<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 4, 1996
REGISTRATION NO. 333-12469
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
STYLING TECHNOLOGY CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 2844 76-2665378
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
1146 SOUTH CEDAR RIDGE, DUNCANVILLE, TEXAS 75137
(214) 296-2887
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
SAM L. LEOPOLD, CHAIRMAN OF THE BOARD
1146 SOUTH CEDAR RIDGE, DUNCANVILLE, TEXAS 75137
(214) 296-2887
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF REGISTRANT'S AGENT FOR SERVICE)
------------------------
COPIES TO:
<TABLE>
<S> <C>
ROBERT S. KANT, ESQ. JEFFREY M. KNETSCH, ESQ.
MICHELLE S. MONSEREZ, ESQ. BRENT T. SLOSKY, ESQ.
MICHAEL L. KAPLAN, ESQ. BROWNSTEIN HYATT FARBER
O'CONNOR, CAVANAGH, ANDERSON, & STRICKLAND, P.C.
KILLINGSWORTH & BESHEARS, P.A. TWENTY-SECOND FLOOR
ONE EAST CAMELBACK ROAD 410 SEVENTEENTH STREET
PHOENIX, ARIZONA 85012-1656 DENVER, COLORADO 80202-4437
(602) 263-2400 (303) 534-6335
</TABLE>
------------------------
APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC: As soon as practicable
after the effective date of this Registration Statement.
If any of the securities being registered in this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [ ]
------------------------
CALCULATION OF REGISTRATION FEE
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
TITLE OF EACH CLASS OF SECURITIES PROPOSED MAXIMUM
TO BE REGISTERED AGGREGATE OFFERING PRICE(1) AMOUNT OF REGISTRATION FEE
<S> <C> <C>
- ------------------------------------------------------------------------------------------------------------
Common Stock, par value $.0001(2)................ $38,640,000 $13,325
- ------------------------------------------------------------------------------------------------------------
Representatives' Warrants(3)..................... 1,960 1
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Common Stock(4).................................. 2,882,400 994
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Total....................................... $41,524,360 $14,320(5)
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- ------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457.
(2) Includes 420,000 shares of Common Stock subject to the Underwriters'
Overallotment Option.
(3) To be issued to the Representatives.
(4) Issuable upon exercise of Representatives' Warrants.
(5) $11,235 of this amount was previously paid.
------------------------
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 THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
- --------------------------------------------------------------------------------
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<PAGE> 2
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.
SUBJECT TO COMPLETION, DATED NOVEMBER 4, 1996
PROSPECTUS
LOGO
2,800,000 SHARES OF COMMON STOCK
------------------------
All of the shares of common stock (the "Common Stock") offered hereby (the
"Offering") are being issued and sold by Styling Technology Corporation (the
"Company"). Prior to the Offering, there has been no public market for the
Common Stock. It is currently anticipated that the initial public offering price
will be between $10.00 and $12.00 per share. For a discussion of the factors
considered in determining the initial public offering price, see "Underwriting."
The Common Stock has been approved for quotation on the Nasdaq National Market,
under the symbol "STYL." The Company's Chief Executive Officer will purchase
$500,000 of Common Stock in the Offering.
SEE "RISK FACTORS" COMMENCING ON PAGE 8 HEREOF FOR A DISCUSSION OF CERTAIN
FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK
OFFERED HEREBY.
------------------------
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>
<CAPTION>
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- ------------------------------------------------------------------------------------------------------
PRICE TO PROCEEDS TO
PUBLIC UNDERWRITING COMPANY(2)
DISCOUNTS
AND COMMISSIONS(1)
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<S> <C> <C> <C>
Per Share.............................. $ $ $
- ------------------------------------------------------------------------------------------------------
Total(3)............................... $ $ $
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- ------------------------------------------------------------------------------------------------------
</TABLE>
(1) Does not include the Representatives' non-accountable expense allowance
equal to the greater of 1 1/2% of the gross proceeds of the Offering or
$350,000 and warrants to purchase 196,000 shares of Common Stock issuable
to the Representatives (the "Representatives' Warrants"). The Company has
agreed to indemnify the Underwriters against certain liabilities, including
liabilities under the Securities Act of 1933, as amended. See
"Underwriting."
(2) Before deducting expenses, estimated at $1,355,000, including the
Representatives' non-accountable expense allowance of $462,000, or
$1,424,300 if the Underwriters' Overallotment Option (as defined below) is
exercised in full, payable by the Company.
(3) The Company has granted the Underwriters an option (the "Overallotment
Option"), exercisable within 30 days of the date of this Prospectus, to
purchase up to an aggregate of 420,000 additional shares of Common Stock,
on the same terms as set forth above, solely to cover overallotments, if
any. If this 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 being offered by the Underwriters, subject
to prior sale and acceptance by the Underwriters and subject to their right to
withdraw, cancel, modify, or reject any order in whole or in part. It is
expected that delivery of the Common Stock will be made at the office of
Friedman, Billings, Ramsey & Co., Inc., Arlington, Virginia, or through the
facilities of The Depository Trust Company, on or about , 1996.
------------------------
<TABLE>
<S> <C>
FRIEDMAN, BILLINGS, RAMSEY PRIME CHARTER
& CO., INC. LTD.
</TABLE>
The date of this Prospectus is , 1996.
<PAGE> 3
[Photo of tanning products, moisturizing lotions and skin care products.]
Body Drench(@), Tan FX(TM), and Capacity products include indoor and outdoor
tanning products and moisturizing lotions and skin care products.
[Photo of skin care, natural nail care products and manicure and pedicure
products.]
Gena(@) product lines include Warm-O-Lotion(TM) and Healthy Hoof(TM) for skin
care and natural nail care as well as a full line of manicure and pedicure
products.
IN CONNECTION WITH THE OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF
THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET OR
OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
The Company intends to furnish to its stockholders annual reports
containing audited consolidated financial statements and quarterly reports
containing unaudited summary financial information for the first three fiscal
quarters of each fiscal year.
2
<PAGE> 4
PROSPECTUS SUMMARY
SIMULTANEOUSLY WITH THE CONSUMMATION OF THE OFFERING, STYLING TECHNOLOGY
CORPORATION WILL ACQUIRE IN SEPARATE TRANSACTIONS FOUR BUSINESSES THAT DEVELOP,
PRODUCE, AND MARKET PROFESSIONAL SALON PRODUCTS (COLLECTIVELY, THE "ACQUIRED
BUSINESSES"). UNLESS THE CONTEXT OTHERWISE REQUIRES, THE INFORMATION CONTAINED
IN THIS PROSPECTUS GIVES EFFECT TO THE ACQUISITIONS OF THE ACQUIRED BUSINESSES
(THE "ACQUISITIONS"); ALL REFERENCES HEREIN TO THE "COMPANY" INCLUDE THE
ACQUIRED BUSINESSES; AND ALL REFERENCES HEREIN TO "STYLING" MEAN "STYLING
TECHNOLOGY CORPORATION" PRIOR TO THE COMPLETION OF THE ACQUISITIONS. UNLESS
OTHERWISE INDICATED, THE INFORMATION CONTAINED IN THIS PROSPECTUS ASSUMES NO
EXERCISE OF THE OVERALLOTMENT OPTION, THE REPRESENTATIVES' WARRANTS, OR OTHER
OUTSTANDING OPTIONS OR WARRANTS, NO ISSUANCE OF SHARES CONTINGENTLY ISSUABLE IN
CONNECTION WITH ONE OF THE ACQUISITIONS, AND GIVES EFFECT TO THE COMPANY'S
REVERSE 0.808-FOR-1 STOCK SPLIT EFFECTED ON SEPTEMBER 19, 1996 AND THE
REPURCHASE OF 807,851 SHARES FROM A STOCKHOLDER. THE FOLLOWING SUMMARY IS
QUALIFIED IN ITS ENTIRETY BY THE DETAILED INFORMATION AND FINANCIAL STATEMENTS
AND NOTES THERETO APPEARING ELSEWHERE IN THIS PROSPECTUS. AS USED HEREIN, THE
TERM "OFFERING PRICE" MEANS AN ASSUMED INITIAL PUBLIC OFFERING PRICE OF $11.00
PER SHARE OF COMMON STOCK.
THE COMPANY
The Company develops, produces, and markets high-end professional salon
products, including hair care, nail care, and skin and body care products as
well as salon appliances and salonwear. The Company sells its products primarily
to beauty and tanning supply distributors and, to a lesser extent, directly to
spas, resorts, health and country clubs, beauty salon chains, and hair, nail,
and tanning salons throughout the United States as well as internationally. On a
pro forma basis, total revenue of the Company would have exceeded $25 million
and its net income would have exceeded $1.5 million in 1995 assuming the
Acquisitions had taken place on January 1, 1995.
Styling was founded in June 1995. Although Styling itself has conducted no
operations to date, it will acquire, simultaneously with the consummation of the
Offering, four professional salon product businesses that, on a combined basis,
have a diversified line of well-established, brand-name professional salon
products. The Company's product lines have been popular in the professional
salon industry for more than 10 years. The Company believes that its Body
Drench(@) product line is one of the leaders in the professional skin care and
tanning products market; its Gena(@) Warm-O-Lotion(TM) product line is a leading
line in professional natural nail care; its line of acrylic nail enhancement
products is well-recognized in the professional nail enhancement market; and
SRC(TM) is regarded by salon professionals as the premier line of salon
appliance products. The Acquisitions also will provide the Company with an
extensive combined network of strong distribution relationships, experienced
sales forces, established marketing and salon industry education programs,
significant production and sourcing capabilities, and experienced management
personnel with extensive relationships in the professional salon products
industry. Styling's business activities to date have related to developing a
business plan, engaging personnel, negotiating the terms of the Acquisitions,
and preparing for the Offering.
The Company's Chief Executive Officer and President have more than 10 and
20 years, respectively, of experience in the professional salon products
industry. The Chief Executive Officer's experience includes serving as the
executive vice president of a mall-based retail chain of beauty supply salons;
the president of a developer of a line of hair care products; the owner of
retail salons; and a joint venturer with Regis Corporation in a mall-based
retail salon chain. The President's experience includes serving as the chief
operating officer of one of the Acquired Businesses; a member of the senior
management team of a corporation that conducted the acquisition of personal care
brands, assets, and trademarks from companies in the professional salon and
mass-market industries; a marketing executive for a large beauty supply
distributor; and the national sales manager for a personal care products
company.
The professional salon products industry is highly fragmented. According to
Modern Salon Magazine, a leading professional salon trade publication, more than
700 firms produce professional salon products. The Company believes most of
these firms are small, closely held businesses, in most cases offering
professional salon products in a single product category. Professional salon
products are sold primarily to beauty supply distributors that resell these
products to beauty salon chains and hair, nail, and tanning salons. According to
industry sources, professional salon industry revenue (including revenue from
salon services and from sales of salon products) for 1995 was $36 billion
domestically (a 6% increase over the prior year) and $70 billion
internationally. Industry growth has resulted from an increased demand for
professional salon products because of the more frequent use of salon services
and the growth and aging of the United States population.
The Company's objective is to become a dominant developer, producer, and
marketer of professional salon products in the United States and
internationally. Key aspects of the Company's strategy to achieve its objective
include (i) pursuing acquisitions to capitalize on the substantial fragmentation
and growth potential in the professional salon products market; (ii) enhancing
the operating efficiencies of acquired businesses;
3
<PAGE> 5
(iii) leveraging its well-established domestic and international distribution
channels; (iv) expanding the distribution of its products in international
markets; and (v) capitalizing on the brand-name recognition of its existing
product lines by introducing new products and formulations under these brand
names.
The four professional salon product businesses that Styling will acquire
simultaneously with the consummation of the Offering are (i) Gena Laboratories,
Inc. ("Gena"), a leading producer and marketer of professional natural nail care
products, pedicure products, skin care products including paraffin therapy
products and, to a lesser extent, hair care products; (ii) the Body Drench
division ("Body Drench") of Designs by Norvell, Inc. ("DBN"), a leading producer
and marketer of high-end professional tanning and moisturizing products and
resort, spa, and health and country club personal care products; (iii) JDS
Manufacturing Co., Inc. ("JDS"), a producer and marketer of acrylic and
fiberglass nail enhancement products; and (iv) Kotchammer Investments, Inc. (dba
Styling Research Company) ("KII"), a marketer of high-end salon appliances (such
as curling irons and blow dryers) and salonwear (such as capes and aprons) that
owns proprietary formulas and marketing rights to several hair care lines
previously formulated and manufactured by Redken Laboratories, Inc. Styling has
entered into separate acquisition agreements for each of the Acquired
Businesses, which include customary representations and warranties, covenants,
closing conditions, and post-closing price adjustments. The total purchase price
for the Acquired Businesses is approximately $23.23 million, of which $20.65
million is payable in cash (not including $2.0 million payable in two years),
$530,000 is payable in notes, and $50,000 is payable in shares of the Company's
Common Stock, subject to adjustment under certain circumstances. In addition, in
connection with the Acquisitions, the Company will assume approximately $300,000
of the long-term debt of the Acquired Businesses. The Company will record an
aggregate of $18.1 million of goodwill in the Acquisitions to be amortized over
a 25-year period. See "Description of the Acquisitions" for a further
description of the Acquisitions, the purchase price being paid in each of the
Acquisitions, the material terms of the acquisition agreement related to each
Acquisition, and the amount of goodwill being recorded in connection with each
Acquisition.
The Company has financed some of the costs associated with the Acquisitions
through the private issuance of a $400,000 promissory note to a single foreign
investor (the "Bridge Note"). In connection with the issuance of the Bridge
Note, the Company agreed to issue, for no additional consideration, 18,182
shares of Common Stock (the "Bridge Note Shares") and redeemable Common Stock
Purchase Warrants (the "Bridge Warrants") to purchase 18,182 shares at an
exercise price equal to 125% of the Offering Price (the "Bridge Warrant
Shares"). The holder of the Bridge Note Shares and the Bridge Warrant Shares has
registration rights with respect to these shares. See "Use of Proceeds,"
"Description of Capital Stock -- Bridge Warrants," and "Description of Capital
Stock -- Shares Eligible for Future Sale."
The Company is a Delaware corporation. The Company maintains its principal
executive office at 1146 South Cedar Ridge, Duncanville, Texas, and its
telephone number is (214) 296-2887. This Prospectus refers to certain trademarks
and service marks, including registered marks, of the Acquired Businesses and of
companies other than the Company.
THE PUBLIC OFFERING
Common Stock offered by the
Company......................... 2,800,000 shares
Common Stock to be outstanding
after the Offering.............. 3,792,149 shares(1)
Use of Proceeds................. To pay the cash portion of the purchase price
for the Acquired Businesses, to repurchase
Common Stock, to repay the Bridge Note, and
to provide funds for working capital, general
corporate purposes, and potential
acquisitions. See "Use of Proceeds."
Nasdaq National Market Symbol... STYL
Risk Factors.................... Prospective purchasers should carefully
consider the factors discussed under "Risk
Factors."
- ---------------
(1) Does not include Common Stock reserved for issuance upon exercise of the
Overallotment Option or the Representatives' Warrants or shares contingently
issuable in connection with the Body Drench Acquisition. Includes 4,545
shares to be issued in the acquisition of KII, options with an exercise
price less than the Offering Price, and the Bridge Note Shares.
4
<PAGE> 6
SUMMARY HISTORICAL AND PRO FORMA FINANCIAL DATA(1)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Simultaneously with the consummation of the Offering, Styling will acquire
the Acquired Businesses in separate transactions in exchange for cash, notes,
and shares of Common Stock. In addition, the Company will assume approximately
$300,000 of the long-term debt of the Acquired Businesses in connection with the
Acquisitions.
Summary historical financial data has been derived from the separate
Financial Statements and is presented for each of the Acquired Businesses. The
Pro Forma Statement of Operations Data set forth on the following pages assumes
that Styling had completed the Acquisitions on January 1, 1995, and such
information as of and for the six months ended June 30, 1996 and for the year
ended December 31, 1995 was derived from the Pro Forma Combined Financial
Statements and the Notes related thereto appearing elsewhere in this Prospectus.
The following summary financial data is qualified in its entirety by the more
detailed information appearing in "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the Financial Statements,
including the Notes related thereto, appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
------------ -------------------
1995 1995 1996
------------ ------- -------
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA-COMPANY PRO FORMA(2):
Net sales................................................ $ 25,181 $15,102 $13,692
Gross profit............................................. 11,875 7,049 6,663
Selling, general, and administrative expenses............ 8,716 4,940 4,040
Income from operations................................... 3,159 2,109 2,623
Net income............................................... 1,599 1,103 1,450
Adjusted pro forma earnings per share.................... .42 .29 .38
Adjusted pro forma shares outstanding.................... 3,791 3,791 3,791
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED FEBRUARY 28, AUGUST 31,
---------------------------- -----------------
1994 1995 1996 1995 1996
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA-GENA:
Net sales................................... $6,426 $7,524 $8,384 $4,336 $4,705
Gross profit................................ 3,146 3,360 3,565 2,039 2,160
Selling, general, and administrative
expenses................................. 2,744 2,964 3,033 1,573 1,454
Income from operations...................... 402 396 532 466 706
Net income.................................. 278 232 317 279 442
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
------------------------------ -----------------
1993 1994 1995 1995 1996
------ ------- ------- ------ ------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA-BODY DRENCH(3):
Net sales................................. $6,653 $11,138 $11,871 $8,250 $6,586
Gross profit.............................. 2,614 4,796 5,444 3,686 3,121
Selling, general, and administrative
expenses............................... 2,055 4,076 4,883 2,971 2,402
Income from operations.................... 559 720 561 714 719
Net income................................ 328 446 294 416 440
</TABLE>
5
<PAGE> 7
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED SEPTEMBER 30, JUNE 30,
------------------------------ -----------------
1993 1994 1995 1995 1996
------ ------- ------- ------ ------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA-JDS:
Net sales................................. $3,799 $ 3,578 $ 3,368 $2,592 $2,339
Gross profit.............................. 2,054 2,114 2,019 1,561 1,389
Selling, general, and administrative
expenses............................... 2,092 2,170 2,046 1,549 1,393
Income (loss) from operations............. (38) (56) (26) 12 (4)
Net income (loss)......................... (29) (16) 9 23 (3)
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
------------------------------ -----------------
1993 1994 1995 1995 1996
------ ------- ------- ------ ------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA-KII:
Net sales................................. $ 102 $ 1,999 $ 1,558 $ 777 736
Gross profit.............................. 60 1,014 846 405 393
Selling, general, and administrative
expenses............................... 87 1,040 891 476 329
Income (loss) from operations............. (27) (26) (45) (71) 64
Net income (loss)......................... (32) (104) (135) (117) 25
</TABLE>
<TABLE>
<CAPTION>
STYLING GENA BODY DRENCH JDS KII
AS OF AS OF AS OF AS OF AS OF
JUNE 30, 1996 AUGUST 31, 1996 JUNE 30, 1996(4) JUNE 30, 1996 JUNE 30, 1996
------------- --------------- ---------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital............. $ 0 $ 2,315 $ 329 $ 333 $ 345
Total assets................ 300 3,975 4,221 728 622
Long-term debt, less current
portion.................. -- 291 -- 432 610
Total stockholders'
equity................... 1 3,065 582 27 (200)
</TABLE>
<TABLE>
<CAPTION>
PRO FORMA
AS OF JUNE 30, ADJUSTED PRO FORMA
1996(5) AS OF JUNE 30, 1996(6)
------------------- ----------------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Working capital.................... $ (17,153) $ 8,335
Total assets....................... 7,000 32,489
Long-term debt, less current
portion......................... 2,291 2,291
Total stockholders' equity......... 50 25,539
</TABLE>
- ---------------
(1) Summary historical financial data is provided for each of the Acquired
Businesses. For accounting purposes, the Acquisitions are to be treated as
business combinations accounted for by the purchase method of accounting as
prescribed by Accounting Principles Board Opinion No. 16. The Acquired
Businesses are to be valued at the fair value of consideration given,
principally cash from the completion of the Offering. The excess of
consideration given over the fair value of net assets received will be
amortized on a straight-line basis over 25 years. Gena and Body Drench
comprise a substantial majority of the combined assets, net sales, and
operating income, and therefore are deemed to be the predecessors of
Styling.
