuals
serving on Advisory Boards established by the Company. The provisions of the
plan for Advisory Board members are substantially the same as those applicable
to directors.
No options will be granted under the Director Plan after the tenth
anniversary of its effective date. The Board may terminate or amend the Director
Plan at any time, except that (i) no such amendment or termination may adversely
affect outstanding options, and (ii) to the extent necessary to maintain the
Director Plan's status under Rule 16b-3, no amendment will be effective unless
approved by stockholders.
As of March 31, 1996, a total of 85,800 stock options were outstanding under
the Director Plan.
44
<PAGE>
FEDERAL INCOME TAX CONSEQUENCES RELATING TO OPTIONS. In general, a director
to whom an option is granted under the Director Plan will recognize no income at
the time of the grant of the option. Upon exercise of the option, a director
will recognize ordinary income in an amount equal to the amount by which the
fair market value of the shares on the date of exercise exceeds the exercise
price of the option (special rules may apply in the case of an option exercised
at a time when the sale of the acquired shares could subject the director to
suit under Section 16(b) of the Exchange Act). The Company will be entitled to a
business expense deduction in the same amount and at the same time as the
director recognizes ordinary income.
EMPLOYEE STOCK PLAN
The Company's employee stock plan (the "Employee Stock Plan") was adopted by
the Board of Directors on November 30, 1995 for the purpose of issuing to each
former Dow employee who became and remained a Company employee, 50 shares of
Common Stock at no cost to that employee. An aggregate of 16,500 shares of
Common Stock of the Company may be issued pursuant to the Employee Stock Plan.
COMPENSATION OF DIRECTORS
Members of the Board of Directors presently receive no additional
remuneration for acting in that capacity. The Company anticipates that its
non-employee Directors will be paid $500 (plus reasonable out-of-pocket
expenses) for each Board meeting or Committee meeting they attend. In addition,
non-employee Directors are entitled to receive options to purchase shares of
Common Stock under the Company's Outside Director and Advisory Board Plan.
Battle Fowler LLP, in which Gerald A. Eppner, Esq., a Director of the
Company is a partner, has represented the Company as general legal counsel since
1993. Since then the Company has paid or accrued fees to Battle Fowler LLP
aggregating $400,000, of which $150,000 was paid in 1995, $50,000 has been paid
to date in 1996 and $200,000 has been accrued for payment in 1996. The Company
also expects to pay Battle Fowler LLP an additional amount of approximately
$250,000 for services in connection with this Offering.
45
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth as of March 31, 1996, certain information
regarding beneficial ownership of the Common Stock by (i) each stockholder known
to the Company to be the beneficial owner of more than 5% of the Common Stock,
(ii) each director and named executive officer of the Company, and (iii) all
executive officers and directors as a group, before and after the Offering.
Unless otherwise indicated, each of the stockholders has sole voting investment
power with respect to the shares beneficially owned.
<TABLE>
<CAPTION>
PERCENTAGE OWNED
AMOUNT AND NATURE OF ----------------------------------
NAME AND ADDRESS OF BENEFICIAL OWNERS BENEFICIAL OWNERSHIP BEFORE OFFERING AFTER OFFERING
------------------------------------------------------------ -------------------- ----------------- ---------------
<S> <C> <C> <C>
Don G. Hoff(1)(2)........................................... 1,910,617 59.8% 33.0%
Perry D. Hoff(3)(4)......................................... 1,699,417 57.2% 30.5%
Intertec Holdings, L.P.(3)(5)............................... 1,676,317 56.6% 30.1%
DowBrands Inc.(6)(7)........................................ 1,163,910 28.2% 17.3%
Futurtec, L.P.(8)(9)........................................ 419,843 14.2% 7.6%
Claude Ganz(10)(11)......................................... 214,500 7.2% 3.9%
Dominic J. LaRosa(12)(13)................................... 99,000 3.3% 1.8%
Donald E. Porter(1)(14)..................................... 95,700 3.2% 1.7%
Gerald A. Eppner(15)(16).................................... 82,500 2.8% 1.5%
Joseph F. Stiley, III(17)(18)............................... 72,600 2.4% 1.3%
William M. Boswell(12)(19).................................. 9,900 * *
Michele L. Redmon(12)(20)................................... 4,950 * *
Harold M. Copperman(1)...................................... 0 * *
Paul E. Dean(1)............................................. 0 * *
All officers and directors of the Company as a group (15
persons)(21)............................................... 2,384,415 69.6% 39.6%
</TABLE>
------------------------
* Represents less than one percent.
(1) The address of Messrs. Don G. Hoff, Porter, Copperman and Dean is c/o
Electronic Hair Styling, Inc., One Lovell Avenue, Mill Valley, CA 94941.
(2) Includes (i) 1,676,317 shares held by Intertec Holdings, L.P., an
investment partnership (whose general partner is Intertec Holdings, Inc., a
corporation of which Mr. Don Hoff is a director and his son is president
and a director) and whose sole limited partner is Intertec Ltd., a limited
partnership in which Mr. Don Hoff holds a 12% limited partner interest, and
whose general partner is a corporation of which Mr. Don Hoff is a director
and his son is an officer and director), and (ii) 234,300 shares which may
be acquired by Mr. Hoff upon the exercise of options currently exercisable
or exercisable within the next 60 days. Excludes 93,060 shares held
directly by other members of Mr. Hoff's family and 128,589 shares which
Intertec Holdings, L.P. is required to purchase pursuant to a stock
purchase agreement with the Company. See "Certain Transactions." Mr. Don
Hoff disclaims beneficial ownership of all but 433,447 shares.
(3) The address of Mr. Perry D. Hoff and Intertec Holdings, L.P. is East 5058
Grapeview Loop, Allyn, WA 98524.
(4) Includes (i) 1,676,317 shares held by Intertec Holdings, L.P., an
investment partnership (whose general partner is Intertec Holdings, Inc., a
corporation of which Mr. Perry Hoff is president and a director)
46
<PAGE>
and whose sole limited partner is Intertec Ltd., a limited partnership in
which Mr. Perry Hoff holds a 25% limited partner interest, and whose
general partner is a corporation of which Mr. Perry Hoff is an officer and
director), (ii) 13,200 shares held directly by Mr. Perry Hoff, and (iii)
9,900 shares which may be acquired by Mr. Perry Hoff upon the exercise of
options currently exercisable or exercisable within the next 60 days. Does
not include 79,860 shares held directly by other members of Mr. Perry
Hoff's family and 128,589 shares which Intertec Holdings, L.P. is required
to purchase pursuant to a stock purchase agreement with the Company. See
"Certain Transactions." Mr. Perry Hoff disclaims beneficial ownership of
all but 437,989 shares.
(5) The sole limited partner of Intertec Holdings, L.P. is Intertec Ltd., a
limited partnership in which Mr. Don Hoff and members of his immediate
family hold 100% of the limited partner interest, and whose general partner
is a corporation, all of whose officers and directors are members of Mr.
Hoff's family. Does not include 128,589 shares which Intertec Holdings,
L.P. is required to purchase pursuant to a stock purchase agreement with
the Company. See "Certain Transactions."
(6) The address of DowBrands Inc. is 9550 Zionsville Road, P.O. Box 68511,
Indianapolis, IN 46268.
(7) Includes 1,163,910 shares which may be acquired upon the conversion of
Series A and Series B Convertible Preferred Stock.
(8) The address of Futurtec, L.P. is 111 Great Neck Road, Suite 301, Great
Neck, NY 11021.
(9) Futurtec Capital Corp., the general partner of Futurtec, L.P., exercises
sole voting and investment power over the shares held by Futurtec, L.P. Mr.
Ido Klear is the sole stockholder of Futurtec Capital Corp.
(10) The address of Mr. Ganz is P.O. Box 1074, Glen Ellen, CA 95442.
(11) Includes 9,900 shares which may be acquired upon the exercise of options
currently exercisable or exercisable within the next 60 days.
(12) The address of Messrs. LaRosa and Boswell and Ms. Redmon is 5601 East River
Road, Fridley, MN 55432.
(13) Includes 33,000 shares which may be acquired upon the exercise of options
currently exercisable or exercisable within the next 60 days. Does not
include warrants to purchase 16,500 shares of Common Stock, exercisable
commencing May 1996.
(14) Includes 36,300 shares which may be acquired upon the exercise of options
currently exercisable or exercisable within the next 60 days.
(15) The address of Mr. Eppner is 75 East 55th Street, New York, NY 10022.
(16) Consists of 9,900 shares which may be acquired upon the exercise of options
currently exercisable or exercisable within the next 60 days.
(17) The address of Mr. Stiley is West 528 Center Street, Spokane, WA 99203.
(18) Includes 29,700 shares which may be acquired upon the exercise of options
currently exercisable or exercisable within the next 60 days.
(19) Includes 9,900 shares which may be acquired upon the exercise of options
currently exercisable or exercisable within the next 60 days. Does not
include warrants to purchase 16,500 shares of Common Stock, exercisable
commencing May 1996.
(20) Consists of 4,950 shares which may be acquired upon the exercise of options
currently exercisable or exercisable within the next 60 days. Does not
include warrants to purchase 8,250 shares of Common Stock exercisable
commencing May 1996.
(21) Includes 466,950 shares which may be acquired upon the exercise of options
currently exercisable or exercisable within the next 60 days.
47
<PAGE>
CERTAIN TRANSACTIONS
LICENSE AGREEMENT. In May 1993, the Company acquired from Intertec Ltd., a
Delaware limited partnership ("Intertec Ltd."), for a 30-year period, the
exclusive worldwide rights to use all RFT technology owned by Intertec Ltd.
relating to cosmetic hair care applications. The 30-year exclusive license
agreement (the "License") gives the Company the right to develop, manufacture
and sell products for cosmetic hair care applications based on RFT technology.
Intertec Ltd., which is entirely owned by Mr. Don G. Hoff and members of his
immediate family, is the sole limited partner in Intertec Holdings, L.P., the
Company's principal shareholder. The License is non-assignable, but the Company
may sublicense the rights granted to it provided the sublicense includes certain
protective provisions. The Company issued, as consideration for the grant of the
license, a promissory note in the principal amount of $1.0 million, and agreed
to pay a royalty as described below. The Company's promissory note, as amended
effective as of May, 1993 (the "Intertec Note"), is payable to Intertec
Holdings, L.P., as agent for Intertec Ltd., in four equal annual installments of
$250,000, commencing on the first to occur of (i) the first anniversary of the
closing of this Offering, or (ii) May 31, 1998. The Intertec Note accrues
interest in arrears at 5.5% per annum, payable with each installment of
principal. The Company has also agreed to pay certain legal expenses, which have
been incurred by Intertec Ltd. in connection with preparing and prosecuting the
patent application for the patent covering the RFT technology. Such expenses
were approximately $60,000 as of February 29, 1996.
The Company will pay a royalty to Intertec Ltd. equal to (i) 1.0% of the
Company's proceeds from any direct sales made by the Company of products,
instruments or components using, or derived from, the technology, and (ii) 1.0%
of the "revenue base" of the Company's sub-licensees. The "revenue base" is the
proceeds received by the sub-licensees for their sales of products using the RFT
technology. This royalty declines in steps as the revenue base increases,
ultimately declining to 0.4% when cumulative sales from all products using the
RFT technology reach $10.0 billion. The Company has no sub-licenses as of the
date of this Prospectus, and there can be no assurance it will enter into any
sub-license on terms favorable to the Company. Upon expiration in 2012 of the
patent held by Intertec Ltd., the Company will be unable to deny competitors
access to RFT technology.
Neither the $1.0 million license fee, the terms of the Intertec Note nor the
terms of the royalty were established by arm's length negotiations or
independent appraisal.
COMMON STOCK PURCHASE AGREEMENT. In March 1996, the Company and Intertec
Holdings, L.P. entered into a stock purchase agreement pursuant to which
Intertec Holdings, L.P. agreed to purchase from the Company, and the Company
agreed to sell to Intertec Holdings, L.P., shares of Common Stock at the initial
public offering price per share. The aggregate number of shares of Common Stock
which Intertec Holdings, L.P. is required to purchase is equal to (x) the
outstanding principal of, and all accrued and unpaid interest on the Intertec
Note as of the closing of the Company's initial public offering, divided by (y)
the initial public offering price per share. Intertec Holdings, L.P. is
obligated, subject to there being no event of default under the Company's loan
agreements and certain other customary conditions, to purchase and pay for the
shares in four equal installments commencing on the first anniversary of the
closing of the Offering. The deferred purchase price under the stock purchase
agreement accrues interest from and after the closing of the Company's initial
public offering at 5.5% per annum, payable with each installment. Intertec
Holdings, L.P. may elect to accelerate one or more purchases under the stock
purchase agreement on 30 days prior notice to the Company. The Company may, at
any time or from time to time, terminate Intertec Holdings, L.P.'s purchase
rights with respect to one or more of the installments, on 10 days prior notice
to Intertec Holdings, L.P. The terms of the stock purchase agreement were not
established by arm's length negotiations or independent appraisal.
FACILITIES AND EQUIPMENT. Pursuant to a lease dated June 30, 1993, the
Company leases from Innovative Capital Management, Inc. ("ICM"), an affiliate of
Mr. Don G. Hoff and Mr. Perry D. Hoff, Directors of the Company, for a 36-month
term expiring in June, 1996, office space in Mill Valley, CA, together with all
of the furniture and office equipment at that location, for a total of $7,513
per month. The space consists of approximately 4,000 square feet used for
corporate offices with furniture and equipment, including computers, telephones,
office machines, desks, conference tables and related items. The terms of the
lease were
48
<PAGE>
not established by arms' length negotiations or independent appraisal. The
Company's Board of Directors will review the terms of a proposed lease renewal
prior to the scheduled expiration of the lease and, if the terms are comparable
to those which might be obtained in an arm's-length transaction, is expected to
approve the renewal.
RELEASE OF PLEDGED ASSETS. On November 22, 1995, the Company repaid in full
its indebtedness to WestAmerica Bank in the amount of $300,000, from the
proceeds of the Norwest Credit Line, thereby releasing WestAmerica Bank's
security interest in certain assets of ICM, pledged as security for such
indebtedness. In connection with the release of its pledged assets, ICM released
its security interest in all the assets of the Company which had been granted to
ICM as security for its pledge.
MANUFACTURING AGREEMENT WITH DOWBRANDS. See "Business -- Manufacturing --
Contract Manufacturing" for information concerning the Company's agreement with
DowBrands, pursuant to which DowBrands agreed to accept $3.0 million of credits
to be applied towards purchases of finished products in eight equal quarterly
installments of $375,000 commencing February 1996.
LEGAL FEES. Battle Fowler LLP, in which Gerald A. Eppner, Esq., a Director
of the Company is a partner, has represented the Company as general legal
counsel since 1993. Since then the Company has accrued fees to Battle Fowler LLP
aggregating $400,000, of which $150,000 was paid in 1995, $50,000 has been paid
to date in 1996 and $200,000 has been accrued for payment in 1996. The Company
expects to pay Battle Fowler LLP an additional amount of approximately $250,000
for services in connection with this Offering.
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 12,000,000 shares of
Common Stock, $0.01 par value, and 4,000,000 shares of preferred stock. As of
March 31, 1996 there were 2,960,495 shares of Common Stock outstanding held by
354 stockholders, and 1,000,000 shares of preferred stock held by one
stockholder.
COMMON STOCK
The shares of Common Stock currently outstanding are, and the shares of
Common Stock that will be outstanding upon the consummation of this Offering
will be, validly issued, fully paid and non-assessable. Each holder of Common
Stock is entitled to one vote for each share owned of record on all matters
voted upon by the stockholders, and a majority vote is required for action to be
taken by the stockholders. In the event of liquidation, dissolution or
winding-up of the Company, the holders of Common Stock are entitled to share
equally and ratably in the assets of the Company, if any, remaining after the
payment of all debts and liabilities of the Company and the liquidation
preference of any outstanding preferred stock. The holders of the Common Stock
have no preemptive rights or cumulative voting rights and there are no
redemption, sinking fund or conversion provisions applicable to the Common
Stock.
Holders of Common Stock are entitled to receive dividends if, as and when
declared by the Board of Directors, out of funds legally available for such
purpose, subject to the dividend and liquidation rights of any preferred stock
that may be issued. Payment of dividends are restricted by the terms of the
Company's existing loan agreement and the terms of the Company's Series A and
Series B Convertible Preferred Stock.
PREFERRED STOCK
The Company's Certificate of Incorporation provides that the Company may, by
vote of its Board of Directors, issue the preferred stock in one or more series
having the rights, preferences, privileges and restrictions thereon, including
dividend rights, dividend rates, conversion rights, voting rights, terms of
redemption, redemption prices, liquidation preferences and the number of shares
constituting any series or designation of such series, without further vote or
action by the stockholders. The issuance of preferred stock may have the effect
of delaying, deferring or preventing a change in control of the Company without
further action by the stockholders and may adversely affect the voting and other
rights of the holders of Common Stock. The issuance of preferred stock with
voting and conversion rights may adversely affect the voting power of the
holders of Common Stock, including the loss of voting control to others.
49
<PAGE>
CONVERTIBLE PREFERRED STOCK
Upon the consummation of this Offering, the 1,000,000 shares of Series A
Convertible Preferred Stock issued to Dow as part of the purchase price of the
Lamaur acquisition will remain outstanding, and the Dow Convertible Note issued
as part of the purchase price of the Lamaur acquisition will automatically be
converted into 763,500 shares of the Company's Series B Convertible Preferred
Stock. The Series A Convertible Preferred Stock provides for a liquidation
preference of $10.00 per share, or $10.0 million in the aggregate, plus any
declared and unpaid dividends. Dividends are payable with respect to the Series
A Convertible Preferred Stock only to the extent (on an as-converted basis) that
dividends are declared payable on the Common Stock. The Series B Convertible
Preferred Stock provides for (i) cumulative cash dividends at the rate of 8.0%
per annum, payable quarterly, and (ii) a liquidation preference of $6.55 per
share, or $5.0 million in the aggregate plus all accrued and unpaid dividends.
The Series A Preferred is not redeemable. The Series B Convertible Preferred
Stock may be redeemed by the Company at any time or from time to time, on 30
days' prior written notice, at a redemption price per share equal to $6.55, plus
all accrued and unpaid dividends. Each Series of Convertible Preferred Stock is
entitled to vote on a share-for-share basis with the Common Stock, and has
certain rights to vote as a class. The Convertible Preferred Stock is
convertible at any time at the option of the holder into shares of Common Stock,
initially at the rate of 0.660 shares of Common Stock for each share of
Convertible Preferred Stock, subject to adjustments for stock dividends, stock
splits, reclassifications or subdivisions, and may be converted into Common
Stock at the option of the Company if the last reported sales price of the
Common Stock exceeds $21.21 for a 30-day trading period, and the Common Stock is
then registered pursuant to Section 12(b) or 12(g) of the Exchange Act and
listed on a securities exchange or quoted on the Nasdaq National Market.
LIMITATIONS UPON TRANSACTIONS WITH "INTERESTED STOCKHOLDERS"
Section 203 of the Delaware General Corporation Law prohibits a publicly
held Delaware corporation from engaging in a "business combination" with an
"interested stockholder" for a period of three years after the date of the
transaction in which the person became an interested stockholder unless (i)
prior to the date of the business combination, the transaction is approved by
the board of directors of the corporation, (ii) upon consummation of the
transaction which resulted in the stockholder becoming an interested
stockholder, the interested stockholder owns at least 85% of the outstanding
voting stock, or (iii) on or after such date the business combination is
approved by the board of directors and by the affirmative vote of at least
66 2/3% of the outstanding voting stock which is not owned by the interested
stockholder. A "business combination" includes mergers, asset sales and other
transactions resulting in a financial benefit to the stockholder. An "interested
stockholder" is a person who, together with affiliates and associates, owns (or
within three years, did own), 15% or more of the corporation's voting stock. The
restrictions of Section 203 do not apply, among other things, if a corporation,
by action of its stockholders, adopts an amendment to its certificate of
incorporation or by-laws expressly electing not to be governed by Section 203,
provided that, in addition to any other vote required by law, such amendment to
the certificate of incorporation or by-laws must be approved by the affirmative
vote of a majority of the shares entitled to vote. Moreover, an amendment so
adopted is not effective until twelve months after its adoption and does not
apply to any business combination between the corporation and any person who
became an interested stockholder of such corporation on or prior to such
adoption. The Company's Certificate of Incorporation and By-laws do not
currently contain any provisions electing not to be governed by Section 203 of
the Delaware General Corporation Law. The provisions of Section 203 of the
Delaware General Corporation Law may have a depressive effect on the market
price of the Common Stock because they could impede any merger, consolidating
takeover or other business combination involving the Company or discourage a
potential acquirer from making a tender offer or otherwise attempting to obtain
control of the Company.
50
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Future sales of shares by current stockholders could adversely affect the
price of the Company's Common Stock. Upon completion of this Offering, the
Company will have 5,560,495 shares of Common Stock outstanding, of which
2,960,495 shares of Common Stock (53.2% of the shares to be outstanding) were
issued by the Company in private transactions. Some of these shares are treated
as "restricted securities" pursuant to Rules 144 and 701 under the Securities
Act.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated), including persons deemed to be "affiliates" of the
Company (as that term is defined under the Act), who has beneficially owned his
or her shares for at least two years is entitled to sell within any three-month
period that number of restricted securities that does not exceed the greater of
one percent of the then outstanding shares of Common Stock (55,605 shares based
on the number of shares to be outstanding after the Offering), or the average
weekly trading volume of the Common Stock during the four calendar weeks
immediately preceding such sale, notice and the availability of current public
information about the Company. After three years have elapsed from the later of
the issuance of restricted securities by the Company or their acquisition from
an affiliate, such shares may be sold without limitations by persons who have
not been affiliates of the Company for at least three months.
REGISTRATION RIGHTS. Certain of the Company's existing holders of Common
Stock, including Intertec Holdings, L.P., the Company's principal stockholder,
and the Company are parties to agreements providing each such holder with
certain registration rights, including one demand registration right exercisable
at any time after six months from the date of this Prospectus for registration
of "restricted securities" having an aggregate market value of at least
$500,000. The registration rights of Intertec Holdings, L.P. extend to the
shares of Common Stock purchasable under its stock purchase agreement, dated as
of March 19, 1996, with the Company.
The Company and Dow are parties to an agreement providing for certain
registration rights with respect to the shares of Common Stock issuable upon
conversion of the Convertible Preferred Stock, including one demand registration
exercisable at any time after the date of this Prospectus. The Company has also
agreed to register for resale on Securities Act Form S-3 all of the shares of
Common Stock issuable upon conversion of the Convertible Preferred Stock as soon
as it is eligible for the use of such form (anticipated to be one year from the
date of this Prospectus). Dow has also been granted "piggyback" registration
rights with respect to the shares of Common Stock issuable upon conversion of
the Convertible Preferred Stock until such time as they cease to be "restricted
securities."
Each of the Company's existing holders of Common Stock was granted
"piggyback" registration rights for a two-year period following their respective
purchases of Common Stock.
The Company has agreed to pay all registration expenses (other than
underwriting or sales commissions) incurred in complying with the registration
rights described above.
Notwithstanding the foregoing, all existing stockholders of the Company with
registration rights have agreed (i) to waive their registration rights with
respect to the Offering, and (ii) without the prior written consent of the
Company and the representative of the Underwriters, not to register any shares
held by them for a period of six months from the date of this Prospectus.
Prior to this Offering there has been no public market for the Common Stock.
The Company cannot predict the number of shares which may be sold in the future
pursuant to Rule 144 since such sales will depend upon the market price and
trading volume of Common Stock, the circumstances of individual holders thereof
and other factors. In addition, the Company can make no predictions as to the
effect, if any, that sales of shares of Common Stock or the availability of
shares for sale will have on the market price prevailing from time to time.
Nevertheless, sales of substantial amounts of the Common Stock in the public
market could adversely affect the market price of the Common Stock and could
impair the Company's future ability to raise capital through an offering of its
equity securities.
51
<PAGE>
The Company intends to file a registration statement under the Securities
Act to register the shares of Common Stock issued and reserved for issuance in
compensatory arrangements and under its employee and director stock plans.
Registration would permit the resale of such shares by non-affiliates in the
public market without restriction under the Securities Act. The number of shares
reserved for issuance under the Company's equity compensation plans and the
number of shares with respect to which awards are outstanding are as follows:
1,250,000 shares under the 1996 Stock Incentive Plan (of which 788,700 were
outstanding as of March 31, 1996), 150,000 shares under the Director Plan (of
which 85,800 were outstanding as of March 31, 1996), and 16,500 under the
Employee Stock Plan (of which 15,575 were outstanding as of March 31, 1996).
UNDERWRITING
The underwriters below, for whom Rodman & Renshaw, Inc. ("Rodman") and Sands
Brothers & Co., Ltd. ("Sands") are acting as representatives (the
"Representatives"), have severally agreed, subject to the terms and conditions
contained in the Underwriting Agreement, to purchase from the Company the number
of shares of Common Stock set forth below opposite their respective names.
<TABLE>
<CAPTION>
UNDERWRITER NUMBER OF SHARES
------------------------------------------------------------------------------------- -----------------
<S> <C>
Rodman & Renshaw, Inc................................................................
Sands Brothers & Co., Ltd............................................................
-----------------
Total............................................................................ 2,600,000
-----------------
-----------------
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters thereunder are subject to approval of certain legal matters by
counsel and to various other considerations. The nature of the Underwriters'
obligations is such that the Underwriters are committed to purchase and pay for
all of the above shares of Common Stock if any are purchased.
The Underwriters, through the Representatives, have advised the Company that
they propose to offer the Common Stock initially at the public offering price
set forth on the cover page of this Prospectus, that the Underwriters may allow
to selected dealers a concession of $ per share, and that such dealers may
reallow a concession of $ per share to certain other dealers. After the public
offering, the offering price and other selling terms may be changed by the
Underwriters. Application has been made for the Common Stock to be included for
quotation on the Nasdaq National Market. The Representatives have advised the
Company that they do not anticipate sales to discretionary accounts by the
Underwriters to exceed 5% of the total number of shares of Common Stock offered
hereby.
The Company has granted to the Underwriters a 30-day over-allotment option
to purchase up to an aggregate of 390,000 additional shares of Common Stock,
exercisable at the public offering price less the underwriting discount. If the
Underwriters exercise such over-allotment option, then each of the Underwriters
will have a firm commitment, subject to certain conditions, to purchase
approximately the same percentage thereof as the number of shares of Common
Stock to be purchased by it, as shown in the above table, bears to the 2,600,000
shares of Common Stock offered hereby. The Underwriters may exercise such option
only to cover over-allotments made in connection with the sale of the shares of
Common Stock offered hereby.
52
<PAGE>
In addition to the underwriting discounts and commissions shown on the cover
page of this Prospectus, the Company has agreed to pay to Sands additional
compensation in the amount of $100,000 for investment banking services performed
in connection with the acquisition of Lamaur from Dow, and to reimburse the
Representatives for certain out-of-pocket expenses, in the amount of $75,000 (of
which $25,000 has been advanced).
In connection with this Offering, the Company has agreed to sell to the
Representatives, for nominal consideration, warrants to purchase a number of
shares of Common Stock equal to 7% of the shares of Common Stock sold in the
Offering including over-allotments, if any (the "Representatives' Warrants").
The Representatives' Warrants are initially exercisable at a price of $ per
share of Common Stock (120% of the initial public offering price) for a period
of four years, commencing one year from the effective date of the Offering and
are restricted from sale, transfer, assignment or hypothecation for a period of
12 months from the effective date of the Offering, except to officers, partners
or successors of the Representatives. The exercise price of the Representatives'
Warrants and the number of shares of Common Stock issuable upon exercise thereof
are subject to adjustment under certain circumstances. The Representatives'
Warrants grant to the holders thereof certain rights of registration for the
securities issuable upon exercise of the Representatives' Warrants. The
Representatives' Warrants are redeemable by the Company, on prior notice, if the
price of the Common Stock two years after the closing of the Offering, exceeds
$ (250% of the initial public offering price) for a 60-day period.
In addition, Rodman has a one-time right of first refusal to perform
services for the Company with respect to certain future transactions for a
period of three years after the effective date of the Offering.
The officers, directors and certain shareholders of the Company have agreed
that they will not sell or dispose of any shares of Common Stock of the Company
for a period of 180 days after the later of the date on which the Registration
Statement is declared effective by the Commission or the first date on which the
shares are bona fide offered to the public, without the prior written consent of
the Representatives.
The Company has agreed to indemnify the Underwriters against certain
liabilities, losses and expenses, including liabilities under the Securities
Act, or to contribute to payments that the Underwriters may be required to make
in respect thereof.
Rodman was retained by the Company in March 1996 for a 10-month period to
provide certain financial advisory services related to general strategic
financial advice, valuation and potential mergers and acquisitions. The Company
has agreed to pay Rodman (i) $265,000, of which $15,000 has been paid to date
and the balance will be payable in equal monthly installments commencing the
month following the closing of the Offering and ending in December 1996, and
(ii) a transaction fee with respect to consummated mergers or acquisitions in
such amount as may be mutually agreed upon in connection with each separate
transaction. As further consideration for such services, the Company has agreed
to sell to Rodman, for nominal consideration, warrants to purchase a number of
shares of Common Stock equal to 1.5% of the number of shares of Common Stock
sold in the Offering (the "Financial Advisor's Warrants"). The Financial
Advisor's Warrants are initially exercisable at a price of $ per share of
Common Stock (120% of the initial public offering price) for a period of four
years, commencing one year from the effective date of the Offering and are
restricted from sale, transfer, assignment or hypothecation for a period of 12
months from the effective date of the Offering, except to officers, partners or
successors of Rodman. The exercise price of the Financial Advisor's Warrants and
the number of shares of Common Stock issuable upon exercise thereof are subject
to adjustment under certain circumstances. The Financial Advisor's Warrants
grant to the holders thereof certain rights of registration for the securities
issuable upon exercise of the Financial Advisor's Warrants. The Financial
Advisor's Warrants are redeemable by the Company, on prior notice, if the price
of the Common Stock two years after the closing of the Offering exceeds
$ (250% of the initial public offering price) for a 60-day period.
53
<PAGE>
Prior to the Offering, there has been no public market for the Common Stock.
Consequently, the initial public offering price has been determined through
negotiations between the Company and the Representatives and is not necessarily
related to the Company's asset value, net worth or other established criteria of
value. Among the factors considered in such negotiations, in addition to
prevailing market conditions, included the history of and prospects for the
industry in which the Company competes, an assessment of the Company's
management, the prospects of the Company, the Company's capital structure and
certain other factors as were deemed relevant.
LEGAL MATTERS
The validity of the issuance of the shares of Common Stock offered by this
Prospectus will be passed upon for the Company by Battle Fowler LLP, New York,
New York. Gerald A. Eppner, Esq., a member of Battle Fowler LLP, legal counsel
to the Company, is a director of the Company and owns 72,600 shares of the
Company's Common Stock. Certain legal matters in connection with the sale of the
Common Stock offered hereby will be passed upon for the Underwriters by
Squadron, Ellenoff, Plesent & Sheinfeld, LLP, New York, New York.
EXPERTS
The financial statements of Electronic Hair Styling, Inc. as of December 31,
1994 and 1995, for the period from April 1, 1993 (Inception) to December 31,
1993, and for the years ended December 31, 1994 and 1995, included in this
Prospectus, have been audited by Deloitte & Touche LLP, independent auditors, as
stated in their report appearing herein, and have been so included in reliance
upon the report of such firm given upon their authority as experts in accounting
and auditing.
The financial statements of PCD, The Personal Care Division of DowBrands
L.P., for the years ended December 31, 1993 and 1994, and for the period from
January 1, 1995 through November 30, 1995, included in this Prospectus, have
been audited by Deloitte & Touche LLP, independent auditors, as stated in their
report appearing herein (which report expresses an unqualified opinion on such
financial statements and includes an explanatory paragraph referring to PCD's
basis of presentation) and have been so included in reliance upon the report of
such firm given upon their authority as experts in accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission,
Washington, D.C., a Registration Statement on Form S-1 with respect to the
shares of Common Stock offered hereby. This Prospectus does not contain all the
information set forth in the Registration Statement and the exhibits and
schedules thereto. For further information pertaining to the Company and the
shares of Common Stock offered hereby, reference is made to the Registration
Statement, including the exhibits, financial statements and schedules filed
therewith. Statements contained in this Prospectus as to the contents of any
contract or any other document are not necessarily complete, and, in each
instance, reference is made to the copy of such contract or document filed as an
exhibit to the Registration Statement, each such statement being qualified in
all respects by such reference. The Registration Statement, including the
exhibits and schedules thereto, may be inspected and copied at the public
reference facilities maintained by the Commission at Judiciary Plaza Building,
450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549 and its regional
offices located at 7 World Trade Center, 13th Floor, New York, New York 10048
and Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661-2511. Copies of such materials can be obtained from the
Commission at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549,
at prescribed rates.
54
<PAGE>
ELECTRONIC HAIR STYLING, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
ELECTRONIC HAIR STYLING, INC.
Independent Auditors' Report.......................................................................... F-2
Balance Sheets as of December 31, 1994 and 1995 and as of March 31, 1996 (Unaudited).................. F-3
Statements of Operations for the Period from April 1, 1993 (Inception) to December 31, 1993, for the
Years Ended December 31, 1994 and 1995 and for the Three Months Ended March 31, 1995 and 1996
(Unaudited).......................................................................................... F-4
Statements of Changes in Stockholders' Equity (Deficit) for the Period from April 1, 1993 (Inception)
to December 31, 1993, for the Years Ended December 31, 1994 and 1995 and for the Three Months Ended
March 31, 1996 (Unaudited)........................................................................... F-5
Statements of Cash Flows for the Period from April 1, 1993 (Inception) to December 31, 1993, for the
Years Ended December 31, 1994 and 1995 and for the Three Months Ended March 31, 1995 and 1996
(Unaudited).......................................................................................... F-6
Notes to Financial Statements for the Period from April 1, 1993 (Inception) to December 31, 1993, for
the Years Ended December 31, 1994 and 1995 and for the Three Months Ended March 31, 1995 and 1996
(Unaudited).......................................................................................... F-7
PCD, THE PERSONAL CARE DIVISION OF DOWBRANDS L.P.