(2) Reflects adjustments for the Acquisitions and the Offering. The pro forma
combined statement of operations data for the year ended December 31, 1995
and the six months ended June 30, 1995 and 1996 assumes that Styling had
completed the Acquisitions on January 1, 1995. The pro forma combined
statement of operations data may not be indicative of actual results that
would have been achieved if the transactions had occurred on the dates
indicated or the results which may be realized in the future. The pro forma
combined statement of operations data contain adjustments which are directly
attributable to the transaction. See the Pro Forma Combined Financial
Statements, including the Notes thereto, appearing elsewhere in this
Prospectus.
6
<PAGE> 8
(3) Body Drench has historically operated as a division of DBN.
(4) Body Drench has historically operated as a division of DBN. Total
stockholders' equity data represents DBN's owners' net investment in the
Division to be acquired by Styling.
(5) Reflects adjustments for the Acquisitions. See the Pro Forma Combined
Financial Statements, including the Notes thereto, appearing elsewhere in
this Prospectus for a discussion of the assumptions made and adjustments
applied in the preparation of this data.
(6) The adjusted Pro Forma Combined Balance Sheet Data as of June 30, 1996 gives
effect to the Acquisitions, the repurchase of Common Stock, the Offering,
and the use of proceeds therefrom, as if such transactions had occurred on
June 30, 1996.
SUPPLEMENTAL INFORMATION RELATING TO PRO FORMA COMBINED STATEMENT OF OPERATIONS
The unaudited pro forma combined financial information for the year ended
December 31, 1995 included elsewhere herein gives effect to certain pro forma
adjustments as described in the notes to such information. In evaluating the
Acquisitions, management of Styling considered the impact of certain cost and
expense savings and other economic benefits that are expected to be realized as
a result of the Acquisitions.
Application of the supplemental adjustments described below to the
unaudited pro forma combined statement of operations for the year ended December
31, 1995 and the six months ended June 30, 1996 would have resulted in the
following:
<TABLE>
<CAPTION>
DECEMBER JUNE 30,
31, 1995 1996
----------- -----------
<S> <C> <C>
Net sales....................................... $25,180,571 $13,691,909
Gross profit.................................... 13,724,802 7,588,269
Net income...................................... 2,502,210 2,001,789
Pro forma earnings per share.................... $ .66 $ .53
</TABLE>
The adjustments to the pro forma combined financial information give effect
to the reduction of material and direct labor costs by approximately $1.85
million and $0.93 million for the year ended December 31, 1995 and the six
months ended June 30, 1996, respectively, as a result of internalizing
production of the Body Drench and JDS products at Gena. The pricing methodology
used was consistent with that of other Gena products and includes the cost
savings on certain products that will be filled at outside contractors at the
price available to the Company on a combined basis.
7
<PAGE> 9
RISK FACTORS
IN ADDITION TO THE OTHER INFORMATION IN THIS PROSPECTUS, PROSPECTIVE
PURCHASERS SHOULD CONSIDER THE FOLLOWING FACTORS IN EVALUATING A PURCHASE OF
SHARES OF COMMON STOCK OFFERED BY THIS PROSPECTUS.
ABSENCE OF COMBINED OPERATING HISTORY
Styling was founded in June 1995 to acquire businesses that develop,
produce, and market professional salon products, but Styling itself has
conducted no operations to date. Styling has entered into separate agreements to
purchase the Acquired Businesses simultaneously with the consummation of the
Offering. The Acquired Businesses have been operating independently, and neither
the historical results of their separate operations nor the Company's pro forma
results of operations are necessarily indicative of the results that would have
been achieved if the Acquired Businesses had been operated on an integrated
basis or the results that may be realized on a combined basis in the future.
OPERATIONS OF ACQUIRED BUSINESSES
The financial performance of several of the Acquired Businesses has shown
declining trends in revenue over the last full fiscal years and in the
comparable periods to date in the current fiscal year relative to the prior
year. JDS and KII have experienced lower revenue in fiscal 1995 compared to
fiscal 1994 and in the six-month period of the current fiscal year compared to
the same period of the prior year. Body Drench has experienced lower revenue in
the first six months of its current fiscal year compared to the comparable
period of the prior year. In addition, several of the Acquired Businesses have
shown declining trends in net income or have shown net losses. Body Drench's net
income was lower in its 1995 fiscal year than its 1994 fiscal year; JDS incurred
a net loss in its 1994 fiscal year and the first nine months of its 1996 fiscal
year; and KII incurred net losses in each of its last three fiscal years. See
"Selected Historical and Pro Forma Financial Data" and "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
The report of Body Drench's independent public accountants dated June 28,
1996 expressed "substantial doubts" about Body Drench's ability to continue as a
going concern in the absence of its acquisition by the Company. The auditors
have informed the Company that, upon the closing of the Offering and the
simultaneous acquisition of Body Drench by the Company, their report with
respect to the audited financial statements of Body Drench would no longer
contain a going concern paragraph.
INTEGRATION OF BUSINESS OPERATIONS
Although certain members of the management of the Company have extensive
experience in the professional salon products industry, there can be no
assurance that the Company will be able to manage effectively the combined
operations of the Acquired Businesses or achieve the Company's operating and
growth strategies. The integration of the management, operations, and facilities
of the Acquired Businesses and other businesses the Company may acquire could
involve unforeseen difficulties, which could have a material adverse effect on
the Company's business, financial condition, and operating results.
The Company has conducted due diligence reviews of each of the Acquired
Businesses, has received representations and warranties regarding each of the
Acquired Businesses, and has negotiated certain purchase price adjustments and
set-off rights with respect to each of the Acquisitions. See "Description of the
Acquisitions." The Company intends to pursue future acquisitions on a similar
basis. There can be no assurance, however, that unforeseen liabilities will not
arise in connection with the operation of the Acquired Businesses or future
acquired businesses or that any contractual purchase price adjustments, rights
of set-off, or other remedies available to the Company will be sufficient to
compensate the Company in the event unforeseen liabilities arise.
The Company anticipates using the opportunities created by the combination
of the Acquired Businesses to effect what the Company believes will be
substantial cost savings, including a reduction in operating expenses as a
result of the internalization of substantial amounts of previously outsourced
manufacturing as well as the elimination of duplicative administrative,
warehouse, and distribution facilities, functions, and
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<PAGE> 10
personnel. Significant uncertainties, however, accompany any business
combination, and there can be no assurance that the Company will be able to
achieve its anticipated integration of facilities, functions, and personnel in
order to achieve operating efficiencies or otherwise realize cost savings as a
result of the Acquisitions or future acquisitions. The inability to achieve the
anticipated cost savings could have a material adverse effect on the Company's
business, financial condition, and operating results. See "Management's
Discussion and Analysis of Financial Conditions and Results of
Operations -- Effects of Combination" and the Pro Forma Combined Financial
Statements.
ACQUISITION STRATEGY
The success of the Company's acquisition strategy will depend in large part
on its ability to acquire and operate successfully additional professional salon
product businesses. There can be no assurance that any suitable additional
acquisitions can be identified or consummated or that the operations of any
businesses that are acquired will be successfully integrated into the Company's
operations. In addition, increased competition for acquisition candidates may
increase purchase prices for acquisitions to levels beyond the Company's
financial capability. As of the date of this Prospectus, the Company has no
binding agreements to effect any acquisitions other than the Acquisitions and is
not engaged in any active negotiations to acquire any other businesses. The
Company expects to use cash and its securities, including Common Stock, as the
primary consideration for future acquisitions. See "Risk Factors -- Future
Capital Needs; Debt Service Requirements." The size, timing, and integration of
any future acquisitions may cause substantial fluctuations in operating results
from quarter to quarter. Consequently, operating results for any quarter may not
be indicative of the results that may be achieved for any subsequent fiscal
quarter or for a full fiscal year. These fluctuations could adversely affect the
market price of the Common Stock.
FUTURE CAPITAL NEEDS; DEBT SERVICE REQUIREMENTS
A substantial portion of the proceeds of the Offering will be applied to
pay the cash portion of the purchase price for the Acquisitions, to discharge
certain liabilities assumed in the Acquisitions, to repurchase Common Stock, and
to repay the Bridge Note. As a result, the Company will rely primarily on cash
flow from operations for its working capital and general corporate needs. The
Company's future capital requirements will depend upon the size and timing of
future acquisitions and the availability of additional financing. To the extent
that the Company finances future acquisitions in whole or in part through the
issuance of Common Stock or securities convertible into or exercisable for
Common Stock, existing stockholders will experience a dilution in the voting
power of their Common Stock and may suffer a dilutive effect on earnings per
share. In the event that potential acquisition candidates are unwilling to
accept Common Stock as consideration or the market price of the Common Stock
declines in value, the Company will be required to use more cash from
operations. The inability of the Company to generate cash from operations for
future acquisitions could materially and adversely affect the Company's
acquisition program unless the Company is able to obtain additional capital
through external financings, including additional equity offerings. Any
borrowings made to finance future acquisitions or for operations could make the
Company more vulnerable to a downturn in its operating results, a downturn in
economic conditions, or increases in interest rates on borrowings that are
subject to interest rate fluctuations. If the Company's cash flow from
operations is insufficient to meet its debt service requirements, the Company
could be required to sell additional equity securities, refinance its
obligations, or dispose of assets in order to meet its debt service
requirements. In addition, it is likely any future financial arrangements will
contain financial and operational covenants and other restrictions with which
the Company must comply, including limitations on capital expenditures, the
payment of dividends, and the incurrence of additional indebtedness. There can
be no assurance that such financing will be available if and when needed or will
be available on terms acceptable to the Company. See "Management's Discussion
and Analysis of Financial Conditions and Results of Operations -- Liquidity and
Capital Resources" and "Business -- Strategy."
CONSUMER PREFERENCES AND NEW PRODUCT INTRODUCTIONS
Consumer preferences in the professional salon product industry depend to a
significant extent on the prescriptive role of salon professionals. Relatively
few products achieve wide acceptance in the professional
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<PAGE> 11
salon market. The Company believes that its success in the professional salon
product industry will depend, in part, on its ability to introduce new and
attractive products on a regular basis. There can be no assurance that any new
products introduced by the Company will achieve any significant degree of market
acceptance or that any acceptance that is achieved will be sustained for any
significant amount of time. The failure of new product lines or product
innovations to achieve or sustain market acceptance could have a material
adverse effect on the Company's business, financial condition, and operating
results.
MANAGEMENT OF GROWTH
The Company's growth and expanding operations may place a significant
strain on the Company's management, administrative, operational, and financial
resources as well as increased demands on its systems and controls. The
Company's ability to manage its growth will require it to continue to integrate
and enhance its operational, financial, and management information systems and
its marketing programs; to motivate, manage, and retain its current employees;
and to identify, hire, and retain additional employees. The failure of the
Company to manage its growth on an effective basis could have a material adverse
effect on the Company's business, financial condition, and operating results.
COMPETITION
The professional salon products industry is highly competitive. The
Company's products compete directly against professional salon and other
functionally similar products sold through distributors of professional salon
products and professional salons. In addition, the Company's professional salon
products compete indirectly against hair care, nail care, and body and skin care
products sold through a variety of non-salon retail channels, including
department stores, mall-based specialty stores and, to a lesser extent, mass
merchants, drugstores, supermarkets, telemarketing programs, television
"infomercials," and catalogs. Current and potential competitors include a number
of companies that have substantially greater resources than the Company,
including better brand-name recognition, broader product lines, and wider
distribution channels. The professional salon products industry is characterized
by a lack of significant barriers to entry with respect to the development and
production of professional salon products, which may result in new competition,
including possible imitators of one or more of the Company's recognized product
lines. In addition, it is common in the professional salon products industry for
companies to market products that are similar to products being successfully
marketed by competitors. Increased competition and any reductions in
competitors' prices, which requires the Company to implement price reductions in
order to remain competitive, could have a material adverse effect on the
Company's business, financial condition, and operating results. See
"Business -- Competition."
DEPENDENCE ON MAJOR CUSTOMERS
The Company depends upon professional beauty and tanning supply
distributors, spas, health and country clubs, chain salons and, to a lesser
extent, hair, nail, and tanning salons to distribute its products. The
distribution channels for professional salon products are highly fragmented. The
Company estimates that there are more than 3,500 domestic wholesale
distributors, 4,000 beauty supply chains, and more than 200,000 salons,
including salon chains. Other than Sally Beauty Company, Inc. ("Sally"), a
division of Alberto-Culver Company, and Regis Corporation ("Regis"), no other
beauty supply chain or beauty salon chain accounts for a significant portion of
the purchases of the Company's professional salon products.
During 1995, the Company's largest customer, Sally, accounted for
approximately 10% of the Company's net sales. The Company currently maintains
more than 5,000 active customer accounts, and no customer other than Sally
accounted for more than 10% of the Company's sales in any of the last three
years. The Company does not have long-term contracts with any of its customers.
An adverse change in, or termination of, the Company's relationship with, or an
adverse change in the financial viability of, one or more of its major
customers, including Sally or Regis, could have a material adverse effect on the
Company's business, financial condition, and operating results.
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<PAGE> 12
DEPENDENCE ON TRADEMARKS
The market for the Company's products depends to a significant extent upon
the goodwill associated with its trademarks and trade names. Therefore,
trademark protection is important 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 trademarks and trade 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."
RELIANCE ON PRODUCTION FACILITY
The Company will produce a significant portion of its products at its
facility in Duncanville, Texas. The production operations at this facility use
certain custom-designed equipment which, if damaged or otherwise rendered
inoperable or unavailable, could result in the disruption of the Company's
production operations. Any extended interruption of operations at the Company's
production facility would have a material adverse effect on its business. The
Company seeks to protect against this risk by maintaining substantial spare
parts and an internal maintenance shop capable of servicing and rebuilding
in-house all 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. To date, no significant disruptions have
been experienced at the facility. See "Business -- Production."
The Company plans to take advantage of combined operations by utilizing its
Duncanville, Texas facility to produce products previously outsourced to third
parties and to internally house warehouse and distribution activities rather
than utilizing leased facilities. The Company has the ability to increase the
size of the facility by building an additional facility on a vacant lot it owns
adjacent to the existing facility. The facility currently is operating at
approximately 40% of its capacity, and the Company has no immediate plans to
commence construction of such an addition. The inability of the Company to
utilize the current facility to the full extent of its capacity could have an
adverse effect on the Company's operating results.
GENERAL ECONOMIC CONDITIONS
The success of the Company's operations depends to an extent upon a number
of factors relating to discretionary consumer spending. These factors include
economic conditions, such as employment, business conditions, interest rates,
and tax rates as well as the continued growth of the professional salon products
industry. There can be no assurance that consumer spending will not be adversely
affected by general social trends and economic conditions, thereby impacting the
Company's growth, net sales, and profitability. If the demand for professional
salon products and related merchandise were to decline, the Company's business,
financial condition, and operating results could be adversely affected.
DEPENDENCE ON KEY PERSONNEL
The Company's success depends to a significant degree upon the skills of
its current key employees and its ability to identify, hire, and retain
additional sales, marketing, and financial personnel. There can be no assurance
that the Company will be successful in retaining its existing key personnel or
in attracting and retaining additional key personnel. The loss of services of
key personnel, including particularly Messrs. Leopold or Clifford, or the
inability to attract and retain additional qualified personnel could have a
material adverse effect upon the Company's business and operating results. The
Company has employment agreements with Messrs. Leopold and Clifford with terms
through September 2001. See "Management -- Employment Agreements." The Company
plans to obtain key person life insurance on each of Messrs. Leopold and
Clifford in the amount of $1.0 million, but does not expect to have key person
life insurance covering any other employee. See "Management."
REGULATION AND POTENTIAL CLAIMS
Certain of the Company's advertising and product labeling practices are
subject to regulation by the Federal Trade Commission (the "FTC"), and certain
of its professional salon product production practices are subject to regulation
by the Food and Drug Administration (the "FDA") as well as by various other
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<PAGE> 13
federal, state, and local regulatory authorities. Compliance with federal,
state, and local laws and regulations has not had a material adverse effect on
the Company to date. Nonetheless, federal, state, and local regulations in the
United States that are designed to protect consumers have had, and can be
expected to have, an increasing influence on product claims, production methods,
product content, and packaging. In addition, any expansion by the Company of its
operations to produce professional salon products that include over-the-counter
drug ingredients would result in the Company becoming subject to additional FDA
regulation as well as a higher degree of inspection and greater burden of
regulatory compliance than currently exist. The nature and use of professional
salon products could give rise to product liability claims if one or more users
of the Company's products were to suffer adverse reactions following their use
of the products. Such reactions could be caused by various factors, many of
which are beyond the Company's control, including hypoallergenic sensitivity and
the possibility of malicious tampering with the Company's products. In the event
of such an occurrence, the Company could incur substantial litigation expense,
receive adverse publicity, and suffer a loss of sales.
The operations of the Company subject it to federal, state, and local
governmental regulations related to the use, storage, discharge, and disposal of
hazardous chemicals. The amount of hazardous waste produced by the Company may
increase in the future when the Company increases production at the Duncanville
facility. The failure by the Company to comply with current or future
environmental regulations could result in the imposition of fines on the
Company, suspension of production, or a cessation of operations. Compliance with
such regulations could require the Company to acquire costly equipment or to
incur other significant expenses. Any failure by the Company to control the use,
or adequately restrict the discharge, of hazardous substances could subject it
to future liabilities. The Company believes that it is in substantial compliance
with applicable federal, state, and local rules and regulations governing the
discharge of hazardous materials into the environment. There are no significant
capital expenditures for environmental control matters anticipated in the
current year or expected in the near future. See "Business -- Government
Regulation."
CONTROL BY MANAGEMENT
Upon the sale of the shares of Common Stock offered hereby, Sam L. Leopold,
the Chairman of the Board and Chief Executive Officer of the Company, will own a
total of approximately 22.5% of the outstanding shares of Common Stock
(including $500,000 of Common Stock to be purchased by Mr. Leopold in the
Offering), and Thomas M. Clifford, President of the Company, will have an option
to purchase 161,571 shares. See "Principal Stockholders." Consequently, Mr.
Leopold will have the ability to influence the election of all of the directors
of the Company and thereby control the business, affairs, and management of the
Company. In addition, Mr. Leopold will have the ability to influence most
matters requiring stockholder approval including significant corporate matters,
such as the amendment of the Company's Certificate of Incorporation and any
merger, consolidation, or sale of all or substantially all of the assets of the
Company. Such a high level of ownership may have the effect of delaying,
deterring, or preventing a change in the control of the Company, even when such
a change would be in the best interests of the other stockholders, and may
adversely affect the voting and other rights of the other holders of Common
Stock. Mr. Leopold acquired his shares of the Company's Common Stock for nominal
cash consideration. Since the formation of the Company, however, Mr. Leopold has
expended considerable time and effort, without compensation, in developing the
Company's business plan, engaging personnel, negotiating the terms of the
Acquisitions, and preparing for the Offering.
ABSENCE OF PRIOR MARKET; POSSIBLE VOLATILITY OF STOCK PRICE
There has been no public market for the Common Stock of the Company prior
to the Offering. Although the Common Stock has been approved for quotation on
the Nasdaq National Market System, there can be no assurance that an active
trading market for the Common Stock will develop or be sustained after the
Offering or that the market price of the Common Stock will not decline below the
Offering Price. The Offering Price of the Common Stock offered hereby was
determined by negotiations between the Company and the Representatives and may
not be indicative of the market price of the Common Stock in the future. See
"Underwriting" for a discussion of the factors considered in determining the
Offering Price. The trading price of the Common Stock in the future could be
subject to wide fluctuations in response to quarterly variations in operating
results of the Company or its competitors, actual or anticipated announcements
of product developments by the
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<PAGE> 14
Company or its competitors, changes in analysts' estimates of the Company's
financial performance, developments or disputes concerning proprietary rights,
regulatory developments, general industry conditions, worldwide economic and
financial conditions, and other events and factors. During certain periods, the
stock markets have experienced extreme price and volume fluctuations. In
particular, prices of stocks of rapidly expanding companies often fluctuate
widely, frequently for reasons unrelated to the operating performance of such
companies. In addition, securities sold in initial public offerings have been
especially susceptible to price volatility. These broad market fluctuations and
other factors may adversely affect the market price of the Common Stock.
SHARES ELIGIBLE FOR FUTURE SALE
Sales of substantial amounts of Common Stock in the public market following
the Offering could adversely affect prevailing market prices. Of the 3,792,149
shares of Common Stock to be outstanding immediately after the completion of the
Acquisitions and the Offering (including options with an exercise price less
than the Offering Price), 2,800,000 shares will be eligible for resale in the
public market without any restrictions. In June 1997 and November 1998, 807,851
and 22,727, respectively, additional shares of Common Stock will be eligible for
sale in the public market, subject to compliance with the volume limitations and
other requirements of Rule 144 under the Securities Act. Holders of 4,545 shares
issued in connection with the Acquisitions will have the right to require the
Company to register such shares of Common Stock for sale under the Securities
Act pursuant to "piggyback" registration rights granted by the Company with
respect to such shares. The holder of the Bridge Note Shares and the Bridge
Warrant Shares may exercise one-time demand registration rights and require the
Company to register the Bridge Note Shares and Bridge Warrant Shares at any time
during the six-month period commencing 120 days after the completion of the
Offering. The holder of the Bridge Note Shares and the Bridge Warrant Shares
also have "piggyback" registration rights with respect to such shares. The
directors and executive officers of the Company have agreed not to sell or
otherwise dispose of 1,042,129 shares of Common Stock currently owned by them or
which may be acquired by them under outstanding stock options for a period of
270 days after the consummation of the Offering without the prior written
consent of the Representatives. Mr. Leopold has agreed to similar restrictions
on the shares he will purchase in the Offering.
The Company also has the authority to issue additional shares of Common
Stock and shares of one or more series of preferred stock. After completion of
the Offering, the Company may issue shares of Common Stock or preferred stock
for use as a portion of the consideration in future acquisitions. These shares
may be registered under the Securities Act, in which case they generally will be
freely tradeable upon their issuance. In addition, the Company expects that it
will issue shares of Common Stock that are "restricted securities" under the
Securities Act in connection with future acquisitions. The issuance of such
shares would result in the dilution of the voting power of the shares of Common
Stock purchased in the Offering and could have a dilutive effect on earnings per
share. See "Description of the Acquisitions," "Description of Capital Stock --
Shares Eligible for Future Sale," and "Underwriting."
RIGHTS TO ACQUIRE SHARES
A total of 400,000 shares of Common Stock have been reserved for issuance
upon exercise of options granted or which may be granted under the Company's
Stock Option Plan. See "Management -- Stock Option Plan." Options to acquire
234,278 shares of Common Stock currently are outstanding, including options to
purchase 72,707 shares granted under the Company's Stock Option Plan. In
addition, there are outstanding Bridge Warrants to acquire 18,182 shares of
Common Stock at an exercise price of 125% of the Offering Price and
Representatives' Warrants to acquire 196,000 shares of Common Stock at an
exercise price of 120% of the Offering Price, in each case subject to adjustment
in accordance with the anti-dilution and other provisions set forth in the
warrants. During the terms of such options and warrants, the holders will have
the opportunity to profit from an increase in the market price of the Common
Stock. The existence of such stock options and warrants may adversely affect the
terms on which the Company can obtain additional financing, and the holders of
such options and warrants can be expected to exercise or convert such options
and warrants at a time when the Company, in all likelihood, would be able to
obtain additional capital by offering shares of its Common Stock on terms more
favorable to the Company than those provided by the
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<PAGE> 15
exercise of such options and warrants. See "Management -- Stock Option Plan,"
"Description of Capital Stock -- Bridge Warrants," and "Description of Capital
Stock -- Shares Eligible for Future Sale."
CHANGE IN CONTROL PROVISIONS
The Company's Certificate of Incorporation and Bylaws and the Delaware
General Corporation Law (the "Delaware GCL") contain provisions that may have
the effect of making more difficult or delaying attempts by others to obtain
control of the Company, even when these attempts may be in the best interests of
stockholders.
Upon the completion of the Offering, the Company will be subject to the
provisions of Section 203 of the Delaware GCL. In general, this statute
prohibits a publicly held Delaware corporation from engaging, under certain
circumstances, in a "business combination" with an "interested stockholder" for
a period of three years after the date of the transaction in which the person
becomes an interested stockholder, unless either (i) prior to the date at which
the stockholder becomes an interested stockholder, the Board of Directors
approved either the business combination or the transaction in which the person
becomes an interested stockholder, (ii) upon consummation of the transaction in
which the stockholder becomes an interested stockholder, the stockholder owned
at least 85% of the outstanding voting stock of the corporation (excluding
shares held by directors who are officers or held in certain employee stock
plans), or (iii) the business combination is approved by the Board of Directors
and by two-thirds of the outstanding voting stock of the corporation (excluding
shares held by the interested stockholder) at a meeting of stockholders (and not
by written consent) held on or subsequent to the date of the business
combination. An "interested stockholder" is a person who, together with
affiliates and associates, owns (or at any time within the prior three years did
own) 15% or more of the corporation's voting stock. Section 203 defines a
"business combination" to include, without limitation, mergers, consolidations,
stock sales and asset based transactions, and other transactions resulting in a
financial benefit to the interested stockholder.
NO CASH DIVIDENDS
The Company has never paid any dividends on its capital stock and does not
anticipate that it will pay dividends in the foreseeable future. Instead, the
Company intends to apply any earnings to the expansion and development of its
business. See "Dividend Policy."
IMMEDIATE AND SUBSTANTIAL DILUTION
Purchasers of Common Stock in the Offering will experience immediate and
substantial dilution in the net tangible book value of $9.03 per share from the
Offering Price. See "Dilution."
FORWARD-LOOKING INFORMATION MAY PROVE INACCURATE
This Prospectus contains various forward-looking statements that are based
on the Company's beliefs as well as assumptions made by and information
currently available to the Company. When used in this Prospectus, the words
"believe," "expect," "anticipate," "estimate," and similar expressions are
intended to identify forward-looking statements. Such statements are subject to
certain risks, uncertainties, and assumptions, including those identified under
"Risk Factors." Should one or more of these risks or uncertainties materialize,
or should underlying assumptions prove incorrect, actual results may vary
materially from those anticipated, estimated, or projected. In addition to the
other risk factors set forth above, among the key factors that may have a direct
bearing on the Company's results are competitive practices in the professional
salon products industries (generally and particularly in the Company's principal
product markets), the ability of the Company to meet existing financial
obligations in the event of adverse industry or economic conditions or to obtain
additional capital to fund future commitments and expansion, the Company's
relationship with employees, the ability to consolidate its operations to the
Duncanville facility, the ability to reduce production costs of certain of the
Acquired Businesses by utilizing the Duncanville facility, and the impact of
current and future laws and governmental regulations affecting the professional
salon products industry and the Company's operations.
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THE COMPANY
Although Styling has conducted no operations to date, it has entered into
definitive agreements to acquire the Acquired Businesses simultaneously with the
consummation of the Offering. The Acquired Businesses are described below.
Gena Laboratories, Inc., a Texas corporation founded in 1930, produces and
markets professional natural nail care and pedicure products and accessories,
skin care products and, to a lesser extent, hair care products. Gena's line of
natural nail care and pedicure products include Warm-O-Lotion and Healthy
Hoof(TM), both well-recognized treatment lines for nails and skin. Gena's skin
care products include Paraffin Springs(TM), the leading paraffin therapy
products as well as thermo-therapy products and Tea Tree Oil products. Gena's
customers include Sally, a division of Alberto-Culver Company and the largest
wholesale supplier of professional supply products with more than 1,600 beauty
supply stores worldwide, and Regis, which has more than 1,700 salons located
primarily in shopping malls in all 50 states and several foreign countries,
principally the United Kingdom. The Company intends to use Gena's Duncanville,
Texas facility as its primary production and distribution center following the
Offering. Gena's revenue for the year ended February 29, 1996 was $8.4 million.
Body Drench, a division of Designs by Norvell, Inc. founded in 1985,
produces and markets high-end professional indoor and outdoor tanning and
moisturizing products and other lotions as well as resort, spa, and health and
country club personal care products under the brand names Body Drench, UTF(@)
Ultra Tanning Formula, and New Basics. Body Drench tanning products, which
include the Carboplex(TM) Tan FX(TM) line, are carried in more than 20,000
domestic and European tanning salons. Its personal care products include a
leading moisturizing lotion and body and bath products that are carried in
domestic and European resorts, spas, and health and country clubs. Body Drench's
products are sold in all 50 states. Body Drench's revenue for the year ended
December 31, 1995 was $11.9 million.
JDS Manufacturing Co., Inc., a California corporation founded in 1982,
produces and markets acrylic and fiberglass nail enhancement products for use in
professional nail services under the brand names Alpha 9, Omni P.O.
Professionals Only(@), Triumph(@) Fiberbond System, and Special Effects Nail
Art. JDS's nail enhancement products are sold in all 50 states through beauty
supply distributors, including Sally. JDS's revenue for the year ended September
30, 1995 was $3.4 million.
Kotchammer Investments, Inc. (dba Styling Research Company), a California
corporation formed in 1993 to acquire a division of Redken Laboratories, Inc.
("Redken"), distributes and markets high-end professional salon appliances (such
as curling irons and blow dryers) and salonwear (such as capes and aprons) under
the trade name Maiko(TM) exclusively to the professional salon industry. KII's
products are sold in all 50 states. KII also owns proprietary formulas and
marketing rights to several hair care lines previously formulated and produced
by Redken. KII's revenue for the year ended December 31, 1995 was $1.6 million.
The total purchase price for the Acquired Businesses will be approximately
$23.23 million plus the assumption of approximately $300,000 of long-term debt
of the Acquired Businesses. The following table sets forth the consideration
being paid for each Acquired Business as well as the total consideration:
<TABLE>
<CAPTION>
DEFERRED COMMON TOTAL
CASH PAYMENT(1) NOTES STOCK CONSIDERATION
----------- ---------- -------- -------- -------------
<S> <C> <C> <C> <C> <C>
Gena........................... $ 8,000,000 $2,000,000 $ -- $ -- $ 10,000,000
Body Drench.................... 8,100,000 -- -- -- 8,100,000
JDS............................ 4,100,000 -- 333,000 -- 4,433,000
KII............................ 450,000 -- 200,000 50,000 700,000
----------- ---------- -------- ------- -----------
Total................ $20,650,000 $2,000,000 $533,000 $ 50,000 $ 23,233,000
=========== ========== ======== ======= ===========
</TABLE>
- ---------------
(1) Represents the cash value of the shares of Common Stock to be issued as
consideration and held in escrow. As described in ("Description of the
Acquisitions -- Gena Acquisition"), these shares are not included in share
calculations and the present value of the amount of the obligation has been
accounted for as long-term debt.
15
<PAGE> 17
DESCRIPTION OF THE ACQUISITIONS
Simultaneously with the consummation of the Offering, Styling will acquire
the Acquired Businesses in four separate transactions, in exchange for cash,
notes, repayment or assumption of indebtedness, and shares of Common Stock,
pursuant to acquisition agreements with respect to each of the Acquired
Businesses as described below. Styling has entered into definitive agreements
with each of the Acquired Businesses, which provide for an aggregate purchase
price for the four Acquired Businesses of approximately $23.23 million, subject
to certain adjustments, of which (i) approximately $20.65 million is payable in
cash (not including $2.0 million payable two years from the date of
acquisition), (ii) approximately $533,000 to be paid through the issuance of
notes, and (iii) 4,545 shares of Common Stock, or approximately $50,000 in
aggregate market value, based on the Offering Price. In addition, the Company
will assume up to approximately $300,000 of long-term debt of the Acquired
Businesses in connection with the Acquisitions. The Company will record
approximately $7.0 million, $6.9 million, and $4.0 million of goodwill in
connection with the acquisitions of Body Drench, Gena, and JDS, respectively.
The Company has received representations and warranties regarding each of
the Acquired Businesses and has negotiated certain price adjustments and set-off
rights with respect to each of the Acquisitions. There can be no assurances,
however, that unforeseen liabilities will not occur in connection with the
operation of the Acquired Businesses or that any contractual purchase price
adjustments, right of set-off, or other remedies available to the Company will
be sufficient to compensate the Company in the event unforeseen liabilities
arise.
BODY DRENCH ACQUISITION
Under an Asset Purchase Agreement among DBN, Joy Norvell Martin (the holder
of approximately 98% of the issued and outstanding capital stock of DBN), and
Styling, the Company will purchase substantially all of the assets of the Body
Drench division of DBN related to its health and personal care products,
accessories, and equipment business. The consideration to be paid by the Company
will be (i) $8.1 million in cash, subject to a commensurate reduction in the
event inventory, accounts receivable, or total asset levels on the closing date
are less than specified levels; and (ii) the assumption of up to $3.3 million of
trade accounts payable, $40,000 of bank debt, and up to $560,000 of taxes and
payroll payables of the Body Drench division. In addition, to the extent that
the sum at the closing date of the payroll payables and the bank debt assumed by
Styling totals less than $600,000, then Styling will grant DBN the right to
receive a number of shares of Common Stock determined by dividing the amount by
which $600,000 exceeds the sum of the payroll payables and the bank debt on the
closing date by 120% of the Offering Price. DBN will have the right to receive
such number of shares of Common Stock at any time during the three-month period
following the date of the completion of the Offering. The Asset Purchase
Agreement with DBN contains provisions respecting confidentiality,
noncompetition, and nonsolicitation of customers, suppliers, and employees for a
five-year period from the closing date. In connection with the acquisition,
Styling will enter into an employment agreement with each of Richard Norvell and
Greg Norvell. See "Management -- Employment Agreements" for a description of
Richard Norvell's employment agreement. The employment agreement with Greg
Norvell is substantially the same as that of Richard Norvell.
GENA ACQUISITION
Under a Stock Purchase Agreement among Donald N. Black, Howard Black,
Barbara Black, Don Cottam, Jim Cottam, the Cottam Family Partnership
(collectively, the "Gena Shareholders"), and Styling, the Company will purchase
from the Gena Shareholders all of the issued and outstanding shares of capital
stock of Gena. The consideration to be paid by the Company will be (i) $8.0
million in cash, (ii) $2.0 million in cash payable on the second anniversary of
the consummation of the acquisition, secured by an escrow of 181,818 shares of
the Common Stock, subject to a commensurate reduction in the event that the
total assets as of the closing date are less than $2.3 million, and (iii) the
assumption of up to $300,000 of long-term debt. The Stock Purchase Agreement
contains provisions respecting confidentiality, noncompetition, and
nonsolicitation of customers, suppliers, and employees for a five-year period
after the closing. In connection with the acquisition, Styling has entered into
an employment agreement with Donald L. Black. See "Management -- Employment
Agreements."