Independent Auditors' Report.......................................................................... F-15
Statements of Operations for the Years Ended December 31, 1993 and 1994 and for the Period from
January 1, 1995 to November 30, 1995................................................................. F-16
Statements of Net Invested Capital for the Years Ended December 31, 1993 and 1994 and for the Period
from January 1, 1995 to November 30, 1995............................................................ F-17
Statements of Cash Flows for the Years Ended December 31, 1993 and 1994 and for the Period from
January 1, 1995 to November 30, 1995................................................................. F-18
Notes to Financial Statements for the Years Ended December 31, 1993 and 1994 and for the Period from
January 1, 1995 to November 30, 1995................................................................. F-19
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
Electronic Hair Styling, Inc.:
We have audited the accompanying balance sheets of Electronic Hair Styling,
Inc. (the "Company"), as of December 31, 1994, and 1995, and the related
statements of operations, stockholders' equity (deficit) and cash flows for the
period from April 1, 1993 (Inception) to December 31, 1993 and for each of the
years ended December 31, 1994 and 1995. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of the Company as of December 31, 1994 and
1995, and the results of its operations and its cash flows for the period from
April 1, 1993 (Inception) to December 31, 1993 and for the years ended December
31, 1994 and 1995, in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
San Francisco, California
March 21, 1996
F-2
<PAGE>
ELECTRONIC HAIR STYLING, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1994 1995
--------- --------- MARCH 31,
1996
-----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash......................................................................... $ 2 $ 2,338 $ 456
Receivables from Dow......................................................... -- 2,374 2,073
Accounts receivable, net..................................................... -- 10,307 13,298
Inventories (Note 3)......................................................... -- 11,140 10,268
Prepaid expenses and other current assets.................................... -- 210 209
--------- --------- -----------
Total current assets....................................................... 2 26,369 26,304
Property, Plant and Equipment, Net (Note 4).................................... 4 16,283 16,034
Other Assets................................................................... -- 315 468
--------- --------- -----------
Total...................................................................... $ 6 $ 42,967 $ 42,806
--------- --------- -----------
--------- --------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable............................................................. $ 144 $ 6,469 $ 6,990
Accrued expenses............................................................. 91 4,024 4,856
Accrued salaries, wages and employee related expenses........................ -- 2,605 1,941
Current portion of long-term debt (Note 5)................................... 185 1,200 1,200
Payables to related parties (Note 8)......................................... 48 1,725 1,500
--------- --------- -----------
Total current liabilities.................................................. 468 16,023 16,487
--------- --------- -----------
Long-Term Debt (Note 5)........................................................ -- 12,850 13,146
Related Party Obligations (Note 8)............................................. 1,000 7,500 7,125
Commitments and Contingencies (Note 9).........................................
Stockholders' Equity (Deficit) (Note 6):
Preferred stock, $0.01 par value, 4,000,000 shares authorized, 1,000,000
shares of Series A issued and outstanding at December 31, 1995 and March 31,
1996 ($10,000,000 liquidation preference)................................... -- 8,500 8,500
Common stock, $0.01 par value, 12,000,000 shares authorized; 2,498,100,
2,944,920 and 2,960,495 shares, issued and outstanding at December 31, 1994
and 1995 and March 31, 1996, respectively................................... 25 29 30
Additional paid-in capital................................................... 734 1,718 1,894
Stock subscriptions receivable............................................... -- (50) (50)
Accumulated deficit.......................................................... (2,221) (3,603) (4,326)
--------- --------- -----------
Total stockholders' equity (deficit)....................................... (1,462) 6,594 6,048
--------- --------- -----------
Total Liabilities and Stockholders' Equity..................................... $ 6 $ 42,967 $ 42,806
--------- --------- -----------
--------- --------- -----------
</TABLE>
See notes to financial statements.
F-3
<PAGE>
ELECTRONIC HAIR STYLING, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED
APRIL 1, 1993 DECEMBER 31, MARCH 31,
(INCEPTION) TO -------------------- --------------------
DECEMBER 31, 1993 1994 1995 1995 1996
----------------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net Sales to Dow...................................... $ -- $ -- $ 1,644 $ -- $ 6,864
Net Sales to Others................................... -- -- 6,426 -- 21,616
------- --------- --------- --------- ---------
Total Net Sales....................................... -- -- 8,070 -- 28,480
Cost of Goods Sold.................................... -- -- 5,656 -- 17,954
------- --------- --------- --------- ---------
Gross Margin.......................................... -- -- 2,414 -- 10,526
Operating Expenses:
Selling, general and administrative expenses........ 565 557 3,496 93 10,843
Technology acquired from a related party (Note 8)... 1,000 -- -- -- --
------- --------- --------- --------- ---------
Total operating expenses.......................... 1,565 557 3,496 93 10,843
------- --------- --------- --------- ---------
Operating Loss........................................ (1,565) (557) (1,082) (93) (317)
Interest Expense...................................... (40) (59) (300) (18) (414)
Other Income.......................................... -- -- -- -- 8
------- --------- --------- --------- ---------
Net Loss.............................................. $ (1,605) $ (616) $ (1,382) $ (111) $ (723)
------- --------- --------- --------- ---------
------- --------- --------- --------- ---------
Net Loss per Share.................................... $ (.43) $ (.15) $ (.33) $ (.03) $ (.18)
------- --------- --------- --------- ---------
------- --------- --------- --------- ---------
Weighted Average Common and Common Equivalent Shares
Outstanding.......................................... 3,701 4,130 4,130 4,130 4,130
------- --------- --------- --------- ---------
------- --------- --------- --------- ---------
</TABLE>
See notes to financial statements.
F-4
<PAGE>
ELECTRONIC HAIR STYLING, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
PERIOD FROM APRIL 1, 1993 (INCEPTION) TO DECEMBER 31, 1993,
THE YEARS ENDED DECEMBER 31, 1994 AND 1995, AND THE THREE MONTHS ENDED MARCH 31,
1996
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK ADDITIONAL STOCK
---------------------- ------------------------ PAID-IN SUBSCRIPTIONS ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL RECEIVABLE DEFICIT TOTAL
--------- ----------- ----------- ----------- ----------- --------------- ------------ ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Initial capitalization --
for cash................ -- $ -- 2,244 $ 22 $ 12 $ -- $ -- $ 34
Issuance of common stock
for cash................ -- -- 254 3 382 -- -- 385
Grants of non-cash stock
option credits.......... -- -- -- -- 129 -- -- 129
Net loss................. -- -- -- -- -- -- (1,605) (1,605)
--------- ----------- ----- --- ----------- ------ ------------ ---------
Balance, December 31,
1993.................. -- -- 2,498 25 523 -- (1,605) (1,057)
Grants of non-cash stock
option credits.......... -- -- -- -- 211 -- -- 211
Net loss................. -- -- -- -- -- -- (616) (616)
--------- ----------- ----- --- ----------- ------ ------------ ---------
Balance, December 31,
1994.................. -- -- 2,498 25 734 -- (2,221) (1,462)
Issuance of Series A
preferred stock......... 1,000 8,500 -- -- -- -- -- 8,500
Issuance of common stock
for cash................ -- -- 135 1 214 -- -- 215
Issuance of common stock
for services............ -- -- 156 1 236 -- -- 237
Issuance of common stock
for stock
subscriptions........... -- -- 73 1 99 (100) -- --
Grants of non-cash stock
option credits.......... -- -- -- -- 311 -- -- 311
Conversion of notes
payable to common
stock................... -- -- 83 1 124 -- -- 125
Reduction of stock
subscriptions
receivable.............. -- -- -- -- -- 50 -- 50
Net loss................. -- -- -- -- -- -- (1,382) (1,382)
--------- ----------- ----- --- ----------- ------ ------------ ---------
Balance, December 31,
1995.................. 1,000 8,500 2,945 29 1,718 (50) (3,603) 6,594
Grants of non-cash stock
option credits
(unaudited)............. -- -- -- -- 83 -- -- 83
Stock grants to employees
(unaudited)............. -- -- 15 1 93 -- -- 94
Net loss (unaudited)..... -- -- -- -- -- -- (723) (723)
--------- ----------- ----- --- ----------- ------ ------------ ---------
Balance, March 31,
1996 (unaudited)...... 1,000 $ 8,500 2,960 $ 30 $ 1,894 $ (50) $ (4,326) $ 6,048
--------- ----------- ----- --- ----------- ------ ------------ ---------
--------- ----------- ----- --- ----------- ------ ------------ ---------
</TABLE>
See notes to financial statements.
F-5
<PAGE>
ELECTRONIC HAIR STYLING, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER ENDED
APRIL 1, 1993 31, MARCH 31,
(INCEPTION) TO -------------------- --------------------
DECEMBER 31, 1993 1994 1995 1995 1996
----------------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash Flows From Operating Activities:
Net loss............................................... $ (1,605) $ (616) $ (1,382) $ (111) $ (723)
Adjustments to reconcile net loss to net cash provided
by (used in) operating activities:
License fee not currently payable.................... 1,000 -- -- -- --
Noncash credits for services......................... 129 211 213 43 83
Issuance of common stock for services................ -- -- 52 -- 94
Depreciation and amortization........................ 1 2 144 -- 321
Effect of changes in:
Receivables........................................ -- -- 3,777 -- (3,355)
Inventories........................................ -- -- 528 -- 872
Other assets....................................... -- -- (92) -- 1
Payables........................................... 154 38 (1,699) 5 296
Accrued expenses................................... 36 55 329 14 168
------- --------- --------- --------- ---------
Net cash provided by (used in) operating
activities...................................... (285) (310) 1,870 (49) (2,243)
------- --------- --------- --------- ---------
Cash Flows From Investing Activities:
Additions to furniture and equipment................... (5) (2) (128) -- (72)
Acquisition of PCD..................................... -- -- (13,689) -- 665
------- --------- --------- --------- ---------
Net cash provided by (used in) investing
activities...................................... (5) (2) (13,817) -- 593
------- --------- --------- --------- ---------
Cash Flows From Financing Activities:
Borrowings............................................. -- 185 14,515 60 596
Repayments of debt..................................... -- -- (300) -- (675)
Costs paid for public offering......................... -- -- (147) -- (153)
Proceeds from sales of stock........................... 419 -- 215 -- --
------- --------- --------- --------- ---------
Net cash provided by (used in) financing
activities...................................... 419 185 14,283 60 (232)
------- --------- --------- --------- ---------
Net Increase (Decrease) in Cash.......................... 129 (127) 2,336 11 (1,882)
Cash at Beginning of Period.............................. -- 129 2 2 2,338
------- --------- --------- --------- ---------
Cash at End of Period.................................... $ 129 $ 2 $ 2,338 $ 13 $ 456
------- --------- --------- --------- ---------
------- --------- --------- --------- ---------
Supplemental Disclosures of Cash Flow Information:
Cash paid during period for interest................... $ 3 $ 5 $ --
Noncash financing activities:
License fee acquired with debt....................... 1,000 -- --
Common stock issued for subscriptions receivable..... -- -- 100
Conversion of notes payable to common stock.......... -- -- 125
Acquisition of PCD (see Note 1):
Issuance of preferred stock.......................... -- -- 8,500
Issuance of convertible subordinated note............ -- -- 5,000
Issuance of credits to Dow........................... -- -- 3,000
Common stock issued for acquisition related
services............................................ -- -- 185
Reduction of subscription receivable through services
performed........................................... -- -- 50
</TABLE>
See notes to financial statements.
F-6
<PAGE>
ELECTRONIC HAIR STYLING, INC.
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND OPERATIONS
Electronic Hair Styling, Inc. (the "Company"), a Delaware corporation, is
the successor to Electronic Hair Styling, Inc., which was incorporated in the
State of Washington on April 1, 1993 (the "Predecessor"). Effective March 18,
1996, Predecessor merged with and into its wholly-owned subsidiary, the Company.
In connection with the merger, the Company issued .660 shares of common stock in
exchange for each issued and outstanding share of Predecessor common stock. The
accompanying Company financial statements, which are substantially identical to
Predecessor's financial statements for periods prior to the merger, give
retroactive effect to the merger.
The Company is engaged in the early stages of research on, and development
of, hair styling appliances and products applying an electronics-based
technology. The Company licensed the technology from Intertec Ltd., which is the
sole limited partner of Intertec Holdings, L.P., the principal stockholder of
the Company (see Note 8). From inception though November 15, 1995, the Company
had no revenues. Prior to the acquisition discussed below, the Company was a
development stage company.
Effective November 15, 1995, the Company acquired certain assets and
liabilities of PCD, the Personal Care Division of DowBrands L.P. ("PCD").
DowBrands L.P. is a limited partnership whose managing partner is DowBrands,
Inc., a wholly owned subsidiary of The Dow Chemical Company (collectively
"Dow"). PCD, which was renamed Lamaur after the acquisition, develops,
manufactures and markets hair care products. The acquisition has been accounted
for as a purchase and did not result in any goodwill. The total purchase price,
including related acquisition costs, was $30.2 million consisting of $13.7
million in cash (funded with revolving and term credit facilities, see Note 5),
$8.5 million (one million shares) of the Company's Series A convertible
preferred stock (see Note 6), a $5.0 million convertible subordinated note (the
"Dow Convertible Note", see Note 8) and $3.0 million of credits to be issued to
Dow for future purchases. The acquisition was accounted for as if it occurred on
November 30, 1995 and the Company's financial statements include the results of
PCD effective December 1, 1995.
The purchase price was allocated to acquired assets and liabilities based on
their estimated fair values as follows (in thousands):
<TABLE>
<S> <C>
Accounts receivable................................................ $ 16,458
Inventories........................................................ 11,668
Property, plant and equipment...................................... 16,805
Other assets....................................................... 35
Accounts payable and accrued expenses.............................. (14,268)
---------
Estimated fair value of assets and liabilities..................... 30,698
Total purchase price............................................... (30,187)
---------
Excess of estimated fair value of assets and liabilities over the
purchase price.................................................... $ 511
---------
---------
</TABLE>
The excess of the estimated fair value of assets and liabilities over the
purchase price was recorded as a reduction of property, plant and equipment.
Accounts payable and accrued expenses at December 31, 1995 included a reserve
for severance costs of $675,000 for an overall reduction in the workforce and
the replacement of a key employee. Such terminations are expected to be
completed by December 31, 1996. Through March 31, 1996, approximately $300,000
had been charged against the reserve.
F-7
<PAGE>
ELECTRONIC HAIR STYLING, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
1. ORGANIZATION AND OPERATIONS (CONTINUED)
The following unaudited pro forma summary results of operations for each of
the years ended December 31, 1994 and 1995 gives effect to the acquisition of
PCD as if it had occurred at the beginning of each period presented. The pro
forma results have been prepared for comparative purposes only and do not
purport to reflect the results of operations which would have actually occurred
had the combination been effective on the dates indicated or which may occur in
the future.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1994 1995
----------- ----------
(IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS)
<S> <C> <C>
Total net sales......................................... $ 121,277 $ 117,766
Net loss................................................ $ (124,856) $ (11,212)
Net loss per share...................................... $ (30.23) $ (2.71)
</TABLE>
2. SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES -- The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reported period. Actual results could differ from those estimates.
CASH balances are held in a collateral account with the Company's lender
(see Note 5). After residing in the account for two days, such balances are
applied against the Company's debt obligations.
ACCOUNTS RECEIVABLE, NET includes an allowance for doubtful accounts, which
is not material.
RECEIVABLES FROM DOW represent amounts due under a contract manufacturing
agreement with Dow (see Note 8) and at December 31, 1995 included a $665,000
refund resulting from an adjustment to the initial purchase price paid to Dow,
which was received in the first quarter of 1996.
INVENTORIES are stated at the lower of weighted average cost or market.
PROPERTY, PLANT, AND EQUIPMENT is recorded at cost and is being depreciated
using the straight-line method over the estimated useful lives of the related
assets which range from 20 to 50 years for buildings and improvements and 3 to
10 years for machinery and equipment.
OTHER ASSETS primarily represent costs incurred in connection with an
initial public offering anticipated to occur in 1996 and will be netted against
the proceeds from the offering.
INCOME TAXES -- Under Statement of Financial Accounting Standards No. 109,
ACCOUNTING FOR INCOME TAXES, the Company provides taxes equal to the net change
in the deferred tax assets and liabilities during the year. Deferred income
taxes represent loss carryforwards and future tax effects resulting from
temporary differences between the financial statement and tax basis of assets
and liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse.
NET LOSS PER SHARE was computed by dividing net loss by the weighted average
number of shares of common stock and common stock equivalents, which consist of
Series A convertible preferred stock, warrants and options issued within one
year of the Company's anticipated initial public offering. In accordance with
the rules of the Securities and Exchange Commission, these common stock
equivalents have been considered as outstanding since the inception of the
Company and have been included in the calculation of weighted average common and
common equivalent shares outstanding for all periods presented using the
treasury stock method at an assumed market price of $9.00, even though they are
anti-dilutive in loss periods. Primary and fully diluted earnings per share are
equivalent in 1995 because the assumed conversion of the Dow Convertible Note is
anti-dilutive.
F-8
<PAGE>
ELECTRONIC HAIR STYLING, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CONCENTRATION OF CREDIT RISK -- The Company sells the majority of its
products to large U.S. retailers. Excluding sales to Dow, sales to the Company's
two largest customers were $1.6 million and $0.9 million, respectively, in 1995.
No other customer accounted for more than 10% of total net sales in 1995. The
Company performs ongoing credit evaluations of its customers and generally does
not require collateral. The Company maintains reserves for potential credit
losses, which have been insignificant.
FAIR VALUE OF FINANCIAL INSTRUMENTS -- Generally accepted accounting
principles require the disclosure of the fair value of certain financial
instruments, whether or not recognized in the balance sheet, for which it is
practicable to estimate fair value. The Company estimated the fair values
presented below using appropriate valuation methodologies and market information
available as of year-end. Considerable judgment is required to develop estimates
of fair value, and the estimates presented are not necessarily indicative of the
amounts that the Company could realize in a current market exchange. The use of
different market assumptions or estimation methodologies could have a material
effect on the estimated fair values. Additionally, these fair values were
estimated at year-end, and current estimates of fair value may differ
significantly from the amounts presented.
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments:
ACCOUNTS RECEIVABLE, ACCOUNTS PAYABLE AND SHORT-TERM BORROWINGS -- The
carrying amount of these items approximates fair value.
DEBT -- To estimate the fair value of debt the Company uses those
interest rates that are currently available to it for issuance of debt with
similar terms and remaining maturities. At December 31, 1995, the carrying
value of debt approximated fair value.
UNAUDITED INTERIM INFORMATION -- The financial information with respect to
the quarters ended March 31, 1995 and 1996 is unaudited. In the opinion of
management, such information contains all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation of the results of such
periods. The results of operations for the quarter ended March 31, 1996 are not
necessarily indicative of the results to be expected for the full year.
NEW ACCOUNTING STANDARDS -- In 1996, the Company adopted the provisions of
Statement of Financial Accounting Standards ("SFAS") No. 121, ACCOUNTING FOR THE
IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF.
SFAS No. 121 establishes recognition of impairment losses when a company no
longer expects to recover the carrying value of a long-lived asset. The effect
of adopting SFAS No. 121 was not material.
In 1995, the Financial Accounting Standards Board issued SFAS No. 123,
ACCOUNTING FOR STOCK-BASED COMPENSATION, which requires adoption of its
disclosure provisions in 1996. The new standard defines a fair value method of
accounting for stock options and other equity instruments. Under the fair value
method, compensation cost is measured at the grant date based on the fair value
of the award and is recognized over the service period, which is usually the
vesting period. The new standard encourages, but does not require, adoption of
the fair value method of accounting for employee stock-based transactions. SFAS
No. 123 permits companies to continue to account for such transactions under
Accounting Principles Board Opinion ("APBO") No. 25, ACCOUNTING FOR STOCK ISSUED
TO EMPLOYEES, but requires a disclosure of pro forma net income and earnings per
share as if the Company had applied the new method of accounting. The Company
has elected to continue to account for stock-based compensation under APBO No.
25 and will include the disclosure requirements of SFAS No. 123 in its financial
statements for the year ending December 31, 1996.
F-9
<PAGE>
ELECTRONIC HAIR STYLING, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
3. INVENTORIES
Inventories include the following:
<TABLE>
<CAPTION>
MARCH 31,
1996
DECEMBER 31. -------------
1995
---------------- (UNAUDITED)
<S> <C> <C>
Finished goods......................................................... $ 6,393,000 $ 5,526,000
Work in process........................................................ 480,000 662,000
Raw materials.......................................................... 4,267,000 4,080,000
---------------- -------------
Total.................................................................. $ 11,140,000 $ 10,268,000
---------------- -------------
---------------- -------------
</TABLE>
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
<S> <C> <C>
1994 1995
--------- -------------
Land and land improvements................................................. $ -- $ 1,662,000
Buildings and improvements................................................. -- 4,981,000
Machinery and equipment.................................................... 7,000 9,599,000
Construction in progress................................................... -- 185,000
--------- -------------
Total.................................................................... 7,000 16,427,000
Less accumulated depreciation.............................................. (3,000) (144,000)
--------- -------------
Total...................................................................... $ 4,000 $ 16,283,000
--------- -------------
--------- -------------
</TABLE>
5. LONG-TERM DEBT
Long-term debt at December 31, 1995 includes the following:
<TABLE>
<S> <C>
Revolving loan.............................................. $ 8,050,000
Term loan................................................... 6,000,000
------------
Total..................................................... 14,050,000
Less current portion........................................ (1,200,000)
------------
Long-term portion........................................... $ 12,850,000
------------
------------
</TABLE>
In November 1995, the Company obtained revolving and term loans to finance
the acquisition of PCD. Under the terms of the revolving facility, the Company
can borrow up to $14.0 million or a lesser amount as determined by the borrowing
base (as defined in the loan agreement, comprising a percentage of eligible
receivables and inventory). The term loan provides for a single advance of $6.0
million and is payable in monthly installments beginning January 1, 1996 of
$100,000, plus interest. Interest is payable monthly at prime plus 1.25% for the
revolving facility (9.75% at December 31, 1995) and at prime plus 1.50% for the
term loan (10.0% at December 31, 1995). Both credit facilities mature on
November 15, 1998. The credit facilities are secured by virtually all assets of
the Company. Additionally, the credit facilities prohibit the payment of
dividends, restrict the Company's ability to incur additional indebtedness and
require the Company to comply with certain financial covenants regarding
profitability, minimum net worth, leverage and cash flow. The Company was in
compliance with these covenants as of December 31, 1995 and March 31, 1996.
Current portion of long-term debt at December 31, 1994 represented
short-term borrowings which were secured by a certificate of deposit maintained
by the Company's Chief Executive Officer and were repaid in 1995.
F-10
<PAGE>
ELECTRONIC HAIR STYLING, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
6. STOCKHOLDERS' EQUITY (DEFICIT)
PREFERRED STOCK -- The Company has authorized 4,000,000 shares of $.01 par
value preferred stock, the terms of which are established at the time of
issuance by the Board of Directors. In connection with the acquisition described
in Note 1, the Company issued one million shares of Series A convertible
preferred stock ("Series A Preferred"). The Series A Preferred has a liquidation
preference of $10.00 per share or $10.0 million in the aggregate and has
dividend and voting rights equal to common stock on an as-converted basis. Each
share of Series A Preferred is convertible into .660 shares of common stock at
the option of the holder, however, if the trading price of the common equals or
exceeds $21.21 per share for a 30-day trading period, the Company may force
conversion.
Also in connection with the acquisition, the Company's Board of Directors
authorized 763,500 shares of Series B convertible preferred stock ("Series B
Preferred") to be issued in the event of conversion of the $5.0 million Dow
Convertible Note (see Note 8). Series B Preferred bears an 8% cumulative
dividend, payable quarterly, has a liquidation preference of $6.55 per share or
$5.0 million in the aggregate, has dividend and voting rights equal to common
stock on an as-converted basis and is redeemable at face value at the option of
the Company in $1.0 million increments at any time. Each share of Series B
Preferred is convertible into .660 shares of common stock at the option of the
holder, however, if the trading price of the common equals or exceeds $21.21 per
share for a 30-day trading period, the Company may force conversion.
STOCK OPTION PLANS -- the Company maintains various stock option plans for
employees and directors. Under all plans, the option price per share has not
been less than the fair market value on the date of grant. Options granted to
directors and certain employees fully vest one year after the grant date and
options granted to other employees typically vest 25% on the grant date with the
remaining 75% vesting over three years. At December 31, 1995, 291,720 shares
were available for grants under these plans. A summary of changes in common
stock options during 1993, 1994 and 1995 is as follows:
<TABLE>
<CAPTION>
NUMBER PRICE PER
OF SHARES SHARE RANGE
----------- --------------
<S> <C> <C>
April 1, 1993 (Inception)
Granted.................................................................. 79,200 $1.52
-----------
Outstanding at December 31, 1993......................................... 79,200 1.52
Granted.................................................................. 42,900 1.52
-----------
Outstanding at December 31, 1994......................................... 122,100 1.52
Granted.................................................................. 623,700 1.52 - 6.06
Canceled................................................................. (9,900) 1.52
-----------
Outstanding at December 31, 1995......................................... 735,900 1.52 - 6.06
-----------
-----------
</TABLE>
Options exercisable at December 31, 1994 and 1995 were 79,200 and 122,100
respectively.
These stock option plans also provide for the issuance of incentive stock
rights, stock appreciation rights and restricted stock, none of which had been
granted as of December 31, 1995.
Subsequent to December 31, 1995, 163,600 options were granted at exercise
prices of $6.06 and $7.50 per share. In connection with Predecessor's merger
with the Company (discussed in Note 1), all of Predecessor's outstanding stock
options were assumed by the Company under the 1996 Stock Incentive Plan or The
Stock Option Plan for Outside Directors and Advisory Board Members. Total shares
authorized under these two plans are 1,250,000 and 150,000, respectively. Total
shares available for grant under these plans were 461,300 and 70,800,
respectively, at December 31, 1995.
EMPLOYEE STOCK PLAN -- In November 1995 the Company adopted the Employee
Stock Plan for the purpose of issuing up to an aggregate of 16,500 shares to
former Dow employees at no cost to the employee. In January 1996, 15,575 shares
were issued pursuant to this plan.
F-11
<PAGE>
ELECTRONIC HAIR STYLING, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
6. STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED)
NON-CASH CREDITS -- Certain of the Company's employees and consultants have
received a portion of their salary or fees, respectively, in the form of
non-cash credits which may be applied to 80% of the exercise price of options
granted to them. Such credits, $651,000 at December, 31, 1995, have been
recorded as expense or cost of acquisition and additional paid-in capital as the
related salary or consulting fees were earned.
STOCK SUBSCRIPTION RECEIVABLE -- In 1995, the Company issued 66,000 shares
of common stock for two 6% notes receivable of $50,000 each, due August 1996 and
July 2001, respectively, or 30 days after the sale of such common stock,
whichever is earlier.
WARRANTS -- In consideration for short-term borrowings of $225,000 in
November 1995 (see Note 8), the Company issued warrants to purchase 74,250
shares of common stock at $3.03 per share. The warrants become exercisable in
May 1996 and expire in November 1998.
7. INCOME TAXES
Deferred taxes are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
<S> <C> <C>
1994 1995
----------- -------------
License fee.............................................................. $ 401,000 $ 401,000
Net operating loss carryforwards......................................... 293,000 670,000
Noncash credits.......................................................... 136,000 261,000
----------- -------------
Gross deferred tax assets................................................ 830,000 1,332,000
Deferred tax asset valuation allowance................................... (830,000) (1,332,000)
----------- -------------
Net deferred tax asset................................................... $ -- $ --
----------- -------------
----------- -------------
</TABLE>
As it is more likely than not that sufficient taxable income will not be
generated in future periods to utilize the deferred tax assets, a valuation
allowance has been recorded.
At December 31, 1995, the Company had net operating loss carryforwards for
tax purposes of approximately $1.8 million which expire in 2008-2010.
8. RELATED PARTY TRANSACTIONS
Related party obligations includes the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
<S> <C> <C>
1994 1995
------------ -------------
Promissory note for license rights...................................... $ 1,000,000 $ 1,000,000
Dow Convertible Note.................................................... -- 5,000,000
Dow purchase credits.................................................... -- 3,000,000
Short-term borrowings................................................... -- 225,000
------------ -------------
Total................................................................... 1,000,000 9,225,000
Less current portion.................................................... -- (1,725,000)
------------ -------------
Long-term portion....................................................... $ 1,000,000 $ 7,500,000
------------ -------------
------------ -------------
</TABLE>
In May 1993, the Company licensed proprietary technology from Intertec Ltd.,
a limited partnership controlled by the Company's Chairman of the Board, Chief
Executive Officer and principal shareholder, pursuant to an exclusive 30-year,
nonassignable, license agreement (the "License Agreement"). According to the
terms of the License Agreement, the Company is required to pay a $1.0 million
license fee, plus royalties, to Intertec Holdings, L.P. ("Intertec Holdings") as
agent for Intertec Ltd. Due to uncertainty
F-12
<PAGE>
ELECTRONIC HAIR STYLING, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
8. RELATED PARTY TRANSACTIONS (CONTINUED)
regarding recoverability from future operations, the license fee was expensed in
1993. A note for the license fee ("Intertec Note") is payable in four equal
annual installments of $250,000 commencing on the earlier of (i) one year after
the closing of an initial public offering, or (ii) May 31, 1998. Interest, at
5.5%, is payable in arrears on the date each installment of principal is due.
The Company will pay a royalty to Intertec Ltd. equal to (i) 1.0% of the
Company's proceeds from any direct sales made by the Company of products,
instruments or components using, or derived from, the technology, and (ii) 1.0%
of the "revenue base" of the Company's sub-licensees. The "revenue base" is the
proceeds received by the sub-licensees for their sales of products using the
technology. This royalty declines in steps as the revenue base increases,
ultimately declining to 0.4% when cumulative sales from all products using the
Company's technology reach $10.0 billion. No royalty fees have been paid to
date.
In March 1996, the Company and Intertec Holdings entered into a stock
purchase agreement pursuant to which Intertec Holdings agreed to purchase from
the Company, and the Company agreed to sell to Intertec Holdings, shares of
common stock at the initial public offering price per share. The aggregate
number of shares of common stock which Intertec Holdings is required to purchase
is equal to (x) the outstanding principal of, and all accrued and unpaid
interest on the Intertec Note as of the closing of the Company's initial public
offering, divided by (y) the initial public offering price per share. Intertec
Holdings is obligated, subject to there being no event of default under the
Company's loan agreements and certain other conditions, to purchase and pay for
the shares in four equal installments commencing on the first anniversary of the
closing of the Company's initial public offering. The deferred purchase price
under the stock purchase agreement accrues interest from and after the closing
of the Company's initial public offering at 5.5% per annum, payable with each
installment. Intertec Holdings may elect to accelerate one or more purchases
under the stock purchase agreement on 30 days' prior notice to the Company. The
Company may, at any time or from time to time, terminate Intertec Holdings's
purchase rights with respect to one or more of the installments, on 10 days'
prior notice to Intertec Holdings.
The $5.0 million Dow Convertible Note bears interest at 8.0%, due quarterly,
is subordinated to any bank borrowings and is convertible, at the option of the
holder, into Series B Preferred (see Note 6) at a conversion ratio of one share
for each $6.55 principal amount of the Dow Convertible Note. Additionally, in
the event of an initial public offering, the Dow Convertible Note automatically
converts into Series B Preferred at the same conversion rate discussed above,
but only to the extent that the conversion does not cause the holder of the Dow
Convertible Note to be the owner of 20% or more of the voting equity of the
Company. The Dow Convertible Note is due in quarterly installments of $250,000
each beginning on December 31, 2000.
In connection with the acquisition described in Note 1, Dow has agreed to
purchase 100% of its requirements for certain Dow products from the Company for
a period of two years beginning November 16, 1995. In connection with this
requirements agreement, Dow agreed to accept as part of the purchase price $3
million of credits to be applied against its future purchases. These credits
will be issued to Dow through credit memos each quarter in the amount of
$375,000 until the credits are fully used. At December 31, 1995, $1.5 million of
such credits were classified as a current liability. Revenues from this
arrangement totaled $1.6 million in 1995. Services are priced based on direct
material and labor costs incurred plus an agreed upon profit margin.
In November 1995, the Company borrowed $225,000 from employees and
stockholders. The borrowings were repaid in February 1996 with interest at 12%.
The lenders received warrants to purchase 74,250 shares of common stock (see
Note 6).
The Company leases its offices in Mill Valley, California from a related
party under a noncancellable lease expiring in June 1996 with monthly rentals of
$6,000. The Company also leases office equipment from a
F-13
<PAGE>
ELECTRONIC HAIR STYLING, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
8. RELATED PARTY TRANSACTIONS (CONTINUED)
related party on a month-to-month basis with monthly rentals of $1,513. Both of
those related parties are controlled by the Company's Chairman of the Board,
Chief Executive Officer and principal shareholder. Rental expense for all leases
was $53,887, $89,428, and $90,156 for 1993, 1994 and 1995, respectively.
9. COMMITMENTS AND CONTINGENCIES
The Company has various purchase and sales commitments and obligations
entered into in the ordinary course of business which management does not
believe will have a material adverse effect on its financial position or results
of operations.