16
<PAGE> 18
JDS ACQUISITION
Under a Stock Purchase Agreement among Jack Sperling and Gary Sperling, the
sole shareholders of JDS (the "JDS Shareholders"), and Styling, the Company will
purchase all of the issued and outstanding shares of JDS's capital stock and
certain notes payable by JDS to Jack Sperling and Gary Sperling (the "JDS
Notes"). The consideration to be paid by the Company will be (i) approximately
$4.1 million in cash, subject to a commensurate reduction in the event the cash
surrender value of the life insurance policies on the closing date exceeds
approximately $83,000; (ii) the assignment to each of the JDS Shareholders of
life insurance policies owned by JDS on the lives of such shareholders; and
(iii) a promissory note bearing simple interest at a per annum rate equal to the
prime rate (but in no event at a rate greater than 10% or less than 8% per
annum) in the amount of approximately $333,000, which will be due and payable in
a single balloon payment two years after the closing date. The Stock Purchase
Agreement contains provisions respecting confidentiality, noncompetition, and
nonsolicitation of customers, suppliers, and employees for a five-year period
after the closing date. In connection with the acquisition, Styling has entered
into an employment agreement with Thomas M. Clifford. See
"Management -- Employment Agreements."
KII ACQUISITION
Under an Asset Purchase Agreement among KII and the John and Sonja Hammer
Family Trust, the Wally and Betty Jones Family Trust, and Gerald Kotch
(collectively, the "KII Stockholders") and Styling, the Company will purchase
certain assets of KII. The consideration to be paid by the Company will be (i)
$450,000 in cash, (ii) a 30-month promissory note in the amount of $200,000
(subject to commensurate reduction in the event the total asset level is less
than a specified level) bearing interest at a per annum rate of 10%, which will
require quarterly payments of principal and interest and mandatory prepayment in
the event of a public offering of Common Stock subsequent to the Offering; (iii)
4,545 shares of the Common Stock; and (iv) the assumption of certain liabilities
of KII, including open purchase orders. The Asset Purchase Agreement contains
provisions respecting confidentiality and prohibitions against use of trade
secrets for the five-year period following the closing. In connection with the
acquisition, Styling will enter into an employment agreement with Gerald Kotch.
See "Management -- Employment Agreements."
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 2,800,000 shares of
Common Stock offered hereby are estimated to be $27.3 million ($31.5 million if
the Overallotment Option is exercised in full), at the Offering Price after
deducting estimated underwriting discounts and expenses. The Company expects to
use approximately $20.65 million of the net proceeds to pay the cash portion of
the purchase price for the Acquired Businesses (other than the $2.0 million
deferred portion), $1.8 million to repurchase shares of Common Stock,
approximately $400,000 to repay the Bridge Note, and the remainder for general
corporate purposes, including working capital and potential acquisitions. See
"Description of the Acquisitions." The Bridge Note bears simple interest at a
rate of 10% per annum. It has a stated maturity date of January 31, 1997, but
requires prepayment upon consummation of the Offering.
The foregoing allocation is based on the Company's current estimates and
may be modified to the extent attractive business expansion opportunities,
including acquisitions, arise or other circumstances change. Pending such uses,
the Company intends to invest the net proceeds in short-term, interest bearing
investment grade securities.
DIVIDEND POLICY
The Company currently intends to retain its earnings to support the growth
and development of its business and has no present intention of paying any
dividends on its Common Stock in the foreseeable future. Any future declaration
of dividends will be subject to the discretion of the Board of Directors of the
Company and will depend on the Company's financial condition, operating results,
capital requirements, and such other factors as the Board of Directors deems
relevant.
17
<PAGE> 19
DILUTION
The pro forma combined net tangible book value of the Company at June 30,
1996 was ($19.8 million) or ($20.06) per share. "Pro forma net tangible book
value per share" is the pro forma tangible net worth (total tangible assets less
total liabilities) of the Company, as adjusted to reflect the Bridge Note and
the repurchase of 807,851 shares of the Company's Common Stock, divided by the
number of shares of Common Stock outstanding without giving effect to the sale
of shares of Common Stock sold in connection with the Offering. After giving
effect to the sale of the shares of Common Stock offered hereby (after deducting
underwriting discounts and estimated offering expenses), the combined net
tangible book value of the Company at June 30, 1996 would have been $7.5 million
or $1.97 per share, representing an immediate increase in net tangible book
value of $22.03 per share to existing stockholders and an immediate dilution of
$9.03 per share to the investors purchasing the shares in the Offering ("New
Investors"). The following table illustrates this dilution on a per share basis:
<TABLE>
<S> <C> <C>
Initial public offering price per share........................... $11.00
Pro forma net tangible book value per share as of June 30, 1996,
as adjusted to reflect Bridge Note and the repurchase of
Common Stock................................................. ($20.06)
Increase per share attributable to shares sold to New
Investors.................................................... 22.03
Net tangible book value per share after the Offering.............. 1.97
-------
Dilution in net tangible book value per share to New Investors.... $ 9.03
=======
</TABLE>
The following table summarizes, as of the consummation of the Offering, the
differences between the amounts paid by the existing stockholders of the Company
and the New Investors with respect to the number of shares purchased from the
Company, the total consideration paid, and the average price paid per share.
<TABLE>
<CAPTION>
SHARES OWNED
AFTER THE PUBLIC
OFFERING TOTAL CONSIDERATION AVERAGE
----------------------- ------------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders(1).......... 987,604 26.1% $ 16,257 0.1% $ 0.00
New Investors(2)(3)............... 2,800,000 73.9% $30,800,000 99.9% $ 11.00
--------- ----- ----------- -----
Total................... 3,787,604 100.0% $30,816,257 100.0%
========= ===== =========== =====
</TABLE>
- ---------------
(1) Does not include 72,707 shares of Common Stock issuable upon the exercise of
outstanding options with an exercise price equal to or greater than the
Offering Price, 18,182 shares issuable to the holders of the Bridge Warrants
exercisable at 125% of the Offering Price, or 4,545 shares of Common Stock
issuable in connection with the acquisition of KII. Assuming the issuance of
such shares, the existing stockholders would own 1,083,038 shares, or 27.9%
of the total shares, would have paid $1,066,037 for such shares, or 3.3% of
the total consideration paid, and the average price paid per share would
have been $0.99. Assuming the issuance of 72,707 shares upon the exercise of
outstanding options and the issuance of 4,545 shares in connection with the
acquisition of KII, the increase in net tangible book value per share
attributable to shares sold to New Investors would be $20.54, rather than
$22.03; the net tangible book value per share after the Offering would be
$1.94, rather than $1.97; and the dilution in net tangible book value per
share to New Investors would be $9.06, rather than $9.03.
(2) Assumes the sale of 2,800,000 shares of Common Stock at the Offering Price.
(3) Includes 45,455 shares to be purchased by Mr. Leopold, the Company's Chief
Executive Officer, in the Offering at the Offering Price.
18
<PAGE> 20
CAPITALIZATION
The following table sets forth the historical capitalization of the Company
as of June 30, 1996, pro forma combined capitalization (assuming the
Acquisitions had been consummated as of that date, but without giving effect to
the Offering) and as adjusted to reflect the sale of the shares of Common Stock
offered hereby as of that date and the application of the estimated net proceeds
therefrom as described in "Use of Proceeds." This table should be read in
conjunction with the financial statements, including the notes thereto, included
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AT JUNE 30, 1996
----------------------------------------------
HISTORICAL PRO FORMA(1) AS ADJUSTED(2)
---------- ------------ --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Cash payable to sellers to complete the Acquisitions
and current portion of long-term debt............... $-- $(19,680) $ --
======== ========
Long-term debt, excluding current portion(1).......... $-- $ 2,291 $ 2,291
Stockholders' equity:
Preferred Stock, $.0001 par value, 1,000,000 shares
authorized; none outstanding..................... -- -- --
Common Stock, $.0001 par value, 10,000,000 shares
authorized; 812,396 pro forma shares issued and
outstanding; 3,630,578 shares issued and
outstanding as adjusted.......................... 1 1 1
Additional paid-in capital.......................... -- 49 27,338
Retained earnings................................... -- -- --
Treasury stock...................................... (1,800)
-------- --------
Total stockholders' equity.......................... 1 50 25,539
-------- --------
Total capitalization.................................. $1 $ 2,341 $ 27,830
======== ========
</TABLE>
- ---------------
(1) Reflects pro forma adjustments to effect the Acquisitions, excluding the
Bridge Note and the Offering.
(2) Reflects pro forma adjustments giving effect to the Acquisitions, the Bridge
Note, the Offering, and the use of proceeds related thereto. See "Use of
Proceeds."
19
<PAGE> 21
SELECTED HISTORICAL AND PRO FORMA FINANCIAL DATA
Styling, founded in 1995, has conducted no operations to date.
Simultaneously with the consummation of the Offering, Styling will acquire the
Acquired Businesses in separate transactions in exchange for cash, notes,
assumption of existing indebtedness, and shares of Common Stock. See
"Description of the Acquisitions." For accounting purposes, the Acquisitions are
to be treated as business combinations accounted for by the purchase method of
accounting as prescribed by Accounting Principles Board Opinion No. 16. The
Acquired Businesses are to be valued at the fair value of consideration given,
principally cash from the completion of the Offering. The excess of
consideration given over the fair value of net assets received will be amortized
on a straight-line basis over 25 years.
Selected historical financial data is provided for Gena, Body Drench, JDS,
and KII. Gena and Body Drench comprise a substantial majority of the combined
assets, net sales, and operating income and therefore, are deemed to be the
predecessors of Styling. The historical financial information for Gena and Body
Drench for each of the three years in the periods ending February 29, 1996 and
December 31, 1995, respectively, was derived from their financial statements,
which have been audited by Arthur Andersen LLP and appear elsewhere in this
Prospectus. The historical financial information for JDS for each of the two
years in the period ended September 30, 1995 was derived from its financial
statements which have been audited by Arthur Andersen LLP and appear elsewhere
in this Prospectus. The historical financial information for KII for the year
ended December 31, 1995 was derived from their financial statements, which have
been audited by Arthur Andersen LLP and appear elsewhere in this Prospectus. The
historical financial information for Gena, Body Drench, JDS, and KII as of and
for the six- and nine-month periods ended August 31, 1996, June 30, 1996, June
30, 1996 and June 30, 1996, respectively, and for the six- and nine-month
periods ended August 31, 1995, June 30, 1995, June 30, 1995 and June 30, 1995,
respectively, was derived from their unaudited financial statements appearing
elsewhere in this Prospectus. The historical balance sheet for Styling as of
June 30, 1996 was derived from Styling's unaudited financial statements
appearing elsewhere in this Prospectus. The historical financial information for
earlier periods for Gena, Body Drench, JDS, and KII not specifically referenced
above, was derived from each Acquisition's unaudited financial statements not
included in this Prospectus. The pro forma combined statement of operations data
set forth on the following page assumes that Styling had completed the
Acquisitions on January 1, 1995, and such information for the six months ended
June 30, 1996 and for the year ended December 31, 1995 was derived from the pro
forma combined financial statements appearing elsewhere in this Prospectus. The
pro forma combined financial information for the six months ended June 30, 1995
does not appear elsewhere in this Prospectus. The pro forma combined balance
sheet data as of June 30, 1996 give effect to the Acquisitions and the Offering
as if such transactions had occurred on June 30, 1996. The pro forma combined
statement of operations data may not be indicative of actual results that would
have been achieved if the transactions had occurred on the dates indicated or
the results that may be realized in the future. The pro forma combined statement
of operations data contain adjustments which are directly attributable to the
Acquisitions.
The following selected financial data is qualified in its entirety by the
more detailed information appearing in "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the Financial Statements,
including the Notes thereto, appearing elsewhere in this Prospectus.
20
<PAGE> 22
SELECTED HISTORICAL AND PRO FORMA FINANCIAL DATA(1)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR SIX MONTHS ENDED
ENDED JUNE 30,
DECEMBER 31, -------------------
1995 1995 1996
------------ ------- -------
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA -- COMPANY PRO FORMA(2):
Net sales................................................ $ 25,181 $15,102 $13,692
Gross profit............................................. 11,875 7,049 6,663
Selling, general, and administrative expenses............ 8,716 4,940 4,040
Income from operations................................... 3,159 2,109 2,623
Net income............................................... 1,599 1,103 1,450
Adjusted pro forma earnings per share.................... .42 .29 .38
Adjusted pro forma shares outstanding.................... 3,791 3,791 3,791
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED FEBRUARY 28, AUGUST 31,
-------------------------------------------------- -----------------
1992 1993 1994 1995 1996 1995 1996
------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA-GENA:
Net sales................ $5,906 $6,537 $6,426 $7,524 $8,384 $4,336 $4,705
Gross profit............. 2,642 2,868 3,146 3,360 3,565 2,039 2,160
Selling, general, and
administrative
expenses.............. 2,416 2,570 2,744 2,964 3,033 1,573 1,454
Income from operations... 226 298 402 396 532 466 706
Net income............... 180 204 278 232 317 279 442
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
---------------------------------------------------- -----------------
1991 1992 1993 1994 1995 1995 1996
------ ------ ------ ------- ------- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA -- BODY DRENCH(3):
Net sales.............. $5,111 $6,234 $6,653 $11,138 $11,871 $8,250 $6,586
Gross profit........... 2,567 2,667 2,614 4,796 5,444 3,686 3,121
Selling, general, and
administrative
expenses............ 1,827 2,285 2,055 4,076 4,883 2,971 2,402
Income from
operations.......... 740 382 559 720 561 714 719
Net income............. 740 382 328 446 294 416 440
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED SEPTEMBER 30, JUNE 30,
-------------------------------------------------- -----------------
1991 1992 1993 1994 1995 1995 1996
------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA -- JDS:
Net sales................ $3,843 $3,819 $3,799 $3,578 $3,368 $2,592 $2,339
Gross profit............. 2,172 2,149 2,054 2,114 2,019 1,561 1,389
Selling, general, and
administrative
expenses.............. 2,071 2,191 2,092 2,170 2,046 1,549 1,393
Income (loss) from
operations............ 101 (42) (38) (56) (26) 12 (4)
Net income (loss)........ 16 (20) (29) (16) 9 23 (3)
</TABLE>
21
<PAGE> 23
SELECTED HISTORICAL AND PRO FORMA FINANCIAL DATA (CONTINUED)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
-------------------------------------------- ---------------
1991 1992 1993 1994 1995 1995 1996
---- ---- ---- ------ ------ ----- ----
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA --
KII:
Net sales...................... -- -- $102 $1,999 $1,558 $ 777 $736
Gross profit................... -- -- 60 1,014 846 405 393
Selling, general, and
administrative expenses..... -- -- 87 1,040 891 476 329
Income (loss) from
operations.................. -- -- (27) (26) (45) (71) 64
Net income (loss).............. -- -- (32) (104) (135) (117) 25
</TABLE>
<TABLE>
<CAPTION>
STYLING GENA BODY DRENCH JDS KII
AS OF AS OF AS OF AS OF AS OF
JUNE 30, 1996 AUGUST 31, 1996 JUNE 30, 1996(4) JUNE 30, 1996 JUNE 30, 1996
------------- --------------- ---------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital............. 0 $ 2,315 $ 329 $ 333 $ 345
Total assets................ 300 3,975 4,221 728 622
Long-term debt, less current
portion.................. -- 291 -- 432 610
Total stockholders'
equity................... 1 3,065 582 27 (200)
</TABLE>
<TABLE>
<CAPTION>
PRO FORMA ADJUSTED PRO FORMA
AS OF JUNE 30, 1996(5) AS OF JUNE 30, 1996(6)
---------------------- ----------------------
<S> <C> <C>
BALANCE SHEET DATA:
Working capital..................................... $(17,153) $ 8,335
Total assets........................................ 7,000 32,489
Long-term debt, less current portion................ 2,291 2,291
Total stockholders' equity.......................... 50 25,539
</TABLE>
- ---------------
(1) Selected historical financial data is provided for each of the Acquired
Businesses. For accounting purposes, the Acquisitions are to be treated as
business combinations accounted for by the purchase method of accounting as
prescribed by Accounting Principles Board Opinion No. 16. The Acquired
Businesses are to be valued at the fair value of consideration given,
principally cash from the completion of the Offering. The excess of
consideration given over the fair value of net assets received will be
amortized on a straight-line basis over 25 years. Gena and Body Drench
comprise a substantial majority of the combined assets, net sales, and
operating income, and therefore are deemed to be the predecessors of
Styling.
(2) Reflects adjustments for the Acquisitions and the Offering. The pro forma
combined statement of operations data for the year ended December 31, 1995
and the six months ended June 30, 1995 and 1996 assumes that Styling had
completed the Acquisitions on January 1, 1995. The pro forma combined
statement of operations data may not be indicative of actual results that
would have been achieved if the transactions had occurred on the dates
indicated or the results which may be realized in the future. The pro forma
combined statement of operations data contain adjustments which are
directly attributable to the transaction. See the Pro Forma Combined
Financial Statements, including the Notes thereto, appearing elsewhere in
this Prospectus.
(3) Body Drench has historically operated as a division of DBN.
(4) Body Drench has historically operated as a division of DBN. Total
stockholders' equity data represents DBN's owners' net investment in the
Division to be acquired by Styling.
(5) Reflects adjustments for the Acquisitions. See the Pro Forma Combined
Financial Statements, including the Notes thereto, appearing elsewhere in
this Prospectus for a discussion of the assumptions made and adjustments
applied in the preparation of this data.
(6) The adjusted pro forma combined balance sheet data as of June 30, 1996 gives
effect to the Acquisitions and the Offering as if such transactions had
occurred on June 30, 1996.
22
<PAGE> 24
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion has been divided into six sections: the first
section presents the pro forma combined financial statements for the Acquired
Businesses, after giving effect to the Acquisitions and the Offering. The next
four sections contain a discussion of the historical results of operations for
each of the Acquired Businesses, and the last section contains a discussion on
the Company's liquidity and capital resources. The information presented for the
Acquired Businesses is based on each company's fiscal year-end. The entirety of
the following discussion of the results of operations and financial position
should be read in conjunction with "Selected Historical and Pro Forma Financial
Data" and the Financial Statements, including the Notes thereto, appearing
elsewhere in this Prospectus.
Except for the historical information contained herein, the discussion in
this Prospectus contains or may contain forward-looking statements that involve
risks and uncertainties. The Company's actual results could differ materially
from those discussed here. Factors that could cause or contribute to such
differences include, but are not limited to, those discussed herein, as well as
those factors discussed under "Risk Factors" and elsewhere in this Prospectus.
Historical results are not necessarily indicative of trends in operating results
for any future periods.
The Company was founded in June 1995 and has conducted no operations to
date; however, simultaneous with the consummation of the Offering, the Company
will acquire four professional salon product businesses that, on a combined
basis, have a diversified line of well-established, brand name salon products.
The Acquisitions will be accounted for under the purchase method of accounting.
PRO FORMA RESULTS OF OPERATIONS -- COMBINED COMPANIES
OVERVIEW OF THE COMPANY (AFTER GIVING PRO FORMA EFFECT TO THE ACQUISITIONS)
The following table sets forth certain financial data for the Acquired
Businesses after giving effect to the pro forma adjustments. The pro forma
information may not be indicative of actual results that would have been
achieved if the Acquisitions had occurred at the beginning of the periods. The
pro forma combined statement of operations data contain adjustments, which are
directly attributable to the transaction. See "Selected Historical and Pro Forma
Financial Data" and Pro Forma Combined Financial Statements, including the Notes
thereto, appearing elsewhere in this Prospectus.
PRO FORMA RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED JUNE 30,
DECEMBER 31, -------------------
1995 1995 1996
------------ ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Net sales.................................................. $ 25,181 $15,102 $13,692
Cost of sales.............................................. 13,306 8,054 7,029
Gross profit............................................... 11,875 7,049 6,663
Selling, general, and administrative
expenses................................................. 8,716 4,940 4,040
Income from operations..................................... 3,159 2,109 2,623
Income tax expense......................................... 1,230 814 979
Net income................................................. 1,599 1,103 1,450
</TABLE>
SIX MONTHS ENDED JUNE 30, 1996 COMPARED TO SIX MONTHS ENDED JUNE 30, 1995
Net Sales
Pro forma net sales decreased 9.3% to $13.7 million in the six months ended
June 30, 1996 from $15.1 million in the six months ended June 30, 1995 resulting
primarily from the difficulty in obtaining inventory from third-party
manufacturers due to cash flow difficulties experienced by Body Drench's parent
in the six months ended June 30, 1996. Body Drench's difficulty in obtaining
inventory prevented delivery of product to customers in time for the Spring 1996
tanning season and had a negative impact on sales. During the six
23
<PAGE> 25
months ended June 30, 1996, Gena recognized a slight increase in net sales
primarily as a result of increased promotional efforts and increased paraffin
spa product sales.
Cost of Sales
Pro forma cost of sales, as a percentage of net sales, decreased to 51.3%
in the six months ended June 30, 1996 as compared with 53.3% in the six months
ended June 30, 1995. The decrease was due primarily to a greater percentage of
net sales at Body Drench in the 1996 period relating to the Tan FX and Tan EX
products, which carried lower production and packaging costs as compared to Body
Drench's other product lines. The Company's decrease in cost of sales as a
percentage of net sales was partially offset by a slight increase in costs at
Gena related to certain raw materials required for the increased production of
the paraffin spa product.
Gross Profit
As a result of the foregoing, pro forma gross profit decreased 5.5% to $6.7
million in the six months ended June 30, 1996 from $7.0 million in the six
months ended June 30, 1995.
Selling, General, and Administrative Expenses
Pro forma selling, general, and administrative expenses decreased 18.2% to
$4.0 million in the six months ended June 30, 1996 from $4.9 million in the six
months ended June 30, 1995. The decrease in selling, general, and administrative
expenses was attributable primarily to a decrease at Body Drench and Gena in
advertising related expenses and a decrease at Body Drench in salaries and
commissions.
Income Tax Expense
Income tax expense increased 20.3% to $1.0 million in the six months ended
June 30, 1996 from $0.8 million in the six months ended June 30, 1995. The pro
forma tax rates of 40.3% and 40.1% for the periods ended June 30, 1996 and 1995,
respectively, differ from the expected statutory rate of 37.0% based on a
portion of the amortization of goodwill, resulting from the Gena and Body Drench
acquisitions, which is not deductible for tax purposes.
Net Income
Pro forma net income increased 31.5% to $1.4 million in the six months
ended June 30, 1996 from $1.1 million in the six months ended June 30, 1995.
TWELVE MONTHS ENDED DECEMBER 31, 1995
Net Sales
Pro forma net sales amounted to $25.2 million in the 12 months ended
December 31, 1995 and were positively effected by the release of Body Drench's
Contemporary product line in December 1994. During 1995, Body Drench realized
the effect of 12 months of the Contemporary product line sales as compared to
only a partial year's sales in 1994. Net sales was also positively impacted by
Body Drench's release of the Tan FX and Tan EX products and the Body Bath lotion
products in the fourth quarter of 1995. In addition, growth in net sales
occurred relating to existing products at Gena, primarily the paraffin spa and
newly acquired MRX(R) product lines.
Cost of Sales
Pro forma cost of sales, as a percentage of net sales, were 52.8% in the 12
months ended December 31, 1995. Gross margins were positively effected by the
introduction of Body Drench's Contemporary product line in December 1994 which
carried a lower raw material cost in relation to net sales as compared to
products sold during 1994, partially offset by an increase in costs to produce
Gena's paraffin spa and MRX products which have a higher costs of sales, as a
percentage of net sales, than its other products.
24
<PAGE> 26
Gross Profit
As a result of the foregoing, pro forma gross profit amounted to $11.9
million in the 12 months ended December 31, 1995.
Selling, General, and Administrative Expenses
Pro forma selling, general, and administrative expenses were $8.7 million
in the 12 months ended December 31, 1995. Factors effecting selling, general,
and administrative expenses were related primarily to an increase in freight
charges in proportion to sales levels at Body Drench due to the growing number
of backorders from the Contemporary product line. Additionally, advertising
expense increased as a result of Body Drench's substantial promotional efforts
in various magazines, catalogs and brochures from the release of the new
Contemporary product line. Body Drench also incurred higher personnel costs for
the 12 months ended December 31, 1995.
Income Tax Expense
Income tax expense amounted to $1.2 million in the 12 months ended December
31, 1995. The pro forma effective tax rate of 43.5% for the period ended
December 31, 1995, differs from the expected statutory rate of 37.0% based on a
portion of the amortization of goodwill, resulting from the Gena and Body Drench
acquisitions, which is not deductible for tax purposes.
Net Income
Pro forma net income for the Company was $1.6 million in the 12 months
ended December 31, 1995.
SUPPLEMENTAL INFORMATION
The unaudited pro forma combined financial information for the year ended
December 31, 1995 included elsewhere herein gives effect to certain pro forma
adjustments as described in the notes to such information. In evaluating the
Acquisitions, management of Styling considered the impact of certain cost and
expense savings and other economic benefits that are expected to be realized as
a result of the Acquisitions.
Application of the supplemental adjustments described below to the
unaudited pro forma combined statement of operations for the year ended December
31, 1995 and the six months ended June 30, 1996 would result in the following:
<TABLE>
<CAPTION>
DECEMBER JUNE 30,
31, 1995 1996
----------- -----------
<S> <C> <C>
Net sales....................................... $25,180,571 $13,691,909
Gross profit.................................... 13,724,802 7,588,269
Net income...................................... 2,502,210 2,001,789
Pro forma earnings per share.................... $ .66 $ .53
</TABLE>
The adjustments to the pro forma combined financial information give effect
to the reduction of material and direct labor costs by approximately $1.85
million and $0.93 million for the year ended December 31, 1995 and the six
months ended June 30, 1996, respectively, as a result of internalizing
production of the Body Drench and JDS products at Gena. The pricing methodology
used was consistent with that of other Gena products and includes the cost
savings on certain products that will be filled at outside contractors at the
price available to the Company on a combined basis.
RESULTS OF OPERATIONS -- GENA
SIX MONTHS ENDED AUGUST 31, 1996 COMPARED TO SIX MONTHS ENDED AUGUST 31, 1995
Net Sales
Net sales increased 8.5% to $4.7 million in the six months ended August 31,
1996 from $4.3 million in the six months ended August 31, 1995. The increase in
net sales was attributable to an increase in sales volume
25
<PAGE> 27
generated by promotional efforts, primarily through price discounts. The
increase in sales was also attributable to the increased sales of the paraffin
spa equipment and products.
Cost of Sales
Cost of sales, as a percentage of net sales, increased to 54.1% in the six
months ended August 31, 1996 as compared with 53.0% in the six months ended
August 31, 1995. The increase was primarily attributable to increased costs for
certain raw materials associated with production of the paraffin spa equipment.
Gross Profit
Gross profit increased 5.9% to $2.2 million in the six months ended August
31, 1996 from $2.0 million for the six months ended August 31, 1995.
Selling, General, and Administrative Expenses
Selling, general, and administrative expenses decreased 7.6% to $1.5
million in the six months ended August 31, 1996 from $1.6 million in the six
months ended August 31, 1995. The decrease was primarily attributable to a
reduction of the Gena's advertising costs related to trade publications and
other promotional services. In addition, Gena's expenses associated with
education and trade show efforts decreased in the six months ended August 31,
1996.
Net Income
Net income increased 58.4% to $0.4 million in the six months ended August
31, 1996 from $0.3 million in the six months ended August 31, 1995.
TWELVE MONTHS ENDED FEBRUARY 29, 1996 COMPARED TO TWELVE MONTHS ENDED FEBRUARY
28, 1995
Net Sales
Net sales increased 11.4% to $8.4 million in the 12 months ended February
29, 1996 from $7.5 million in the 12 months ended February 28, 1995. The
increase in net sales was attributable to growth in sales of existing products,
which consisted primarily of increased acceptance of the paraffin spa product
line that was introduced in February 1993 and the continued sales growth for the
MRX product line that was acquired in September 1994.
Cost of Sales
Cost of sales, as a percentage of net sales, increased to 57.5% in the 12
months ended February 29, 1996 as compared with 55.3% in the 12 months ended
February 28, 1995. The increase was attributable to additional costs incurred to
produce the new paraffin spa equipment, which has a higher cost of sales, as a
percentage of net sales, at approximately 64.0%. Additionally, cost of sales, as
a percentage of net sales, on the new MRX product line, introduced in September
1994, was approximately 60.0%, which was also higher than Gena's other product
lines.
Gross Profit
As a result of the foregoing, gross profit increased 6.1% to $3.6 million
in the 12 months ended February 29, 1996 from $3.4 million in the 12 months
ended February 28, 1995.
Selling, General, and Administrative Expenses
Selling, general, and administrative expenses remained relatively constant
at $3.0 million in the 12 months ended February 29, 1996 and 1995. The slight
increase in selling, general, and administrative expenses was attributable to an
increase in selling and promotional costs primarily related to increased sales
of the paraffin spa product. Additionally, Gena was offering greater promotional
incentives to generate additional
26
<PAGE> 28
sales resulting in increased selling costs. The above increases were partially
offset by reduced travel expenses and smaller management bonuses than had been
paid in the previous period.
Net Income
Net income increased 36.6% to $0.3 million in the 12 months ended February
29, 1996 from $0.2 million in the 12 months ended February 28, 1995.
TWELVE MONTHS ENDED FEBRUARY 28, 1995 COMPARED TO TWELVE MONTHS ENDED FEBRUARY
28, 1994
Net Sales
Net sales increased 17.1% to $7.5 million in the 12 months ended February
28, 1995 from $6.4 million in the 12 months ended February 28, 1994. The
increase was primarily a result of increased sales of Gena's paraffin spa
product line which had been introduced in February 1993, and the acquisition of
Design Classic(TM) in February 1994, a manufacturer of fiberglass nail products.
Gena also acquired the MRX product line, an all-purpose antiseptic and hydrating
lotion, in September 1994 and began to ship substantial quantities in fiscal
1995. Total sales related to the Design Classic and MRX product lines were
approximately $1.0 million in 1995.
Cost of Sales
Cost of sales, as a percentage of net sales, increased to 55.3% in the 12
months ended February 28, 1995 as compared with 51.0% in the 12 months ended
February 28, 1994 as a result of additional labor, machine retooling and
material costs incurred to produce the new paraffin spa product, which has lower
gross margins than the Gena's other products. In addition, Gena incurred certain
one-time packaging and other costs to integrate their newly acquired Design
Classic product line. Gena also experienced an increase in certain raw materials
costs.
Gross Profit
As a result of the foregoing, gross profit increased 6.8% to $3.4 million
in the 12 months ended February 28, 1995 from $3.1 in the 12 months ended
February 28, 1994.
Selling, General, and Administrative Expenses
Selling, general, and administrative expenses increased 8.0% to $3.0
million in the 12 months ended February 28, 1995 from $2.7 million in the 12
months ended February 28, 1994 as a result of the increase in selling and
promotional costs related to the introduction and promotion of the paraffin spa
product line. In addition, Gena incurred an increase in costs related to the
acquisition of Design Classic, which includes amortization of intangible assets,
and increased personnel costs required to support the new product.
Net Income
Net income decreased 16.5% to $0.2 million in the 12 months ended February
28, 1995 from $0.3 million in the 12 months ended February 28, 1994.
RESULTS OF OPERATIONS -- BODY DRENCH
SIX MONTHS ENDED JUNE 30, 1996 COMPARED TO SIX MONTHS ENDED JUNE 30, 1995
Net Sales
Net sales for the six months ended June 30, 1996 decreased 20.2% to $6.6
million compared to $8.2 million for the six months ended June 30, 1995. The
decrease in net sales during the first six months of 1995 was primarily related
to difficulty in obtaining inventory from third party manufacturers in the six
months ended June 30, 1996 due to cash flow difficulties experienced by Body
Drench's parent. This caused Body Drench to forego potential sales due to its
inability to deliver product to customers in time for the Spring 1996
27
<PAGE> 29
tanning season. The Contemporary product line is comprised of various lotions
and creams to be used in conjunction with the indoor tanning process. Sales of
the Contemporary product line, which was introduced in October 1994, declined in
the first six months of 1996, and was partially offset by the increased sales of
its new product releases Tan FX and Tan EX and the Body Bath lotion product.
Upon completion of the Acquisitions and implementation of the Company's strategy
(see "Business -- Strategy"), management believes that the decline in sales will
not represent a continuing material trend.
Cost of Sales
Cost of sales, as a percentage of net sales, decreased to 52.6% for the six
months ended June 30, 1996 as compared with 55.3% for the six months ended June
30, 1995. This decrease was due primarily to a greater percentage of net sales
in the 1996 period relating to the Tan FX and Tan EX products, which carried
lower production and packaging costs as compared to the Contemporary product
line.
Gross Profit
As a result of the foregoing, gross profit decreased 15.3% to $3.1 million
in the six months ended June 30, 1996 from $3.7 million in the six months ended
June 30, 1995.
Selling, General, and Administrative Expenses
Selling, general, and administrative expenses decreased 19.2% to $2.4
million for the six months ended June 30, 1996 compared to $3.0 million for the
six months ended June 30, 1995. The decrease was attributable primarily to a
decrease in advertising related expenses in salaries and commissions, as Body
Drench did not introduce as many new products in 1996 and eliminated several
sales and administrative positions.
Net Income
Net income remained relatively constant at $0.4 million in the six months
ended June 30, 1996 and 1995.
TWELVE MONTHS ENDED DECEMBER 31, 1995 COMPARED TO TWELVE MONTHS ENDED DECEMBER
31, 1994
Net Sales
Net sales in 1995 increased 6.6% to $11.9 million compared to $11.1 million
in 1994. The increase in net sales was due to the release of the new
Contemporary product line introduced in October 1994. During 1995, Body Drench
realized a full year of Contemporary sales as compared to only a partial year in
1994. The increase in net sales was also impacted by the release of the Tan FX
and Tan EX products, and the Contemporary products introduced in the fourth
quarter of 1995.
Costs of Sales
Cost of sales, as a percentage of net sales, decreased to 54.1% for the 12
months ended December 31, 1995 as compared with 56.9% for the 12 months ended
December 31, 1994. This decrease was due primarily to the introduction of the
Contemporary product line during late 1994 which carried a lower raw material
cost in relation to net sales as compared to products sold during 1995.
Gross Profit
As a result of the foregoing, gross profit increased 13.5% to $5.4 million
in the 12 months ended December 31, 1995 from $4.8 million in the 12 months
ended December 31, 1994.
Selling, General, and Administrative Expenses
Selling, general, and administrative expenses increased 19.8% to $4.9
million in 1995 compared to $4.1 million in 1994. The increase was attributable
to the continued increase of shipping costs in proportion to sales levels due to
the growing number of backorders from the Contemporary product line. Backorders
resulted
28
<PAGE> 30
primarily from the Body Drench's inability to produce sufficient product to meet
customer orders due to cash flow shortages at DBN and Body Drench. Additionally,
advertising expense increased by approximately 1.0% of net sales as a result of
the heavy promotional efforts in various magazines, catalogs and brochures with
the release of the new Contemporary product line. Body Drench also incurred
higher personnel costs through the addition of several marketing and sales
professionals.
Net Income
Net income decreased 34.1% to $0.3 million in the 12 months ended December
31, 1995 compared to $0.4 million in the 12 months ended December 31, 1994.
TWELVE MONTHS ENDED DECEMBER 31, 1994 COMPARED TO TWELVE MONTHS ENDED DECEMBER
31, 1993
Net Sales
Net sales increased 67.4% to $11.1 million in the 12 months ended December
31, 1994 compared to $6.7 million in the 12 months ended December 31, 1993. The
increase in net sales was attributable to management's decision to expand the
distribution network to include several beauty supply distributors. This
expansion of distribution channels included establishing a dedicated sales force
to promote Body Drench's products to the tanning and beauty industry. In
addition, Body Drench introduced the Contemporary product line in October 1994.
Cost of Sales
Cost of sales, as a percentage of net sales, decreased to 56.9% for the 12
months ended December 31, 1994 as compared with 60.7% for the 12 months ended
December 31, 1993. This decrease was due primarily to lower purchasing costs as
a result of the higher volume of purchases during 1994. In addition Body Drench
incurred lower overhead and labor costs as a percentage of revenues, as a result
of increased production efficiencies due to higher utilization of pre-packaged,
ready to ship products.
Gross Profit
As a result of the foregoing, gross profit increased 83.5% to $4.8 million
in the 12 months ended December 31, 1994 from $2.6 million in the 12 months
ended December 31, 1993.