F-14
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Dow Chemical Company:
We have audited the accompanying statements of operations of PCD, the
Personal Care Division of DowBrands L.P., ("PCD"), a limited partnership whose
managing partner is DowBrands Inc., a wholly owned subsidiary of The Dow
Chemical Company, for the years ended December 31, 1993 and 1994, and for the
period from January 1, 1995 to November 30, 1995, and the related statements of
net invested capital and cash flows for the periods then ended. These financial
statements are the responsibility of PCD's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the results of operations of PCD for the years ended December 31, 1993
and 1994, and for the period from January 1, 1995 to November 30, 1995, and the
changes in its net invested capital, and its cash flows for the periods then
ended, in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared from the separate
records maintained by PCD and may not be indicative of the conditions that would
have existed or the results of operations if PCD had been operated as an
unaffiliated company. As discussed in Note 1, Statement of Financial Accounting
Standards No. 109 requires that the consolidated amount of current and deferred
tax expenses for a group that files a consolidated tax return be allocated among
members of the group when those members issue separate financial statements. On
the basis that PCD is a division and not a separate subsidiary, current and
deferred income taxes have not been provided for in the accompanying financial
statements.
DELOITTE & TOUCHE LLP
San Francisco, California
January 26, 1996
F-15
<PAGE>
PCD, THE PERSONAL CARE DIVISION OF DOWBRANDS L.P.
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1993 AND 1994 AND THE PERIOD
FROM JANUARY 1, 1995 TO NOVEMBER 30, 1995
<TABLE>
<CAPTION>
PERIOD FROM
YEAR ENDED DECEMBER 31, JANUARY 1, 1995
------------------------ TO NOVEMBER 30,
1993 1994 1995
----------- ----------- -----------------
(IN THOUSANDS)
<S> <C> <C> <C>
Net Sales to Dow.................................................... $ 16,592 $ 19,253 $ 19,783
Net Sales to Others................................................. 95,439 102,024 89,913
----------- ----------- -----------------
Total Net Sales..................................................... 112,031 121,277 109,696
Cost of Goods Sold.................................................. 71,061 71,735 67,088
----------- ----------- -----------------
Gross Margin........................................................ 40,970 49,542 42,608
Operating Expenses.................................................. 53,851 57,830 42,344
Write-down of Assets................................................ -- 120,100 11,000
----------- ----------- -----------------
Operating Loss...................................................... (12,881) (128,388) (10,736)
Other:
Interest expense from Dow......................................... (6,643) (5,805) (1,603)
Other income, net................................................. 317 705 101
----------- ----------- -----------------
Total other..................................................... (6,326) (5,100) (1,502)
----------- ----------- -----------------
Net Loss............................................................ $ (19,207) $ (133,488) $ (12,238)
----------- ----------- -----------------
----------- ----------- -----------------
</TABLE>
See notes to financial statements.
F-16
<PAGE>
PCD, THE PERSONAL CARE DIVISION OF DOWBRANDS L.P.
STATEMENTS OF NET INVESTED CAPITAL
YEARS ENDED DECEMBER 31, 1993 AND 1994 AND THE PERIOD
FROM JANUARY 1, 1995 TO NOVEMBER 30, 1995
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, PERIOD FROM
----------------------- JANUARY 1, 1995
1993 1994 TO NOVEMBER 30, 1995
---------- ----------- --------------------
(IN THOUSANDS)
<S> <C> <C> <C>
Net invested capital, beginning of period.......................... $ 179,654 $ 169,058 $ 47,493
Net loss for the period............................................ (19,207) (133,488) (12,238)
Net capital invested by (returned to) Dow.......................... 8,611 11,923 (3,489)
---------- ----------- --------
Net invested capital, end of period................................ $ 169,058 $ 47,493 $ 31,766
---------- ----------- --------
---------- ----------- --------
</TABLE>
See notes to financial statements.
F-17
<PAGE>
PCD, THE PERSONAL CARE DIVISION OF DOWBRANDS L.P.
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1993 AND 1994 AND THE PERIOD
FROM JANUARY 1, 1995 TO NOVEMBER 30, 1995
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, PERIOD FROM
----------------------- JANUARY 1, 1995 TO
1993 1994 NOVEMBER 30, 1995
---------- ----------- --------------------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash Flows From Operating Activities:
Net loss.......................................................... $ (19,207) $ (133,488) $ (12,238)
Adjustments to reconcile net loss to net cash provided by (used
in) by operating activities:
Write-down of assets............................................ -- 120,100 11,000
Depreciation.................................................... 3,822 3,956 2,010
Goodwill amortization........................................... 3,568 3,568 --
Changes in:
Accounts receivable........................................... 1,581 (3,299) 2,009
Inventories................................................... 3,479 (1,342) 792
Prepaid expenses and other.................................... 62 101 215
Accounts payable and accrued expenses......................... 285 (790) 268
---------- ----------- --------
Net cash provided by (used in) operating activities......... (6,410) (11,194) 4,056
---------- ----------- --------
Cash Flows Used In Investing Activities:
Additions to property, plant, and equipment..................... (2,542) (902) (1,011)
Other........................................................... 341 173 444
---------- ----------- --------
Net cash used in investing activities....................... (2,201) (729) (567)
---------- ----------- --------
Cash Flows From Financing Activities:
Net capital invested by (returned to) Dow....................... 8,611 11,923 (3,489)
---------- ----------- --------
Net Change in Cash................................................ -- -- --
Cash at Beginning of Period....................................... 1 1 1
---------- ----------- --------
Cash at End of Period............................................. $ 1 $ 1 $ 1
---------- ----------- --------
---------- ----------- --------
</TABLE>
F-18
<PAGE>
PCD, THE PERSONAL CARE DIVISION OF DOWBRANDS L.P.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1993 AND 1994 AND PERIOD
FROM JANUARY 1, 1995 TO NOVEMBER 30, 1995
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
BUSINESS -- PCD, the Personal Care Division of DowBrands L.P., ("PCD") a
limited partnership whose managing partner is DowBrands Inc., a wholly owned
subsidiary of The Dow Chemical Company (collectively "Dow"), develops,
manufactures and markets hair care products.
Effective November 15, 1995, pursuant to an Asset Purchase Agreement, Dow
sold substantially all of the assets and liabilities of PCD to Electronic Hair
Styling, Inc. (the "Company") for $28.8 million comprised of $12.3 million in
cash, a $5.0 million 8.0% subordinated note (convertible into Series B preferred
stock), $8.5 million in Series A convertible preferred stock and $3.0 million in
credits to be issued to Dow for future purchases. Through its Series A
convertible preferred stock holdings, Dow will maintain an approximate 18%
ownership interest in the voting equity of the Company. The sale was accounted
for as if it occurred on November 30, 1995.
BASIS OF PRESENTATION -- The accompanying financial statements present
operations, net invested capital and cash flows of PCD on a historical basis. In
1987, DowBrands L.P. acquired PCD's predecessor for approximately $183 million.
As a result of this acquisition, Dow's new accounting basis, determined in
accordance with the purchase method of accounting, was "pushed-down" to PCD and,
accordingly, the assets and liabilities of PCD were adjusted to reflect their
fair values. The excess of Dow's cost of PCD over the estimated fair value of
net assets acquired was recorded as goodwill and was being amortized over 40
years. During 1994, in contemplation of Dow's sale of PCD, Dow wrote down its
investment in PCD by approximately $120 million. This write-down was applied to
PCD's unamortized goodwill of $117 million and to property, plant and equipment
of $3 million. In 1995 the proposed buyer withdrew its offer. During 1995, Dow
further wrote down its investment in PCD by an additional $11 million, which was
recorded as a reduction of property, plant and equipment.
RELATIONSHIP WITH DOW -- PCD uses certain resources and administrative staff
of Dow, including accounting, legal, tax, treasury, data processing, risk
management, human resources and corporate relations. PCD is charged a fee for
these services at an amount that Dow estimates to be based on actual time or
costs incurred. These charges were $2,237,000 and $1,465,000 in 1993 and 1994,
respectively and $733,500 for the period from January 1, 1995 to November 30,
1995 and are included in operating expenses.
In addition, PCD is charged interest by Dow on an imputed amount of debt
required to fund Dow's total capital investment in PCD. Such interest charges
were $6,643,000 and $5,805,000 in 1993 and 1994, respectively, and $1,603,000
for the period from January 1, 1995 to November 30, 1995.
INCOME TAXES -- Statement of Financial Accounting Standards No. 109 requires
that the consolidated amount of current and deferred tax expense for a group
that files a consolidated tax return be allocated among the members of the group
when those members issue separate financial statements. However, management of
PCD believes that such requirement applies only to separate financial statements
of subsidiaries and since PCD is a division of Dow and not a separate
subsidiary, current and deferred income taxes have not been provided for in the
accompanying financial statements.
CONCENTRATION OF CREDIT RISK -- PCD sells the majority of its products to
large U.S. retailers. Excluding sales to Dow, sales to PCD's largest customer
were $21.6 million and $22.3 million in 1993 and 1994, respectively, and $19.7
million for the period from January 1, 1995 to November 30, 1995. No other
customer accounted for more than 10% of net sales in any period. PCD performs
ongoing credit evaluations of its customers and generally does not require
collateral. PCD maintains reserves for potential credit losses, which have been
insignificant.
F-19
<PAGE>
PCD, THE PERSONAL CARE DIVISION OF DOWBRANDS L.P.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1993 AND 1994 AND PERIOD
FROM JANUARY 1, 1995 TO NOVEMBER 30, 1995
2. RELATED PARTY TRANSACTIONS
PCD provides contract packaging and manufacturing services for Dow. Revenues
from this arrangement totaled $16,592,000 and $19,253,000 in 1993 and 1994,
respectively and $19,783,000 for the period from January 1, 1995 to November 30,
1995. Services are priced based on direct material and labor costs incurred plus
an agreed upon profit margin.
3. EMPLOYEE BENEFIT PLANS
Through November 15, 1995, PCD's employees were eligible to participate in
Dow's retirement, 401(k) and postretirement health and welfare benefit plans.
Contributions to the plans by PCD on behalf of PCD's employees were
approximately $1,789,000, and $1,657,000 in 1993 and 1994, respectively and
$1,432,000 for the period from January 1, 1995 to November 30, 1995.
4. COMMITMENTS AND CONTINGENCIES
PCD has various purchase and sales commitments and obligations entered into
in the ordinary course of business which management does not believe will have a
material adverse effect on PCD's financial statements.
F-20
<PAGE>
3 Pictures of Company Manufacturing Facility
(Testing Laboratory (Bottling Plant)
(Aerial View)
2 Pictures of Models
5 Laboratory Pictures
1 Salon Picture
<PAGE>
Lamaur created Pativa to help its salon partners grow their business by
offering the innovative products, progressive education and effective
promotions necessary to achieve financial and personal success.
3 MODELS
<PAGE>
-------------------------------------------
-------------------------------------------
-------------------------------------------
-------------------------------------------
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION IN CONNECTION WITH THIS OFFER MADE BY
THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST
NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE UNDERWRITERS.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION TO BUY
BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER TO SELL OR SOLICITATION IS NOT
AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT
QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER
OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE
HEREOF.
UNTIL , 1996 ALL DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED
SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED
TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO
DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR
UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---
<S> <C>
Prospectus Summary.............................. 3
Risk Factors.................................... 6
Use of Proceeds................................. 12
Dividend Policy................................. 12
Capitalization.................................. 13
Dilution........................................ 14
Unaudited Pro Forma Financial Information....... 15
Selected Financial Data......................... 16
Management's Discussion and Analysis of
Financial Condition and Results of
Operations..................................... 18
Business........................................ 23
Management...................................... 34
Principal Stockholders.......................... 46
Certain Transactions............................ 48
Description of Capital Stock.................... 49
Shares Eligible for Future Sale................. 51
Underwriting.................................... 52
Legal Matters................................... 54
Experts......................................... 54
Additional Information.......................... 54
Index to Financial Statements................... F-1
</TABLE>
[LOGO]
ELECTRONIC HAIR STYLING, INC.
2,600,000 SHARES
COMMON STOCK
--------------
PROSPECTUS
--------------
RODMAN & RENSHAW, INC.
SANDS BROTHERS & CO., LTD.
, 1996
-------------------------------------------
-------------------------------------------
-------------------------------------------
-------------------------------------------
<PAGE>
Exhibit 1.1
2,600,000 SHARES
ELECTRONIC HAIR STYLING, INC.
COMMON STOCK
UNDERWRITING AGREEMENT
_____________, 1996
Rodman & Renshaw, Inc.
Sands Brothers & Co.,Ltd.
c/o Rodman & Renshaw, Inc.
225 Liberty Street
2 World Financial Center, 30th Floor
New York, New York 10281
On behalf of the Several
Underwriters named in
Schedule I attached hereto.
Ladies and Gentlemen:
Electronic Hair Styling, Inc., a Delaware corporation (the "Company"),
proposes to sell to you (the "Representatives") and the other underwriters named
in Schedule I attached hereto (the "Underwriters"), for whom you are acting as
the Representatives, an aggregate of 2,600,000 shares (the "Firm Shares") of the
Company's Common Stock, par value $.01 per share (the "Common Stock"). In
addition, the Company proposes to grant to the Underwriters an option to
purchase up to an additional 390,000 shares (the "Option Shares") of Common
Stock solely for the purpose of covering over-allotments in connection with the
sale of the Firm Shares. The Firm Shares and the Option Shares are together
called the "Shares."
1. SALE AND PURCHASE OF THE SHARES. On the basis of the representations,
warranties and agreements contained in, and subject to the terms and conditions
of, this Agreement:
(a) The Company agrees to issue and sell the Firm Shares to the
several Underwriters, and each of the Underwriters agrees, severally and
not jointly, to purchase at the purchase price per share of Common Stock of
$_____ (the "Initial Price"), the aggregate number of Firm Shares set forth
opposite such Underwriter's name in Schedule I attached hereto. The
Underwriters agree to offer the Firm Shares to the public as set forth in
the Prospectus (as defined in Section _).
(b) The Company grants to the several Underwriters an option to
purchase all or any part of the number of Option Shares, severally and not
jointly, at the Initial Price. The number of Option Shares to be purchased
by each Underwriter shall be the same percentage (adjusted by
<PAGE>
the Representatives to eliminate fractions) of the total number of Option
Shares to be purchased by the Underwriters as such Underwriter is
purchasing of the Firm Shares. Such option may be exercised only to cover
over-allotments in the sales of the Firm Shares by the Underwriters and may
be exercised in whole or in part at any time on or before 12:00 noon, New
York City time, on the business day before the Firm Shares Closing Date (as
defined below), and from time to time thereafter within 30 days after the
date of this Agreement, upon written or telegraphic notice, or verbal or
telephonic notice confirmed by written or telegraphic notice, by the
Representatives to the Company no later than 12:00 noon, New York City
time, on the business day before the Firm Shares Closing Date or at least
two business days before any Option Shares Closing Date (as defined below),
as the case may be, setting forth the number of Option Shares to be
purchased and the time and date (if other than the Firm Shares Closing
Date) of such purchase.
2. DELIVERY AND PAYMENT. Delivery by the Company of the Firm Shares to
the Representatives for the respective accounts of the Underwriters, and payment
of the purchase price by certified or official bank check or checks payable in
New York Clearing House (next day) funds to the Company, shall take place at the
offices of Rodman & Renshaw, Inc., at 225 Liberty Street, 2 World Financial
Center, 30th Floor, New York, New York, 10281, at 10:00 a.m., New York City
time, on the third business day following the date on which the public offering
of the Shares commences (unless such date is postponed in accordance with the
provisions of Section 10(b)), or at such time and place on such other date, not
later than 10 business days after the date of this Agreement, as shall be agreed
upon by the Company and the Representatives (such time and date of delivery and
payment are called the "Firm Shares Closing Date"). The public offering of the
Shares shall be deemed to have commenced at the time, which is the earlier of
(a) the time, after the Registration Statement (as defined in Section 4 below)
becomes effective, of the release by you for publication of the first newspaper
advertisement which is subsequently published relating to the Shares or (b) the
time, after the Registration Statement becomes effective, when the Shares are
first released by you for offering by the Underwriters or dealers by letter or
telegram.
In the event the option with respect to the Option Shares is exercised,
delivery by the Company of the Option Shares to the Representatives for the
respective accounts of the Underwriters and payment of the purchase price by
certified or official bank check or checks payable in New York Clearing House
(next day) funds to the Company shall take place at the offices of Rodman &
Renshaw, Inc. specified above at the time and on the date (which may be the same
date as, but in no event shall be earlier than, the Firm Shares Closing Date)
specified in the notice referred to in Section 1(b) (such time and date of
delivery and payment is called the "Option Shares Closing Date"). The Firm
Shares Closing Date and the Option Shares Closing Dates are called,
individually, a "Closing Date" and, together, the "Closing Dates."
Certificates evidencing the Shares shall be registered in such names and
shall be in such denominations as the Representatives shall request at least two
full business days before the Firm Shares Closing Date or the Option Shares
Closing Date, as the case may be, and shall be made available to the
Representatives for checking and packaging, at such place as is designated by
-2-
<PAGE>
the Representatives, on the full business day before the Firm Shares Closing
Date or the Option Shares Closing Date, as the case may be.
3. PUBLIC OFFERING. The Company understands that the Underwriters
propose to make a public offering of the Shares (the "Offering"), as set forth
in and pursuant to the Prospectus (as defined in Section 4 below), as soon after
the effective date of the Registration Statement and the date of this Agreement
as the Representatives deem advisable. The Company hereby confirms that the
Underwriters and dealers have been authorized to distribute or cause to be
distributed each preliminary prospectus and are authorized to distribute the
Prospectus (as from time to time amended or supplemented if the Company
furnishes amendments or supplements thereto to the Underwriters).
4. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.
The Company represents and warrants to, and agrees with, the
several Underwriters that:
(i) The Company has filed with the Securities and Exchange
Commission (the "Commission") a registration statement, and may have
filed one or more amendments thereto, on Form S-1 (Registration No.
333- ^ 2722), including in such registration statement and each such
amendment a related preliminary prospectus (a "Preliminary
Prospectus"), for the registration of the Shares and the Option
Shares, in conformity with the requirements of the Securities Act of
1933, as amended (the "Act"). ^ As used in this Agreement, the term
"Registration Statement" means such registration statement, as
amended, on file with the Commission at the time such registration
statement becomes effective (including the prospectus, financial
statements, exhibits, and all other documents filed as a part thereof
or incorporated by reference directly or indirectly therein), provided
that such Registration Statement, at the time it becomes effective,
may omit such information as is permitted to be omitted from the
Registration Statement when it becomes effective pursuant to Rule 430A
of the General Rules and Regulations promulgated under the Act (the
"Regulations"), which information ("Rule 430 Information") shall be
deemed to be included in such Registration Statement when a final
prospectus is filed with the Commission in accordance with Rules 430A
and 424(b)(1) or (4) of the Regulations; the term "Preliminary
Prospectus" means each prospectus included in the Registration
Statement, or any amendments thereto, before it becomes effective
under the Act, the form of prospectus omitting Rule 430A Information
included in the Registration Statement when it becomes effective, if
applicable (the "Rule 430A Prospectus"), and any prospectus filed by
the Company with your consent pursuant to Rule 424(a) of the
Regulations; and the term "Prospectus" means the final prospectus
included as part of the Registration Statement, except that if the
prospectus relating to the securities covered by the Registration
Statement in the form first filed on behalf of the Company with the
Commission pursuant to Rule 424(b) of the Regulations shall differ
from such final prospectus, the term "Prospectus" shall mean the
prospectus as filed pursuant to Rule
-3-
<PAGE>
424(b) from and after the date on which it shall have first been used.
(ii) When the Registration Statement becomes effective, and at
all times subsequent thereto to and including the Closing Dates, and
during such longer period as the Prospectus may be required to be
delivered in connection with sales by the Underwriters or a dealer of
the Shares, and during such longer period until any post-effective
amendment thereto shall become effective, the Registration Statement
(and any post-effective amendment thereto) and the Prospectus (as
amended or as supplemented if the Company shall have filed with the
Commission any amendment or supplement to the Registration Statement
or the Prospectus) will contain all statements which are required to
be stated therein in accordance with the Act and the Regulations, will
comply with the Act and the Regulations, and will not contain any
untrue statement of a material fact or omit to state any material fact
^ necessary in order to make the statements ^ made, in light of the
circumstances under which they were made, not misleading; if a Rule
430A Prospectus is included in the Registration Statement at the time
it becomes effective, the Prospectus filed pursuant to Rules 430A and
424(b)(1) or (4) will contain all Rule 430A Information; and each
Preliminary Prospectus, as of the date filed with the Commission, did
not include any untrue statement of a material fact or omit to state
any material fact ^ necessary in order to make the statements ^ made,
in light of the circumstances under which they were made, not
misleading; except that no representation or warranty is made in this
Section 4(a)(ii) with respect to statement or omissions made in
reliance upon and in conformity with written information furnished to
the Company as stated in Section 7(b) with respect to any Underwriter
by or on behalf of such Underwriter through the Representatives
expressly for inclusion in any Preliminary Prospectus, the
Registration Statement ^ or the Prospectus, or any amendment or
supplement thereto.
(iii) Neither the Commission nor the "blue sky" or securities
authority of any jurisdiction have issued an order (a "Stop Order")
suspending the effectiveness of the Registration Statement, preventing
or suspending the use of any Preliminary Prospectus, the Prospectus,
the Registration Statement, or any amendment or supplement thereto, ^
or suspending the registration or qualification of the Firm Shares or
the Option Shares nor has any of such authorities instituted or to the
best of the Company's knowledge threatened to institute any
proceedings with respect to a Stop Order.
(iv) Any contract, agreement, instrument, lease^ or license
required to be described in the Registration Statement or the
Prospectus has been properly described therein. Any contract
agreement, instrument, lease^ or license required to be filed as an
exhibit to the Registration Statement has been filed with the
Commission as an exhibit to or has been incorporated as an exhibit by
reference into the Registration Statement.
-4-
<PAGE>
(v) The Company is a corporation duly organized, validly
existing, and in good standing under the laws of the State of
Delaware, with full corporate power and authority, and all necessary
consents, authorizations, approvals, orders, licenses, certificates,
and permits of and from, and declarations and filings with, all
federal, state, local, and other governmental authorities and all
courts and other tribunals, to own, lease, license, and use its
properties and assets and to carry on its business as now being
conducted and in the manner described in the Prospectus. The Company
is duly qualified to do business and is in good standing in each
jurisdiction in which its ownership, leasing, licensing, or character,
location or use of property and assets or the conduct of its business
makes such qualification necessary. The Company does not own, lease
or license any property or conduct any business outside the United
States of America other than the sale of certain __________ division
products. The Company has no subsidiary or subsidiaries and does not
control, directly or indirectly, any corporation, partnership, joint
venture, association or other business organization, except for those
permitted to be excluded pursuant to ^ Regulation S-K.
(vi) The authorized capital stock of the Company consists of
12,000,000 shares of Common Stock, of which [^_________] shares are
outstanding and 4,000,000 shares of convertible preferred stock, of
the Company (the "Preferred Stock"), of which 1,000,000 shares of
Series A Convertible Preferred Stock are outstanding and 763,500
shares of Series B Convertible Preferred Stock will be outstanding ^
from and after the Firm Shares Closing Date. Each outstanding share
of Common Stock has been duly and validly authorized and issued, fully
paid, and non-assessable, without any personal liability attaching to
the ownership thereof and has not been issued and is not owned or held
in violation of any preemptive rights of stockholders. There is no
commitment, plan, preemptive right or arrangement to issue, and no
outstanding option, warrant, or other right calling for the issuance
of, shares of capital stock of the Company or any security or other
instrument which by its terms is convertible into, exercisable for, or
exchangeable for capital stock of the Company, except as ^ described
in the Prospectus. There is outstanding no security or other
instrument which by its terms is convertible into or exchangeable for
capital stock of the Company, except as ^ described in the Prospectus.
(vii) The financial statements of the Company included in the
Registration Statement and the Prospectus fairly present, with respect
to the Company , the financial position, the results of operations^
and the other information purported to be shown therein at the
respective dates and for the respective periods to which they apply.
Such financial statements have been prepared in accordance with
generally accepted accounting principles (except to the extent that
certain footnote disclosures regarding any stub period may have been
omitted in accordance with the applicable rules of the Commission
under the ^ Securities Act) consistently applied throughout the
periods involved, are correct and complete, and are in accordance with
the books and records of the Company.
-5-
<PAGE>
The accountants whose report on the audited financial statements is
filed with the Commission as a part of the Registration Statement are,
and during the periods covered by their report(s) included in the
Registration Statement and the Prospectus were, independent certified
public accountants with respect to the Company within the meaning of
the Act and the Regulations. No other financial statements are
required by Form S-1 or otherwise to be included in the Registration
Statement or the Prospectus. There has at no time been a material
adverse change in the financial condition, results of operations,
business, properties, assets, liabilities, or future prospects of the
Company from the latest information set forth in the Registration
Statement or the Prospectus, except as ^ described in the Prospectus.
(viii) There is no litigation, arbitration, claim, governmental
or other proceeding (formal or informal), or investigation before any
court or before any public body or board pending^ or, to the best of
the Company's knowledge, threatened (nor does the Company know of
any basis therefor) with respect to the Company, or any of its
operations, business, properties, or assets, except as ^ described in
the Prospectus or such as individually or in the aggregate do not now
have ^, or, to the best of the Company's knowledge, based on facts and
circumstances known to the Company on the date hereof, would not
reasonably be expected in the future to have, a material adverse
effect upon the operations, business, properties, assets or financial
condition of the Company. The Company is not involved in any labor
dispute, nor, to the best of the Company's knowledge, is such dispute
threatened, which dispute would have a material adverse effect upon
the operations, business, properties, assets or financial condition of
the Company. The Company is not in violation of, or in default with
respect to, any law, rule, regulation, order, judgment, or decree; nor
is the Company required to take any action in order to avoid any such
violation or default.
(ix) The Company has good and marketable title in fee simple ^ to
all real properties and good title to all other properties and assets
which the Prospectus indicates are owned by it, and has valid and
enforceable leasehold interests in each of such items, free and clear
of all liens, security interests, pledges, charges, encumbrances, and
mortgages^, other than those disclosed in the Registration Statement
and the Prospectus and those which, individually or in the aggregate,
with all those liens, security interests, pledges, charges,
encumbrances and mortgages disclosed in the Registration Statement and
the Prospectus, do not have a material adverse effect on the assets or
properties, business, results of operation, prospects or condition
(financial or otherwise) of the Company. No real property owned,
leased, licensed or used by the Company lies in an area which is, or
to the knowledge of the Company will be, subject to zoning, use or
building code restrictions which would prohibit, and no state of facts
relating to the actions or inaction of another person or entity or his
or its ownership, leasing, licensing or use of any real or personal
property exists or will exist which would prevent,
-6-
<PAGE>
the continued effective ownership, leasing, licensing or use of such
real property in the business of the Company as presently conducted or
as the Prospectus indicates it contemplates conducting (except as ^
described in the Prospectus).
(x) The Company, and to the knowledge of the Company, any other
party, is not now ^ and would not reasonably be expected by the
Company, based on facts and circumstances known to the Company on the
date hereof, to be in violation or breach of, or in default with
respect to, complying with any term, obligation or provision of any
material contract, agreement, instrument, lease, license, indenture,
mortgage, deed of trust, note, arrangement or understanding to which
^ the Company is a party or by which any of its properties or business
may be bound or affected, and no event has occurred which with notice
or lapse of time or both would constitute such a default, and each
such contract, agreement, instrument, lease, license, indenture,
mortgage, deed of trust, note, arrangement or understanding is in full
force and is the legal, valid and binding obligation of the Company
and to the best of the Company's knowledge, the other parties thereto
and is enforceable as to them in accordance with its terms, except as
the enforceability thereof may be limited by bankruptcy, insolvency,
fraudulent conveyance, reorganization, moratorium or other similar
laws affecting the enforcement of creditors' rights generally and by
general equitable principles. The Company enjoys peaceful and
undisturbed possession under all leases and licenses under which it is
operating. The Company is not a party to or bound by any contract,
agreement, instrument, lease, license, indenture, mortgage, deed of
trust, note, arrangement or understanding, or subject to any charter
or other restriction, which has had or may ^ reasonably be expected by
the Company, based on a facts and circumstances known to the Company
on the date hereof, in the future to have a material adverse effect on
the financial condition, results of operations, business, properties,
assets, liabilities or future prospects of the Company. The Company
is not in violation or breach of, or in default with respect to, any ^
provision of its certificate of incorporation ^ or by-laws or of any
franchise, license, permit, judgment, decree, order, statute, rule or
regulation which would have a material adverse effect on the assets
or properties, business, results of operation, prospects or condition
(financial or otherwise) of the Company.
(xi) The Company has filed all federal, state, local and foreign
tax returns which are required to be filed by it through the date
hereof, or ^ has received extensions thereof, and ^ has paid all taxes
shown on such returns and all assessments received by it to the extent
that the same are material and have become due.
(xii) All patents, patent applications, trademarks, trademark
applications, trade names, service marks, copyrights, copyright
applications, franchises, and other intangible properties and assets
listed in the Registration Statement under "Patents and Trademarks"
(all of the foregoing being collectively herein called "Intangibles")
that the Company owns, possesses or has pending, or
-7-
<PAGE>
under which it is licensed, are in good standing and uncontested.
There is no right under any Intangible necessary to the business of
the Company as presently conducted or as the Prospectus indicates the
Company contemplates conducting (except as may be so described in the
Prospectus). The Company has not infringed, is infringing, or has
received any notice of infringement with respect to asserted
Intangibles of others. To the knowledge of the Company, there is no
infringement by others of Intangibles of the Company. To the knowledge
of the Company, there is no Intangible of others which ^ would
reasonably be expected by the Company, based of facts and
circumstances known to the Company on the date hereof, in the future
to have a materially adverse effect on the financial condition,
results of operations, business, properties, assets, liabilities ^ of
the Company as each of the foregoing exists on the date hereof.
(xiii) Neither the Company nor, to the best of the Company's
knowledge, any director, officer, agent, employee or other person
associated with or acting on behalf of the Company has, directly or
indirectly: used any corporate funds for unlawful contributions,
gifts, entertainment, or other unlawful expenses relating to political
activity; made any unlawful payment to foreign or domestic government
officials or employees or to foreign or domestic political parties or
campaigns from corporate funds; violated any provision of the Foreign
Corrupt Practices Act of 1977, as amended; or made any bribe, rebate,
payoff, influence payment, kickback, or other unlawful payment.^
(xiv) The Company has all requisite power and authority to
execute, deliver and perform each of this Agreement and the warrants
representing the right to purchase a number of shares of Common Stock
(the "Warrant Stock") equal to 7.0% of the aggregate number of shares
purchased in the Offering, including the over-allotment option (which
warrants shall be evidenced in the form set forth as an exhibit to the
Registration Statement) (the "Representative Warrants" and,
collectively, with this Agreement, the "Company Documents"). All
necessary corporate proceedings of the Company have been duly taken to
authorize the execution, delivery and performance of each of the
Company ^ Documents by the Company. Each of the other Company
Documents has been duly authorized by the Company and is, or, when
executed and delivered by the Company, will be, the legal, valid and
binding obligation of the Company, enforceable against the Company in
accordance with its terms. No consent, authorization, approval,
order, license, certificate or permit of or from, or declaration or
filing with, any federal, state, local or other governmental authority
or any court or other tribunal is required by the Company for the
execution, delivery or performance by the Company of the Company
Documents (except filings under the Act which have been or will be
made before the applicable Closing Date and such consents consisting
only of consents under "blue sky" or securities laws which have been
obtained at or prior to the date of this Agreement). No consent of
any party to any contract, agreement, instrument, lease, license,
indenture, mortgage, deed of trust,
-8-
<PAGE>
note, arrangement or understanding to which the Company is a party, or
to which any of its respective properties or assets are subject, is
required for the execution, delivery or performance of the Company
Documents which has not been obtained, and the execution, delivery and
performance of any of the Company Documents, will not violate, result
in a breach of, conflict with, accelerate the due date of any payments
under, or (with or without the giving of notice or the passage of time
or both) entitle any party to terminate or call a default under any
such contract, agreement, instrument, lease, license, indenture,
mortgage, deed of trust, note, arrangement, or understanding, or
violate or result in a breach of any term of the certificate of
incorporation ^ or by-laws of the Company, or violate, result in a
breach of, or conflict with any law, rule, regulation, order, judgment
or decree binding on the Company or to which any of its operations,
business, properties or assets are subject.
(xv) The Firm Shares and the Option Shares are validly
authorized. The ^ Shares, when issued and ^ delivered in accordance
with this Agreement, will be duly and validly issued, fully paid, and
non-assessable, without any personal liability attaching to the
ownership thereof, and will not be issued in violation of any
preemptive rights of stockholders, optionholders, warrantholders and
any other persons and the Underwriters will receive good title to the
^ Shares purchased by them, respectively, free and clear of all liens,
security interests, pledges, charges, encumbrances, stockholders'
agreements and voting trusts.
(xvi) The Warrant Stock is validly authorized and reserved
for issuance and, when issued and delivered upon exercise of the
Representative Warrants, will be validly issued, fully paid and non-
assessable, without any personal liability attaching to the ownership
thereof, and will not be issued in violation of any preemptive rights
of stockholders, optionholders, warrantholders and any other persons
and the holders of the Representative Warrants will receive good title
to the securities purchased by them, respectively, free and clear of
all liens, security interests, pledges, charges, encumbrances^ and any
rights under stockholders' agreements and voting trusts other than any
liens, security interests, pledges, charges, encumbrances and rights
under stockholders' agreements and voting trusts created or incurred
by the holders of the Representative Warrants.
(xvii) The Common Stock, the Firm Shares, the Option Shares and
the Representative Warrants conform to all statements relating thereto
contained in the Registration Statement or the Prospectus.