Selling, General, and Administrative Expenses
Selling, general, and administrative expenses increased 98.3% to $4.1
million in 1994 compared to $2.1 million in 1993. The increase in selling,
general, and administrative expenses related to additional sales and
administrative positions to support the corresponding increase in sales. In
addition, Body Drench incurred significant up front costs of promotional
literature, including new catalogs, brochures and price sheets, related to the
introduction of the Contemporary product line introduced in October 1994. Body
Drench also incurred a higher level of freight charges in proportion to sales
levels due to significant number of backorders, resulting from inventory
shortages, which caused additional shipment costs to customers.
Net Income
Net income increased 36.0% to $0.4 million in 1994 compared to $0.3 million
in 1993.
RESULTS OF OPERATIONS -- JDS
NINE MONTHS ENDED JUNE 30, 1996 COMPARED TO NINE MONTHS ENDED JUNE 30, 1995
Net Sales
Net sales decreased 9.8% to $2.3 million for the nine months ended June 30,
1996 compared to $2.6 million for the nine months ended June 30, 1995. The
decrease was caused by a decline in its customer base as a result of the
acquisition of several JDS' customers by a large beauty supply company that is
not a customer
29
<PAGE> 31
of JDS. Upon completion of the Acquisitions and implementation of the Company's
strategy (see "Business -- Strategy"), management believes that the decline in
sales will not represent a continuing material trend.
Cost of Sales
Cost of sales, as a percentage of net sales, increased slightly to 40.6% in
the nine months ended June 30, 1996 as compared with 39.8% in the nine months
ended June 30, 1995. This increase was due to significant costs incurred for raw
materials as a result of the introduction of a new product.
Gross Profit
As a result of the foregoing, gross profit decreased 11.0% to $1.4 million
in the nine months ended June 30, 1996 from $1.6 million in the nine months
ended June 30, 1995.
Selling, General, and Administrative Expenses
Selling, general, and administrative expenses decreased 10.1% to $1.4
million in the nine months ended June 30, 1996 from $1.5 million in the nine
months ended June 30, 1995. The decrease related primarily to the elimination of
warehouse personnel, as a result of JDS' effort to reduce overhead costs.
Net Income (Loss)
Net loss was ($3,094) in the nine months ended June 30, 1996 compared to
net income of $23,275 in the nine months ended June 30, 1995.
TWELVE MONTHS ENDED SEPTEMBER 30, 1995 COMPARED TO TWELVE MONTHS ENDED
SEPTEMBER 30, 1994
Net Sales
Net sales decreased 5.9% to $3.4 million for the 12 months ended September
30, 1995 compared to $3.6 million for the 12 months ended September 30, 1994.
The decrease was primarily a result of increased competition from several new
products in the market that impacted JDS' market share. Upon completion of the
Acquisitions and implementation of the Company's strategy (see
"Business -- Strategy"), management believes that the decline in sales will not
represent a continuing material trend.
Cost of Sales
Cost of sales, as a percentage of net sales, decreased to 40.1% in the 12
months ended September 30, 1995 as compared with 40.9% in the 12 months ended
September 30, 1994. The increase was a result of obtaining more favorable
freight terms with its shipping contractors.
Gross Profit
As a result of the foregoing, gross profit decreased 4.5% to $2.0 million
in the 12 months ended September 30, 1995 from $2.1 million in the 12 months
ended September 30, 1994.
Selling, General, and Administrative Expenses
Selling, general, and administrative expenses decreased 5.7% to $2.0
million for the 12 months ended September 30, 1995 compared to $2.2 million for
the 12 months ended September 30, 1994. The decrease was primarily a result of a
decrease in promotional costs, as no new products were introduced during 1995,
and a decrease in management salaries resulting from an effort to reduce
overhead costs.
Net Income (Loss)
Net income was $8,574 in the 12 months ended September 30, 1995 compared to
a net loss of ($16,494) in the 12 months ended September 30, 1994.
30
<PAGE> 32
TWELVE MONTHS ENDED SEPTEMBER 30, 1994 COMPARED TO TWELVE MONTHS ENDED
SEPTEMBER 30, 1993
Net Sales
Net sales decreased 5.8% to $3.6 million for the 12 months ended September
30, 1994 compared to $3.8 million for the 12 months ended September 30, 1993.
The decrease was primarily a result of a decrease in JDS' customer base as a
result of several of their customers ceasing operations. The largest of these
companies comprised approximately $100,000 of JDS' sales in 1993.
Cost of Sales
Cost of sales, as a percentage of net sales, decreased to 40.9% in the 12
months ended September 30, 1994 as compared with 45.9% in the 12 months ended
September 30, 1993. The decrease was primarily a result of more favorable
purchasing terms achieved due to a change in its raw materials source.
Gross Profit
Gross profit increased 2.9% from $2.0 million for the 12 months ended
September 30, 1993 to $2.1 million for the twelve months ended September 30,
1994.
Selling, General, and Administrative Expenses
Selling, general, and administrative expenses increased 3.7% to $2.2
million in the 12 months ended September 30, 1994 compared to $2.1 million in
the 12 months ended September 30, 1993. The increase was partly a result of an
increase in promotional costs associated with the introduction of a new brand of
nail enhancement products. The remaining increase resulted primarily from the
addition of a new regional manager and a new sales incentive program.
Net Loss
Net loss decreased 43.1% to $16,494 in the 12 months ended September 30,
1994 compared to $29,000 in the 12 months ended September 30, 1993.
RESULTS OF OPERATIONS -- KII
SIX MONTHS ENDED JUNE 30, 1996 COMPARED TO SIX MONTHS ENDED JUNE 30, 1995
Net Sales
Net sales decreased 5.3% to $0.7 million in the six months ended June 30,
1996 compared to $0.8 million in the six months ended June 30, 1995. The
decrease in net sales was primarily attributable to a reduction in the customer
base and decreased promotional efforts.
Costs of Sales
Cost of sales, as a percentage of net sales, decreased to 46.6% in the six
months ended June 30, 1996 as compared with 47.9% in the six months ended June
30, 1995. This decrease was due primarily to a continued increase in purchasing
costs related to KII's international freight costs.
Gross Profit
Gross profits remained relatively constant at $0.4 million for the six
months ended June 30, 1995 and 1996.
Selling, General, and Administrative Expenses
Selling, general, and administrative expenses decreased 30.9% to $0.3
million in the six months ended June 30, 1996 compared to $0.5 million in the
six months ended June 30, 1995. The decrease in selling, general, and
administrative expenses was primarily attributable to a reduction in commission
expenses related to the decrease in sales as well as lower promotional costs.
31
<PAGE> 33
Net Income (Loss)
Net income was $24,765 in the six months ended June 30, 1996 compared to a
net loss of ($116,610) in the six months ended June 30, 1995.
TWELVE MONTHS ENDED DECEMBER 31, 1995 COMPARED TO TWELVE MONTHS ENDED DECEMBER
31, 1994
Net Sales
Net sales in the 12 months ended December 31, 1995 decreased 22.1% to $1.6
million compared to $2.0 million in the 12 months ended December 31, 1994. As
part of its overall strategy, KII acquired a division of Redken in December
1993. During 1994, Redken reduced its customer base by 17 distributors, which
had a direct impact on sales for KII. Upon completion of the Acquisitions and
implementation of the Company's strategy (see "Business -- Strategy"),
management believes that the decline in sales will not represent a continuing
material trend.
Costs of Sales
Cost of sales, as a percentage of net sales, increased to 45.7% in the 12
months ended December 31, 1995 as compared with 49.3% in the 12 months ended
December 31, 1994. The increase was primarily attributable to increased freight
and duty costs associated with international purchases.
Gross Profit
As a result of the foregoing, gross profit decreased 16.6% to $0.8 million
in the 12 months ended December 31, 1995 from $1.0 million in the 12 months
ended December 31, 1994.
Selling, General, and Administrative Expenses
Selling, general, and administrative expenses decreased 14.3% to $0.9
million in the 12 months ended December 31, 1995 compared to $1.0 million in the
12 months ended December 31, 1994. The decrease in selling, general, and
administrative expenses was attributable to a decrease in salaries and
commissions through the elimination of several sales positions.
Net Loss
Net loss increased to $134,919 in the 12 months ended December 31, 1995
from $72,000 in the 12 months ended December 31, 1994.
LIQUIDITY AND CAPITAL RESOURCES
The pro forma working capital as of June 30, 1996 after giving adjusted pro
forma effect to the consummation of the Acquisitions and the application of the
net proceeds from the Offering (see "Use of Proceeds"), was $4.1 million. The
pro forma indebtedness as of such date consisted of approximately $2.8 million,
of which approximately $2.5 million represents debt associated with seller
carryback financing, bearing interest rates of approximately 10% due in
approximately two years (includes the $2.0 million deferred cash payment
described under "Description of the Acquisitions -- Gena Acquisition").
In September 1996 the Company used the net proceeds of a $0.4 million
Bridge Note to fund a portion of the Offering expenses and acquisition costs.
The Bridge Note bears interest at an annual rate of 10% and is to be repaid on
the earlier of January 31, 1997, or upon consummation of the Offering. The
holder of the Bridge Note will be issued 18,182 shares of Common Stock and
Warrants to acquire 18,182 shares of Common Stock at an exercise price of 125%
of the Offering Price, subject to certain adjustments, upon repayment of the
Bridge Note.
The Company has conducted no operations to date and has no substantial
working capital. A substantial portion of the proceeds of the Offering will be
applied to pay the cash purchase price of the Acquisitions, to discharge certain
liabilities assumed in the Acquisitions, to repurchase Common Stock, and to
repay the Bridge Note. As a result, the Company will rely primarily on cash flow
from operations, approximately $4.4
32
<PAGE> 34
million of remaining proceeds from the Offering, and proposed bank financing for
its working capital and general corporate needs and for potential acquisitions.
The report of Body Drench's independent public accountants dated June 28,
1996 expressed "substantial doubts" about Body Drench's ability to continue as a
going concern in the absence of its acquisition by the Company. The auditors
have informed the Company that, upon the closing of the Offering and the
simultaneous acquisition of Body Drench by the Company, their report with
respect to the audited financial statements of Body Drench would no longer
contain a going concern paragraph.
The Company currently plans to consolidate the operations of Body Drench,
JDS, and KII into Gena's facilities in Duncanville, Texas. As a result of the
foregoing, the Company believes it will incur costs of approximately $70,000 to
consolidate and move the operations of the Acquired Businesses, and to fund
capital expenditures related to computer equipment, software and other
improvements in order to enable the Company to fully integrate the Acquisitions.
The Company believes that its planned consolidation and capital expenditures and
operating requirements through the end of 1996 and 1997 will be funded by
operations, proceeds from the Offering, and proposed bank financing. The Company
has obtained letters of intent, subject to completion of customary due
diligence, from several financial institutions to provide a working capital line
of credit and an acquisition line of credit which, when combined with the
Company's cash resources, will be used for anticipated future acquisitions of
professional salon product companies and for working capital. There can be no
assurance that the Company will be able to generate sufficient cash flow from
operations to meet its working capital requirements or to obtain additional
financing on terms favorable to the Company, or, at all. The Company may revise
its plans in response to future changes in the beauty industry in general, the
demand for its products, its results of operations, other capital requirements
and other relevant factors.
NEW ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board has issued SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and For Long-Lived Assets To
Be Disposed Of," to measure certain long-lived assets for impairment based on
discounted cash flows. The Company's adoption of SFAS No. 121 as of January 1,
1996 had no material effect on the Company's financial position.
The Financial Accounting Standards Board issued SFAS No. 123, "Accounting
for Stock-Based Compensation," which allows, but does not require, a Company to
record stock based compensation on the fair value basis. If the Company elects
not to recognize compensation expense under this method, disclosure of the pro
forma effect of SFAS No. 123 is required. The Company has adopted SFAS No. 123
using the disclosure method as of January 1, 1996.
33
<PAGE> 35
BUSINESS
GENERAL
The Company develops, produces, and markets high-end professional salon
products, including hair care, nail care, and skin and body care products as
well as salon appliances and salonwear. The Company sells its products primarily
to beauty and tanning supply distributors and, to a lesser extent, directly to
spas, resorts, health and country clubs, beauty salon chains, and hair, nail,
and tanning salons throughout the United States as well as in Canada, Europe,
Argentina, Australia, and New Zealand. On a pro forma basis, total revenue of
the Company would have exceeded $25 million and its net income would have
exceeded $1.5 million in 1995 assuming the Acquisitions had taken place on
January 1, 1995.
Styling was founded in June 1995. Although Styling itself has conducted no
operations to date, it has entered into definitive agreements to acquire,
simultaneously with the consummation of the Offering, four professional salon
product businesses that, on a combined basis, have a diversified line of
well-established, brand-name professional salon products that have been popular
in the professional salon products industry for more than 10 years. The
Acquisitions will provide the Company with an extensive network of strong
distribution relationships, experienced sales forces, established marketing and
salon industry education programs, significant production and sourcing
capabilities, and experienced management personnel with extensive relationships
in the professional salon products industry.
The Company's Chief Executive Officer and President have more than 10 and
20 years, respectively, of experience in the professional salon products
industry. The Chief Executive Officer's experience includes serving as the
executive vice president of a mall-based retail chain of beauty supply salons;
the president of a developer of a line of hair care products; the owner of
retail salons; and a joint venturer with Regis in a mall-based retail salon
chain. The President's experience includes serving as the chief operating
officer of one of the Acquired Businesses; a member of the senior management
team of a corporation that conducted the acquisition of personal care brands,
assets, and trademarks from companies in the professional salon and mass-market
industries; a marketing executive for a large beauty supply distributor; and the
national sales manager for a personal care products company.
INDUSTRY OVERVIEW
Professional salon products consist of hair care, nail care, and skin and
body care products as well as salon appliances and sundries that are used by
salon professionals in rendering salon services to their clients. Many
professional salon products also are retailed to clients and other customers of
salons, resorts, spas, health and country clubs, and beauty supply outlets,
typically upon the advice of a salon professional who recommends products to
address a client's individual needs.
Professional hair care products include shampoo, conditioner, styling gel,
glazes, mousse, hair spray, permanent, hair relaxer, and hair color products.
Professional nail care products include fiberglass and acrylic nail enhancement
solutions applied by the salon professional in rendering the nail service and
the accessories used by the professional to apply solutions, natural nail care
and pedicure solutions and accessories, and polishes. Skin and body care
products include body lotions, tanning products, cosmetics, skin moisturizers,
and other personal care products (such as shaving creams and antiperspirants)
used by salon professionals in rendering salon services (such as facials,
manicures, pedicures, paraffin therapy, aroma-therapy, and thermo-therapy) or
available for use by patrons of tanning salons, spas, resorts, and health and
country clubs. Professional salon appliances and sundries include hair dryers,
curling irons, brushes, furniture, and salonwear (such as capes), substantially
all of which are used by salon professionals only.
Salon professionals, as the users and "prescribers" of professional salon
products, typically select professional salon products on the basis of the
benefits and performance rather than price, which is passed on to the salon
client as part of the price of the salon service or is paid directly by the
salon client if the product is retailed. In addition, fashion trends
significantly impact the professional salon industry. As a result of
performance-based or fashion-trend purchase decisions, suppliers of professional
salon products market their products primarily by educating wholesale
distributors and salon professionals as to the uses and benefits of
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<PAGE> 36
their products as well as fashion industry trends. The prescriptive nature of
the professional salon industry typically fosters greater brand loyalty, and
professional sales products typically have higher profit margins, than the
mass-marketed beauty products as a result of relative price insensitivity.
The professional salon products industry has grown significantly during the
last several years, which the Company believes has resulted from more frequent
use of salon services by each salon client and the growth and aging of the
United States population. According to industry sources, professional salon
industry revenue (including revenue from salon services and from sales of salon
products) for 1995 was $36 billion domestically (a 6% increase over the prior
year) and $70 billion internationally. The Company believes that between 10% and
30% of salon revenue results from the resale of professional salon products by
salons. Industry sources estimate that there currently are more than 200,000
licensed beauty salons and 1.8 million licensed cosmetologists in the United
States. Approximately 127 million clients visit salons each month.
The professional salon products industry is highly fragmented, with
approximately 700 firms selling such products domestically. Many companies
serving the professional salon products market are small and often are either
owner-operated or are operated ancillary to another business. According to Vi
Nelson & Associates, Inc., a consulting firm specializing in the professional
salon industry, most of the salon product companies generate less than $10
million in sales, with many of such companies generating less than $3 million in
sales. Most of these companies serve only a single product segment of the
professional salon products market. For example, most companies offering
professional salon hair care products do not also offer nail and skin care
products. The Company believes that there are many attractive acquisition
candidates in the professional salon industry because of the highly fragmented
nature of the industry, the need of industry participants for capital, and their
owners' desire for liquidity. Based on the industry experience of its
management, the Company believes it is the only company taking advantage of this
fragmentation by targeting the acquisition of professional salon product
companies.
STRATEGY
The Company's objective is to become a dominant developer, producer, and
marketer of professional salon products in the United States and
internationally. Key aspects of the Company's strategy to achieve this objective
are as follows:
Pursuing Strategic Acquisitions
The Company plans to pursue strategic acquisitions to capitalize on the
substantial fragmentation and growth potential existing in the professional
salon products market by acquiring professional salon product companies
possessing complementary high-end professional products with well-recognized
brand names. Acquisition candidates will be selected based on their potential to
broaden the Company's product lines, expand the geographical scope of its
distribution network into new markets, or achieve increased value from the
Company's marketing, distribution, and product development capabilities as well
as from its capital and management resources.
The Company's acquisition strategy will offer each candidate (i) the
opportunity to be a part of a diversified professional salon product company,
thereby enhancing its ability to compete in its particular product segment
through an expansion of distribution channels and improved production and
distribution capacities; (ii) the potential for increased profitability as a
result of centralization of certain administrative functions (such as risk
management, accounting, information systems, and purchasing), greater purchasing
power of raw materials and other supplies and services, and other economies of
scale; (iii) enhanced financial strength and visibility as part of a public
company; (iv) the opportunity for its management to remain involved in
operations; and (v) an opportunity for liquidity through the receipt of cash or
securities of the Company.
Most of the Company's directors and the key managers of the Acquired
Businesses have been visible participants in the professional salon product
industry, including as officers and directors of the American Beauty Association
(a leading trade organization), which has allowed them to become personally
acquainted with principals of professional salon product businesses across the
country. The Company believes that the
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<PAGE> 37
industry's awareness of the Company, its management, and its strategies, will
attract interest from the principals of salon product businesses who may be
seeking liquidity or an exit alternative.
Enhancing Operational Efficiencies of Acquired Businesses
The Company plans to enhance the operating efficiencies of the Acquired
Businesses as well as any business it acquires in the future by eliminating
duplicative facilities, personnel, and functions. The Company plans to take
advantage of combined operations by utilizing its Duncanville, Texas facility to
produce products previously produced by third parties and to house warehouse and
distribution activities rather than utilizing leased facilities. The Company
also will integrate its sourcing and distribution capabilities to enable the
Company to utilize its increased purchasing power to maximize cost savings,
ensure the quality of its raw material and components, and achieve efficiencies
in distribution. In addition, the Company will upgrade its management
information systems to provide an integrated system for forecasting, production,
inventory management, distribution, procurement, and accounting.
The Company believes that it can reduce the selling, general, and
administrative expenses of the Acquired Businesses by approximately $2.0 million
in fiscal 1997, which represents an 18.6% reduction of such expenses over the
fiscal 1996 selling, general, and administrative expenses by (i) eliminating
excess compensation and related perquisites paid to owner-employees of the
Acquired Businesses; (ii) eliminating duplicative administrative functions (such
as risk management, accounting, information systems, and purchasing); and (iii)
closing the corporate offices of JDS and KII. The Company also believes that it
can reduce the cost of sales of the Acquired Businesses to 46% of sales in
fiscal 1997 from 53% of sales in fiscal 1996 by (a) relocating substantially all
production of the Body Drench products and all production of the JDS fiberglass
nail enhancement products to the Duncanville facility; (b) outsourcing the
production of the JDS acrylic enhancement products with a new production source;
and (c) eliminating the warehousing and distribution facility and the labor and
shipping costs with respect to JDS and KII. Additional warehouse facility costs
will be reduced in the third quarter of 1997 when the Body Drench warehousing
function is consolidated in the Duncanville facility. The Company's ability to
achieve such savings could be adversely affected by any delays that the Company
encounters in effecting such changes and any unanticipated difficulties it
encounters in integrating its business operations. In addition, the cost savings
will be mitigated, particularly if the Company does not increase its revenue, by
the expenses of operating the Company as a public company and the expansion of
its marketing efforts, including the costs associated with preparing marketing
materials, such as educational videos and pamphlets for distribution to
customers, increased media advertising, attendance at trade shows, and
conducting in-field demonstrations of its products.
Leveraging Well-Established Distribution Channels
The Company plans to coordinate the marketing efforts for its expanding
product lines, while maintaining their brand-name recognition, and to leverage
the well-established domestic and international distribution channels for
certain product lines to distribute other product lines. Historically, separate
distribution channels have been utilized for each of the Company's product
lines. Taking advantage of the Company's extensive but uncoordinated
distribution network and its existing relationships with its wholesale
distributors and professional supply outlets, the Company will offer its
distributors and outlets the opportunity to market additional product lines to
their customers. The Company also plans to expand its marketing efforts through
increased advertising programs and educational efforts directed to salon product
distributors and salon professionals. The Company plans to increase its
marketing expenditures from approximately $0.4 million during 1996 to
approximately $0.6 million during 1997 and to fund such amount from working
capital. Based on management's knowledge of the industry, the Company believes
it is the only professional salon supplier that can provide (i) hair care
products, (ii) natural nail care and nail enhancement products, (iii) body care
products, including indoor and outdoor tanning products, moisturizers, and
lotions, and (iv) salon appliances and salonwear.
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<PAGE> 38
Expanding International Presence
The Company believes that international markets for hair, nail, and skin
care products represent a significant growth opportunity. The Company plans to
leverage its relationships with salon professionals and distributors for its
core products and its existing international presence to gain further
international penetration, particularly in the European Economic Community,
Latin America, and the Far East.
Capitalizing on Brand Name Recognition
The Company intends to leverage the significant brand-name recognition of
its existing product lines by introducing new products and formulations under
these brand names. The Company believes its combined operations will provide it
with greater capacity and know-how to develop, test, and market new products
within each of its product lines, including the cross-utilization of proprietary
technologies, product development resources, and knowledge regarding trends in
the professional salon industry.
The Company believes that its brand names are widely recognized among salon
professionals and distributors of beauty, tanning, health care, and personal
care products. The Company intends to continue to strengthen and broaden its
portfolio of core brands, including Gena, Body Drench, SRC, and Alpha 9 by,
among other things, continuing to globalize its marketing and product
development to provide a uniform image and product throughout the world. Each
core brand is marketed with a distinct and uniform global image, which includes
packaging and advertising.
PRODUCTS
The Company offers more than 500 professional salon hair care, natural nail
care and nail enhancement products, skin and body care products, and salon
accessories and salonwear under its Body Drench, Gena, SRC, and Alpha 9 brand
names. The Company believes these brand names are widely recognized by salon
distributors and professionals and their clients as superior in quality to
mass-marketed product alternatives and other professional salon products.
The Gena line of natural nail care products features Warm-O-Lotion, a
collagen enriched lotion that is prominently featured in salons throughout the
United States. The Gena line also includes leading professional pedicure
products such as Pedi Soft, a collagen enriched conditioning lotion, Pedi Care
dry skin lotion, and Pedi Soak foot bath. The Gena product line also includes
the industry's most extensive line of paraffin therapy products, such as
Paraffin Springs Therapy Spa, a paraffin bath for conditioning heat therapy
treatments. In addition, the Gena product line also includes the Tea Tree Oil
lines of lotions and shampoos, which have anesthetic qualities to relieve dry,
itching skin and scalp, the Healthy Hoof nail and skin treatment line to
strengthen, moisturize, and condition nails and cuticles, and the MRX
antiseptics and lotions for use by salon professionals.
Body Drench is a leading brand name for professional skin care and tanning
products. Body Drench professional skin care products include moisturizing
lotions and body baths supplemented with Vitamins A and E and botanical extracts
for moisture retention and skin rejuvenation, alpha hydroxy acids for natural
skin exfoliation, and Unitrienol T-27 for skin elasticity. The Body Drench brand
name includes leading indoor tanning products that utilize the Carboplex(TM)
delivery system, which replaces moisture lost during tanning and produces
faster, darker tanning results. The Company also offers outdoor tan care and sun
protection products under the Body Drench name, which are available exclusively
at resorts, spas, and health and country clubs.
The Alpha 9 and Omni P.O. Professionals Only acrylic professional nail
enhancement product lines provide a complete line of liquids, powders, tips,
files, and other implements and treatments necessary for the professional nail
technician to complete the acrylic nail enhancement process. The Company's
Triumph Fiberbond nail enhancement system includes fiberglass, linen, and silk
nail enhancement treatment products for application by nail technicians for
their clients.
The SRC line of professional curling irons and blow dryers are recognized
within the salon industry as the finest quality in salon appliances. The
appliances are designed for high usage and durability and feature quick start up
and recovery capabilities. All SRC professional curling irons are backed by the
industry's only three year warranty. The Company's Maiko salonwear line features
an extensive array of salonwear for the stylist and the stylist's clientele.
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<PAGE> 39
The table below sets forth a description of the Company's principal
products; the brand name under which such products are sold; the approximate
percentage of such products sold for professional salon use and the approximate
percentage retailed to clients and customers; and the distribution channels for
such products.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRODUCT PRODUCT BRAND SALON RETAIL SALES
CATEGORY DESCRIPTION NAMES USE(1) BY SALONS(1)
- ----------------- -------------------------------- ----------------- -------- ------------
<S> <C> <C> <C> <C>
Hair Care Shampoo, conditioner, and Body Drench; Gena 20% 80%
hairspray
Nail Care Natural nail care products, Alpha 9; Omni 90% 10%
acrylic and fiberglass nail P.O.; Triumph;
enhancement products, and Gena; Design
manicure and pedicure solutions Classic; Adios
and accessories
Skin and Body Moisturizing lotion, indoor and Body Drench; Gena 40% 60%
Care outdoor tanning products,
personal care products, paraffin
waxes, and thermo-therapy
treatments
Salon Appliances Hairdryers, curling irons, and SRC; 100% 0%
and Sundries salonwear (capes and aprons) Maiko
<CAPTION>
PRODUCT DISTRIBUTION
CATEGORY CHANNEL
- ----------------- ---------------------------------
<S> <C>
Hair Care Beauty and tanning supply
distributors and outlets, beauty
salon chains, health and country
clubs, resorts and spas
Nail Care Beauty supply distributors and
outlets and beauty salon chains
Skin and Body Beauty and tanning supply
Care distributors and outlets, beauty
salon chains, health and country
clubs, resorts and spas
Salon Appliances Beauty supply distributors
and Sundries
</TABLE>
- ---------------
(1) Company estimates.
- --------------------------------------------------------------------------------
PRODUCT DEVELOPMENT
The Company intends to leverage the significant brand-name recognition of
its existing product lines by introducing new products and formulations under
its brand names. The Company believes that its combined operations will provide
it with greater capacity and know-how to develop, test, and market new products
in each of its product lines, including the expanded applications of proprietary
technologies. The Company's managers, working together with its marketing and
product development personnel, continuously monitor shifts in the fashion
industry generally and the salon industry in particular to identify new product
opportunities. The Company believes the experience of its key managers and their
combined relationships within the industry as well as the Company's product line
orientation will enable it to quickly recognize and respond to salon innovations
and fashion industry trends.
SALES AND MARKETING
The Company sells its professional salon products and appliances
exclusively through professional salon industry distribution channels to beauty
and tanning supply distributors and, to a lesser extent, to spas, resorts and
health and country clubs (both directly and to distributors), and directly to
beauty salon chains, and hair, nail, and tanning salons throughout the United
States and in Canada, Europe, Argentina, Australia, and New Zealand. The Company
believes that its strategy of marketing its products exclusively for use in or
resale by the professional salon industry channels complements the quality image
of the Company's products and fosters a high degree of loyalty to its products
by distributors of professional salon products.
The marketing programs and sales forces for each of the Company's product
lines focus on educating salon professionals and salon distributors regarding
the high quality and the specific benefits of the Company's products as well as
the latest trends and developments in the fashion and beauty industries. An
important element of the Company's marketing is its participation at salon
industry trade shows, at which salon product manufacturers exhibit and sell
their products to wholesale salon product distributors, and several annual
domestic and international salon professionals trade shows and numerous
professional salon distributor-sponsored shows, at which products, styles, and
techniques are demonstrated to salon professionals. Another key element of the
Company's education-focused marketing is in-the-field demonstrations of its
products for a
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<PAGE> 40
group of salon professionals in a certain locale, usually at the request of a
beauty supply distributor. In addition, the Company advertises its products in
trade and distributor publications as well as in national advertising through
such magazines as Glamour, Mirabella, Redbook, and Self. The Company also will
produce educational videos and pamphlets for distribution to beauty supply
distributors and salon professionals.
The Company plans to increase its marketing expenditures from approximately
$0.4 million in 1996 to approximately $0.6 million in 1997, all of which will be
funded from working capital. These expenditures will include the costs
associated with preparing marketing materials, such as educational videos and
pamphlets for distribution to customers, increased media advertising, attendance
at trade shows, and conducting in-field demonstrations of its products.
The Company believes that its combined marketing and distribution
capabilities provide it with strong distribution relationships in each of the
professional salon distribution channels. The Body Drench product lines are sold
domestically in all 50 states and in Europe to approximately 85 beauty supply
distributors, to approximately 75 tanning supply distributors, and to
approximately 3,000 spas, resorts, health and country clubs, beauty salon chains
as well as, to a lesser extent, directly to hair, nail, and tanning salons by a
sales force of approximately 16 marketing representatives, telemarketers, and
field sales personnel as well as by approximately 30 independent manufacturers'
representatives. The Gena product lines are sold nationally to approximately 700
beauty supply distributors, including Sally, as well as to approximately 4,000
beauty supply chains by a sales force of three marketing representatives and
approximately 40 independent manufacturers' representatives. The JDS product
lines are sold nationally to more than 1,200 beauty supply distributors and
outlets, including Sally, by a sales force of three employees. The KII salon
appliances and salonwear lines are sold nationally to more than 50 beauty supply
distributors, 14 beauty schools, and six beauty salon chains by a sales force of
two employees.
Other than Sally and Regis, no other beauty supply chain or other customer
accounts for a significant portion of the purchases of the Company's
professional salon products. During 1995, Sally accounted for approximately 10%
of the Company's net sales. The Company has supplied products to Sally and Regis
on a purchase order basis for more than five years. The Company, however, does
not have any contractual agreements with Sally or Regis relating to the supply
of products.
Upon the consummation of the Acquisitions, the Company intends to
capitalize on each product lines's marketing programs and distribution network
to introduce other of the Company's product lines. The Company believes this
enhanced utilization of its existing marketing and distribution capacities will
result in increased sales in some of its product lines with little or no
increase in selling cost.
PRODUCTION
The principal production, assembly, packaging, and warehouse operations of
the Company are conducted through a 30,000 square foot complex located in
Duncanville, Texas. The Company will lease a production and warehouse facility
located in Alexandria, Tennessee for a period of six months with an option to
renew for another six-month period. See "Business -- Properties" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- General."
The production area in the Duncanville facility consists of approximately
6,000 square feet of space and includes formula compounding areas, multiple
manual and fully automated liquid filling lines, and packaging facilities. The
compounding or mixing department utilizes a combination of manual and fully
automated batch processing systems. The Company maintains an internal control
system to monitor the quality of its products. The Company also maintains
product liability insurance at levels it believes to be adequate. The Company
maintains an inventory of raw materials and packaging materials as well as
certain finished goods in its on-site warehouses that comprise a total of
approximately 20,000 square feet. Finished inventory generally is warehoused for
distribution throughout the world at the Duncanville facility.
The Company expects the machinery and equipment at its Duncanville facility
to have a relatively high level of capacity utilization when the production
requirements of the Acquired Businesses are fully integrated
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<PAGE> 41
at the Duncanville facility. The Company believes these steps will yield
additional production efficiencies and cost savings. However, no assurance can
be given as to the Company's ability to achieve any level of utilization or
increased productivity. The Duncanville facility has a significant amount of
available space for the installation of additional machinery and equipment and
warehousing if additional capacity is needed. The Company also has the ability
to increase the size of its Duncanville facility by building an additional
20,000 square foot facility on a vacant lot it owns adjacent to the existing
facility. The Company, however, has no immediate plans to install additional
machinery and equipment or to increase the warehousing space in the existing
facility or to commence construction of an additional facility.
Raw materials used to produce the Company's professional salon products
(other than salon appliances and salonwear) include water, alcohol, mineral and
natural oils, fragrances, other chemicals, and a wide variety of packaging
materials and compounds including containers, such as cardboard boxes and
plastic containers, container caps, tops, valves and labels, all of which it
purchases from outside sources. The Company's principal raw materials and
packaging components are available from several domestic suppliers, and it does
not depend on the availability of supplies from any single source. The Company
does not anticipate any difficulty in obtaining adequate supplies of raw
materials to meet its needs as a result of the long-established supplier
relationships and alternative raw material substitutes it has developed.
Similarly, while the industry from time to time has experienced raw material
cost increases, the Company believes it will be able to purchase its
requirements at competitive prices. To date, increases in raw material costs
have not had a material effect on the Company's operating results. Substantially
all of the Company's salon appliance products currently are manufactured on a
contract basis by Windmere Corporation, a Florida manufacturer with overseas
production facilities. Because the Company owns the tooling and molds used to
manufacture such appliance products, it believes it could substitute another
manufacturer on a timely basis and at reasonable prices. No single supplier
furnishes more than 10% of the Company's raw materials or other supplies.
COMPETITION
The professional salon products industry is highly competitive. The
Company's products compete directly against professional salon and other similar
products sold through distributors of professional salon products and
professional salons. The Company's principal competitors in the professional
salon hair care products market include Bristol-Myers Squibb Company (under the
trademarks Clairol and Matrix), Nexxus Products Co., Paul Mitchell Systems and
Redken. The Company's competitors in the professional salon nail care market
include Creative Nail Design, Inc., Star Nail Products, Inc., OPI Products Inc.
and Backscratchers, Inc. The Company's largest competitors in the professional
salon skin and body care products market include California Suncare, Inc., Supre
Inc., Swedish Beauty Manufacturing, Inc., and Australian Gold, Inc. The
Company's largest competitors in the professional salon appliances and sundries
market are Helen of Troy Limited, Belson Products (a division of Windmere
Corporation), Conair Corporation, Cricket Brush Company (a division of West
Coast Beauty Supply Co.), Andre (a division of Fromm International, Inc.), and
Betty Dain Creations, Inc. In addition, the Company's professional salon
products compete indirectly against hair care, nail care, and skin and body care
products and salon accessories sold through a variety of non-salon retail
channels, including department stores, mall-based specialty stores and, to a
lesser extent, mass merchants, drugstores, supermarkets, telemarketing programs,
television "infomercials," and catalogs. See "Risk Factors -- Competition."
PATENTS AND TRADEMARKS
The Company markets its products under a number of trademarks and trade
names that are registered in the United States and several foreign countries.
Principal trademarks of the Company include Body Drench, Alpha 9, and Gena, and
the names of most of the products sold under each of these brands. The Company
believes its position in the marketplace depends to a significant extent upon
the goodwill engendered by its trademarks and trade names and, therefore,
considers trademark protection to be important to its business. The Company's
trademarks and trade names have unlimited life. The Company will seek to
register significant trademarks and trade names in other foreign countries as it
enters these markets.
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<PAGE> 42
A number of the Company's products incorporate patented or patent-pending
formulations pursuant to nonexclusive licenses from third parties. The Company
does not consider any single patent to be material to the conduct of its
business.
GOVERNMENT REGULATION
Some of the Company's advertising and product labeling practices are
subject to regulation by the FTC, and certain of its salon product production
practices are subject to regulation by the FDA as well as by various other
federal, state, local, and foreign regulatory authorities. Such regulations
relate principally to the ingredients, labelling, packaging, and marketing of
the Company's products. The Company believes that it is in substantial
compliance with such regulations, as well as applicable federal, state, local,
and foreign rules and regulations governing the discharge of materials hazardous
to the environment. There are no significant capital expenditures for
environmental control matters either estimated in the current year or expected
in the near future. See "Risk Factors -- Regulation and Potential Claims."