(xviii) Subsequent to the respective dates as of which
information is given in the Registration Statement and the Prospectus,
and except as may otherwise be properly described therein, there has
not been any material adverse change in the assets or properties,
business or results of operations or financial condition of the
Company, whether or not arising from transactions in the ordinary
course of business; the Company has
-9-
<PAGE>
not sustained any material loss or interference with its business or
properties from fire, explosion, earthquake, flood or other calamity,
whether or not covered by insurance; since the date of the latest
balance sheet included in the Registration Statement and the
Prospectus, except as reflected therein, the Company has not
undertaken any liability or obligation, direct or contingent, except
for liabilities or obligations undertaken in the ordinary course of
business; and the Company has not (A) issued any securities or
incurred any liability or obligation, primary or contingent, for
borrowed money, (B) entered into any transaction not in the ordinary
course of business, or (C) declared or paid any dividend or made any
distribution on any of its capital stock or redeemed, purchased or
otherwise acquired or agreed to redeem, purchase or otherwise acquire
any shares of its capital stock.
(xix) Neither the Company nor any of its officers, directors or
affiliates (as defined in the Regulations), has taken or will take,
directly or indirectly, prior to the termination of the underwriting
syndicate contemplated by this Agreement, any action designed to
stabilize or manipulate the price of any security of the Company, or
which has caused or resulted in, or which might in the future
reasonably be expected to cause or result in, stabilization or
manipulation of the price of any security of the Company, to
facilitate the sale or resale of any of the Firm Shares or the Option
Shares.
(xx) The Company has obtained from each of its executive officers
and directors and ^ the stockholders set forth under the caption
"Principal Stockholders" in the Prospectus, their enforceable written
agreement, in form and substance satisfactory to counsel for the
Underwriters, that for a period of 180 days from the date on which the
public offering of the Shares commences they will not, without your
prior written consent, offer, pledge, sell, contract to sell, grant
any option for the sale of, or otherwise dispose of, directly or
indirectly, any shares of Common Stock or other securities of the
Company (or any security or other instrument which by its terms is
convertible into, exercisable for, or exchangeable for shares of
Common Stock or other securities of the Company, including, without
limitation, any shares of Common Stock issuable under any employee
stock options), beneficially owned by them, except with respect to
Shares being sold in connection herewith or their being a beneficial
owner of any such Shares;
(xxi) The Company is not, and does not intend to conduct its
business in a manner in which it would be, an "investment company" as
defined in Section 3(a) of the Investment Company Act of 1940 (the
"Investment Company Act").
(xxii) No person or entity has the right to require
registration of shares of Common Stock or other securities of the
Company because of the filing or effectiveness of the Registration
Statement, except such person or entities from whom written waivers of
such rights have been received prior to the date hereof.
-10-
<PAGE>
(xxiii) Except as set forth in the Prospectus, the Company has
not granted any person or entity any right to underwrite shares of
Common Stock or other securities of the Company.
(xxiv) Except as may be set forth in the Prospectus, the Company
has not incurred any liability for a fee, commission or other
compensation on account of the employment of a broker or finder in
connection with the transactions contemplated by this Agreement.
(xxv) No transaction has occurred between or among the Company
and any of its officers or directors or any affiliates of any such
officer or director, that is required to be described in and is not
described in the Registration Statement and the Prospectus.
(xxvi) The Common Stock, including the Shares, are authorized
for quotation on the Nasdaq National Market.
(xxvii) Neither the Company nor any of its affiliates is
presently doing business with the government of Cuba or with any
person or affiliate located in Cuba. If, at any time after the date
that the Registration Statement is declared effective with the
Commission or with the Florida Department of Banking and Finance (the
"Florida Department"), whichever date is later, and prior to the end
of the period referred to in the first clause of Section 4(a)(ii)
hereof, the Company commences engaging in business with the government
of Cuba or with any person or affiliate located in Cuba, the Company
will so inform the Florida Department within ninety days after such
commencement of business in Cuba, and during the period referred to in
Section 4(a)(ii) hereof will inform the Florida Department within
ninety days after any change occurs with respect to previously
reported information.
5. CONDITIONS OF THE UNDERWRITERS' OBLIGATIONS. The obligations of the
Underwriters under this Agreement are several and not joint. The respective
obligations of the Underwriters to purchase the Shares are subject to each of
the following terms and conditions:
(a) The Prospectus shall have been timely filed with the Commission
in accordance with Section 6(a)(i) of this Agreement.
(b) No order preventing or suspending the use of any preliminary
prospectus or the Prospectus shall have been or shall be in effect and no
order suspending the effectiveness of the Registration Statement shall be
in effect and no proceedings for such purpose shall be pending before or
threatened by the Commission, and any requests for additional information
on the part of the Commission (to be included in the Registration Statement
or the Prospectus or otherwise) shall have been complied with to the
satisfaction of the Representatives.
(c) The representations and warranties of the Company contained in
this Agreement and in the certificates delivered pursuant to Section
-11-
<PAGE>
5(d) shall be true and correct when made and on and as of each Closing Date
as if made on such date and the Company shall have performed all covenants
and agreements and satisfied all the conditions contained in this Agreement
required to be performed or satisfied by it ^ at or before such Closing
Date.
(d) The Representatives shall have received on each Closing Date a
certificate, addressed to the Representatives and dated such Closing Date,
of the chief executive or chief operating officer and the chief financial
officer of the Company to the effect that the persons executing such
certificate have carefully examined the Registration Statement, the
Prospectus and this Agreement and that the representations and warranties
of the Company in this Agreement are true and correct on and as of such
Closing Date with the same effect as if made on such Closing Date and the
Company has performed all covenants and agreements and satisfied all
conditions contained in this Agreement required to be performed or
satisfied by it at or prior to such Closing Date.
(e) The Representatives shall have received at the time this
Agreement is executed and on each Closing Date, signed letters from
Deloitte & Touche LLP addressed to the Representatives and dated,
respectively, the date of this Agreement and each such Closing Date, in
form and scope reasonably satisfactory to the Representatives, with
reproduced copies or signed counterparts thereof for each of the
Underwriters confirming that they are independent accountants within the
meaning of the Act and the Regulations, that the response to Item 10 of the
Registration Statement is correct in so far as it relates to them and
stating in effect that:
(i) in their opinion the audited financial statements and
financial statement schedules included or incorporated by reference in
the Registration Statement and the Prospectus and reported on by them
comply as to form in all material respects with the applicable
accounting requirements of the Act, the Exchange Act and the related
published rules and regulations thereunder;
(ii) on the basis of a reading of the amounts included in the
Registration Statement and the Prospectus under the heading "Summary
Financial Data" which would not necessarily reveal matters of
significance with respect to the comments set forth in such letter, a
reading of the minutes of the meetings of the stockholders and
directors of the Company, and inquiries of certain officials of the
Company who have responsibility for financial and accounting matters
of the Company as to transactions and events subsequent to the date of
the latest audited financial statements, except as disclosed in the
Registration Statement and the Prospectus, nothing came to their
attention which caused them to believe that:
(A) the amounts in "Summary Financial Data," and included
or incorporated by reference in the Registration Statement and
the Prospectus do not agree with the corresponding amounts in the
audited and unaudited financial statements from which such
amounts were derived; or
-12-
<PAGE>
(B) with respect to the Company, there were, at a specified
date not more than five business days prior to the date of the
letter, any decreases in net sales, income before income taxes
and net income or any increases in long-term debt of the Company
or any decreases in the capital stock, working capital or the
stockholders' equity in the Company, as compared with the amounts
shown on the Company's audited Balance Sheet for the fiscal ^
quarter ended ^ March 31, ^ 1996 included in the Registration
Statement or the audited Statement of Operations, for such year;
and
(iii) they have performed certain other procedures as a result of
which they determined that information of an accounting, financial or
statistical nature (which is limited to accounting, financial or
statistical information derived from the general accounting records of
the Company) set forth in the Registration Statement and the
Prospectus and reasonably specified by the Representatives agrees with
the accounting records of the Company.
References to the Registration Statement and the Prospectus in this
paragraph (e) are to such documents as amended and supplemented at the date
of such letter.
(f) The Representatives shall have received on each Closing Date from
Battle Fowler LLP, counsel for the Company, an opinion, addressed to the
Representatives and dated such Closing Date, and in form ^ attached hereto
as Exhibit __, satisfactory to counsel for the Underwriters, with
reproduced copies or signed counterparts thereof for each of the
Underwriters^.
In addition, such counsel shall state that such counsel has
participated in ^ conferences with officers and other representatives of the
Company, representatives of the Representatives and representatives of the
independent accountants of the Company, in connection with the preparation of
the Registration Statement and the Prospectus at which conferences the contents
of the Registration Statement and the Prospectus and related matters were
discussed and, although such counsel has not independently verified and is not
passing upon and does not assume any responsibility for the accuracy,
completeness or fairness of the statements contained in the Registration
Statement and the Prospectus (except as specified in the foregoing opinion), on
the basis of the foregoing and relying as to materiality upon the
representations of executive officers of the Company after conferring with such
executive officers, no facts have come to the attention of such counsel which
lead such counsel to believe that the Registration Statement at the time it
became effective contained any untrue statement of a material fact or omitted to
state a material fact ^ necessary in order to make the statements ^ made, in
light of the circumstances under which they were made, not misleading, or that
the Prospectus, except for the financial statements and other financial and
statistical data included therein as to which counsel need express no opinion,
as amended or supplemented on the date thereof contained any untrue statement of
a material fact or omitted to state a material fact necessary in order to make
the statements therein, in the light of the circumstances under which they were
made, not misleading.
-13-
<PAGE>
In rendering their opinion as aforesaid, counsel may rely upon an
opinion or opinions, each dated the Closing Date, of other counsel retained by
the Company as to laws of any jurisdiction other than the Federal laws of the
United States, the General Corporate Law of the states of Delaware and New York,
provided that (1) each such local counsel is reasonably acceptable to the
Representatives and (2) such reliance is expressly authorized by each opinion so
relied upon and a copy of each such opinion is addressed to the Representatives
and is in form and substance reasonably satisfactory to them and their counsel.
In addition, such counsel may rely, as to matters of fact, to the extent such
counsel deems proper, on certificates of responsible officers of the Company,
provided that executed copies of such certificates are provided to the
Representatives.
(g) All proceedings taken in connection with the sale of the Firm
Shares and the Option Shares as herein contemplated shall be satisfactory
in form and substance to the Representatives and its counsel, and the
Underwriters shall have received from Squadron, Ellenoff, Plesent &
Sheinfeld, LLP, a favorable opinion, addressed to the Representatives and
dated such Closing Date, with respect to the Shares, the Registration
Statement and the Prospectus, and such other related matters, as the
Representatives may reasonably request, and the Company shall have
furnished to Squadron, Ellenoff, Plesent & Sheinfeld, LLP, such documents
as they may reasonably request for the purpose of enabling them to pass
upon such matters.
(h) ^ On the Firm Shares Closing Date, the Company shall have issued
to the Representatives the Representative Warrants representing the right
to purchase a number of shares of Warrant Stock equal to 7.0% of the
aggregate number of shares sold in the Offering on or prior to the Firm
Shares Closing Date.
6. COVENANTS OF THE COMPANY.
(a) The Company covenants and agrees as follows:
(i) The Company shall use its best efforts to cause the
Registration Statement to become effective as promptly as possible.
If the Registration Statement has become or becomes effective with a
form of prospectus omitting Rule 430A information, or filing of the
Prospectus is otherwise required under Rule 424(b), the Company will
file the Prospectus, properly completed, pursuant to Rule 424(b)
within the time period prescribed and will provide evidence
satisfactory to you of such timely filing. The Company shall notify
you immediately, and confirm such notice in writing, (A) when the
Registration Statement and any post-effective amendment thereto become
effective, (B) of the receipt of any comments from the Commission or
the "blue sky" or securities authority of any jurisdiction regarding
the Registration Statement, any post-effective amendment thereto, the
Prospectus, or any amendment or supplement thereto, and (C) of the
receipt of any notification with respect to a Stop Order. The Company
shall not file any amendment of the Registration Statement or
supplement to the Prospectus unless the Company has furnished the
Representatives a copy for their review prior to filing and shall not
file any such proposed
-14-
<PAGE>
amendment or supplement to which the Representatives reasonably
object. The Company shall use its best efforts to prevent the
issuance of any Stop Order and, if issued, to obtain as soon as
possible the withdrawal thereof.
(ii) During the time when a prospectus relating to the Shares is
required to be delivered hereunder or under the Act or the
Regulations, to comply so far as it is able with all requirements
imposed upon it by the Act, as now existing and as hereafter amended,
and by the Regulations, as from time to time in force, so far as
necessary to permit the continuance of sales of or dealings in the
Shares in accordance with the provisions hereof and the Prospectus.
If, at any time when a prospectus relating to the Shares is required
to be delivered under the Act and the Regulations, any event as a
result of which the Prospectus as then amended or supplemented would
include any untrue statement of a material fact or omit to state any
material fact necessary to make the statements therein in the light of
the circumstances under which they were made not misleading, or if it
shall be necessary to amend or supplement the Prospectus to comply
with the Act or the Regulations, the Company promptly shall prepare
and file with the Commission, subject to the third sentence of
paragraph (i) of this Section 6(a), an amendment or supplement which
shall correct such statement or omission or an amendment which shall
effect such compliance.
(iii) The Company shall make generally available to its
security holders and to the Representatives as soon as practicable,
but not later than 45 days after the end of the 12-month period
beginning at the end of the fiscal quarter of the Company during which
the Effective Date (or 90 days if such 12-month period coincides with
the Company's fiscal year), an earnings statement (which need not be
audited) of the Company, covering such 12-month period, which shall
satisfy the provisions of Section 11(a) of the Act or Rule 158 of the
Regulations.
(iv) The Company shall furnish to the Representatives and counsel
for the Underwriters, without charge, signed copies of the
Registration Statement (including all exhibits and amendments thereto)
and to each other Underwriter a copy of the Registration Statement
(without exhibits thereto) and all amendments thereof and, so long as
delivery of a prospectus by an Underwriter or dealer may be required
by the Act or the Regulations, as many copies of any preliminary
prospectus and the Prospectus and any amendments thereof and
supplements thereto as the Representatives may reasonably request.
(v) The Company shall cooperate with the Representatives and its
counsel in endeavoring to qualify the Shares for offer and sale under
the laws of such jurisdictions as the Representatives may designate
and shall maintain such qualifications in effect so long as required
for the distribution of the Shares; provided, however, that the
Company shall not be required in connection therewith, as a condition
thereof, to qualify as a foreign
-15-
<PAGE>
corporation or to execute a general consent to service of process in
any jurisdiction or subject itself to taxation as doing business in
any jurisdiction.
(vi) For a period of five years after the date of this Agreement,
the Company shall supply to the Representatives, and to each other
Underwriter who may so request in writing, copies of such financial
statements and other periodic and special reports as the Company may
from time to time distribute generally to the holders of any class of
its capital stock and to furnish to the Representatives a copy of each
annual or other report it shall be required to file with the
Commission.
(vii) Without the prior written consent of the
Representatives, for a period of 180 days from the date on which a
public offering of the Shares commences, the Company shall not issue,
sell or register with the Commission or otherwise dispose of, directly
or indirectly, any securities of the Company (or any securities
convertible into or exercisable or exchangeable for securities of the
Company), except for the issuance of the Shares pursuant to, and any
option or stock purchase plan described in the Registration Statement.
(viii) On or before completion of this ^ Offering , the Company
shall make all filings required under applicable securities laws and
by the Nasdaq National Market with respect to the Shares.
(ix) Prior to each Closing Date and for a period of 25 days
thereafter, you shall be given reasonable written prior notice of any
press release or other direct or indirect communication and of any
press conference with respect to the Company, the financial
conditions, results of operations, business, properties, assets,
liabilities of the Company, or this ^ Offering.
(x) On the Closing Dates, sell to the Representatives (or any of
each of their designated officers or ^ partners), individually and not
as representatives of the Underwriters, the Representative Warrants
(at a price of $0.001 per share of underlying Common Stock) to
purchase a number of shares of Warrant Stock equal to 7.0% of the
aggregate number of Shares sold in the Offering on or prior to the
Closing Date (subject to adjustment in the event of stock splits,
stock dividends and similar events), which Representative Warrants
shall be evidenced in the form set forth as an exhibit to the
Registration Statement.
(xi) For a period of three ^ years after the Firm Shares Closing
Date, the Company shall grant Rodman & Renshaw, Inc. ("Rodman"),
individually and not as representative of the Underwriters, a 30-day
right of first refusal to act as the Company's financial advisor or
managing underwriter or exclusive placement agent, as the case may be,
in connection with any sale of the Company (including the sale of a
majority or controlling minority interest in the stock or assets of
the Company), an acquisition or merger by the Company, or the raising
of additional financing through either a public or private offering of
-16-
<PAGE>
securities, subject to the approval of Rodman's Commitment Committee
and the good faith negotiation of customary and mutually agreeable
terms provided the Company is working with a regional investment
banking firm. If such transaction as is contemplated by this
paragraph 6(a)(xii) is instituted by a major bracket investment
banking firm, then Rodman will act as a manager and receive economics
pari passu to all other co-managers, provided that if there are no
other co-managers, then Rodman will receive no less than 35%.
Rodman's rights under this Section 6(a)(xii) shall terminate upon the
earlier of (i) the completion of the first successful transaction
under this Section 6(a)(xii) performed by Rodman, or (ii) Rodman's
failure to exercise its right of first refusal to lead manage a
bonafide public offering of at least $20,000,000.
(b) The Company agrees to pay, or reimburse if paid by the
Representatives, whether or not the transactions contemplated hereby are
consummated or this Agreement is terminated, all costs and expenses
relating to the registration and public offering of the Shares including
those relating to: (i) the preparation, printing, filing and distribution
of the Registration Statement including all exhibits thereto, each ^
Preliminary Prospectus, the Prospectus, all amendments and supplements to
the Registration Statement and the Prospectus, and any documents required
to be delivered with any Preliminary Prospectus or the Prospectus, and the
printing, filing and distribution of the Agreement Among Underwriters, the
Company Documents and related documents; (ii) the preparation and delivery
of certificates for the Shares to the Underwriters; (iii) the registration
or qualification of the Shares for offer and sale under the securities or
Blue Sky laws of the various jurisdictions referred to in Section 6(a)(v),
including the fees and disbursements of counsel for the Underwriters in
connection with such registration and qualification and the preparation,
printing, distribution and shipment of preliminary and supplementary Blue
Sky memoranda; (iv) the furnishing (including costs of shipping and
mailing) to the Representatives and to the Underwriters of copies of each ^
Preliminary Prospectus, the Prospectus and all amendments or supplements to
the Prospectus, and of the several documents required by this Section to be
so furnished, as may be reasonably requested for use in connection with the
^ Offering and sale of the Shares by the Underwriters or by dealers to whom
Shares may be sold; (v) the filing fees of the National Association of
Securities Dealers, Inc. in connection with its review of the terms of the
public offering; (vi) the furnishing (including costs of shipping and
mailing) to the Representatives and to the Underwriters of copies of all
reports and information required by Section 6(a)(vi); (vii) inclusion of
the Shares for quotation on the NASDAQ National Market System; and (viii)
all transfer taxes, if any, with respect to the sale and delivery of the
Shares by the Company to the Underwriters. Except as otherwise
contemplated by Section 9 hereof, the Underwriters will pay their own
counsel fees and expenses to the extent not otherwise covered by clause
(iii) above, and their own travel and travel-related expenses in connection
with the distribution of the Shares.
-17-
<PAGE>
7. INDEMNIFICATION.
(a) The Company agrees to indemnify and hold harmless each
Underwriter and each person, if any, who controls any Underwriter within
the meaning of Section 15 of the Act or Section 20 of the Exchange Act
against any and all losses, claims, damages and liabilities, joint or
several (including any reasonable investigation, legal and other expenses
incurred in connection with, and any amount paid in settlement of, any
action, suit or proceeding or any claim asserted), to which they, or any of
them, may become subject under the Act, the Exchange Act or other Federal
or state law or regulation, at common law or otherwise, insofar as such
losses, claims, damages or liabilities arise out of or are based upon any
untrue statement or alleged untrue statement of a material fact contained
in any preliminary prospectus, the Registration Statement or the Prospectus
or any amendment thereof or supplement thereto, or arise out of or are
based upon any omission or alleged omission to state therein such fact
required to be stated therein or necessary to make such statements therein
not misleading. Such indemnity shall not inure to the benefit of any
Underwriter (or any person controlling such Underwriter) on account of any
losses, claims, damages or liabilities arising from the sale of the Shares
to any person by such Underwriter if such untrue statement or omission or
alleged untrue statement or omission was made in such preliminary
prospectus, the Registration Statement or the Prospectus, or such amendment
or supplement, in reliance upon and in conformity with information
furnished in writing to the Company by the Representatives on behalf of any
Underwriter specifically for use therein. In no event shall the
indemnification agreement contained in this Section 7(a) inure to the
benefit of any Underwriter on account of any losses, claims, damages,
liabilities or actions arising from the sale of the Shares upon the public
offering to any person by such Underwriter if such losses, claims, damages,
liabilities or actions arise out of, or are based upon, a statement or
omission or alleged omission in a preliminary prospectus and if, in respect
to such statement, omission or alleged omission, the Prospectus differs in
a material respect from such preliminary prospectus and a copy of the
Prospectus has not been sent or given to such person at or prior to the
confirmation of such sale to such person. This indemnity agreement will be
in addition to any liability which the Company may otherwise have.
(b) Each Underwriter agrees, severally and not jointly, to indemnify
and hold harmless the Company, each person, if any, who controls the
Company within the meaning of Section 15 of the Act or Section 20 of the
Exchange Act, each director of the Company, and each officer of the Company
who signs the Registration Statement, to the same extent as the foregoing
indemnity from the Company to each Underwriter, but only insofar as such
losses, claims, damages or liabilities arise out of or are based upon any
untrue statement or omission or alleged untrue statement or omission which
was made in any Preliminary Prospectus, any Rule 430A Prospectus, the
Registration Statement or the Prospectus, or any amendment thereof or
supplement thereto, which were made in reliance upon and in conformity with
information furnished in writing to the Company by the Representatives on
behalf of any Underwriter for specific use therein; provided, however, that
the obligation of each Underwriter to indemnify the Company (including any
controlling person, director or officer thereof) shall be limited to the
net proceeds received by the
-18-
<PAGE>
Company from such Underwriter. For all purposes of this Agreement, the
amounts of the selling concession and reallowance set forth in the
Prospectus constitute the only information furnished in writing by or on
behalf of any Underwriter expressly for inclusion in any Preliminary
Prospectus, any Rule 430A Prospectus, the Registration Statement or the
Prospectus or any amendment or supplement thereto.
(c) It is expressly agreed and understood by the Company and each of
the Underwriters that nothing in this Section 7 shall require any party to
indemnify any indemnified person or entity for any loss, claim, damage,
liability or expense found to have resulted primarily from such person's or
entity's knowing or intentional misconduct, gross negligence or bad faith
in connection with any acts or omissions with respect to this Agreement,
the offering of Shares or the Representative Warrant Agreement.
(d) Any party that proposes to assert the right to be indemnified
under this Section will, promptly after receipt of notice of commencement
of any action, suit or proceeding against such party in respect of which a
claim is to be made against an indemnifying party or parties under this
Section, notify each such indemnifying party of the commencement of such
action, suit or proceeding, enclosing a copy of all papers served. No
indemnification provided for in Section 7(a) or 7(b) shall be available to
any party who shall fail to give notice as provided in this Section 7(d) if
the party to whom notice was not given was unaware of the proceeding to
which such notice would have related and was prejudiced by the failure to
give such notice but the omission so to notify such indemnifying party of
any such action, suit or proceeding shall not relieve it from any liability
that it may have to any indemnified party for contribution or otherwise
than under this Section. In case any such action, suit or proceeding shall
be brought against any indemnified party and it shall notify the
indemnifying party of the commencement thereof, the indemnifying party
shall be entitled to participate in, and, to the extent that it shall wish,
jointly with any other indemnifying party similarly notified, to assume the
defense thereof, with counsel reasonably satisfactory to such indemnified
party, and after notice from the indemnifying party to such indemnified
party of its election so to assume the defense thereof and the approval by
the indemnified party of such counsel, the indemnifying party shall not be
liable to such indemnified party for any legal or other expenses, except as
provided below and except for the reasonable costs of investigation
subsequently incurred by such indemnified party in connection with the
defense thereof. The indemnified party shall have the right to employ its
counsel in any such action, but the fees and expenses of such counsel shall
be at the expense of such indemnified party unless (i) the employment of
counsel by such indemnified party has been authorized in writing by the
indemnifying parties, (ii) the indemnified party shall have reasonably
concluded that there may be a conflict of interest between the indemnifying
parties and the indemnified party in the conduct of the defense of such
action (in which case the indemnifying parties shall not have the right to
direct the defense of such action on behalf of the indemnified party), or
(iii) the indemnifying parties shall not have employed counsel to assume
the defense of such action within a reasonable time after notice of the
commencement thereof, in each of
-19-
<PAGE>
which cases the reasonable fees and expenses of counsel shall be at the
expense of the indemnifying parties. An indemnifying party shall not be
liable for any settlement of any action, suit, proceeding or claim effected
without its written consent.
8. CONTRIBUTION. In order to provide for just and equitable contribution
in circumstances in which the indemnification provided for in Sections 7(a) and
(b) is due in accordance with its terms but for any reason is held to be
unavailable from the Company or the Underwriters, the Company and the
Underwriters shall contribute to the aggregate losses, claims, damages and
liabilities (including any investigation, legal and other expenses reasonably
incurred in connection with, and any amount paid in settlement of, any action,
suit or proceeding or any claims asserted, but after deducting any contribution
received by the Company from persons other than the Underwriters, such as
persons who control the Company within the meaning of the Act, officers of the
Company who signed the Registration Statement and directors of the Company, who
may also be liable for contribution) to which the Company and one or more of the
Underwriters may be subject in such proportion as is appropriate to reflect the
relative benefits received by the Company on the one hand and the Underwriters
on the other from the offering of the Shares or, if such allocation is not
permitted by applicable law or indemnification is not available as a result of
the indemnifying party not having received notice as provided in Section 7
hereof, in such proportion as is appropriate to reflect not only the relative
benefits referred to above but also the relative fault of the Company on the one
hand and the Underwriters on the other in connection with the statements or
omissions which resulted in such losses, claims, damages, liabilities or
expenses, as well as any other relevant equitable considerations. The relative
benefits received by the Company and the Underwriters shall be deemed to be in
the same proportion as (x) the total proceeds from the Offering (net of
underwriting discounts but before deducting expenses) received by the Company
from the sale of the Shares, as set forth in the table on the cover page of the
Prospectus (but not taking into account the use of the proceeds of such sale of
Shares by the Company), bear to (y) the underwriting discount received by the
Underwriters, as set forth in the table on the cover page of the Prospectus.
The relative fault of the Company and the Underwriters shall be determined by
reference to, among other things, whether the untrue or alleged untrue statement
of a material fact related to information supplied by the Company or the
Underwriters and the parties' relative intent, knowledge, access to information
and opportunity to correct or prevent such statement or omission. The Company
and the Underwriters agree that it would not be just and equitable if
contribution pursuant to this Section 8 were determined by pro rata allocation
(even if the Underwriters were treated as one entity for such purpose) or by any
other method of allocation which does not take account of the equitable
considerations referred to above. Notwithstanding the provisions of this
Section 8, (i) in no case shall any Underwriter (except as may be provided in
the Agreement Among Underwriters) be liable or responsible for any amount in
excess of the underwriting discount applicable to the Shares purchased by such
Underwriter hereunder, and (ii) the Company shall be liable and responsible for
any amount in excess of the underwriting discount; provided, however (i) that no
person guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Act) shall be entitled to contribution from any person who was not
guilty of such fraudulent misrepresentation. For purposes of this Section 8,
each person, if any, who controls an Underwriter within the meaning of Section
15 of the Act or Section 20(a) of the Exchange Act shall have the same rights to
contribution as such Underwriter, and each person, if any, who controls the
-20-
<PAGE>
Company within the meaning of the Section 15 of the Act or Section 20(a) of the
Exchange Act, each officer of the Company who shall have signed the Registration
Statement and each director of the Company shall have the same rights to
contribution as the Company, subject in each case to clauses (i), (ii) and (iii)
in the immediately preceding sentence of this Section 8. Any party entitled to
contribution will, promptly after receipt of notice of commencement of any
action, suit or proceeding against such party in respect of which a claim for
contribution may be made against another party or parties under this Section,
notify such party or parties from whom contribution may be sought, but the
omission so to notify such party or parties from whom contribution may be sought
shall not relieve the party or parties from whom contribution may be sought from
any other obligation it or they may have hereunder or otherwise than under this
Section. No party shall be liable for contribution with respect to any action,
suit, proceeding or claim settled without its written consent. The
Underwriters' obligations to contribute pursuant to this Section 8 are several
in proportion to their respective underwriting commitments and not joint.
9. TERMINATION. This Agreement may be terminated with respect to the
Shares to be purchased on any Closing Date by the Representatives by notifying
the Company at any time prior to the purchase of the Shares:
(a) in the absolute discretion of the Representatives at or before
any Closing Date: (i) if on or prior to such date, any domestic or
international event or act or occurrence has materially disrupted, or in
the opinion of the Representatives will in the future materially disrupt,
the securities markets; (ii) if there has occurred any new outbreak or
material escalation of hostilities or other calamity or crisis the effect
of which on the financial markets of the United States is such as to make
it, in the judgment of the Representatives, inadvisable to proceed with the
Offering; (iii) if there shall be such a material adverse change in general
financial, political or economic conditions or the effect of international
conditions on the financial markets in the United States such as to make
it, in the judgment of the Representatives, inadvisable or impracticable to
market the Shares; (iv) if trading in the Shares has been suspended by the
Commission or trading generally on the New York Stock Exchange, Inc., the
American Stock Exchange, Inc. or the Nasdaq National Market System has been
suspended or limited, or minimum or maximum ranges for prices for
securities shall have been fixed, or maximum ranges for prices for
securities have been required, by said exchanges or by order of the
Commission, the National Association of Securities Dealers, Inc., or any
other governmental or regulatory authority; or (v) if a banking moratorium
has been declared by any state or federal authority, or
(b) at or before any Closing Date, if any of the conditions specified
in Section 5 shall not have been fulfilled when and as required by this
Agreement.
If this Agreement is terminated pursuant to any of its provisions, the
Company shall not be under any liability to any Underwriter, and no Underwriter
shall be under any liability to the Company, except that (y) if this Agreement
is terminated by the Representatives or the Underwriters because of any failure,
refusal or inability on the part of the Company to comply with the terms or to
fulfill any of the conditions of this Agreement, the Company will reimburse the
Underwriters for all out-of-pocket expenses (including the fees and
-21-
<PAGE>
disbursements of their counsel) incurred by them in connection with the proposed
purchase and sale of the Shares or in contemplation of performing their
obligations hereunder and (z) no Underwriter who shall have failed or refused to
purchase the Shares and Representative Warrants agreed to be purchased by it
under this Agreement, without some reason sufficient hereunder to justify
cancellation or termination of its obligations under this Agreement, shall be
relieved of liability to the Company or to the other Underwriters for damages
occasioned by its failure or refusal.
10. SUBSTITUTION OF UNDERWRITERS. If one or more of the Underwriters
shall fail (other than for a reason sufficient to justify the cancellation or
termination of this Agreement under Section 9) to purchase on any Closing Date
the Shares agreed to be purchased on such Closing Date by such Underwriter or
Underwriters, the Representatives may find one or more substitute underwriters
to purchase such Shares or make such other arrangements as the Representatives
may deem advisable or one or more of the remaining Underwriters may agree to
purchase such Shares in such proportions as may be approved by the
Representatives, in each case upon the terms set forth in this Agreement. If no
such arrangements have been made by the close of business on the business day
following such Closing Date:
(a) if the number of Shares to be purchased by the defaulting
Underwriters on such Closing Date shall not exceed 10% of the Shares that
all the Underwriters are obligated to purchase on such Closing Date, then
each of the nondefaulting Underwriters shall be obligated to purchase such
Shares on the terms herein set forth in proportion to their respective
obligations hereunder; provided, that in no event shall the maximum number
of Shares that any Underwriter has agreed to purchase pursuant to Section 1
be increased pursuant to this Section 10 by more than one-ninth of such
number of Shares without the written consent of such Underwriter, or
(b) if the number of Shares to be purchased by the defaulting
Underwriters on such Closing Date shall exceed 10% of the Shares that all
the Underwriters are obligated to purchase on such Closing Date, then the
Company shall be entitled to an additional business day within which it
may, but is not obligated to, find one or more substitute underwriters
reasonably satisfactory to the Representatives to purchase such Shares upon
the terms set forth in this Agreement.
In any such case, either the Representatives or the Company shall have the
right to postpone the applicable Closing Date for a period of not more than five
business days in order that necessary changes and arrangements (including any
necessary amendments or supplements to the Registration Statement or Prospectus)
may be effected by the Representatives and the Company. If the number of Shares
to be purchased on such Closing Date by such defaulting Underwriter or
Underwriters shall exceed 10% of the Shares that all the Underwriters are
obligated to purchase on such Closing Date, and none of the nondefaulting
Underwriters or the Company shall make arrangements pursuant to this Section
within the period stated for the purchase of the Shares that the defaulting
Underwriters agreed to purchase, this Agreement shall terminate with respect to
the Shares to be purchased on such Closing Date without liability on the part of
any nondefaulting Underwriter to the Company and without liability on the part
of the Company, except in both cases as provided in Sections 6(b), 7, 8 and 9.
The provisions of this Section shall not in any way affect the liability of
-22-
<PAGE>
any defaulting Underwriter to the Company or the nondefaulting Underwriters
arising out of such default. A substitute underwriter hereunder shall become an
Underwriter for all purposes of this Agreement.
11. MISCELLANEOUS. The respective agreements, representations,
warranties, indemnities and other statements of the Company or its officers,
and of the Underwriters set forth in or made pursuant to this Agreement shall
remain in full force and effect, regardless of any investigation made by or on
behalf of any Underwriter or the Company or any of the officers, directors or
controlling persons referred to in Sections 7 and 8 hereof, and shall survive
delivery of and payment for the Shares. The provisions of Sections 6(b), 7, 8
and 9 shall survive the termination or cancellation of this Agreement.
This Agreement has been and is made for the benefit of the Underwriters and
the Company and their respective successors and assigns and, to the extent
expressed herein, for the benefit of persons controlling any of the
Underwriters, or the Company, and directors and officers of the Company, and
their respective successors and assigns, and no other person shall acquire or
have any right under or by virtue of this Agreement. The term "successors and
assigns" shall not include any purchaser of Shares from any Underwriter merely
because of such purchase.
All notices and communications hereunder shall be in writing and mailed or
delivered, or by telefax or telegraph if subsequently confirmed by letter, (a)
if to the Representatives, to Rodman & Renshaw, Inc., 225 Liberty Street, 2
World Financial Center, 30th Floor, New York, New York 10281, Attention: Peter
H. Blum, Managing Director, telecopy: (212) 416-7439, and (b) if to the Company,
to the Company's agent for service as such agent's address appears on the cover
page of the Registration Statement with a copy to Battle Fowler LLP, 75 East
55th Street, New York, New York 10022, Attention: Gerald Eppner, Esq., telecopy:
(212) 856-7811.
This Agreement shall be governed by and construed in accordance with the
laws of the State of New York without regard to principles of conflict of laws.
This Agreement may be signed in any number of counterparts, each of which
shall be an original, with the same effect as if the signatures thereto and
hereto were upon the same instrument.
All pronouns and any variations thereof shall be deemed to refer to the
masculine, feminine, or neuter, singular or plural, as the identity of the
person or persons or entity or entities require.
All section headings herein are for convenience of reference only and are
not part of this Agreement, and no construction or inference shall be derived
therefrom.
-23-
<PAGE>
Please confirm that the foregoing correctly sets forth the agreement among
us.
Very truly yours,
ELECTRONIC HAIR STYLING, INC.
By ____________________________________
-24-
<PAGE>
Confirmed on behalf of itself
and as the Representatives of the several Underwriters
named in Schedule I annexed hereto:
RODMAN & RENSHAW, INC.
By:______________________________
Name: Peter H. Blum
Title: Managing Director
SANDS BROTHERS & CO., LTD.
By:______________________________
Name:
Title:
-25-
<PAGE>
SCHEDULE I
Number of Firm
Shares to be
Name Of Underwriter Purchased
------------------- ---------------
Rodman & Renshaw, Inc.
Sands Brothers & Co., Ltd.
Total. . . . . . . . . . . . . . . . . . . . . . . . . 2,600,000
-26-
<PAGE>
ELECTRONIC HAIR STYLING, INC.
INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE
CUSIP 285722 10 4
THIS CERTIFIES THAT [LOGO] SEE REVERSE FOR CERTAIN
DEFINITIONS AND A STATEMENT
AS TO THE RIGHTS, PREFERENCES,
PRIVILEGES AND RESTRICTIONS
ON SHARES
IS THE RECORD HOLDER OF
FULLY PAID AND NON-ASSESSABLE SHARES OF COMMON STOCK, $.01 PAR VALUE, OF
ELECTRONIC HAIR STYLING, INC.
transferable on the books of the Corporation in person or by duly authorized
attorney on surrender of this Certificate properly endorsed. This Certificate
shall not be valid until countersigned and registered by the Transfer Agent and
Registrar. Witness the facsimile seal of the Corporation and the signatures of
its duly authorized officers.
DATED: /s/ Don G. Hoff
COUNTERSIGNED AND REGISTERED [SEAL] CHAIRMAN OF THE BOARD
AMERICAN SECURITIES TRANSFER, INC. AND CHIEF EXECUTIVE OFFICER
P.O. Box 1596
Denver, Colorado 90201
TRANSFER AGENT AND REGISTRAR
/s/ John D. Hellman
AUTHORIZED SIGNATURE CHIEF FINANCIAL OFFICER
<PAGE>
Exhibit 4.3
WARRANT FOR COMMON STOCK
W/CASHLESS EXERCISE
THE WARRANTS REPRESENTED BY THIS CERTIFICATE AND THE SHARES ISSUABLE
UPON EXERCISE HEREOF HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT
OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY STATE SECURITIES
LAWS AND, UNLESS SO REGISTERED, MAY NOT BE OFFERED OR SOLD EXCEPT
PURSUANT TO AN EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE
REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND APPLICABLE STATE
SECURITIES LAWS.
THE TRANSFER OF THIS WARRANT IS
RESTRICTED AS DESCRIBED HEREIN.
ELECTRONIC HAIR STYLING, INC.
Warrant for the Purchase of Shares of Common Stock,
par value $.01 per Share
No. 1 [__________] Shares
THIS CERTIFIES that, for receipt in hand of [$______] [$0.001 per
share of underlying Common Stock] and other value received, [
] (the "Holder"), is entitled to subscribe for and purchase from
ELECTRONIC HAIR STYLING, INC., a Delaware corporation (the "Company"), upon the
terms and conditions set forth herein, at any time or from time to time after
[one year after the ^ effective date], and before 5:00 P.M. on [five years after
the ^ effective date], New York time (the "Exercise Period"), [________] shares
of the Company's Common Stock, par value $.01 per share ("Common Stock"), at a
price of $_____ per Share [120% of the Offering price] (the "Exercise Price").
This Warrant is the warrant or one of the warrants (collectively, including any
warrants issued upon the exercise or transfer of any such warrants in whole or
in part, the "Warrants") issued pursuant to the Underwriting Agreement, dated
__________, between Rodman & Renshaw, Inc. and Sands Brothers & Co., Ltd., as
representatives of the several Underwriters named therein, and the Company. As
used herein the term "this Warrant" shall mean and include this Warrant and any
Warrant or Warrants hereafter issued as a consequence of the exercise or
transfer of this Warrant in whole or in part. This Warrant may not be sold,
transferred, assigned or hypothecated until [one year after the ^ effective
date] except that it may be transferred, in whole or in part, to (i) one or more
officers or partners of the Holder (or the officers or partners of any such
partner); (ii) any other underwriting firm or member of the selling group which
participated in the public offering of Common Stock (the "Offering") which
commenced on [effective date] (or the officers or partners of any such firm);
(iii) a successor to the Holder, or the officers or partners of such successor;
(iv) a purchaser of substantially all of the assets of the Holder; or (v) by
operation of law; and the term the "Holder" as used herein shall include any
transferee to whom this Warrant has been transferred in accordance with the
above.
<PAGE>
The number of shares of Common Stock issuable upon exercise of the
Warrants (the "Warrant Shares") and the Exercise Price may be adjusted from time
to time as hereinafter set forth.
1. This Warrant may be exercised during the Exercise Period, as to
the whole or any lesser number of whole Warrant Shares, by the surrender of this
Warrant (with the election at the end hereof duly executed) to the Company at
its office at One Lovell Avenue, Mill Valley, California 94941, or at such other
place as is designated in writing by the Company, together with a certified or
bank cashier's check payable to the order of the Company in an amount equal to
the Exercise Price multiplied by the number of Warrant Shares for which this
Warrant is being exercised (the "Stock Purchase Price").
2. (a) In lieu of the payment of the Stock Purchase Price, the
Holder shall have the right (but not the obligation), to require the Company to
convert this Warrant, in whole or in part, into shares of Common Stock (the
"Conversion Right") as provided for in this Section 2. Upon exercise of the
Conversion Right, the Company shall deliver to the Holder (without payment by
the Holder of any of the Stock Purchase Price) that number of shares of Common
Stock (the "Conversion Shares") equal to the quotient obtained by dividing (x)
the value of this Warrant (or portion thereof as to which the Conversion Right
is being exercised if the Conversion Right is being exercised in part) at the
time the Conversion Right is exercised (determined by subtracting the aggregate
Stock Purchase Price of the shares of Common Stock as to which the Conversion
Right is being exercised in effect immediately prior to the exercise of the
Conversion Right from the aggregate Current Market Price (as defined in Section
6(e) hereof) of the shares of Common Stock as to which the Conversion Right is
being exercised immediately prior to the exercise of the Conversion Right) by
(y) the Current Market Price of one share of Common Stock immediately prior to
the exercise of the Conversion Right.
(b) The Conversion Rights provided under this Section 2 may be
exercised in whole or in part and at any time and from time to time while any
Warrants remain outstanding. In order to exercise the Conversion Right, the
Holder shall surrender to the Company, at its offices, this Warrant with the
Notice of Conversion at the end hereof duly executed. The presentation and
surrender shall be deemed a waiver of the Holder's obligation to pay all or any
portion of the aggregate purchase price payable for the shares of Common Stock
as to which such Conversion Right is being exercised. This Warrant (or so much
thereof as shall have been surrendered for conversion) shall be deemed to have
been converted immediately prior to the close of business on the day of
surrender of such Warrant for conversion in accordance with the foregoing
provisions.
3. Upon each exercise of the Holder's rights to purchase Warrant
Shares or Conversion Shares, the Holder shall be deemed to be the holder of
record of the Warrant Shares or Conversion Shares issuable upon such exercise or
conversion, notwithstanding that the transfer books of the Company shall then be
closed or certificates representing such Warrant Shares or Conversion Shares
shall not then have been actually delivered to the Holder. As soon as
practicable after each such exercise or conversion of this Warrant, the Company
shall issue and deliver to the Holder a certificate or certificates for the
Warrant Shares or Conversion Shares issuable upon such exercise or conversion,
registered in the name of the Holder or its designee. If this Warrant should
- 2 -
<PAGE>
be exercised or converted in part only, the Company shall, upon surrender of
this Warrant for cancellation, execute and deliver a new Warrant evidencing the
right of the Holder to purchase the balance of the Warrant Shares (or portions
thereof) subject to purchase hereunder.
4. Any Warrants issued upon the transfer or exercise or conversion in
part of this Warrant shall be numbered and shall be registered in a Warrant
Register as they are issued. The Company shall be entitled to treat the
registered holder of any Warrant on the Warrant Register as the owner in fact
thereof for all purposes and shall not be bound to recognize any equitable or
other claim to or interest in such Warrant on the part of any other person, and
shall not be liable for any registration or transfer of Warrants which are
registered or to be registered in the name of a fiduciary or the nominee of a
fiduciary unless made with the actual knowledge that a fiduciary or nominee is
committing a breach of trust in requesting such registration or transfer, or
with the knowledge of such facts that its participation therein amounts to bad
faith. This Warrant shall be transferable only on the books of the Company upon
delivery thereof duly endorsed by the Holder or by his duly authorized attorney
or representative, or accompanied by proper evidence of succession, assignment,
or authority to transfer. In all cases of transfer by an attorney, executor,
administrator, guardian, or other legal representative, duly authenticated
evidence of his or its authority shall be produced. Upon any registration of
transfer, the Company shall deliver a new Warrant or Warrants to the person
entitled thereto. This Warrant may be exchanged, at the option of the Holder
thereof, for another Warrant, or other Warrants of different denominations, of
like tenor and representing in the aggregate the right to purchase a like number
of Warrant Shares (or portions thereof), upon surrender to the Company or its
duly authorized agent. Notwithstanding the foregoing, the Company shall have no
obligation to cause Warrants to be transferred on its books to any person if, in
the opinion of counsel to the Company, such transfer does not comply with the
provisions of the Securities Act of 1933, as amended (the "Act"), and the rules
and regulations thereunder.
5. The Company shall at all times reserve and keep available out of
its authorized and unissued Common Stock, solely for the purpose of providing
for the exercise of the rights to purchase all Warrant Shares and/or Conversion
Shares granted pursuant to the Warrants, such number of shares of Common Stock
as shall, from time to time, be sufficient therefor. The Company covenants that
all shares of Common Stock issuable upon exercise of this Warrant, upon receipt
by the Company of the full Exercise Price therefor, and all shares of Common
Stock issuable upon conversion of this Warrant, shall be validly issued, fully
paid, and nonassessable, without any personal liability attaching to the
ownership thereof, and will not be issued in violation of any preemptive rights
of stockholders, optionholders, warrantholders and any other persons and the
Holders will receive good title to the securities purchased by them,
respectively, free and clear of all liens, security interests, pledges, charges,
encumbrances, stockholders' agreements and voting trusts which might be
created by acts or omissions to act of the Company.
6. (a) In case the Company shall at any time after the date the
Warrants were first issued (i) declare a dividend on the outstanding Common
Stock payable in shares of its capital stock, (ii) subdivide the outstanding
Common Stock, (iii) combine the outstanding Common Stock into a smaller number
of shares, or (iv) issue any shares of its capital stock by reclassification of
- 3 -
<PAGE>
the Common Stock (including any such reclassification in connection with a
consolidation or merger in which the Company is the continuing corporation),
then, in each case, the Exercise Price, and the number and kind of securities
issuable upon exercise or conversion of this Warrant, in effect at the time of
the record date for such dividend or of the effective date of such subdivision,
combination, or reclassification, shall be proportionately adjusted so that the
Holder after such time shall be entitled to receive the aggregate number and
kind of shares which, if such Warrant had been exercised or converted
immediately prior to such time, he would have owned upon such exercise or
conversion and been entitled to receive by virtue of such dividend, subdivision,
combination, or reclassification. Such adjustment shall be made successively
whenever any event listed above shall occur.
(b) ^[Intentionally omitted.]
(c) In case the Company shall distribute to all holders of Common
Stock (including any such distribution made to the stockholders of the Company
in connection with a consolidation or merger in which the Company is the
continuing corporation) evidences of its indebtedness, cash (other than any cash
dividend which, together with any cash dividends paid within the 12 months prior
to the record date for such distribution, does not (on a per-share basis)
exceed 5% of the Current Market Price per share at the record date for such
distribution) or assets (other than distributions and dividends payable in
shares of Common Stock), or rights, options, or warrants to subscribe for or
purchase Common Stock, or securities convertible into or exchangeable for
shares of Common Stock^, then, in each case, the Exercise Price shall be
adjusted by multiplying the Exercise Price in effect immediately prior to the
record date for the determination of stockholders entitled to receive such
distribution by a fraction, the numerator of which shall be the Current Market
Price per share of Common Stock on such record date, less the fair market value
(as determined in good faith by the board of directors of the Company, whose
determination shall be conclusive absent manifest error) of the portion of
the evidences of indebtedness or assets so to be distributed, or of such
rights, options, or warrants or convertible or exchangeable securities, or
the amount of such cash, applicable to one share, and the denominator of
which shall be such Current Market Price per share of Common Stock. Such
adjustment shall be made whenever any such distribution is made, and shall
become effective on the record date for the determination of stockholders
entitled to receive such distribution.
(d) ^[Intentionally omitted.]
(e) For the purpose of any computation under this Section 6, the
Current Market Price per share of Common Stock on any date shall be deemed to be
the average of the daily closing prices for the 30 consecutive trading days
immediately preceding the date in question. The closing price for each day
shall be the last reported sales price regular way or, in case no such reported
sale takes place on such day, the closing bid price regular way, in either case
on the principal national securities exchange (including, for purposes hereof,
the NASDAQ National Market System) on which the Common Stock is listed or
admitted to trading or, if the Common Stock is not listed or admitted to trading
on any national securities exchange, the highest reported bid price for the
Common Stock as furnished by the National Association of Securities Dealers,
Inc. through NASDAQ or a similar organization if NASDAQ is no longer reporting
- 4 -
<PAGE>
such information. If on any such date the Common Stock is not listed or
admitted to trading on any national securities exchange and is not quoted by
NASDAQ or any similar organization, the fair value of a share of Common Stock
on such date, as determined in good faith by the board of directors of the
Company, whose determination shall be conclusive absent manifest error, shall be
used.
(f) No adjustment in the Exercise Price shall be required if such
adjustment is less than $.05; PROVIDED, HOWEVER, that any adjustments which by
reason of this Section 6 are not required to be made shall be carried forward
and taken into account in any subsequent adjustment. All calculations under
this Section 6 shall be made to the nearest cent or to the nearest
one-thousandth of a share, as the case may be.
(g) In any case in which this Section 6 shall require that an
adjustment in the Exercise Price be made effective as of a record date for a
specified event, the Company may elect to defer, until the occurrence of such
event, issuing to the Holder, if the Holder exercised or converted this Warrant
after such record date, the shares of Common Stock, if any, issuable upon such
exercise or conversion over and above the shares of Common Stock, if any,
issuable upon such exercise or conversion on the basis of the Exercise Price in
effect prior to such adjustment; PROVIDED, HOWEVER, that the Company shall
deliver to the Holder a due bill or other appropriate instrument evidencing the
Holder's right to receive such additional shares upon the occurrence of the
event requiring such adjustment.
(h) Upon each adjustment of the Exercise Price as a result of the
calculations made in Sections ^ 6(c)^ or 6(d) hereof, this Warrant shall
thereafter evidence the right to purchase, at the adjusted Exercise Price, that
number of shares (calculated to the nearest thousandth) obtained by dividing (i)
the product obtained by multiplying the number of shares purchasable upon
exercise of this Warrant prior to adjustment of the number of shares by the
Exercise Price in effect prior to adjustment of the Exercise Price, by (ii) the
Exercise Price in effect after such adjustment of the Exercise Price.
(i) Whenever there shall be an adjustment as provided in this Section
6, the Company shall promptly cause written notice thereof to be sent by
registered mail, postage prepaid, to the Holder, at its address as it shall
appear in the Warrant Register, which notice shall be accompanied by an
officer's certificate setting forth the number of Warrant Shares purchasable
upon the exercise of this Warrant and the Exercise Price after such adjustment
and setting forth a brief statement of the facts requiring such adjustment and
the computation thereof, which officer's certificate shall be conclusive
evidence of the correctness of any such adjustment absent manifest error.
(j) The Company shall not be required to issue fractions of shares of
Common Stock or other capital stock of the Company upon the exercise or
conversion of this Warrant. If any fraction of a share would be issuable on the
exercise or conversion of this Warrant (or specified portions thereof), the
Company shall purchase such fraction for an amount in cash equal to the same
fraction of the Current Market Price of such share of Common Stock on the date
of exercise or conversion of this Warrant.
- 5 -
<PAGE>
7. (a) In case of any consolidation with or merger of the Company
with or into another corporation (other than a merger or consolidation in which
the Company is the surviving or continuing corporation), or in case of any sale,
lease, or conveyance to another corporation of the property and assets of any
nature of the Company as an entirety or substantially as an entirety, such
successor, leasing, or purchasing corporation, as the case may be, shall (i)
execute with the Holder an agreement providing that the Holder shall have the
right thereafter to receive upon exercise or conversion of this Warrant solely
the kind and amount of shares of stock and other securities, property, cash, or
any combination thereof receivable upon such consolidation, merger, sale, lease,
or conveyance by a holder of the number of shares of Common Stock for which this
Warrant might have been exercised or converted immediately prior to such
consolidation, merger, sale, lease, or conveyance, and (ii) make effective
provision in its certificate of incorporation or otherwise, if necessary, to
effect such agreement. Such agreement shall provide for adjustments which shall
be as nearly equivalent as practicable to the adjustments in Section 6.
(b) In case of any reclassification or change of the shares of Common
Stock issuable upon exercise or conversion of this Warrant (other than a change
in par value or from no par value to a specified par value, or as a result of a
subdivision or combination, but including any change in the shares into two or
more classes or series of shares), or in case of any consolidation or merger of
another corporation into the Company in which the Company is the continuing
corporation and in which there is a reclassification or change (including a
change to the right to receive cash or other property) of the shares of Common
Stock (other than a change in par value, or from no par value to a specified par
value, or as a result of a subdivision or combination, but including any change
in the shares into two or more classes or series of shares), the Holder shall
have the right thereafter to receive upon exercise or conversion of this Warrant
solely the kind and amount of shares of stock and other securities, property,
cash, or any combination thereof receivable upon such reclassification, change,
consolidation, or merger by a holder of the number of shares of Common Stock for
which this Warrant might have been exercised or converted immediately prior to
such reclassification, change, consolidation, or merger. Thereafter,
appropriate provision shall be made for adjustments which shall be as nearly
equivalent as practicable to the adjustments in Section 6.
(c) The above provisions of this Section 7 shall similarly apply to
successive reclassifications and changes of shares of Common Stock and to
successive consolidations, mergers, sales, leases, or conveyances.
8. In case at any time the Company shall propose
(a) to pay any dividend or make any distribution on shares of
Common Stock in shares of Common Stock or make any other distribution
(other than regularly scheduled cash dividends which are not in a greater
amount per share than the most recent such cash dividend) to all holders of
Common Stock; or
(b) to issue any rights, warrants, or other securities to all
holders of Common Stock entitling them to purchase any additional
- 6 -
<PAGE>
shares of Common Stock or any other rights, warrants, or other securities;
or
(c) to effect any reclassification or change of outstanding
shares of Common Stock, or any consolidation, merger, sale, lease, or
conveyance of property, described in Section 7; or
(d) to effect any liquidation, dissolution, or winding-up of
the Company; or
(e) to take any other action which would cause an adjustment to
the Exercise Price;
then, and in any one or more of such cases, the Company shall give written
notice thereof, by registered mail, postage prepaid, to the Holder at the
Holder's address as it shall appear in the Warrant Register, mailed at least 15
days prior to (i) the date as of which the holders of record of shares of Common
Stock to be entitled to receive any such dividend, distribution, rights,
warrants, or other securities are to be determined, (ii) the date on which any
such reclassification, change of outstanding shares of Common Stock,
consolidation, merger, sale, lease, conveyance of property, liquidation,
dissolution, or winding-up is expected to become effective, and the date as of
which it is expected that holders of record of shares of Common Stock shall be
entitled to exchange their shares for securities or other property, if any,
deliverable upon such reclassification, change of outstanding shares,
consolidation, merger, sale, lease, conveyance of property, liquidation,
dissolution, or winding-up, or (iii) the date of such action which would require
an adjustment to the Exercise Price.
9. The issuance of any shares or other securities upon the exercise
or conversion of this Warrant, and the delivery of certificates or other
instruments representing such shares or other securities, shall be made without
charge to the Holder for any tax or other charge in respect of such issuance.
The Company shall not, however, be required to pay any tax which may be payable
in respect of any transfer involved in the issue and delivery of any certificate
in a name other than that of the Holder and the Company shall not be required to
issue or deliver any such certificate unless and until the person or persons
requesting the issue thereof shall have paid to the Company the amount of such
tax or shall have established to the satisfaction of the Company that such tax
has been paid.
10. (a) If, at any time during the seven-year period commencing upon
^ the effective date of the Company's initial public offering, the Company shall
file a registration statement (other than on Form S-4, Form S-8, or any
successor form) with the Securities and Exchange Commission (the "Commission")
while any Underwriters' Securities (as hereinafter defined) are outstanding, the
Company shall give all the then holders of any Underwriters' Securities (the
"Eligible Holders") at least 30 days prior written notice of the filing of such
registration statement. If requested by any Eligible Holder in writing within
20 days after receipt of any such notice, the Company shall, at the Company's
sole expense (other than the fees and disbursements of counsel for the Eligible
Holders and the underwriting discounts, if any, payable in respect of the
Underwriters' Securities sold by any Eligible Holder), register or qualify all
- 7 -
<PAGE>
or, at each Eligible Holder's option, any portion of the Underwriters'
Securities of any Eligible Holders who shall have made such request,
concurrently with the registration of such other securities, all to the extent
requisite to permit the public offering and sale of the Underwriters' Securities
through the facilities of all appropriate securities exchanges and the
over-the-counter market, and will use its best efforts through its officers,
directors, auditors, and counsel to cause such registration statement to become
effective as promptly as practicable. Notwithstanding the foregoing, if the
managing underwriter of any such offering shall advise the Company in writing
that, in its opinion, the distribution of all or a portion of the Underwriters'
Securities requested to be included in the registration concurrently with the
securities being registered by the Company would materially adversely affect the
distribution of such securities by the Company for its own account, then any
Eligible Holder who shall have requested registration of his or its
Underwriters' Securities shall delay the offering and sale of such Underwriters'
Securities (or the portions thereof so designated by such managing underwriter)
for such period, not to exceed 90 days (the "Delay Period"), as the managing
underwriter shall request, provided that no such delay shall be required as to
any Underwriters' Securities if any securities of the Company are included in
such registration statement and eligible for sale during the Delay Period for
the account of any person other than the Company and any Eligible Holder unless
the securities included in such registration statement and eligible for sale
during the Delay Period for such other person shall have been reduced pro rata
to the reduction of the Underwriters' Securities which were requested to be
included and eligible for sale during the Delay Period in such registration. As
used herein, "Underwriters' Securities" shall mean the Warrants and the Warrant
Shares and the Conversion Shares which, in each case, have not been previously
sold pursuant to a registration statement or Rule 144 promulgated under the Act.
(b) If, at any time during the four-year period commencing [one year
after the ^ effective date], the Company shall receive a written request, from
Eligible Holders who in the aggregate own (or upon exercise of all Warrants then
outstanding would own) a majority of the total number of shares of Common Stock
then included (or upon such exercise would be included) in the Underwriters'
Securities (the "Majority Holders"), to register the sale of all or part of such
Underwriters' Securities, the Company shall, as promptly as practicable, prepare
and file with the Commission a registration statement sufficient to permit the
public offering and sale of the Underwriters' Securities through the facilities
of all appropriate securities exchanges and the over-the-counter market, and
will use its best efforts through its officers, directors, auditors, and counsel
to cause such registration statement to become effective as promptly as
practicable; PROVIDED, HOWEVER, that the Company shall only be obligated to
file one such registration statement for which all expenses incurred in
connection with such registration (other than the fees and disbursements of
counsel for the Eligible Holders and underwriting discounts, if any, payable in
respect of the Underwriters' Securities sold by the Eligible Holders) shall be
borne by the Company and one additional such registration statement for which
all such expenses shall be paid by the Eligible Holders. Within three business
days after receiving any request contemplated by this Section 10(b), the Company
shall give written notice to all the other Eligible Holders, advising each of
them that the Company is proceeding with such registration and offering to
include therein all or any portion of any such
- 8 -
<PAGE>
other Eligible Holder's Underwriters' Securities, provided that the Company
receives a written request to do so from such Eligible Holder within 20 days
after receipt by him or it of the Company's notice.
(c) In the event of a registration pursuant to the provisions of this
Section 10, the Company shall use its best efforts to cause the Underwriters'
Securities so registered to be registered or qualified for sale under the
securities or blue sky laws of such jurisdictions as the Holder or such holders
may reasonably request; PROVIDED, HOWEVER, that the Company shall not for any
such purpose be required to (A) qualify generally to do business as a
foreign corporation in any jurisdiction wherein it is not so otherwise
required to be so qualified, (B) subject itself to taxation in any
jurisdiction wherein it is not so subject or (C) consent to general service
of process in any such jurisdiction or otherwise take action that would
subject it to the general jurisdiction of the courts of any jurisdiction to
which it is not so subject.
(d) The Company shall keep effective any registration or
qualification contemplated by this Section 10 and shall from time to time amend
or supplement each applicable registration statement, preliminary prospectus,
final prospectus, application, document, and communication for such period of
time as shall be required to permit the Eligible Holders to complete the offer
and sale of the Underwriters' Securities covered thereby. The Company shall in
no event be required to keep any such registration or qualification in effect
for a period in excess of nine months from the date on which the Eligible
Holders are first free to sell such Underwriters' Securities.
(e) In the event of a registration pursuant to the provisions of this
Section 10, the Company shall furnish to each Eligible Holder such number of
copies of the registration statement and of each amendment and supplement
thereto (in each case, including all exhibits), such reasonable number of
copies of each prospectus contained in such registration statement and each
supplement or amendment thereto (including each preliminary prospectus), all of
which shall conform to the requirements of the Act and the rules and regulations
thereunder, and such other documents, as any Eligible Holder may reasonably
request to facilitate the disposition of the Underwriters' Securities included
in such registration.
(f) In the event of a registration pursuant to the provisions of this
Section 10, the Company shall furnish each Eligible Holder of any Underwriters'
Securities so registered with an opinion of its counsel (reasonably acceptable
to the Eligible Holders) to the effect that (i) the registration statement has
become effective under the Act and no order suspending the effectiveness of the
registration statement, preventing or suspending the use of the registration
statement, any preliminary prospectus, any final prospectus, or any amendment or
supplement thereto has been issued, nor has the Commission or any securities or
blue sky authority of any jurisdiction instituted or threatened to institute any
proceedings with respect to such an order, (ii) the registration statement and
each prospectus forming a part thereof (including each preliminary prospectus),
and any amendment or supplement thereto, complies as to form with the Act and
the rules and regulations thereunder, and (iii) such counsel has no knowledge of
any material
- 9 -
<PAGE>
misstatement or omission in such registration statement or any prospectus, as
amended or supplemented. Such opinion shall also state the jurisdictions in
which the Underwriters' Securities have been registered or qualified for sale
pursuant to the provisions of Section 10(c).
(g) In the event of a registration pursuant to the provision of this
Section 10, the Company shall enter into a cross-indemnity agreement and a
contribution agreement, each in customary form, with each underwriter, if any,
and, if requested, enter into an underwriting agreement containing conventional
representations, warranties, allocation of expenses, and customary closing
conditions, including, but not limited to, opinions of counsel and accountants'
cold comfort letters, with any underwriter who acquires any Underwriters'
Securities.
(h) The Company agrees that until all the Underwriters' Securities
have been sold under a registration statement or pursuant to Rule 144 under the
Act, it shall keep current in filing all reports, statements and other materials
required to be filed with the Commission to permit holders of the Underwriters'
Securities to sell such securities under Rule 144.
11. (a) Subject to the conditions set forth below, the Company agrees
to indemnify and hold harmless each Eligible Holder, its officers, directors,
partners, employees, agents, and counsel, and each person, if any, who controls
any such person within the meaning of Section 15 of the Act or Section 20(a) of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), from and
against any and all loss, liability, charge, claim, damage, and expense
whatsoever (which shall include, for all purposes of this Section 11, but not be
limited to, reasonable attorneys' fees and any and all reasonable expense
whatsoever incurred in investigating, preparing, or defending against any
litigation, commenced or threatened, or any claim whatsoever, and any and all
amounts paid in settlement of any claim or litigation), as and when incurred,
arising out of, based upon, or in connection with (i) any untrue statement or
alleged untrue statement of a material fact contained (A) in any registration
statement, preliminary prospectus, or final prospectus (as from time to time
amended and supplemented), or any amendment or supplement thereto, relating
to the sale of any of the Underwriters' Securities, or (B) in any application
or other document or communication (in this Section 11 collectively called an
"application") executed by or on behalf of the Company or based upon written
information furnished by or on behalf of the Company filed in any
jurisdiction in order to register or qualify any of the Underwriters'
Securities under the securities or blue sky laws thereof or filed with the
Commission or any securities exchange; or any omission or alleged omission to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading, unless such statement or omission was made
in reliance upon and in conformity with written information furnished to the
Company with respect to such Eligible
- 10 -
<PAGE>
Holder by or on behalf of such person expressly for inclusion in any
registration statement, preliminary prospectus, or final prospectus, or any
amendment or supplement thereto, or in any application, as the case may be, or
(ii) any breach of any representation, warranty, covenant, or agreement of the
Company contained in this Warrant. The foregoing agreement to indemnify shall
be in addition to any liability the Company may otherwise have, including
liabilities arising under this Warrant.
If any action is brought against any Eligible Holder or any of its
officers, directors, partners, employees, agents, or counsel, or any controlling
persons of such person (an "indemnified party") in respect of which indemnity
may be sought against the Company pursuant to the foregoing paragraph, such
indemnified party or parties shall promptly notify the Company in writing of the
institution of such action (but the failure so to notify shall not relieve the
Company from any liability pursuant to this Section 11(a) and the Company shall
promptly assume the defense of such action, including the employment of counsel
(reasonably satisfactory to such indemnified party or parties) and payment of
expenses. Such indemnified party or parties shall have the right to employ its
or their own counsel in any such case, but the fees and expenses of such counsel
shall be at the expense of such indemnified party or parties unless the
employment of such counsel shall have been authorized in writing by the Company
in connection with the defense of such action or the Company shall not have
promptly employed counsel reasonably satisfactory to such indemnified party or
parties to have charge of the defense of such action or such indemnified party
or parties shall have reasonably concluded that there may be a conflict of
interest between the indemnified party or parties and the Company in the
conduct of the defense of such action, in any of which events such fees and
expenses shall be borne by the Company and the Company shall not have the
right to direct the defense of such action on behalf of the indemnified party
or parties. Anything in this Section 11 to the contrary notwithstanding, the
Company shall not be liable for any settlement of any such claim or action
effected without its written consent, which shall not be unreasonably
withheld. The Company shall not, without the prior written consent of each
indemnified party that is not released as described in this sentence, settle
or compromise any action, or permit a default or consent to the entry of
judgment in or otherwise seek to terminate any pending or threatened action,
in respect of which indemnity may be sought hereunder (whether or not any
indemnified party is a party thereto), unless such settlement, compromise,
consent, or termination includes an unconditional release of each indemnified
party from all liability in respect of such action. The Company agrees
promptly to notify the Eligible Holders of the commencement of any litigation
or proceedings against the Company or any of its officers or directors in
connection with the sale of any Underwriters' Securities or any preliminary
prospectus, prospectus, registration statement, or amendment or supplement
thereto, or any application relating to any sale of any Underwriters'
Securities.
(b) The Holder agrees to indemnify and hold harmless the Company,
each director of the Company, each officer of the Company who shall have signed
any registration statement covering Underwriters' Securities held by the Holder,
each other person, if any, who controls the Company within the meaning of
Section 15 of the Act or Section 20(a) of the Exchange Act, and its or their
respective counsel, to the same extent as the foregoing indemnity from the
- 11 -
<PAGE>
Company to the Holder in Section 11(a), but only with respect to statements or
omissions, if any, made in any registration statement, preliminary prospectus,
or final prospectus (as from time to time amended and supplemented), or any
amendment or supplement thereto, or in any application, in reliance upon and in
conformity with written information furnished to the Company with respect to the
Holder by or on behalf of the Holder expressly for inclusion in any such
registration statement, preliminary prospectus, or final prospectus, or any
amendment or supplement thereto, or in any application, as the case may be. If
any action shall be brought against the Company or any other person so
indemnified based on any such registration statement, preliminary prospectus, or
final prospectus, or any amendment or supplement thereto, or in any application,
and in respect of which indemnity may be sought against the Holder pursuant to
this Section 11(b), the Holder shall have the rights and duties given to the
Company, and the Company and each other person so indemnified shall have the
rights and duties given to the indemnified parties, by the provisions of Section
11(a).
(c) To provide for just and equitable contribution, if (i) an
indemnified party makes a claim for indemnification pursuant to Section 11(a) or
11(b) (subject to the limitations thereof) but it is found in a final judicial
determination, not subject to further appeal, that such indemnification may not
be enforced in such case, even though this Agreement expressly provides for
indemnification in such case, or (ii) any indemnified or indemnifying party
seeks contribution under the Act, the Exchange Act or otherwise, then the
Company (including for this purpose any contribution made by or on behalf of any
director of the Company, any officer of the Company who signed any such
registration statement, any controlling person of the Company, and its or their
respective counsel), as one entity, and the Eligible Holders of the
Underwriters' Securities included in such registration in the aggregate
(including for this purpose any contribution by or on behalf of an indemnified
party), as a second entity, shall contribute to the losses, liabilities, claims,
damages, and expenses whatsoever to which any of them may be subject, on the
basis of relevant equitable considerations such as the relative fault of the
Company and such Eligible Holders in connection with the facts which resulted in
such losses, liabilities, claims, damages, and expenses. The relative fault, in
the case of an untrue statement, alleged untrue statement, omission, or alleged
omission, shall be determined by, among other things, whether such statement,
alleged statement, omission, or alleged omission relates to information supplied
by the Company or by such Eligible Holders, and the parties' relative intent,
knowledge, access to information, and opportunity to correct or prevent such
statement, alleged statement, omission, or alleged omission. The Company and
the Holder agree that it would be unjust and inequitable if the respective
obligations of the Company and the Eligible Holders for contribution were
determined by pro rata or per capita allocation of the aggregate losses,
liabilities, claims, damages, and expenses (even if the Holder and the other
indemnified parties were treated as one entity for such purpose) or by any other
method of allocation that does not reflect the equitable considerations referred
to in this Section 11(c). In no case shall any Eligible Holder be responsible
for a portion of the contribution obligation imposed on all Eligible Holders in
excess of its pro rata share based on the number of shares of Common Stock owned
(or which would be owned upon exercise of all Underwriters' Securities) by it
and included in such registration as compared to the number of shares of Common
Stock owned (or which would be owned
- 12 -
<PAGE>
upon exercise of all Underwriters' Securities) by all Eligible Holders and
included in such registration. No person guilty of a fraudulent
misrepresentation (within the meaning of Section 11(f) of the Act) shall be
entitled to contribution from any person who is not guilty of such fraudulent
misrepresentation. For purposes of this Section 11(c), each person, if any, who
controls any Eligible Holder within the meaning of Section 15 of the Act or
Section 20(a) of the Exchange Act and each officer, director, partner, employee,
agent, and counsel of each such Eligible Holder or control person shall have the
same rights to contribution as such Eligible Holder or control person and each
person, if any, who controls the Company within the meaning of Section 15 of the
Act or Section 20(a) of the Exchange Act, each officer of the Company who shall
have signed any such registration statement, each director of the Company, and
its or their respective counsel shall have the same rights to contribution as
the Company, subject in each case to the provisions of this Section 11(c).
Anything in this Section 11(c) to the contrary notwithstanding, no party shall
be liable for contribution with respect to the settlement of any claim or action
effected without its written consent. This Section 11(c) is intended to
supersede any right to contribution under the Act, the Exchange Act or
otherwise.
12. (a) At any time after two (2) years and sixty (60) days after
the closing date of the Offering, on not less than thirty (30) days notice,
this Warrant may be redeemed, at the option of the Company, at a redemption
price of $0.05 per underlying share of Common Stock, provided the market price
of the Common Stock receivable upon exercise of such Warrant shall exceed 250%
of the price per share of Common Stock in the Offering for a period of 60
days commencing two (2) years after the closing date of the Offering (the
"Target Price"), subject to adjustment as set forth in Section 12(e), below.
Market price for the purpose of this Section 12 shall mean the last reported
sale price on the primary exchange on which the Common Stock is traded, if
the Common Stock is traded on a national securities exchange or the Nasdaq
Market System.
(b) In the event the conditions set forth in Section 12(a) are met,
and the Company shall desire to exercise its right so to redeem the Warrants, it
shall mail a notice of redemption to each of the Holders of the Warrants to be
redeemed, first class, postage prepaid, not later than the thirtieth day before
the date fixed for redemption, at their last address as shall appear on the
records of the Warrants. Any notice mailed in the manner provided herein shall
be conclusively presumed to have been duly given whether or not the Holder
receives such notice.
(c) The notice of redemption shall specify the (i) the redemption
price, (ii) the date fixed for redemption, (iii) the place where the Warrants
shall be delivered and the redemption price paid, and (iv) that the right to
exercise the Warrant shall terminate at 5:00 P.M. (New York time) on the
business day immediately preceding the date fixed for redemption. The date
fixed for the redemption of the Warrants shall be the Redemption Date. No
failure to mail such notice nor any defect therein or in the mailing thereof
shall affect the validity of the proceedings for such redemption except as to a
Holder (a) to whom notice was not mailed or (b) whose notice was defective.
(d) Any right to exercise a Warrant shall terminate at 5:00 P.M. (New
York time) on the business day immediately preceding the Redemption Date. On
and after the Redemption Date, Holders of the Warrants shall have no further
rights except to receive, upon surrender of the Warrant, the Redemption Price.
- 13 -
<PAGE>
(e) If the shares of the Company's Common Stock are subdivided or
combined into a greater or smaller number of shares of Common Stock, the Target
Price shall be proportionally adjusted by the ratio which the total number of
shares of Common Stock outstanding immediately prior to such event bears to the
total number of shares of Common Stock to be outstanding immediately after such
event.
13. Unless registered pursuant to the provisions of Section 10
hereof, the Warrant Shares or Conversion Shares issued upon exercise or
conversion of the Warrants shall be subject to a stop transfer order and the
certificate or certificates evidencing such Warrant Shares shall bear the
following legend:
"THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
"SECURITIES ACT"), OR ANY STATE SECURITIES LAWS AND, UNLESS SO
REGISTERED, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN EXEMPTION
FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION
REQUIREMENTS OF THE SECURITIES ACT AND APPLICABLE STATE SECURITIES
LAWS."
14. Upon receipt of evidence satisfactory to the Company of the loss,
theft, destruction, or mutilation of any Warrant (and upon surrender of any
Warrant if mutilated), and upon reimbursement of the Company's reasonable
incidental expenses, the Company shall execute and deliver to the Holder thereof
a new Warrant of like date, tenor, and denomination.
15. The Holder of any Warrant shall not have, solely on account of
such status, any rights of a stockholder of the Company, either at law or in
equity, or to any notice of meetings of stockholders or of any other proceedings
of the Company, except as provided in this Warrant.
16. This Warrant shall be construed in accordance with the laws of
the State of New York applicable to contracts made and performed within such
State, without regard to principles of conflicts of law.
Dated: , 199_
ELECTRONIC HAIR STYLING, INC.
By: _______________________________
[Seal]
______________________________
Secretary
- 14 -
<PAGE>
FORM OF ASSIGNMENT
(To be executed by the registered holder if such holder desires to transfer the
attached Warrant.)
FOR VALUE RECEIVED, ______________________________ hereby sells,
assigns, and transfers unto __________________ a Warrant to purchase __________
shares of Common Stock, par value $.01 per share, of Electronic Hair Styling,
Inc. (the "Company"), together with all right, title, and interest therein, and
does hereby irrevocably constitute and appoint ____________________ attorney to
transfer such Warrant on the books of the Company, with full power of
substitution.
Dated: ______________________
Signature ___________________________
NOTICE
The signature on the foregoing Assignment must correspond to the name as
written upon the face of this Warrant in every particular, without alteration or
enlargement or any change whatsoever.
- 15 -
<PAGE>
To: Electronic Hair Styling, Inc.
One Lovell Avenue
Mill Valley, CA 94941
ELECTION TO EXERCISE
The undersigned hereby exercises his or its rights to purchase _______
Warrant Shares covered by the within Warrant and tenders payment herewith in the
amount of $_________ in accordance with the terms thereof, and requests that
certificates for such securities be issued in the name of, and delivered to:
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
(Print Name, Address and Social Security
or Tax Identification Number)
and, if such number of Warrant Shares shall not be all the Warrant Shares
covered by the within Warrant, that a new Warrant for the balance of the Warrant
Shares covered by the within Warrant be registered in the name of, and delivered
to, the undersigned at the address stated below.
Dated: ______________________ Name__________________________
(Print)
Address:_______________________________________________________
___________________________
(Signature)
- 16 -
<PAGE>
To: Electronic Hair Styling, Inc.
One Lovell Avenue
Mill Valley, CA 94941
CASHLESS EXERCISE FORM
(To be executed upon conversion of the attached Warrant)
The undersigned hereby irrevocably elects to surrender its Warrant for the
number of shares of Common Stock as shall be issuable pursuant to the cashless
exercise provisions of the within Warrant, in respect of _____ shares of Common
Stock underlying the within Warrant, and requests that certificates for such
securities be issued in the name of and delivered to:
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
(Print Name, Address and Social Security
or Tax Identification Number)
and, if such number of shares shall not be all the shares exchangeable or
purchasable under the within Warrant, that a new Warrant for the balance of the
Warrant Shares covered by the within Warrant be registered in the name of, and
delivered to, the undersigned at the addressed stated below.
Dated: _________________________ Name _____________________________
(Print)
Address: _____________________________________________________________
__________________________________
(Signature)
- 17 -
<PAGE>
WARRANT FOR _______ SHARES
OF
COMMON STOCK
OF
ELECTRONIC HAIR STYLING, INC.
THIS WARRANT is issued as of November 6, 1995, by ELECTRONIC HAIR STYLING, INC.,
a Washington corporation, located at One Lovell Avenue, Mill Valley, CA 94941
(the "Company"), to [INVESTOR] (the "Investor"), whose address is [ADDRESS],
pursuant to that certain Investment Agreement between the Company and Investor
dated as of November 1, 1995 ("Investment Agreement").
NOW, THEREFORE, for consideration received:
1. WARRANTS. The Company hereby certifies that Investor is entitled
to purchase [# SHARES] shares of Company's $.01 par value Common Stock (the
"Common Stock"), on the terms and conditions set forth below, for a price of
$2.00 per share. The term "Warrants herein means Investor's right hereunder to
purchase shares of Common Stock.
2. TERM OF WARRANTS. The Warrants may be exercised at any time or
from time to time commencing six months after the date hereof and, unless
exercised, will expire at the close of business on November 30, 1998 (the
"Effective Period").
3. NONTRANSFERABILITY OF WARRANTS.
THE WARRANTS REPRESENTED HEREBY HAVE BEEN ACQUIRED FOR INVESTMENT AND
NEITHER THE WARRANTS NOR THE UNDERLYING SHARES HAVE BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933 AS AMENDED, AND THEY MAY NOT BE SOLD OR
TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION THEREFROM
UNDER SAID ACT.
4. METHOD OF EXERCISING WARRANT. The Warrants may be exercised by
giving written notice to the Company any time during the Effective Period at its
office at One Lovell Avenue, Mill Valley, California 94941, Attention:
Secretary. Such notice shall state the number of Warrants being exercised, be
signed by the Investor, and be accompanied by payment is full of the exercise
price (in cash or by certified check). The Company shall issue a certificate or
certificates representing such shares in Investor's name or such other name as
Investor directs, and deliver such certificate(s) as soon as practicable after
the notice and payment is received. The shares represented by such
certificate(s) shall be deemed fully paid and nonassessable. The Investor shall
not any of the rights of a stockholder of the Company with respect to the shares
underlying the Warrants until certificates for such shares shall have been
issued to him.
5. LIMITATION ON EXERCISE. Notwithstanding Paragraph 4, if a current
registration statement is not in effect with the Securities and Exchange
Commission for the shares underlying the Warrants and/or qualification with or
approval from applicable state securities agencies has not been obtained with
respect to such shares, the Warrants may not be exercised unless an exemption
from registration or qualification for the transaction is available in the
opinion of counsel for the Company. The Company has agreed to register the
shares underlying the Warrants under certain circumstances, as set forth in the
Investment Agreement.
6. STOCK SPLITS, MERGERS, ETC. (a) In case of any stock split,
reverse split or stock dividend or similar transaction which increases or
decreases the number of outstanding
<PAGE>
shares of the Common Stock, appropriate adjustment will be made by the Board of
Directors to the number of shares which may be purchased hereunder, using the
same factor as was applied to the outstanding shares of Common Stock.
(b) In the case of a merger of the Company with a subsidiary, parent
or other affiliated company, wherein such other company will be the surviving
corporation, the Company shall require, as part of the merger, that the
surviving corporation assume the Company's obligations under this agreement,
except that in such event, on the exercise of the Warrants, the stock issued
would be stock of the surviving corporation, and the number of shares to be
issued would be adjusted by the same factor or ratio that was applied to each
share of Common Stock in the merger.
The price paid per share to exercise a warrant after a stock split or
exchange would be determined as follows: W x $2.00
---------
N
(where W equals the total number of shares subject to this Warrant and N equals
the total number of shares which could be purchased pursuant to this Warrant
after the split or merger.) For example, if Investor has Warrants to purchase
1,000 shares at $2.00 per share, and the Common Stock has been split or
exchanged using a factor of .65, then after the split or merger Investor would
be entitled to purchase 650 shares, and the price per share would be $3,077. The
total price for exercising all the Warrants would be same--$2,000.
(c) In the case of a merger or similar transaction with an
unaffiliated company which results in a replacement of the Company's Common
Stock with stock of another corporation, the Company shall use its best efforts
to replace the Warrants with comparable warrants to purchase the stock of such
other corporation.
7. GENERAL. The Company, or its successor, shall at all times during
the Effective Period reserve and keep available such number of shares of the
Common Stock as will be sufficient to satisfy the requirements of this Warrant,
shall pay all original issue taxes with respect to the issuance of shares
pursuant hereto and all other fees and expenses necessarily incurred by the
Company in connection therewith, and shall, from time to time, use its best
efforts to comply with all laws and regulations which, in the opinion of counsel
for the Company, shall be applicable thereto.
8. NOTICES. Any notice relating to this Warrant shall be in writing
and delivered in person or by first class mail, postage prepaid, to the party at
the address of the party set forth in on the first page hereof. A notice shall
be deemed to have been given on the date it is received. Anyone to whom a notice
may be given under this agreement may designate a new address by notice to that
effect.
9. ENFORCEABILITY: GOVERNING LAW. This Warrant shall be finding upon
the Company its successors and assigns, and shall be governed by the laws of the
State of Washington.
IN WITNESS WHEREOF, the Company has caused this Warrant to be executed by a
duly authorized officer of the Company as of the day and year first above
written.
ELECTRONIC HAIR STYLING, INC., a
Washington corporation
By:
----------------------------------
Don Hoff, Chairman
2
<PAGE>
7. REGISTRATION RIGHTS. The Investor and other investors purchasing Common
Stock of the Company concurrently herewith pursuant to a similar Stock
Purchase Agreement.
("Registerable Securities"), will be entitled to the following rights to have
their shares registered under the Securities Act of 1933.
(a) Following the Company's Initial Public Offering (IPO) the
Investor will be entitled to request one registration, but the Company's
obligation to honor this request shall be subject to the following
restrictions:
(i) the request must be made by holders of at least 50% of the
Registerable Securities that have not been theretofore registered; and
(ii) the Registerable Securities to be registered must be at
least 5% of the outstanding shares of the Company.
The Company will have no obligation to register the shares of the
Investor after two years following the purchase of shares by the Investor
provided that the Company complies with the reporting requirements of
Section 13 of the Securities Exchange Act of 1934 or makes publicly
available such information as may be necessary, in order to enable the
Investor to sell his shares under Rule 144. In the event that the Company
fails to comply with Section 13 or fails to make available such information
that will allow Investor to sell its shares under Rule 144 after two years
following their purchase, holders of at least 50% of the Registerable
Security desiring to sell at least 5% of the outstanding shares of the
Company will be entitled to one registration, on demand during a period of
three years after two years following their purchase, subject to conditions
described in paragraph (b) and approval of the Board of Directors.
(b) After twelve months and prior to two years following the purchase
and delivery of Shares, if the Company initiates a registration for the
public sale of its own securities or securities owned by other shareholders,
the Investor may have its Registerable Securities included ("piggybacked")
in the Company registration, subject to approval of the Board of Directors,
provided that the Company may at its option require all Registerable
Securities so requested to be registered to be sold in a firm underwriting
Registerable Securities.
Investor will be entitled to have this securities registered in a
Company registration after two years following their purchase if the
Company fails to comply with the reporting requirements of Section 13 of
the Exchange Act or does not make publicly such information as would allow
the Investor to sell its shares under Rule 144, if at least 50% of the
holders of Registerable Securities requested registration of the equivalent
of at least 5% of the outstanding shares of the Company.
(c) Expenses of registration (excluding underwriters' discount and
commissions and any legal or accounting fees separately incurred by selling
stockholders) will be borne by the Company.
3
<PAGE>
7. REGISTRATION RIGHTS. After the Company's Initial Public Offering
(IPO) the Investor will be entitled to the following rights to have their shares
registered under the Securities Act of 1933.
(a) The Investor will be entitled to request one registration, but
the Company's obligation to honor this request shall be subject to the
following restrictions:
(i) the request must be made by holders of at least 50% of the
Registerable Securities that have not been theretofore registered; and
(ii) the Registerable Securities to be registered must be at
least 5% of the outstanding shares of the Company.
The Company will have no obligation to register the shares of the
Investor after two years following the purchase of shares by the Investor
provided that the Company complies with the reporting requirements of
Section 13 of the Securities Exchange Act of 1934 or makes publicly
available such information as may be necessary, in order to enable the
Investor to sell his shares under Rule 144. In the event that the Company
fails to comply with Section 13 or fails to make available such information
that will allow Investor to sell his or her shares under Rule 144 after two
years following their purchase, holders of at least 50% of the Registerable
Security desiring to sell at least 5% of the outstanding shares of the
Company will be entitled to one registration, on demand during a period of
three years after two years following their purchase, subject to conditions
described in paragraph (b) and approval of the Board of Directors.
(b) After twelve months and prior to two years following the purchase
and delivery of Shares, if the Company initiates a registration for the
public sale of its own securities or securities owned by other
shareholders, the Investor may have his or her Registerable
Securities included ("piggybacked") in the Company registration, subject to
approval of the Board of Directors, and the Underwriter of the Company's
securities, provided that the Company may at its option require all
Registerable Securities so requested to be registered to be sold in a firm
underwriting.
Investor will be entitled to have the securities registered in a
Company registration after two years following their purchase if the
Company fails to comply with the reporting requirements of Section 13 of
the Exchange Act or does not make publicly such information as would allow
the Investor to sell his or her shares under Rule 144, if at least 50% of
the holders of Registerable Securities requested registration of the
equivalent of at least 5% of the outstanding shares of the Company.
(c) Expenses of registration (excluding underwriters' discount and
commissions and any legal or accounting fees separately incurred by selling
stockholders) will be borne by the Company.
4
<PAGE>
6. REGISTRATION RIGHTS. The Subscriber will be entitled to have his/her
shares registered under the Securities Act of 1933, on the terms and conditions
described below. The term "Registerable Securities" shall be those shares of
Common Stock of the Company acquired pursuant to a Subscription Agreement or
Stock Purchase Agreement dated prior to or concurrently herewith containing
similar piggy back and demand registration rights (or acquired from a transferee
who held such rights), which shares remain unregistered at a particular time or
from time to time.
I. PIGGY BACK REGISTRATION RIGHTS.
(a) For two years following the purchase and delivery of
Shares, if the Company initiates a registration for the public sale of its own
securities or securities owned by other shareholders. Subscriber shall be
entitled to have the Shares included ("piggybacked") in the Company registration
statement; provided, however, that if the registration is for a public offering
involving an underwriting, the Company may at its option require Subscriber to
participate in such underwriting. In such event that portion of Subscriber's
shares that are included in the underwriting (determined pursuant to subsection
(d) below) will be included in the registration statement. Subscriber's
registration rights under this Section 4(I) are conditioned on Subscriber
participating in the underwriting to the extent requested and entering into an
underwriting agreement with the selected underwriter(s).
(b) If the registration involves an underwriting, Company
will use its best efforts (but shall not be absolutely obligated) to include in
the registration statement all of the Registerable Securities, including those
that are in excess of the underwriter's marketing limitation and will not be
sold in the underwriting. If the registration statement includes any Shares
which will not be sold in the underwriting, Subscriber agrees to execute an
agreement wherein Subscriber will withhold from sale for a specified period
(including sale under Rule 144) some or all of the Shares, as requested by the
Company so long as all holders of more than 5% of the Company's common stock and
the officers and directors of the Company enter into similar agreements.
(c) If less than all Registerable Securities can be
included in the underwriting (or included in the registration statement), the
number to be included in the underwriting and/or the statement, as the case may
be, shall be, after including all of the shares that the Company proposes to
sell, allocated among all shareholders of the Company who have the right to
participate in a piggy-back registration, pro rata, in proportion to their
ownership of shares of Registerable Securities with piggy-back registration
rights. (In the event any owner requests inclusion of less than all his/her pro
rata allotment or later withdraws from participation, the excess will be
allocated pro rata among those desiring to include more than their allotment.
(d) The Company will provide Subscriber with written notice
of any proposed registration, whether the registration involves an underwriting
and what number of
5
<PAGE>
Registerable Securities can be included in the underwriting. To have Shares
included in the registration, Subscriber must notify the Company in writing,
given within 15 days after notice from the Company, of the number of the Shares
to be included. Expenses of registration (excluding underwriters' discount and
commissions and any legal or accounting fees separately incurred by selling
stockholders) will be borne by the Company.
(e) Subscriber's rights under this Section 6(I) shall
continue with respect to any of the Shares which remain unregistered; but
Subscriber's right to have the Shares registered under this Section 6(I) shall
not arise in connection with a registration by the Company covering only
securities reserved for an employee stock option plan or relating solely to a
Rule 145 transaction.
II. DEMAND REGISTRATION
(a) After six months after the first public offering of the
Company's securities, Subscriber will be entitled to request one registration of
the Shares in a Company registration, provided that the holders of 30% or more
of the Registerable Securities request registration of the Registerable
Securities having an aggregate market value on the date of request of not less
than $500,000. "Aggregate market value" shall mean the market price per share of
the Company's common stock on the principal trading market for the Common Stock
on such date (which, if listed on a stock exchange shall be the last sale price
for the stock on such date, and if traded on NASDAQ, shall mean the average
between the last bid and asked price for the stock on such date) multiplied by
the number of shares for which registration is requested.
(b) Within fifteen days after receipt of a request for
registration, the Company will provide written notice of the request to all
holders of Registerable Securities. To participate in the registration,
Subscriber must so request the Company in writing, given within 15 days after
notice from the Company, and specify the number of the Shares to be registered
and the intended method of disposition. To the extent Shareholder elects not to
participate, his/her demand registration rights with respect to those shares
will terminate.
(c) The Company will have no obligation to register the
Shares after two years following the purchase and delivery of Shares so long as
the Company complies with the reporting requirements of Section 13 of the
Exchange Act or makes public such information as would allow Subscriber to sell
the Shares under Rule 144. If the Company fails to comply with such requirements
or to make public such information, Subscriber will have the right to demand
registration on the terms set forth in subsections (a)-(c) above for a period of
three years after the end of such two year period.
(d) Expenses of registration (excluding underwriters'
discount and commissions and any legal or accounting fees separately incurred by
selling stockholders) will be borne by the Company.
III. REGISTRATION PROCEDURES
(a) For each registration required to be made by the Company
hereunder, the Company at its expense and as expeditiously as practicable shall
prepare and file a registration statement, use its best efforts to cause such
statement to become effective and keep such statement effective for 120 days or
until the distribution of securities described in the statement is completed,
whichever occurs first. The Company also shall use its best efforts to register
or qualify such securities under the securities or blue sky laws of such
jurisdictions as would enable the holders of the securities to effect their
disposition, and to have such securities listed on the same securities exchange
or quotation system on which other securities of the Company are then listed.
6
<PAGE>
(b) In connection with any registration which includes the
Shares, Subscriber agrees (i) to furnish customary information as may be
requested for the registration statement regarding the Shares, the ownership
thereof and the proposed plan of distribution; (ii) to enter a market stand-off
agreement, if requested, as described in Section 6(I)(b) above; and (iii) not to
sell the Shares under the provisions of this Section 4 without a declaration of
the effectiveness of the registration statement by the SEC.
7
<PAGE>
Exhibit 5.1
(212) 856-7000
(212) 339-9150
May , 1996
Electronic Hair Styling, Inc.
One Lovell Avenue
Mill Valley, CA 94941
Re: Initial Public Offering of Common Stock
---------------------------------------
Ladies and Gentlemen:
We have acted as special counsel to Electronic Hair Styling, Inc., a
Delaware corporation (the "Company"), in connection with the preparation and
filing with the Securities and Exchange Commission (the "Commission") under the
Securities Act of 1933, as amended (the "Securities Act"), of a Registration
Statement on Form S-1 (File No. 333-2722) (the "Registration Statement"), and
the Prospectus forming a part thereof (the "Prospectus"), providing for the
Company's registration of 2,600,000 shares of Common Stock, par value $.01 per
share, of the Company (the "Common Stock")(2,990,000 shares if the underwriters'
over allotment option is exercised in full). Capitalized terms used but not
defined herein shall have the respective meanings given or ascribed thereto in
the Registration Statement. You have requested that we furnish our opinion as
to matters hereinafter set forth.
For purposes of this letter, we have examined originals or copies of
the following:
(a) Registration Statement, as filed with the Commission on March 22,
1996, and as amended on May 1, 1996;
<PAGE>
2
May ,1996
(b) Amendment No. 2 to the Registration Statement, as filed today
with the Commission (the "Amendment");
(c) Restated Certificate of Incorporation of the Company, as filed as
an exhibit to the Registration Statement;
(d) By-Laws of the Company, as filed as an exhibit to the
Registration Statement;
(e) Proposed Form of Stock Certificate representing shares of Common
Stock as filed as an exhibit to the Amendment;
(f) Proposed form of the Underwriting Agreement, as filed as an
exhibit to the Registration Statement (the "Underwriting Agreement"); and
(g) Minutes books of the Company, as certified by the Company.
In rendering the opinion herein expressed we have assumed the
genuineness of all signatures, the authenticity of all documents, instruments
and certificates submitted to us as originals, the conformity with the original
documents, instruments and certificates of all documents, instruments and
certificates submitted to us as copies and the legal capacity to sign of all
individuals executing documents. We have assumed the completeness of the
corporate records provided to us by the Company. We have relied upon
representations of the Company as to certain factual matters relevant hereto.
We are not admitted to the practice of law in any jurisdiction but the
State of New York, and we do not express any opinion as to the laws of other
states or jurisdictions other than the laws of the State of New York, the
federal law of the United States and the General Corporation Law of the State of
Delaware. No opinion is expressed as to the effect that the law of any other
jurisdiction may have upon the subject matter of the opinions expressed herein
under conflicts of law principles, rules and regulations or otherwise.
Based upon and subject to the foregoing examination, we are of the opinion
that the Common Stock to be sold by the Company pursuant to the Registration
Statement have been duly and validly authorized and, when issued and delivered
in accordance with the Underwriting Agreement, will be validly issued, fully
paid and nonassessable.
<PAGE>
3
May ,1996
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the use of our name under the caption "Legal
Matters" in the Prospectus. In giving such consent, we do not admit that we
come within the category of persons whose consent is required by Section 7 of
the Act or the rules or regulations of the Commission thereunder.
Very truly yours,
<PAGE>
Exhibit 7.1
May , 1996
Electronic Hair Styling, Inc.
One Lovell Avenue
Mill Valley, CA 94941
Re: Liquidation Preference of the Series A and
Series B Preferred Stock of Electronic Hair Styling, Inc.
---------------------------------------------------------
Ladies and Gentlemen:
We have acted as special counsel to Electronic Hair Styling, Inc. a
Delaware corporation (the "Company"), in connection with the preparation and
filing with the Securities and Exchange Commission (the "Commission") under the
Securities Act of 1933, as amended (the "Securities Act"), of a Registration
Statement on Form S-1 (File No. 333-2722) (the "Registration Statement"),
providing for the Company's registration of 2,600,000 shares of Common Stock,
par value $.01 per share, of the Company (the "Common Stock").
You have requested our opinion whether there exists any restriction
upon the surplus of the Company available for the payment of dividends on the
capital stock of the Company by reason of the fact that the liquidation
preference of the Series A Preferred Stock, par value $.01 per share ("Series
A"), and Series B Preferred Stock, par value $ .01 per share ("Series B," and
collectively with Series A, the "Preferred Stock") exceeds the par value of such
stock, and whether any remedy would be available to holders of the Preferred
Stock before or after payment of any such dividend which would reduce or reduces
the surplus of the Company to an amount less than the amount of such excess.
<PAGE>
2
Electronic Hair Styling, Inc. May , 1996
For the purpose of rendering our opinions as expressed herein, we have
examined and have relied upon:
(a) the Restated Certificate of Incorporation of EHS Merger Corp.
(now known as Electronic Hair Styling, Inc.) as filed as an
exhibit to the Registration Statement (the "Certificate"); and
(b) the By-Laws of the Company, as filed as an exhibit to the
Registration Statement (the "By-Laws").
With respect to the foregoing documents, we have assumed the
authenticity of all documents submitted to us as originals, the conformity to
authentic originals of all documents submitted to us as copies or forms, the
genuineness of all signatures, the legal capacity of natural persons, and that
the foregoing documents, in the forms furnished to us for our review, have not
been and will not be altered or amended in any respect material to our opinions
as expressed herein. In addition, we have assumed for purposes of our opinions
as expressed herein that the Certificate and the By-Laws constitute the
certificate of incorporation and the by-laws, respectively, of the Company as
presently in effect. We have not reviewed any other documents of or applicable
to the Company for purposes hereof, and we assume there exists no provision of
any such other document that bears upon or is inconsistent with our opinions as
expressed herein. We have made no independent factual investigation of our own
for purposes hereof, but rather have relied solely upon the foregoing documents,
the statement and information set forth therein, and the additional facts
recited or assumed herein, all of which we assume to be true, complete and
accurate in all material respects.
In summary, Part Six, Section 4 of the Certificate provides that, in
the event of any liquidation, dissolution or winding up of the Company, whether
voluntary or involuntary, the Series A and the Series B shall rank PARI PASSU,
and the holders of shares of the Preferred Stock shall be entitled to receive,
out of the assets of the Company available for distribution to stockholders,
cash in an amount for each share of Preferred Stock held by them equal to the
Liquidation Preference of such share (defined in Part Six, Section 2 of the
Certificate as $10.00 per share, as adjusted to reflect increases or decreases
in the number of outstanding Series A, for holders of Series A (the "Series A
Liquidation Preference"), and as $6.55 per share, as adjusted to reflect
increases or decreases in the number of outstanding Series B, for holders of
Series B (the "Series B Liquidation Preference")), plus, in the case of the
Series B, all accrued and unpaid dividends thereon before any payment shall be
made or any assets distributed to the holders of any other class or series of
capital stock of the Company.
<PAGE>
3
Electronic Hair Styling, Inc. May , 1996
In this respect, you have requested our opinion under the General
Corporation Law of the State of Delaware (the "DGCL"): (1) whether, as a matter
of law, prior to a liquidation, dissolution or winding up of the Company, there
will be any restriction upon the surplus of the Company available for the
payment of dividends on the capital stock of the Company solely by reason of the
fact that the Series A Liquidation Preference and the Series B Liquidation
Preference exceed the par value of the Series A and the Series B, respectively;
and (2) whether, as a matter of law, any remedy would be available to holders of
the Preferred Stock, either before or after payment of any dividend, prior to a
liquidation, dissolution or winding up of the Company, solely by reason of the
fact that payment of such dividend would reduce or reduces the surplus of the
Company to an amount less than the difference between the Series A Liquidation
Preference and the Series B Liquidation Preference and the par value of the
Series A and the Series B, respectively.
Section 170 of the DGCL authorizes a Delaware corporation to pay
dividends out of its surplus. Surplus is defined by Section 154 of the DGCL as
the amount by which the net assets of a corporation exceed its capital. Both
net assets, as defined in Section 154, and capital, as defined in and determined
in accordance with Sections 154 and 244 of the DGCL, are determined without
reference to the amount of any liquidation preference of any class of the
corporation's stock. Accordingly, the authorization in Section 170 of the DGCL
for payment of dividends out of surplus is not in any way limited or restricted
solely by reason of the fact that a series or class of stock of a corporation,
such as the Preferred Stock, has a liquidation preference in excess of the par
value of such stock.
We are aware of no controlling decision of any court of the State of
Delaware that addresses the question presented for our consideration, but we
believe that such courts would adopt the reasoning set forth herein should the
question be litigated. We note in addition that our opinion as expressed herein
is supported by the discussion of the Court in BAILEY V. TUBIZE RAYON
CORPORATION, 56 F. Supp. 418, 423 (D. Del. 1944) (applying Delaware law).
Based upon and subject to the foregoing, and subject to the
limitations stated hereinbelow, it is our opinion that, solely as a matter of
law, under the DGCL as in effect on the date hereof:
(1) prior to a liquidation, dissolution or winding up of the Company,
there will be no restriction upon the surplus of the Company
available for the payment of the dividends on the capital stock
of the Company solely be reason of the fact that the Series A
Liquidation Preference and the Series
<PAGE>
4
Electronic Hair Styling, Inc. May , 1996
B Liquidation Preference exceed the par value of the Series A and
the Series B, respectively; and
(2) no remedy would be available to holders of the Preferred Stock
either before or after payment of any dividend, prior to a
liquidation, dissolution or winding up of the Company, solely by
reason of the fact that payment of such dividend would reduce or
reduces the surplus of the Company to an amount less than the
difference between the Series A Liquidation Preference and the
Series B Liquidation Preference and the par value of the Series A
and the Series B, respectively.
The foregoing opinions are limited to the DGCL, and we have not
considered and express no opinion on the effect of any other laws or the laws of
any other state or jurisdiction, including federal laws regulating securities or
other federal laws, or the rules and regulations of stock exchanges or of any
other regulatory body. In addition, our opinions as expressed herein address
only the questions of whether, solely as a matter of law, there exists any
restriction upon the surplus available for payment of dividends, or any remedy
would be available to holders of Preferred Stock before or after payment of
dividends, solely by reason of the excess of the Series A Liquidation Preference
and Series B Liquidation Preference over the par value of the Series A or Series
B, respectively, and we render no opinion on the effect of any charter
restrictions on payment of dividends on other stock prior to payment of all
accumulated dividends on or the redemption of the Preferred Stock or the effect
of any other charter restrictions regarding payment of dividends or remedies
relating thereto.
We hereby consent to the use and filing of this opinion letter as an
exhibit to the Registration Statement, provided, however, that in giving such
consent, we do not admit that we come within the category of persons whose
consent is required under Section 7 of the Securities Act or the Rules and
Regulations of the Commission thereunder.
Very truly yours,
<PAGE>
MANUFACTURING AGREEMENT
This AGREEMENT made as of this 16th day of November 1995 between DOWBRANDS
L.P., 9550 Zionsville Road, Indianapolis, IN 46268, a Delaware limited
partnership, (hereinafter "DowBrands") and ELECTRONIC HAIR STYLING
INCORPORATED, a Washington corporation having its principal office at One Lovell
Avenue, Mill Valley, CA 94941 (hereinafter "EHS");
WITNESSES:
WHEREAS, DowBrands wishes to have certain consumer products compounded and
packaged for it by EHS; and
WHEREAS, EHS wishes to compound and package products for DowBrands in
accordance with the terms hereinafter set forth;
NOW, THEREFORE, for good and valuable consideration the Parties hereby
agree as follows:
1. MANUFACTURE
EHS agrees to compound and package (hereinafter "Manufacture") for
DowBrands and DowBrands will issue purchase orders to purchase all of its
requirements for its U.S. business for the products listed in Exhibit "A"
attached hereto (hereinafter the "Products") on an as-needed basis. Exhibit "A"
may be amended from time to time by mutual written agreement of the Parties to
add or delete items thereto.
a. EHS warrants that its manufacture of the Products will meet and be in
accordance with the specifications described in the Product Manual for the
Products (collectively "Product Specifications" and individually the
"Product Specification") attached hereto as Exhibit "B". DowBrands
reserves the right to change said Specifications from time to time provided
that no change in Specifications shall become effective until same shall
first have been communicated in writing to EHS, either by personal delivery
or by mail or fax, and EHS shall have acknowledged receipt of the
communication. In case such change shall require a special charge or a
price change, the Parties will agree upon any appropriate price adjustment
before such change in Specifications becomes effective. Likewise, EHS may
request a change in a Product Specification in writing but no such change
shall be effective unless expressly agreed to in writing by an authorized
representative of DowBrands.
b. The Products will be manufactured by EHS at the Fridley, MN manufacturing
site. The manufacture of the Products by EHS shall be open to inspection
by DowBrands upon providing EHS reasonable notice of such time of such
inspection and at all times subject to confidentiality restrictions which
may be applicable when EHS is manufacturing products for other customers.
Furthermore, at the request of DowBrands, EHS shall furnish to DowBrands
quality assurance samples of the Products for testing by DowBrands.
c. Manufacture, sale and delivery of Products to DowBrands shall be made
pursuant to DowBrands purchase orders (purchase order copy is attached for
reference as Exhibit "C". Terms and conditions contained in the purchase
order shall apply where not in conflict with this Agreement or Exhibits to
this Agreement. These terms and conditions are incorporated by reference.)
<PAGE>
d. Shipments of finished Products shall be made by EHS in accordance with
instructions set forth in DowBrands purchase orders. Shipments shall be at
DowBrands expense, and risk of loss with respect to each shipment shall
pass from EHS to DowBrands upon shipment of product from EHS warehouse (FOB
shipment point).
e. In the event that EHS is unable to provide all of DowBrands U.S.
requirements for the Products according to a delivery schedule specified by
DowBrands, EHS shall notify DowBrands within three (3) working days of
receipt of the delivery schedule of its inability to timely meet such a
schedule. In such event, DowBrands will have the right to have those
quantities of the Product that EHS is unable to timely provide manufactured
by another party without any liability under the requirements provisions of
this contract. In the event that EHS fails to timely deliver Products
according to a delivery schedule or fails to timely inform DowBrands of its
inability to comply with a delivery schedule, EHS will be liable for
DowBrands direct losses resulting from the lost sales of such product
provided that DowBrands will use reasonable efforts to secure supply of
product from other sources or otherwise mitigate its damages.
2. FORCE MAJEURE
EHS shall not be liable under the provision of this agreement nor shall EHS
be deemed to be in breach or default hereunder where such failure is
attributable to or caused by fire, flood, accident, act of God, strike, other
industrial disturbance, governmental order or act, riot, civil insurrection or
other cause beyond the control of EHS (each of the foregoing events being herein
referred to as a "Force Majeure Event"), provided that nothing in this Section
shall relieve DowBrands of its obligations under this Agreement to pay for
Products ordered and delivered in accordance herewith. In the event that EHS
suffers a Force Majeure Event, it shall endeavor to notify DowBrands thereof as
promptly as possible after the occurrence of such Force Majeure Event.
3. PAYMENT AND PRICES
a. The prices for the various Products manufactured by EHS for DowBrands shall
be set forth in Exhibit "D" attached hereto. The prices set forth in
Exhibit "D" are guaranteed until April 30, 1996. Pricing in Exhibit "D"
will be re-negotiated and mutually agreed upon annually.
b. EHS may invoice DowBrands upon shipment of Product or (subject to the
proviso hereafter set forth) upon the date such Product is ready for
shipment in the event that DowBrands is not ready to accept immediate
delivery. DowBrands shall pay EHS invoices within thirty (30) days of
shipment - Net Thirty (30) Days.
4. PREPAYMENT FOR PRODUCT
EHS acknowledges the $3 million prepayment to EHS by DowBrands for finished
Product, and promises to repay the amount of $3 million to DowBrands in eight
(8) equal quarterly payments of $375,000 each over a two (2) year period
commencing on February 16, 1996. The process for such repayment will be that
EHS shall issue a credit memo for $375,000 at the close of each quarter and
DowBrands will make deduction against future invoices to fully satisfy the
credit memo.
5. FORECASTS AND SCHEDULING
Thirty (30) days prior to any required monthly production run for
Products, DowBrands will provide to EHS: (a) a purchase order for Product
requirements for the next ensuing calendar month, and (b) a schedule setting
forth DowBrands firm forecasted monthly Product requirements for the next two
(2) ensuing calendar months as well as a flexible forecast for following 10
months.
6. RAW MATERIALS
2
<PAGE>
a. EHS will be responsible for the procurement of all the specified raw
materials required to manufacture the Products according to the Product
Specifications and agrees to do so in the manner that minimizes the cost of
raw materials provided that, at all times, DowBrands shall have the option
upon providing adequate notice to EHS to purchase individual raw materials
if it can do so at a lower cost than can be achieved by EHS.
b. EHS agrees to maintain adequate inventories of raw materials to meet the
requirements of DowBrands in a timely manner.
c. EHS PURCHASED RAW MATERIALS: Changes in the cost of Dow-supplied raw
materials and aerosol cans can be passed through to DowBrands in the form
of an adjustment to the price of Products listed in Exhibit "D" once prior
to April 30, 1996. After April 30, 1996, industry changes in the cost of
raw materials, chemicals, and packaging components may be passed through to
DowBrands only with ninety (90) days' advance notification of such changes
and the effective dates thereof. In the event that DowBrands is not
prepared to accept such changes, DowBrands shall be entitled to supply any
such raw materials, chemicals, or packaging components for purposes of
Manufacture.
7. WASTE: FAILURE TO MEET SPECIFICATIONS
a. In the event that DowBrands elects to supply EHS with raw materials in
accordance with Clause 6c, the Parties will develop an allowance for waste
to be included as Exhibit "E" to be used for DowBrands purchased raw
materials. At least annually, variances from these allowances will be
determined and the aggregate loss or gain by product group will be
calculated. In the event the waste in any year of this Agreement shall be
in excess of the allowance set forth in Exhibit "E", DowBrands may invoice
EHS for such excess at its costs from its suppliers and EHS shall credit
DowBrands such amounts within thirty (30) days after receipt of DowBrands
invoice.
b. EHS shall be solely responsible for manufacturing the Products in
accordance with the Product Specifications in force at the time of
manufacture and, accordingly, shall indemnify and defend DowBrands from any
costs, claims, and consequences, arising from EHS's failure to manufacture
the Products in accordance with such Product Specifications or the failure
of the finished Products to meet such Product Specifications. Furthermore,
EHS shall be responsible for maintaining product quality levels at least
equivalent to those achieved by DowBrands at the time of execution of this
Agreement.
c. In the event that any finished Products do not meet DowBrands Product
Specifications, within thirty (30) days of rejection by DowBrands, EHS may
submit a rework procedure to DowBrands for approval. DowBrands shall
respond to such proposal within thirty (30) days of receipt and shall not
unreasonably withhold approval.
d. EHS shall be solely responsible for the disposal of any rejected finished
goods, which are the responsibility of EHS as set forth in (b) above, and
the attendant cost thereof. Such disposal shall be in accordance with all
applicable federal, state, provincial, and local laws, rules, and
regulations which pertain to such disposal and shall be subject to approval
by DowBrands, not to be unreasonably withheld.
8. PERMITS, LICENSES COMPLIANCE WITH LAW
EHS shall maintain all necessary permits, licenses and certifications
necessary for the manufacture of the Products. EHS will observe and abide by
all applicable laws, regulations, ordinances and other rules of the federal,
state, or local authority where the work is done, or any other
3
<PAGE>
duly constituted public authority. EHS agrees to hold DowBrands harmless
from liability or penalty which might be imposed by reason of any asserted or
established violation of such laws, regulations, ordinances, or other rules in
connection with the manufacture of the Products.
9. WASTE
a. EHS agrees to use its best efforts to minimize and manage any waste
generated as a result of the manufacture of the Product. EHS shall manage
the waste generated at EHS's facility as a result of the manufacture of
the Product and, as owner and operator of the facility, shall be defined as
the "waste generator."
b. All management, storage, handling, transportation, treatment, recycling,
and disposal of waste shall be conducted in compliance with all applicable
federal, state and local laws. This provision shall survive the expiration
or termination of this Agreement until all waste generated from the
performance of the manufacture of the Products are removed from EHS's
facility. This Section 9 shall not apply to any waste or rinsate generated
in connection with EHS's providing manufacturing services, or using the
Equipment for its own benefit or for the benefit of any third party, and
EHS shall be solely responsible for the management and disposal of any
waste or rinsate so generated.
10. CONFIDENTIALITY
a. The formula, specifications, methods of manufacturing of or for the
Products and all other information contained within the Product
Specifications formulation manual and associated correspondence is agreed
to be confidential information (hereinafter "Confidential Information").
As such, EHS hereby agrees to hold all the Confidential Information in the
strictest confidence and will make no use of such information except as set
forth herein or in such other written agreement as may be entered into
between the Parties. The Confidential Information shall not be revealed by
EHS or any of its employees or agents to anyone outside of EHS, other than
governmental authorities as required by law (provided EHS has given
DowBrands at least ten (10) days notice of such disclosure where legally
possible), and shall be revealed within EHS only to such persons as have
actual need for such information for the above-stated purposes, have been
advised by EHS of the confidential nature of the Confidential Information,
and have agreed to maintain the Confidential Information as confidential.
b. EHS's obligations under this Article shall not apply to any of the
Confidential Information which:
(i) was demonstrably known by EHS prior to the date of
disclosure thereof to EHS by DowBrands;
(ii) was known or generally available to the industry or to the
public prior to the date of such disclosure;
(iii) becomes known or generally available to the industry or to
the public subsequent to the date of such disclosure through
no breach of this Agreement, nor any act or failure to act
on EHS's part; or
(iv) is disclosed or made available to EHS at any time by a third
party who has a bona fide right to disclose or make such
information available to it.
c. The disclosure by DowBrands to EHS of the Confidential Information shall
not be construed as granting EHS a license or any other rights to any,
present or future, trademarks, copyrights, patents or other industrial
property protection, or applications thereof, of DowBrands relating to the
Confidential Information, including all documents and other materials
relating thereto and any copies thereof shall, at DowBrands request, at any
time, immediately be returned by EHS to DowBrands except for any records
which are required to be maintained by any federal, state, provincial, or
local regulatory authorities. Incidental observation of Products by
business visitors to EHS's plants shall not constitute disclosures of
4
<PAGE>
Confidential Information within the meaning of this Article provided EHS
takes reasonable care to prevent such observations.
11. INDEMNITIES
a. EHS shall indemnify and hold DowBrands harmless from and against and shall
defend and fully satisfy any and all claims for bodily injury, death,
property damage, or product recall, including all costs and attorneys' fees
incurred in connection with such claims resulting from its negligent acts
or omissions in the manufacture of any Products for DowBrands or its
failure, for any reason whatsoever, to manufacture the Products in
accordance with the Product Specifications, and delivered to DowBrands
without modification.
b. Subject to Sections 7a and c, DowBrands assumes responsibility and agrees
to indemnify and hold EHS harmless for claims against Products that have
been manufactured to the Product Specifications and delivered to DowBrands
without modifications.
c. EHS warrants that no Products, hereafter produced and shipped or delivered
by it to or for DowBrands will be, at the time of such shipment or
delivery, or will become, as a result of EHS's negligent acts or omissions
in the manufacture of the Products, or as a result of EHS's failure, for
any reason whatsoever, to manufacture the Products in accordance with the
Specifications out of compliance with all applicable legislation governing
the Product, and without limiting the generality of the foregoing, will be
or will become adulterated within the meaning of the U.S. Food, Drug and
Cosmetic Act or the Canadian Food and Drug Act, and EHS shall indemnify and
hold harmless DowBrands from and against and shall defend DowBrands against
any and all consequences of a breach of this warranty by EHS. DowBrands in
turn warrants that packaging components, labels, labeling or ingredients
furnished or specified by it or for it will not be or result in adulterated
or misbranded Products within the meaning of such act, or other applicable
legislation, provided, however, that EHS shall provide the inspection and
quality control services required by the Product Specifications.
12. INTELLECTUAL PROPERTY INDEMNIFICATION
a. EHS agrees to indemnify, defend and save DowBrands harmless against any
patent, trademark, copyright, or intellectual property claim related to the
Products manufactured by EHS except to the extent it arises out of and is
caused directly by the Product Specifications and designs provided by
DowBrands.
b. DowBrands agrees to indemnify, defend and save EHS harmless against any
patent, trademark, copyright or intellectual property claim to the extent
it arises out of and is caused directly by the Product Specifications and
designs provided by DowBrands.
13. INSURANCE
The Parties shall each maintain sufficient insurance coverage to
accommodate the indemnities set forth in Clause 7 hereof.
14. TERM OF AGREEMENT
This Agreement shall become effective on the 16th day of November 1995 and
shall have a two (2) year term expiring on November 15, 1997. DowBrands shall
have the right to continue the Agreement for two (2) additional one year terms
by providing EHS written notice of its intention to do so within ninety (90)
days prior to the expiration of the term of this Agreement.
15. EARLY TERMINATION
This Agreement may be terminated:
5
<PAGE>
a. By either Party on written notice in any case where the other Party:
(i) fails to vacate within fifteen (15) days the filing of a
voluntary or involuntary petition in bankruptcy or
insolvency by or against it under federal or state law,
including but not limited to any proceeding under the
Federal Bankruptcy Act or any receivership proceeding in law
or equity under the state law, or commits an act of
bankruptcy under the Canadian Bankruptcy Act;
(ii) is adjudicated as a bankruptcy;
(iii) has a receiver appointed over it or its assets;
(iv) makes a general assignment for the benefit of its creditors;
or
(v) dissolves its corporate existence;
b. By DowBrands in the event of a material failure by EHS to meet agreed
product delivery schedules; or failure by EHS to comply with the
Product Specifications, the product quality specifications,
regulations, and procedures set forth in paragraphs 6.b., 6.c. and
6.d.
In the event of such a failure DowBrands shall inform EHS in writing
of such failure setting out facts of such failure. EHS shall have
seven (7) calendar days to resolve such failure to the satisfaction of
this Agreement. In the event such failure is not resolved to the
satisfaction of DowBrands by the seventh (7th) calendar day, DowBrands
shall have the right to terminate this Agreement with immediate effect
upon receipt of written notice.
16. MISCELLANEOUS
a. In all cases where written notices are to be sent by either Party, they
shall be deemed sufficiently sent if personally delivered, faxed (with
confirmation copy sent by ordinary mail) or mailed by certified mail,
return receipt requested, to the attention of all of the following at the
addresses hereinafter designated, which may be changed on written notice.
Any notices so sent shall be deemed received on the date of fax
transmission or physical delivery.
To DowBrands: To EHS:
DowBrands L.P. Electronic Hair Styling Inc.
9550 Zionsville Road One Lovell Avenue
P. O. Box 68511 Mill Valley, CA 94941
Indianapolis, IN 46268 ATTN: Dominic LaRosa
ATTN: Manager of Contract
Manufacturing
b. EHS shall carry out its activities hereunder as an independent contractor
and not as an agent, servant, employee, or representative of DowBrands, and
EHS shall have no authority to enter into and incur any obligation or
liability or to use or make any representation on behalf of DowBrands or to
hold itself out as having such authority.
c. The waiver by either Party of any provision of this Agreement shall not be
deemed to constitute a waiver of any other provision of this Agreement.
The invalidity of any provision of this Agreement shall not impair the
validity of any other provision or of the agreement as a whole.
d. This Agreement, together with its Exhibits and copy of DowBrands purchase
order, contains the entire agreement between the Parties hereto, supersedes
any prior written or oral agreements, and may not be modified, altered,
terminated, or discharged in any manner except by an instrument in writing
signed by or on behalf of both Parties.
e. This Agreement shall in all respects be construed, interpreted and governed
by the laws of the state of Indiana.
6
<PAGE>
f. The paragraph headings herein shall be for convenience only and shall not
be of any force and effect in the interpretation of this Agreement.
g. EHS shall not assign or subcontract its obligations hereunder without the
express written approval of DowBrands, which consent shall not be
unreasonably withheld or delayed.
17. RECORD KEEPING
Batch quality assurance sampling and paperwork shall be retained for three
(3) years after date of manufacture.
18. DOWBRANDS PURCHASE ORDERS
The terms and conditions of DowBrands purchase orders are incorporated by
reference and shall apply to the purchase of any finished Product by DowBrands
from EHS. If any inconsistency arises between the purchase order terms and this
Agreement, this Agreement shall control interpretation.
DOWBRANDS L.P. ELECTRONIC HAIR STYLING INC.
_______________________________ _______________________________
Signature Signature
_______________________________ _______________________________
Typed/Printed Name Typed/Printed Name
_______________________________ _______________________________
Title Title
_______________________________ _______________________________
Date Date
7
<PAGE>
HEADINGS FOR EXHIBITS
A) Products
B) Product Specifications
C) Purchase Order
D) PRODUCT PRICES
E) WASTE ALLOWANCE
8
<PAGE>
EXHIBIT "A"
PRODUCTS
Dow Bathroom Cleaner with SCRUBBING BUBBLES-Registered Trademark- Aerosol
SPRAY'N WASH-Registered Trademark- tough stain removing Gel
SPRAY'N STARCH-Registered Trademark- fabric finish
9
<PAGE>
EXHIBIT "E"
WASTE ALLOWANCE
Schedules to be developed and agreed upon in the event that DowBrands
supplies raw materials to EHS.
10
<PAGE>
Exhibit 10.8
INDEMNIFICATION AGREEMENT
THIS AGREEMENT, dated as of the ____ day of _________, 199_, is made
by and between Electronic Hair Styling, Inc., a Delaware corporation having its
principal place of business in the State of California (the "Company") and
_____________ (the "Indemnitee"), a resident of ________________.
WHEREAS, it is essential to the Company to retain and attract the most
capable persons available as officers, directors, key employees or other agents;
and
WHEREAS, Indemnitee is currently serving as __________________________
(the "Position"); and
WHEREAS, both the Company and Indemnitee recognize the increased risk
of litigation and other claims being asserted against directors and officers of
publicly-traded and other corporations, as a result of which competent and
experienced persons have become more reluctant to serve in such positions, and
as a result of which creative management and decision making has been deterred;
and
WHEREAS, the provision of indemnification will assist the Company in
attracting and retaining the most skilled and competent officers and directors;
and
WHEREAS, in recognition of Indemnitee's need for substantial
protection against personal liability in order to allow Indemnitee to continue
to provide service to the Company in an effective manner, the Company wishes to
provide in this Agreement for the indemnification of the Indemnitee and for the
advancing of expenses to Indemnitee, in each case to the full extent permitted
by law and as set forth in this Agreement.
NOW THEREFORE, in consideration of the premises and the covenants
contained herein, the Company and Indemnitee agree as follows:
1. AGREEMENT TO SERVE. Indemnitee will continue to serve faithfully
and to the best of his ability in the Position, at the will of the Company or
pursuant to the terms of any separate agreement which may exist, so long as he
is duly elected or appointed and qualified or until such time as he tenders his
resignation in writing.
2. RIGHT TO INDEMNIFICATION. In the event Indemnitee was or is made
a party or was or is threatened to be made a party to or was or is involved or
called as a witness in any action, suit, proceeding or alternative dispute
resolution mechanism, or any hearing, inquiry or investigation that Indemnitee
in good faith believes may lead to the institution of such action, suit,
proceeding or alternative dispute resolution mechanism, whether civil, criminal,
administrative or investigative, and any appeal therefrom (hereinafter,
collectively a "Proceeding"), by reason of the fact that he was, is or had
agreed to become a director, officer, employee, agent, fiduciary or Delegate (as
defined herein) of the Company, Indemnitee shall be indemnified and held
harmless by the Company to the fullest extent permitted under the Delaware
General Corporation Law (the "DGCL"), as the same now exists or may hereafter be
amended (but, in the case of any such amendment, only to the extent that such
amendment permits the Company to provide broader
<PAGE>
indemnification rights than the DGCL permitted the Company to provide prior to
such amendment) against all expenses (including reasonable attorneys' fees and
all other costs, expenses, liabilities, obligations and disbursements in
connection with investigating, prosecuting, defending, preparing to prosecute
and defend, or being a witness or other participant in any Proceeding),
liabilities and losses (including, but not limited to, judgements; fines;
liabilities under ERISA for damages, excise taxes or penalties; damages, fines
or penalties arising out of violation of any law related to the protection of
the public health, welfare or the environment; and amounts paid or to be paid in
settlement) incurred or suffered by such person in connection with any
Proceeding (collectively, "Expenses"); PROVIDED, that except as provided in
Section 6 hereof, the Company shall indemnify any such person seeking indemnity
in connection with a Proceeding (or part thereof) initiated by such person only
if such Proceeding (or part thereof) was authorized by the Board of Directors of
the Company.
For purposes of this Agreement, a "Delegate" is any person serving at
the request of the Company as a director, officer, trustee fiduciary, partner,
employee or agent of an entity or enterprise other than the Company (including,
but not limited to, service with respect to employee benefit plans and trusts).
3. EXPENSES. Expenses incurred by Indemnitee in defending or
otherwise being involved in a Proceeding shall be paid by the Company in advance
of the final disposition of such Proceeding, including any appeal therefrom,
upon receipt of an undertaking (the "Undertaking") by or on behalf of Indemnitee
to repay such amount if it shall ultimately be determined that he is not
entitled to be indemnified by the Company; provided, that in connection with a
Proceeding (or part thereof) initiated by Indemnitee, except as provided in
Section 6 hereof, the Company shall pay such Expenses in advance of the final
disposition only if such Proceeding (or part thereof) was authorized by the
Board of Directors of the Company. The Undertaking shall provide that if
Indemnitee has commenced Proceedings in a court of competent jurisdiction to
secure a determination that he should be indemnified by the Company, he shall
not be obligated to repay the Company during the pendency of such Proceeding.
Any claim for expenses shall include a written statement setting forth in
reasonable detail the costs and expenses incurred by Indemnitee.
4. MANDATORY PAYMENT OF EXPENSES. Notwithstanding any other
provision of this Agreement, to the extent that Indemnitee has been successful
on the merits or otherwise, including, without limitation, the dismissal of an
action without prejudice, in defense or any Proceeding or in the defense of any
claim, issue or matter therein, Indemnitee shall be indemnified hereunder
against all Expenses incurred by Indemnitee in connection therewith.
5. NOTICE. Indemnitee shall, as a condition precedent to
Indemnitee's right to be indemnified under this Agreement, give the Company
notice in writing as soon as practicable of any Proceeding for which
indemnification will or could be sought under this Agreement.
6. PROTECTION OF RIGHTS. If a claim under Section 2 or any
agreement ("Other Agreement") providing indemnification to Indemnitee is not
promptly paid in full by the Company after a written claim has been received by
the Company or if Expenses
-2-
<PAGE>
pursuant to Section 3 or an Other Agreement have not been promptly advanced
after a written request for such advancement accompanied by the Undertaking has
been received by the Company, the claimant may at any time thereafter bring suit
against the Company to recover the unpaid amount of the claim or the advancement
of Expenses. If successful, in whole or in part, in such suit Indemnitee shall
also be entitled to be paid the reasonable expense thereof. It shall be a
defense to any such action (other than an action brought to enforce a claim for
Expenses incurred in defending any Proceeding in advance of its final
disposition where the required Undertaking has been tendered to the Company)
that Indemnitee has not met the standards of conduct which make it permissible
under the DGCL for the Company to indemnify Indemnitee for the amount claimed,
but the burden of proving such defense shall be on the Company. Neither the
failure of the Company (including its Board of Directors, independent legal
counsel, or its stockholders) to have made a determination that indemnification
of Indemnitee is proper in the circumstances because he has met the applicable
standard of conduct required under the DGCL, nor the actual determination by the
Company (including its Board of Directors, independent legal counsel, or its
stockholders) that Indemnitee had not met such applicable standard of conduct,
shall be a defense to the action or create a presumption that Indemnitee had not
met the applicable standard of conduct.
If a Change of Control has occurred, Indemnitee upon making a claim
under Section 2 or seeking to avoid repayment to the Company pursuant to an
Undertaking under Section 3 shall have (i) the right, but not the obligation, to
have a determination made by independent legal counsel as to whether
indemnification of the claimant is proper because he or she has met the
applicable standard of conduct required under the DGCL; and (ii) shall have the
right to select as independent legal counsel for such purpose any law firm as
designated (or within a category designated) for such purpose in a resolution
adopted by the Board of Directors of the Company prior to the Change of Control
and in full force and effect immediately prior to the Change of Control. If a
determination has been made in accordance with the preceding sentence, no
determination inconsistent therewith by other legal counsel, by the Board of
Directors, or by stockholders shall be of any force or effect, provided however,
that Indemnitee shall maintain all rights granted hereby to bring an action as
specified in the preceding paragraph.
A "Change of Control" shall be deemed to have occurred if (i)
individuals who as of May __, 1996 constitute the Board of Directors of the
Company (the "Incumbent Directors") cease for any reason to constitute at least
a majority of the Board of Directors of the Company, or (ii) there is a merger,
consolidation or reorganization ("Merger") of the Company in which the Company
is not the surviving entity (the "Survivor") and at any time following such
Merger, Incumbent Directors do not constitute a majority of the Board of
Directors of the Survivor; provided that any individual who becomes a director
after May __, 1996 whose election, or nomination for election by the Company's
stockholders was approved by a vote or written consent of at least two-thirds of
the directors then comprising the Incumbent Directors shall be deemed to be an
Incumbent Director, but excluding, for this purpose, any such individual whose
initial assumption of office is in connection with an actual or threatened
election contest (as such term is used in Rule 14a-11 under the Securities
Exchange Act of 1934, as amended) relating to the election of the directors of
the Company.
-3-
<PAGE>
7. NO PRESUMPTION. For purposes of this Agreement, the termination
of any Proceeding, by judgement, order, settlement (whether with or without
court approval) or conviction, or upon a plea of nolo contendere or its
equivalent, shall not create a presumption that Indemnitee did not meet any
particular standard of conduct or have any particular belief or that a court has
determined that indemnification or contribution is not permitted by applicable
law.
8. NON-EXCLUSIVITY OF RIGHTS. The rights conferred on Indemnitee by
this Agreement shall not be exclusive of any other right which Indemnitee may
have or hereafter acquire under any statute, provision of the Company's Restated
Certificate of Incorporation or By-Laws, other agreement, vote of stockholders
or directors or otherwise.
9. SELECTION OF COUNSEL. In the event the Company shall be
obligated hereunder to pay the Expenses of any Proceeding, the Company shall be
entitled to assume the defense of such Proceeding with counsel approved by
Indemnitee, which approval shall not be unreasonably withheld, upon the delivery
to Indemnitee of written notice of its election so to do. After delivery of
such notice, approval of such counsel by Indemnitee and the retention of such
counsel by the Company, the Company will not be liable to Indemnitee under this
Agreement for any fees of counsel subsequently incurred by Indemnitee with
respect to the same Proceeding; provided that, (i) Indemnitee shall have the
right to employ Indemnitee's counsel in any such Proceeding at Indemnitee's
expense and (ii) if (A) the employment of counsel by Indemnitee has been
previously authorized by the Company, (B) Indemnitee shall have reasonably
concluded that there is a conflict of interest between the Company and
Indemnitee in the conduct of any such defense, or (C) the Company shall not
continue to retain such counsel to defend such Proceeding, then the fees and
expenses of Indemnitee's counsel shall be at the expense of the Company. The
Company shall have the right to conduct such defense as it sees fit in its sole
discretion, including the right to settle any claim against Indemnitee at the
Company's expense without the consent of the Indemnitee.
10. SUBROGATION. In the event of any payment under this Agreement to
Indemnitee, the Company shall be subrogated to the extent of such payment to all
of the rights of recovery of Indemnitee, who shall execute all papers required
and shall do everything that may be necessary to secure such rights, including
execution of such documents as are necessary to enable the Company to bring suit
to enforce such rights.
11. EXCEPTIONS. Any other provision herein to the contrary
notwithstanding, the Company shall not be obligated pursuant to the terms of
this Agreement:
(a) Excluded Action or Omissions. To indemnify Indemnitee for Expenses
resulting from acts, omissions or transactions for which Indemnitee is
prohibited from receiving indemnification under applicable law; and
(b) Claims under Section 16(b). To indemnify Indemnitee for expenses and
the payment of profits arising from the purchase and sale by Indemnitee of
securities in violation of Section 16(b) of the Securities Exchange Act of
1934, as amended, or any similar successor statute.
-4-
<PAGE>
12. AMENDED; WAIVER. No provision of this Agreement may be amended
or modified except with the consent in writing of Indemnitee and the Company,
nor may any provision of this Agreement be waived except in writing by the party
granting such waiver. A waiver of any provision hereof shall not be deemed a
waiver of any other provision hereof. Failure of either of the parties hereto
to insist upon strict compliance with any provision hereof shall not be deemed
to be a waiver of such provision or any other provision hereof.
13. NO DUPLICATION OF PAYMENTS. The Company shall not be liable
under this Agreement to make any payment in connection with any Proceeding to
the extent Indemnitee has otherwise actually received payment under any
insurance policy, statute, provision of the Company's Restated Certificate of
Incorporation or By-Laws, other agreement, vote of stockholders or directors or
otherwise of the amounts otherwise indemnifiable.
14. PARTIAL INDEMNIFICATION. If Indemnitee is entitled under any
provision of this Agreement to indemnification by the Company for some or a
portion of Expenses incurred in connection with any Proceeding, but not,
however, for all of the total amount thereof, the Company shall nevertheless
indemnify Indemnitee for the portion of such Expenses to which Indemnitee is
entitled.
15. LIABILITY INSURANCE. To the extent the Company maintains an
insurance policy or policies providing directors' and officers' liability
insurance, Indemnitee shall be covered by such policy or policies, in accordance
with its or their terms, to the maximum extent of coverage available for any
officer of director of the Company.
16. BINDING EFFECT. This Agreement shall be binding upon and inure
to the benefit of and be enforceable by the parties hereto and their respective
successors and assigns (including, without limitation, any successor by
purchase, merger, consolidation, reorganization or otherwise to all of
substantially all of the business and/or assets of the Company) and their
spouses, heirs, and personal and legal representatives.
17. TERM. The provisions of this Agreement shall be applicable to
all Proceedings, regardless of when commenced and regardless of whether relating
to events, acts or omissions occurring before, on or after the date on which
this Agreement becomes effective. This Agreement shall continue in effect
regardless of whether Indemnitee continues to serve in the Position; provided,
however, that notwithstanding any other provision hereof, the Company shall have
no obligations hereunder with respect to liability, losses and Expenses of any
Proceeding to the extent that such liability, losses and Expenses relate to
conduct of the Indemnitee which occurs after Indemnitee no longer holds the
Position nor a position of a corporate officer or director of the Company.
18. SEVERABILITY. If this Agreement or any portion hereof shall be
invalidated or held to be unenforceable, such invalidity or unenforceability
shall not affect the other provisions hereof, and this Agreement shall be deemed
to be modified to the minimum extent necessary to avoid such invalidity or
unenforceability, and as so modified this Agreement and the remaining provisions
hereof shall remain valid and enforceable in accordance with their terms to the
fullest extent permitted by law.
-5-
<PAGE>
19. NOTICE. All notices and other communications hereunder shall be
in writing and delivered by hand or by first class registered or certified mail,
return receipt requested, postage prepaid, addressed as follows:
IF TO THE INDEMNITEE:
______________________
______________________
______________________
______________________
IF TO THE COMPANY:
Electronic Hair Styling, Inc.
One Lovell Avenue
Mill Valley, CA 94941
Attention: Don G. Hoff, President and Chief Executive Officer
or to such other address as either party shall have furnished to the other in
writing in accordance herewith. Notice and communications shall be effective
when actually received by the addressee.
20. GOVERNING LAW. This Agreement shall be governed by and construed
and enforced in accordance with the laws of the state of Delaware, without
regard to the principles thereof respecting conflicts of law.
21. CAPTIONS. The captions of this Agreement are not part of the
provisions hereof and shall have no force or effect.
22. COUNTERPARTS. This Agreement may be executed in multiple
counterparts, each of which shall be deemed to be an original but all of which
together will constitute one and the same instrument originals.
IN WITNESS WHEREOF, Indemnitee and the Company, pursuant to the
authorization of its Board of Directors, execute this Agreement on the date
stated below.
ELECTRONIC HAIR STYLING, INC.
By:
-----------------------------
Title:
Date:
INDEMNITEE
-----------------------------
Name:
Date:
-6-
<PAGE>
FIRST AMENDMENT TO CREDIT AGREEMENT
This Amendment is made as of the 15th day of March, 1996 by and between
Electronic Hair Styling, Inc., a Washington corporation ("the Borrower"), and
Norwest Business Credit, Inc., a Minnesota corporation ("the Lender").
RECITALS
The Borrower and the Lender have entered into the Credit and Security Agreement
dated as of November 16, 1995 (the "Credit Agreement").
The Lender has agreed to make a term loan, a real estate loan and certain loan
advances to the Borrower pursuant to the terms and conditions set forth in the
Credit Agreement.
The term loan is evidenced by the Borrower's term note dated November 16, 1995
in the original principal amount of $2,300,000, the real estate loan is
evidenced by the Borrower's real estate note dated November 16, 1995 in the
original principal amount of $3,700,000 and the loan advances under the Credit
Agreement are evidenced by the Borrower's revolving note dated as of November
16, 1995, in the maximum principal amount of $14,000,000, each of which notes
are payable to the order of the Lender (collectively, the "Note").
All indebtedness of the Borrower to the Lender is secured pursuant to the terms
of the Credit Agreement and all other Security Documents as defined therein
(collectively, the "Security Documents").
The Borrower has requested that certain amendments be made to the Credit
Agreement, which the Lender is willing to make pursuant to the terms and
conditions set forth herein.
NOW, THEREFORE, in consideration of the premises and of the mutual covenants and
agreements herein contained, it is agreed as follows:
1. Terms used in this Amendment which are defined in the Credit Agreement
shall have the same meanings as defined therein, unless otherwise defined
herein.
2. The Credit Agreement is hereby amended as follows:
(a) Section 6.13 of the Credit Agreement is hereby amended by deleting the
portion of said Section set forth in table form and replacing the same with
the following:
<PAGE>
Book Net Worth
For the Month Ending Plus Subordinated Indebtedness
-------------------- ------------------------------
December 31, 1995 $10,050,000
January 31, 1996 $8,550,000
February 29, 1996 $8,550,000
March 31, 1996 $8,250,000
April 30, 1996 $8,250,000
May 31, 1996 $8,250,000
June 30, 1996 $8,250,000
July 31, 1996 $8,550,000
August 31, 1996 $8,850,000
September 30, 1996 $8,850,000
October 31, 1996 $9,250,000
November 30, 1996 $9,750,000
December 31, 1996 $10,050,000
(b) Section 6.14 of the Credit Agreement is hereby amended by deleting the
portion of said Section set forth in table form and replacing the same with the
following:
For the Month Ending Leverage Ratio
-------------------- --------------
January 31, 1996 4.06 to 1.0
February 29, 1996 4.35 to 1.0
March 31, 1996 4.39 to 1.0
April 30, 1996 4.45 to 1.0
May 31, 1996 4.26 to 1.0
June 30, 1996 4.36 to 1.0
July 31, 1996 4.52 to 1.0
August 31, 1996 4.49 to 1.0
September 30, 1996 4.14 to 1.0
October 31, 1996 3.86 to 1.0
November 30, 1996 3.59 to 1.0
December 31, 1996 3.58 to 1.0
(c) Section 6.15 of the Credit Agreement is hereby amended by deleting the
portion of said Section set forth in table form and replacing the same with the
following:
For the Month Ending Net Income
-------------------- ----------
January 31, 1996 ($1,500,000)
February 29, 1996 ($1,500,000)
March 31, 1996 ($1,500,000)
April 30, 1996 ($1,800,000)
-2-
<PAGE>
May 31, 1996 ($1,800,000)
June 30, 1996 ($1,800,000)
July 31, 1996 ($1,500,000)
August 31, 1996 ($1,200,000)
September 30, 1996 ($1,200,000)
October 30, 1996 ($800,000)
November 31, 1996 ($300,000)
December 31, 1996 -0-
(d) Section 6.16 of the Credit Agreement is hereby amended by adding to said
Section the following proviso:
";provided, however, that the Borrower may reduce the outstanding principal
balance of the Subordinated Indebtedness by up to $5,000,000, solely out of
the proceeds of the Borrower's initial public offering of its common stock,
if and only if the net proceeds from any such initial public offering are
equal to or in excess of $15,000,000."
(e) Section 6.17 of the Credit Agreement is hereby amended by adding to said
Section a new sentence, reading as follows:
"In addition to the foregoing, the Lender shall have the right to modify
(i) any or all of such covenants in its discretion, within 60 days after
the close of the Borrower's initial public offering of its common stock,
and (ii) Leverage Ratio and Book Net Worth Plus Subordinated Indebtedness
covenants if at any time the value of the Borrower's Class A preferred
stock is determined to be greater than $7,000,000."
(f) Section 7.5 of the Credit Agreement is hereby amended by adding to the end
of said Section the following proviso:
"PROVIDED, FURTHER, HOWEVER, that the Borrower may redeem up to $5,000,000
of its Class B preferred stock, solely out of the proceeds of the Borrower's
initial public offering of the its common stock, if and only if the net
proceeds from any such initial public offering are equal to or in excess of
$15,000,000."
(g) Section 8.1(q) of the Credit Agreement is hereby amended by adding to the
end of said Section the following proviso:
"; provided, however, that such minimum ownership percentage requirement
shall be reduced to 24% of the voting stock of the Borrower if the Borrower
raises at least $15,000,000 of net proceeds from the Borrower's initial
public offering of its common stock."
-3-
<PAGE>
3. Except as explicitly amended by this Amendment, all of the terms and
conditions of the Credit Agreement shall remain in full force and effect and
shall apply to any loan or advance thereunder.
4. This Amendment shall be effective upon receipt by the Lender of an executed
facsimile copy hereof, to be supplemented with an executed original hereof
within two (2) business days, together with the following, in substance and form
acceptable to the Lender in its sole discretion:
(a) Certificate of the Secretary of the Borrower certifying as to (i) the
resolutions of the board of directors of the Borrower approving the
execution and delivery of this Amendment, (ii) the fact that the Articles
of Incorporation and Bylaws of the Borrower, which were certified and
delivered to the Lender pursuant to the Certificate of the Borrower's
Secretary dated as of November 16, 1995 in connection with the execution
and delivery of the Credit Agreement continue in full force and effect and
have not been amended or otherwise modified except as set forth in the
Certificate to be delivered, and (iii) certifying that the officers and
agents of the Borrower who have been certified to the Lender, pursuant to
the Certificate of the Borrower's Secretary dated as of November 16, 1995,
as being authorized to sign and to act on behalf of the Borrower continue
to be so authorized or setting forth the sample signatures of each of the
officers and agents of the Borrower authorized to execute and deliver this
Amendment and all other documents, agreements and certificates on behalf of
the Borrower.
5. The Borrower hereby represents and warrants to the Lender as follows:
(a) The Borrower has requisite power and authority to execute this
Amendment and to perform all of its obligations hereunder, and this
Amendment has been duly executed and delivered by the Borrower and
constitutes the legal, valid and binding obligation of the Borrower,
enforceable in accordance with its terms.
(b) The execution, delivery and performance by the Borrower of this
Amendment have been duly authorized by all necessary corporate action and
do not (i) require any authorization, consent or approval by any
governmental department, commission, board, bureau, agency or
instrumentality, domestic or foreign, (ii) violate any provision of any law,
rule or regulation or of any order, writ, injunction or decree presently in
effect, having applicability to the Borrower, or the articles of
incorporation or by-laws of the Borrower, or (iii) result in a breach of or
constitute a default under any indenture or loan or credit agreement or any
other agreement, lease or instrument to which the Borrower is a party or by
which it or its properties may be bound or affected.
(c) All of the representations and warranties contained in Article V of
the Credit Agreement are correct on and as of the date hereof as though
made on and as of such date, except to the extent that such representations
and warranties relate solely to an earlier date.
-4-
<PAGE>
6. All references in the Credit Agreement to "this Agreement" shall be deemed
to refer to the Credit Agreement as amended hereby; and any and all references
in the Security Documents to the Credit Agreement shall be deemed to refer to
the Credit Agreement as amended hereby.
7. The execution of this Amendment and acceptance of any documents related
hereto shall not be deemed to be a waiver of any Default or Event of Default
under the Credit Agreement or breach, default or event of default under any
Security Document or other document held by the Lender, whether or not known to
the Lender and whether or not existing on the date of this Amendment.
8. The Borrower hereby absolutely and unconditionally releases and forever
discharges the Lender, and any and all participants, parent corporations,
subsidiary corporations, affiliated corporations, insurers, indemnitors,
successors and assigns thereof, together with all of the present and former
directors, officers, agents and employees of any of the foregoing, from any and
all claims, demands or causes of action of any kind, nature or description,
whether arising in law or equity or upon contract or tort or under any state or
federal law or otherwise, which the Borrower has had, now has or has made claim
to have against any such person for or by reason of any act, omission, matter,
cause or thing whatsoever arising from the beginning of time to and including
the date of this Amendment, whether such claims, demands and causes of action
are matured or unmatured or known or unknown.
9. The Borrower hereby reaffirms its agreement under the Credit Agreement to
pay or reimburse the Lender on demand for all costs and expenses incurred by the
Lender in connection with the Credit Agreement, the Security Documents and all
other documents contemplated thereby, including without limitation all
reasonable fees and disbursements of legal counsel. Without limiting the
generality of the foregoing, the Borrower specifically agrees to pay all fees
and disbursements of counsel to the Lender for the services performed by such
counsel in connection with the preparation of this Amendment and the documents
and instruments incidental hereto. The Borrower hereby agrees that the Lender
may, at any time or from time to time in its sole discretion and without further
authorization by the Borrower, make a loan to the Borrower under the Credit
Agreement, or apply the proceeds of any loan, for the purpose of paying any such
fees, disbursements, costs and expenses.
10. This Amendment may be executed in any number of counterparts, each of which
when so executed and delivered shall be deemed an original and all of which
counterparts, taken together, shall constitute one and the same instrument.
-5-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly
executed as of the day and year first above written.
ELECTRONIC HAIR STYLING, INC.
By: /s/ Don G. Hoff
--------------------------
Its: President and Chief Financial Officer
NORWEST BUSINESS CREDIT, INC.
By: /s/ Michelle Guetter
----------------------------
Its: Assistant Vice President
-6-
<PAGE>
Exhibit 10.10
SUBSCRIPTION AND PURCHASE AGREEMENT
-----------------------------------
SUBSCRIPTION AND PURCHASE AGREEMENT, dated as of March 19, 1996 (this
"AGREEMENT"), by and between Electronic Hair Styling, Inc., a Delaware
corporation (the "COMPANY"), and Intertec Holdings, L.P., a Delaware limited
partnership ("PURCHASER").
R E C I T A L S:
- - - - - - - -
Purchaser desires to subscribe for and, subject from time to time
hereafter, purchase from the Company, and the Company desires to issue and sell
to Purchaser, the number of shares of common stock, par value $.01 per share
(the "COMMON STOCK"), of the Company determined in accordance with Section 2
hereof.
Accordingly, the parties hereto agree as follows:
1. DEFINITIONS
As used in this Agreement, the following capitalized terms shall have
the indicated meanings:
(a) "IPO PRICE" shall mean the price per share at which the
Company's shares of Common Stock shall be offered to the public in the
Company's initial public offering, subject to adjustment as set forth in
Section 5 hereof.
(b) "NOTE" shall mean the promissory note, dated May 1993, in the
aggregate principal amount of $1 million, made by the Company in favor of
Purchaser.
(c) "PURCHASE DATE" shall mean each date on which a principal
repayment is due and payable under the Note in accordance with the terms
thereof, or, if earlier, the date of any repayment of principal prior to its
stated maturity, provided, however, that the Purchaser may elect to accelerate
any such Purchase Date to any earlier date on 30 days' prior written notice to
the Company.
(d) "PURCHASE PRICE" shall mean the number of Purchasable Shares
purchasable at a Closing (as defined in Section 2.3(a) hereof), multiplied by
the IPO Price.
(e) "PURCHASABLE SHARES" shall mean the aggregate number of shares of
Common Stock purchasable by Purchaser under this Agreement determined by
dividing (i) the sum of (A) the aggregate principal amount of the Note
outstanding on the closing date of the Company's initial public offering and (B)
all interest accrued but unpaid under the Note on such closing date, by (ii) the
IPO Price.
<PAGE>
2. SUBSCRIPTION AND PURCHASE OF SHARES; COMPANY TERMINATION RIGHTS.
2.1. SUBSCRIPTION AND PURCHASE. Upon the terms and subject to the
conditions of this Agreement, Purchaser hereby subscribes for and, on each
Purchase Date, agrees to purchase from the Company, and the Company hereby
agrees to issue and sell to Purchaser, subject to the Company's termination
rights set forth in Section 2.4, such number of shares of Common Stock as equals
the number of Purchasable Shares multiplied by a fraction equal to (x) the
amount of the principal repayment of the Note on such Purchase Date, divided by
(y) $1,000,000. Purchaser's obligations under this Section 2 are subject only
to the conditions set forth in Section 2.2 hereof.
2.2. CONDITIONS TO PURCHASER'S OBLIGATION. Purchaser's obligation to
effect any Closing hereunder shall be subject to the following conditions:
(a) there is no event of default under any material obligation of the
Company for borrowed money;
(b) no proceeding shall have been instituted by the Company or any
other party in a court having jurisdiction in the premises seeking a decree or
order for relief in respect of the Company under any applicable bankruptcy,
insolvency or other similar law now or hereafter in effect, or for the
appointment of a receiver, liquidator, assignee, custodian, trustee or
sequestrator (or other similar official) of the Company or for any substantial
part of its property, or for the winding-up or liquidation of the Company's
affairs; and
(c) The Company shall not have given a termination notice with
respect to such closing as provided for in Section 2.4.
2.3. CLOSING; DELIVERIES.
(a) On each Purchase Date, a closing of the transactions contemplated
by this Agreement (a "CLOSING") shall take place at the offices of Battle Fowler
LLP, 75 East 55th Street, New York, New York 10022, or such other place as may
be agreed to by the parties, at 11:00 A.M. Eastern Standard Time.
(b) At each Closing, the Company shall deliver, or cause to be
delivered to Purchaser, against delivery by Purchaser of the Purchase Price, a
duly issued certificate or certificates (each a "Certificate") representing the
number of Purchasable Shares to be purchased by Purchaser at such Closing.
(c) At each Closing, Purchaser shall deliver to the Company, against
delivery of a Certificate or Certificates, the Purchase Price plus interest
accrual and unpaid on the unpaid balance of the aggregate Purchase Price of
all Purchasable shares under this Agreement, from the closing of the
Company's initial public offering at the rate of 5.5% per annum. The
Purchase Price payable pursuant to this Agreement shall be payable in cash
(payable by wire transfer to a bank account designated by the Company at
least two business days prior to each Closing) or by tender to the Company
for cancellation any indebtedness under the Note, then due and owing by the
Company to Purchaser.
-2-
<PAGE>
2.4 COMPANY TERMINATION RIGHTS.
The Company may, from time to time, terminate the Purchaser's
right to purchase from the Company, and the Company's obligation to issue and
sell to the Purchaser, the Purchasable Shares. Such termination shall be
effected by written notice delivered by the Company to the Purchaser not less
than 10 nor more than 60 days prior to the Purchase Date to which such notice
relates.
3. REPRESENTATIONS AND WARRANTIES OF PURCHASER
Purchaser hereby represents, warrants and acknowledges to the Company
as follows:
3.1. EXECUTION, DELIVERY AND PERFORMANCE. Purchaser has full
partnership right, power and authority to execute and deliver this Agreement and
to perform Purchaser's obligations hereunder. This Agreement has been duly
authorized, executed and delivered by or on behalf of Purchaser and is valid,
binding and enforceable against Purchaser in accordance with its terms, subject,
as to enforcement, to bankruptcy, insolvency, reorganization, moratorium or
similar laws from time to time in effect and affecting creditors' rights
generally and to general equity principles.
3.2. INVESTMENT AND OTHER REPRESENTATIONS.
(a) Purchaser is acquiring the Purchasable Shares solely for
investment for Purchaser's own account and not with a view to, or for resale in
connection with, the distribution or other disposition thereof, except for such
distributions and dispositions which are effected in compliance with (i) the
Securities Act of 1933, as amended (the "SECURITIES ACT"), and the rules and
regulations of the Securities and Exchange Commission promulgated thereunder and
(ii) applicable state securities laws.
(b) Purchaser understands that (i) the purchase of the Purchasable
Shares involves a high degree of risk of loss of Purchaser's investment therein,
and (ii) there are substantial restrictions on the transferability of the
Purchasable Shares under the provisions of the Securities Act and applicable
state securities laws.
(c) Purchaser has been given the opportunity to examine all corporate
documents and to ask questions of, and receive answers from, the Company and its
representatives concerning the terms and conditions of the purchase of the
Purchasable Shares and the business and affairs of the Company and all such
questions have been answered to Purchaser's full satisfaction.
(d) Purchaser is an "accredited investor" under one of the categories
set forth in Rule 501(a)(1) through (3) (inclusive) promulgated under the
Securities Act.
3.3. SHARES UNREGISTERED. Purchaser acknowledges that Purchaser has
been advised that: (i) the Purchasable Shares have not been registered under the
Securities Act, (ii) a transfer of Purchasable Shares will require the
availability of an exemption under the Securities Act (it being understood that
Rule 144 promulgated under the Securities Act
-3-
<PAGE>
is not presently available with respect to the sales of any securities of the
Company, and when and if the Purchasable Shares may be disposed of without
registration in reliance on Rule 144, such disposition can be made only in
limited amounts in accordance with the terms and conditions of such Rule),
(iii) restrictive legends in the form set forth below shall be placed on the
Certificates and (iv) a notation shall be made in the appropriate records of
the Company indicating that the Purchasable Shares are subject to
restrictions on transfer and, if the Company should at some time in the
future engage the service of a securities transfer agent, appropriate
stop-transfer instructions will be issued to such transfer agent with respect
to the Purchasable Shares. Each Certificate representing Purchasable Shares
shall bear a legend substantially as follows:
The securities represented by this certificate have not been
registered under the Securities Act of 1933, as amended (the
"Act"), or under any applicable state securities laws and
may not be offered or sold except pursuant to (i) an
effective registration statement under the Act and such
state securities laws, (ii) to the extent applicable, Rule
144 under the Act (or any similar rule under such Act
relating to the disposition of securities), or (iii) an
opinion of counsel, if such opinion shall be reasonably
satisfactory to counsel to the issuer, that an exemption
from registration under such Act and such securities laws is
available.
4. REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents and warrants to Purchaser as follows:
4.1. EXECUTION, DELIVERY AND PERFORMANCE. The Company has the
corporate power and authority to execute and deliver this Agreement and to
perform its obligations hereunder. This Agreement has been duly authorized,
executed and delivered by the Company and is valid, binding and enforceable
against the Company in accordance with its terms, subject, as to enforcement, to
bankruptcy, insolvency, reorganization, moratorium or similar laws from time to
time in effect and affecting creditors' rights generally and to general equity
principles.
4.2. SHARES DULY AUTHORIZED. The Purchasable Shares to be issued to
Purchaser pursuant to this Agreement, when issued and delivered in accordance
with the terms of this Agreement and upon receipt by the Company of the Purchase
Price from Purchaser, will be duly and validly issued and will be fully paid and
non-assessable. The Company shall reserve, free from preemptive rights, out of
its authorized but unissued shares, or out of shares held in its treasury,
sufficient shares of Common Stock to provide for the issuance, from time to
time, of all Purchasable Shares under this Agreement.
4.3. NO CONFLICT. Neither the execution and delivery nor the
performance of this Agreement by the Company will conflict with the Company's
Restated Certificate of Incorporation or By-laws or result in a breach of any
terms or provisions of, or constitute a default under, any contract, agreement
or instrument to which the Company is a party or by which the Company is bound.
-4-
<PAGE>
5. ADJUSTMENT OF PURCHASABLE SHARES; NOTICES.
5.1. In the event that the Company shall at any time after the date
hereof:
(a) declare a dividend or make a distribution on any series of its
Common Stock in shares of any series of its Common Stock,
(b) subdivide or reclassify shares of any series of its outstanding
Common Stock into a greater number of shares,
(c) combine shares of any series of its outstanding Common Stock into
a smaller number of shares,
(d) pay a dividend or make a distribution on any series of its Common
Stock in shares of any series of its capital stock (other than
Common Stock), or
(e) issue by reclassification of any series of its Common Stock
shares of any series of its capital stock,
then appropriate adjustments shall be made in the number and kind of shares
purchasable pursuant to this Agreement. Such adjustments shall be made without
change in the total value applicable to the number of Purchasable Shares
purchasable immediately prior to such event. An adjustment made pursuant to
this Section 5 shall become effective immediately after the record date in the
case of a dividend or distribution and shall become effective immediately after
the effective date in the case of subdivision, combination or reclassification.
Such adjustment shall be made successively whenever any event referred to above
shall occur.
5.2. Upon any adjustment of the number of Purchasable Shares pursuant
to Section 6.1, the Company shall give prompt written notice thereof to
Purchaser, by first-class mail postage prepaid addressed to Purchaser at its
last address as shown on the stock transfer books of the Company, which notice
shall set forth in reasonable detail the method of calculation of any such
adjustment and the facts upon which such calculation was based.
6. REGISTRATION RIGHTS. In consideration of Purchaser's commitment to
purchase the Purchasable Shares pursuant to this Agreement, and in recognition
of the fact that registration rights previously granted to Purchaser have
expired, the Company and Purchaser hereby agree that Purchaser shall be entitled
to have the Purchasable Shares registered under the Securities Act on the terms
and conditions set forth in Exhibit A attached hereto. The Company and
Purchaser agree that, effective upon the execution and delivery of this
Agreement, the registration rights set forth in Exhibit A shall be applicable to
all shares of Common Stock owned by Purchaser as of the date hereof, and that on
the date hereof, Section 7 of the Stock Purchase Agreement, dated as of April
29, 1993, by and between the Company and Purchaser, relating to Purchaser's
right to have securities of the Company owned by Purchaser registered, shall be
terminated and of no further force and effect.
-5-
<PAGE>
7. MISCELLANEOUS
7.1. SURVIVAL OF REPRESENTATIONS AND WARRANTIES. All covenants,
agreements, representations and warranties made herein shall survive the
execution and delivery of this Agreement and delivery of the Purchasable Shares
and payment therefor and, notwithstanding any investigation heretofore or
hereafter made by Purchaser or on Purchaser's behalf, shall continue in full
force and effect.
7.2. ENTIRE AGREEMENT. This Agreement contains the entire agreement
between the parties hereto in respect of the subject matter contained herein and
merges and supersedes all prior discussions, agreements and understandings of
any and every nature among them.
7.3. BINDING EFFECT, BENEFITS. This Agreement and all the provisions
hereof shall be binding upon and inure to the benefit of the parties hereto and
their respective successors and assigns; nothing in this Agreement, expressed or
implied, is intended to confer on any person other than the parties hereto or
their respective successors and assigns, any rights, remedies, obligations or
liabilities under or by reason of this Agreement.
7.4. AMENDMENT, MODIFICATION AND WAIVER. This Agreement may be
amended or modified, or any provision hereof may be waived, provided that such
amendment or waiver is set forth in a writing executed by the Company and
Purchaser. No course of dealing between or among any parties to this Agreement
will be deemed effective to modify, amend or discharge any part of this
Agreement or any rights or obligations of any party hereto.
7.5. HEADINGS. The headings of the sections of this Agreement are
inserted for convenience only and shall not constitute a part hereof.
7.6. COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which shall be deemed to be an original, but all of which
shall constitute one and the same instrument.
7.7. APPLICABLE LAW. This Agreement shall be governed by and
construed in accordance with the laws of the State of Delaware without regard to
the principles thereof respecting conflicts of law.
7.8. FURTHER ASSURANCES. Each party hereto shall do and perform or
cause to be done and performed all such further acts and things and shall
execute and deliver all such other agreements, certificates, instruments and
documents as any other party hereto reasonably may request in order to carry out
the intent and accomplish the purposes of this Agreement and the consummation of
the transactions contemplated thereby.
-6-
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Agreement to be
executed in its corporate name by an officer duly authorized and Purchaser has
caused this Agreement to be executed in its name by a duly authorized signatory
or officer in each case as of the date and year first above written.
ELECTRONIC HAIR STYLING, INC.
By:_________________________________________________
Name: Don G. Hoff
Title: Chairman of the Board and
Chief Executive Officer
INTERTEC HOLDINGS, L.P.
By: Intertec Holdings, Inc.,
its General Partner
By:_______________________________________________
Name:
Title:
-7-
<PAGE>
Exhibit 10.11
PROMISSORY NOTE
$1,000,000 May 5, 1993
FOR VALUE RECEIVED, the undersigned, ELECTRONIC HAIR STYLING, INC., a
Washington corporation (the "Company"), promises to pay to INTERTEC HOLDINGS,
L.P., a Delaware limited partnership, at East 5058 Grapeview Loop, Allyn,
Washington 98524 ("Payee"), or such other place as the Payee may from time to
time designate, the principal sum of ONE MILLION AND NO/100 DOLLARS
($1,000,000.00) plus interest thereon, as follows:
1. INTEREST. The unpaid principal balance shall accrue interest at the
rate of five and one half percent (5.5%) per annum, commencing January 1, 1996.
Interest shall be computed on the basis of the actual number of calendar days in
the year and the number of days elapsed. From and after the date interest begins
to accrue, interest shall be paid quarterly in arrears, on the last day of each
calendar quarter.
2. PRINCIPAL PAYMENTS. Payments of principal shall be made in four
installments of TWO HUNDRED FIFTY THOUSAND AND NO/100 DOLLARS ($250,000) each.
The first principal installment shall be paid on the earlier of (i) the first
anniversary of the closing of the Company's initial public offering of its
common stock, and (ii) December 1, 1997. Such date on which the first payment of
principal is required hereunder is referred to as the First Payment Date. The
remaining three installments shall be due and payable on the first, second, and
third anniversaries, respectively, of the First Payment Date ("Payment Dates").
The twelve month period ending on each Payment Date is referred to herein as a
"Payment Year." Notwithstanding any other provision of this Note, all amounts
due hereunder shall be paid in full on or before December 31, 2001.
3. LIMITATIONS ON PAYMENT. Notwithstanding Paragraph 2, the amount
payable on any Payment Date (principal plus interest) shall be limited to the
greater of (a) twenty percent (20%) of the Company's gross revenues for the
Payment Year ending on such Payment Date or (b) ten percent (10%) of the
Company's invested capital on such Payment Date. This limitation is hereinafter
referred to as the "Payment Limits." The excess of the installment and any other
amounts hereunder due on a Payment Date over the Payment Limit shall cumulate
and be payable, together with the next scheduled installment, on the next
succeeding Payment Date, up to the amount of the Payment Limit, with the excess,
if any, to cumulate again and be payable on the next Payment Date, subject to
the Payment Limit. If this Note is not paid in full on the last scheduled
Payment Date by reason of the Payment Limits, the time for payments shall be
extended by one additional 12-month period, and the Company shall pay to
holder on the last day of such 12-month period the entire unpaid principal
balance and all accrued interest plus any other amounts due hereunder.
4. LATE CHARGE. In the event any payment is not received within seven (7)
days after its due date, the Company agrees to pay a late charge equal to two
percent (2%) of the amount then due as the agreed amount of the Payee's damages
for such late payment. The Company acknowledges that this late charge is
reasonable and that it would be impractical or extremely difficult to fix the
amount of holder's actual damages in the event of late payment.
5. PAYMENTS: PREPAYMENT. Payments made hereunder shall be credited first
to accrued interest and the remainder to principal. The Company shall have the
right to prepay this Note in whole or in part, at any time, on ten (10) days'
advance written notice.
<PAGE>
6. CURRENCY. All payments of principal, interest or other charges shall
be made in U.S. dollars.
7. DEFAULT. If payment of any installment hereunder is not made within
ten (10) days after the same is due, the whole sum of principal and interest
hereunder shall become immediately due at the option of the Payee. Following
default, whether or not holder accelerates this Note, interest shall accrue on
the unpaid amounts at the rate of two points over the interest rate otherwise in
effect hereunder. This Note is given pursuant to a License Agreement between
INTERTEC LTD a Delaware Limited Partnership, and the Company of even date
herewith.
8. WAIVERS: AMENDMENTS. The Company waives diligence, presentment,
protest and demand, and also any notice of protest, demand, or dishonor of this
Note. Any delay in exercising, failure to exercise or partial exercise by Payee
of any of its rights or remedies hereunder shall not constitute a waiver
thereof. This Note cannot be modified except by a writing signed by the Company
and the Payee which makes reference to this Note.
9. GOVERNING LAW. This Note shall be construed and governed by the laws
of the state of Washington. If any provision of this Note is determined by a
court of competent jurisdiction to be invalid or unenforceable, the remaining
provisions shall be fully enforceable to the extent permitted by law.
10. COSTS AND ATTORNEY'S FEES. The Company agrees to pay all costs,
including reasonable attorneys' fees, incurred by the Payee in enforcing payment
hereof.
11. RESTATEMENT. This Restated Note supercedes in their entirety all prior
notes between the Company and Payee and all amendments thereto.
IN WITNESS WHEREOF, this Note is executed as of the day and year first set
forth above.
ELECTRONIC HAIR STYLING, INC., a
Washington corporation
By: /s/ Don Hoff
-----------------------------
Don Hoff, President
By: /s/ Donald Porter
-----------------------------
Donald Porter, Vice President
Accepted:
INTERTEC HOLDINGS, L.P.
By: Intertec Holdings, Inc., general partner
By: /s/ Perry D. Hoff
---------------------
Perry Hoff, President
<PAGE>
EXHIBIT 23.2
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Amendment No. 2 to Registration Statement No.
333-2722 of Electronic Hair Styling, Inc. of our report dated January 24, 1996
on the financial statements of PCD, the Personal Care Division of DowBrands L.P.
(which report expresses an unqualified opinion on such financial statements and
includes an explanatory paragraph referring to PCD's basis of presentation), and
our report dated March 21, 1996 on the financial statements of Electronic Hair
Styling, Inc., appearing in the Prospectus, which is a part of such Registration
Statement.
We also consent to the references to us under the heading "Experts" in such
Prospectus.
DELOITTE & TOUCHE LLP
San Francisco, California
May 17, 1996
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<CASH> 2,338
<SECURITIES> 0
<RECEIVABLES> 13,493
<ALLOWANCES> (711)
<INVENTORY> 11,140
<CURRENT-ASSETS> 26,369
<PP&E> 16,426
<DEPRECIATION> (143)
<TOTAL-ASSETS> 42,967
<CURRENT-LIABILITIES> 16,022
<BONDS> 20,350
0
8,500
<COMMON> 29
<OTHER-SE> (1,935)
<TOTAL-LIABILITY-AND-EQUITY> 6,594
<SALES> 8,070
<TOTAL-REVENUES> 8,070
<CGS> 5,656
<TOTAL-COSTS> 5,656
<OTHER-EXPENSES> 3,496
<LOSS-PROVISION> 27
<INTEREST-EXPENSE> 300
<INCOME-PRETAX> (1,382)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,382)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,382)
<EPS-PRIMARY> (0.33)
<EPS-DILUTED> (0.33)
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 456
<SECURITIES> 0
<RECEIVABLES> 16,366
<ALLOWANCES> (913)
<INVENTORY> 10,267
<CURRENT-ASSETS> 26,303
<PP&E> 16,490
<DEPRECIATION> 456
<TOTAL-ASSETS> 42,805
<CURRENT-LIABILITIES> 16,487
<BONDS> 20,271
0
8,500
<COMMON> 29
<OTHER-SE> (2,482)
<TOTAL-LIABILITY-AND-EQUITY> 6,047
<SALES> 28,480
<TOTAL-REVENUES> 28,480
<CGS> 17,954
<TOTAL-COSTS> 17,954
<OTHER-EXPENSES> 10,843
<LOSS-PROVISION> 188
<INTEREST-EXPENSE> 414
<INCOME-PRETAX> (723)
<INCOME-TAX> 0
<INCOME-CONTINUING> (723)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (723)
<EPS-PRIMARY> (0.18)
<EPS-DILUTED> (0.18)
</TABLE>