EMPLOYEES
At August 30, 1996, the Company employed approximately 116 persons,
consisting of approximately 41 administrative employees; 53 warehouse and
production employees; and 19 sales and marketing employees. None of the
Company's employees are covered by collective bargaining agreements with the
Company, and the Company believes that its relations with its employees are
good.
PROPERTIES
The Company owns its facility in Duncanville, Texas, near Dallas. This
facility contains administrative, production, and warehousing areas. The 20,000
square foot facility includes an approximately 4,000 square foot administrative
area, a 6,000 square foot production area, and a 10,000 square foot warehousing
area. The Company believes the facility is well maintained and adequate for its
needs. The Company also leases approximately 10,000 square feet of warehousing
space in Duncanville pursuant to a lease that expires on December 31, 2006. In
addition, the Company leases approximately 6,000 square feet of warehouse space
in Duncanville pursuant to a lease that expires in March 1997. The Company also
leases a manufacturing and warehouse facility located in Alexandria, Tennessee
for a period of one year with options to renew. Pursuant to short-term and
month-to-month leases, the Company leases additional warehouse and
administrative space in Duncanville, Texas; Alexandria, Tennessee; and Woodland
Hills, California. The Company expects to terminate such leases upon completing
the integration of the operations of the Acquired Businesses. See
"Business -- Production."
LEGAL PROCEEDINGS
The Company is, and may in the future be, party to litigation arising in
the ordinary course of its business. The Company does not consider any current
claims to be material to its business, financial condition, or operating
results. There can be no assurance that the Company's insurance coverage will be
adequate to cover all liabilities occurring out of any claims that may be
instituted in the future or that any future claims that are not covered by
insurance will not have an adverse effect on the Company's business, financial
condition, or operating results.
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<PAGE> 43
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth information concerning each of the executive
officers, directors, and proposed director of the Company as well as the key
officers of each of the Company's divisions:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------ --- ----------------------------------------------
<S> <C> <C>
Sam L. Leopold................ 42 Chairman of the Board and Chief Executive
Officer
Thomas M. Clifford............ 43 President and Director
David E. Ziegler(1)........... 52 Chief Financial Officer, Treasurer, and
Secretary
Gerald L. Kotch(2)............ 61 Vice President -- SRC Division
Richard E. Norvell(2)......... 44 Vice President -- Body Drench Division
Donald N. Black(2)............ 44 Vice President/Production -- Gena Division
Thomas H. Adcock.............. 56 Director of Manufacturing
Sunny Stinchcombe............. 41 Vice President/Sales and Marketing -- Gena
Division
James A. Brooks............... 63 Director
Daniel Howell................. 45 Director
Sylvan Schefler(3)............ 58 Proposed Director
</TABLE>
- ---------------
(1) Effective October 14, 1996.
(2) Upon consummation of the Acquisitions.
(3) Upon consummation of the Offering.
Sam L. Leopold, a founder of the Company, has served as its Chairman of the
Board and Chief Executive Officer of the Company since the Company's
incorporation in June 1995. Mr. Leopold is a party to a joint venture agreement
with Regis, a publicly held, mall-based retail chain of beauty supply salons,
pursuant to which he operates four mall-based Trade Secret retail salons in
California. Mr. Leopold also owns and previously served as President and
Chairman of Beauty Boutique International, which was founded in 1990 and
operates three retail salons in Arizona. Mr. Leopold is not involved with the
day-to-day operations of the joint venture with Regis or Beauty Boutique
International, although both purchase products from the Company in the ordinary
course of business. From 1986 to 1991, Mr. Leopold served as Executive Vice
President of Consumer Beauty Supply, Inc. (dba Beauty Express), a mall-based
retail chain of beauty supply salons. During that time, Mr. Leopold was
responsible for day-to-day operations and oversaw the growth and development of
Beauty Express from less than 20 retail salons to more than 50 retail salons and
from approximately $8 million in annual revenue to approximately $25 million in
annual revenue. From 1989 to 1991, Mr. Leopold served as president of Avanti
International, Inc. developing a line of hair care products. Mr. Leopold served
as in-house counsel to MDC Holdings, Inc., a publicly held national home
builder, from 1982 to 1984. Mr. Leopold expects to devote substantially all of
his business time to the Company.
Thomas M. Clifford, a founder of the Company, has served as its President
and as a director since the Company's incorporation. Mr. Clifford also has
served as Chief Operating Officer of JDS since October 1991. Mr. Clifford served
as Senior Vice President of Sales of American International Industries ("AII"),
a national multi-brand marketer of salon-quality products from September 1986 to
October 1991. During that time, Mr. Clifford was a member of the management team
that conducted AII's acquisition of brands, assets, and trademarks from
approximately 10 companies in the professional salon and mass-market industries.
While with AII, Mr. Clifford was responsible for management of multiple brand
names and product lines in both the professional salon and mass-market
industries. From August 1986 to September 1987, Mr. Clifford served as Vice
President of Marketing of Sterling Beauty Supplies, a large beauty supply
distributor in the western United States. Mr. Clifford served as National Sales
Manager of Helen of Troy Limited, a publicly held personal care products
company, from August 1985 to August 1986 and was responsible for executing its
national sales strategy. From April 1983 to August 1985, Mr. Clifford served
first as National Sales Manager
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and subsequently as Vice President of Sales and Marketing of Illinois Razor
Strops, a manufacturer of cutlery and sundries for the barber and beauty supply
industry. During his tenure with that company, Mr. Clifford successfully
repositioned the company into the professional salon market. Additionally, Mr.
Clifford has served as a director of the American Beauty Association since 1991
and is the treasurer-elect of that organization.
David E. Ziegler has served as Chief Financial Officer, Treasurer, and
Secretary of the Company commencing October 14, 1996. Mr. Ziegler served as
Chief Financial Officer of Cellular World Corporation ("CWC"), a retail chain of
wireless communications products stores, from February 1994 to October 1996. Mr.
Ziegler joined F&C International, Inc. ("F&C"), an international developer and
manufacturer of flavors and fragrances used by consumer product producers in the
food, beverage, and personal care industries, as Vice President and Chief
Financial Officer in January 1993 to strengthen senior management and
restructure F&C. Mr. Ziegler served F&C in such capacity until October 1993. F&C
filed for protection under Chapter 11 of the United States Bankruptcy Code
("Chapter 11") in April 1993. Mr. Ziegler joined Zaks Stores, Inc. ("Zaks"), a
retail chain of arts and crafts stores, as Chief Financial Officer in 1991 after
Zaks had defaulted on a significant bank loan which resulted in a filing under
Chapter 11. Prior to Mr. Ziegler leaving Zaks in 1992, it reorganized and
emerged from Chapter 11. Mr. Ziegler is a certified public accountant and was a
partner at Arthur Andersen LLP from 1978 to 1986.
Gerald L. Kotch will serve as Vice President -- SRC Division upon
completion of the Acquisitions. Mr. Kotch has served as President of KII since
December 1993. Prior to that time, Mr. Kotch served as Vice President and
General Manager of the Styling Research Division of Redken Laboratories, Inc.
from November 1992 to December 1993. Mr. Kotch served as President of Marketing
Options Consulting Co., a management consulting firm for manufacturers within
the professional salon industry, from founding the company in January 1991 until
November 1992. From April 1991 to November 1992, Mr. Kotch served as General
Manager of the Beauty Division of DeMert and Dougherty, a Chicago-based aerosol
and liquid goods manufacturer. Mr. Kotch has served as President of the American
Beauty Association since November 1994.
Richard E. Norvell will serve as Vice President -- Body Drench Division
upon completion of the Acquisitions. Mr. Norvell has served as Secretary and
Treasurer of Designs by Norvell, Inc. since November 1977 and President of the
Body Drench Division since July 1985. Mr. Norvell is a founder of and served as
an original member of the Board of Directors of Suntan Association for
Education, the primary trade association for the indoor tanning industry, from
1989 to 1992.
Donald N. Black will serve as Vice President -- Gena Division upon
completion of the Acquisitions. Mr. Black has served as President of Gena since
June 1989, as Vice President of Gena from December 1984 to June 1989 and as
General Manager of Gena from December 1979 to December 1989.
Thomas H. Adcock will serve as Director of Manufacturing of the Company
upon completion of the Acquisitions. Mr. Adcock served as Vice President of
Commercial Development of Virbac, Inc., a manufacturer and distributor of
veterinary products, including pet shampoo and conditioner products ("Virbac"),
from September 1995 to July 1996. Mr. Adcock served as Vice
President -- Manufacturing of Virbac from January 1994 to September 1995. Mr.
Adcock founded and served as President of A & I Laboratories, Inc., a developer
and contract manufacturer of dermatological products, including shampoos,
lotions, and creams for humans and pets, since founding the company in March
1985 until January 1994 when he sold the company to Virbac. Mr. Adcock served as
Director of Planning, Warehousing, and Distribution of Maybelline Co. from June
1981 to March 1985.
Sunny Stinchcombe will serve as Vice President/Sales and Marketing -- Gena
Division upon completion of the Acquisitions. Ms. Stinchcombe has served as Vice
President/Sales and Marketing of Gena since 1989. Previously, Ms. Stinchcombe
was National Sales Manager at Gena from 1984 to 1989. Ms. Stinchcombe has over
14 years experience in the professional salon products industry.
James A. Brooks has served as a director of the Company since September
1996. Mr. Brooks has served as President of Signe Inc., a management consulting
firm for major consumer product companies and a variety of salon industry
companies, since founding the company in December 1984. Mr. Brooks served as
Senior Vice President of Sales and Marketing of Lamaur, Inc. from 1983 to 1984,
at that time a publicly traded company listed on the New York Stock Exchange and
a leading domestic producer and marketer of a broad
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<PAGE> 45
range of hair care products and as Senior Vice President of Sales and Marketing
of Redken Laboratories, Inc. from 1977 to 1983. Mr. Brooks is a director of
Malibu 2000, a hair care products company.
Daniel Howell has served as a director of the Company since September 1996.
Mr. Howell has served as President of Nouvelle Methode, Inc., a business
consulting firm since founding it in March 1993. Mr. Howell founded and served
as President and Chief Executive Officer of Beauty Biz, Inc., an upscale
retailer of professional beauty supplies, from its inception in March 1986 to
March 1993. Mr. Howell has served as a director of Classic Restaurants
International, Inc., a publicly traded restaurant company, since February 1996.
In addition, Mr. Howell was a member of the board of directors of Helen of Troy
Limited, a publicly held professional hair care products company, from March
1988 to June 1993.
Sylvan Schefler will be appointed to the Board of Directors upon
consummation of the Offering. Mr. Schefler is Vice Chairman of Prime Charter
Ltd., an investment banking firm and one of the Representatives of the
Underwriters of the Offering. Mr. Schefler has served as Chairman of the
Investment Banking Division and as a member of the Executive Committee of Prime
Charter Ltd. since September 1994. Mr. Schefler has been a partner of Crystal
Asset Management Group, Ltd., a merchant banking firm since 1990. Previously,
Mr. Schefler was Chief Executive Officer of Hampshire Securities Corporation, an
investment banking firm, from 1992 to 1994 and Co-Chairman of Dabney/Resnick and
Wagner, Inc., an investment banking firm, from 1990 to 1992. Mr. Schefler
previously served in various capacities with Drexel Burnham Lambert Incorporated
for over 30 years, including as a member of its Executive Committee and Board of
Directors. Mr. Schefler has served as a director of GSE Systems, Inc., a
supplier of software systems for manufacturing industries, since August 1995.
Directors hold office until the next annual meeting of stockholders or
until their successors have been elected. Officers serve at the pleasure of the
Board of Directors. There are no family relationships among any of the directors
or officers of the Company. Messrs. Brooks, Howell, and Schefler will serve as
the members of the Audit and Compensation Committees of the Board of Directors.
EXECUTIVE COMPENSATION
The Company was incorporated in June 1995 and has conducted no operations
to date. As a result, no salaries have been paid or accrued by the Company.
Compensation to be paid to the Company's Chief Executive Officer and the four
other most highly compensated executive officers following the Offering is
disclosed below. See "Management -- Employment Agreements" and
"Management -- 1996 Stock Option Plan." In June 1995, Mr. Leopold acquired
807,851 shares of the Company's Common Stock for nominal consideration and Mr.
Clifford obtained options to acquire 161,571 shares of Common Stock at a price
of $0.10 per share. Since the formation of the Company, Messrs. Leopold and
Clifford have expended considerable time and efforts, without consideration, in
developing the Company's business plan, engaging personnel, negotiating the
terms of the Acquisitions, and preparing for the Offering.
EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements with Messrs. Leopold,
Clifford, and Ziegler, and with certain of the key managers of the Acquired
Businesses, effective upon the completion of the Acquisitions. The terms of
these agreements are described below.
The Company has entered into employment agreements with Messrs. Leopold and
Clifford providing for Mr. Leopold to serve as Chairman of the Board and Chief
Executive Officers of the Company and for Mr. Clifford to serve as President of
the Company, in each case through September 2001. Upon completion of the
Offering, each of Messrs. Leopold and Clifford will receive an initial base
salary of $150,000 for the first year, $200,000 for the second year, and
$250,000 per annum for the remainder of the term of his employment agreement.
The Company entered into an employment agreement with Mr. Ziegler providing for
Mr. Ziegler to serve as Chief Financial Officer of the Company through September
2000. Mr. Ziegler will receive a base salary of $140,000 for the first year,
$165,000 for the second year, and $190,000 for the third year and will receive a
one-time bonus of $20,000 upon the completion of the Offering. Messrs. Leopold,
Clifford, and Ziegler are eligible to receive an annual bonus out of the bonus
pool, if any, established at the discretion of the Board of Directors. The
Company also granted Mr. Ziegler options under the Company's 1996 Stock Option
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<PAGE> 46
Plan to acquire 72,707 shares of Common Stock at an exercise price equal to the
Offering Price. One-fourth of Mr. Ziegler's options are exercisable upon the
consummation of the Offering, and his remaining options vest ratably over the
following three years.
In connection with the acquisition of Body Drench, the Company will enter
into an employment agreement with Richard Norvell, who will be responsible for
the day-to-day activities, positioning, strategies, and execution of the sales
and marketing plans with respect to Body Drench. Mr. Norvell will devote at
least 80% of his business time to the performance of his duties under the
agreement. Mr. Norvell will receive an annual salary of $125,000 for the
three-year term of the employment agreement. In the event Mr. Norvell's brother,
Greg Norvell, is no longer employed by the Company, Mr. Norvell's annual salary
will increase to $200,000 for the remainder of the term of his employment
agreement. The employment agreement also provides that Mr. Norvell may
participate, at the sole discretion of the Company's Board, in any stock option
program adopted by the Company. The employment agreement will continue only if
the Body Drench Division revenue and earnings from continuing operations for
1997, 1998, and 1999 increase by at least 12% over the prior year's revenue and
earnings from continuing operations. The employment agreement contains a
covenant not to compete after the expiration or termination of such employment
agreement.
In connection with the acquisition of KII, the Company will enter into an
employment agreement with Gerald L. Kotch providing for Mr. Kotch to serve as
Vice President of the SRC Division of the Company until December 31, 2000,
subject to termination by either party at any time. Mr. Kotch will be
responsible for the day-to-day operations of the SRC Division. Pursuant to the
employment agreement, Mr. Kotch will receive an initial salary of $114,000 a
year, subject to periodic review by the Company, and will be eligible to receive
an annual bonus to be determined by the Company's Board based upon such
performance standards as are established by the Board. Mr. Kotch will be
eligible to participate in the Company's 1996 Stock Option Plan at the sole
discretion of the Board. In the event the Company terminates Mr. Kotch's
employment prior to December 31, 2000 for reasons other than a breach of the
employment agreement or an act involving a crime, moral turpitude, fraud, or
dishonesty, the Company must continue to pay Mr. Kotch's salary for the
six-month period following such termination. The employment agreement with Mr.
Kotch contains a covenant not to compete following Mr. Kotch's employment with
the Company for a period of the same length as Mr. Kotch's employment with the
Company but in no event less than six months nor greater than 36 months.
In connection with the acquisition of Gena, the Company entered into a
one-year employment agreement with Donald N. Black providing for Mr. Black to
serve the Company as Vice President -- Gena Division and to supervise operations
at the Duncanville facility. The employment agreement provides that the Company
will pay Mr. Black $76,998 for the first six months of the term of the
employment agreement and $38,496 for the remaining six months.
DIRECTOR COMPENSATION
The Company pays each independent director an annual retainer of $5,000 and
$1,500 for each meeting of the Board of Directors attended. Directors also
receive $500 for each meeting of a committee of the Board of Directors attended.
In addition, independent directors receive stock options under the Company's
1996 Stock Option Plan. See "Management -- 1996 Stock Option Plan." Under the
Company's 1996 Stock Option Plan, Messrs. Brooks, Howell, and Schefler each will
receive options to purchase 5,000 shares of Common Stock at the Offering Price
upon the completion of the Offering. Officers of the Company receive no
additional compensation for serving on the Board of Directors.
1996 STOCK OPTION PLAN
In September 1996, the Company adopted the 1996 Stock Option Plan (the
"Plan"), which provides for the grant of incentive and nonqualified stock
options to acquire Common Stock of the Company, the direct grant of Common
Stock, the grant of stock appreciation rights ("SARs"), and the grant of other
cash awards to key personnel, directors, consultants, independent contractors,
and others providing valuable services to the Company and its subsidiaries. The
Company believes that the Plan represents an important factor in attracting and
retaining executive officers and other key employees and constitutes a
significant part of its compensation program, providing such individuals with an
opportunity to acquire a proprietary interest in the Company, and
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<PAGE> 47
thereby align their interests with the interests of the Company's other
stockholders, and giving them an additional incentive to use their best efforts
for the long-term success of the Company. The Plan also provides for the
automatic grant of options to independent members of the Company's Board of
Directors, which the Company believes promotes the interests of the Company by
providing such directors the opportunity to acquire a proprietary interest, or
otherwise increase their proprietary interest, in the Company and thereby align
their interests with the interests of the Company's other stockholders in the
Company's success and progress.
A maximum of 400,000 shares of Common Stock of the Company may be issued
under the Plan. As of the date of this Prospectus, there were outstanding
options to acquire 72,707 shares of the Common Stock under the Plan at an
exercise price equal to the Offering Price. The maximum number of shares of
stock with respect to which options or SARs may be granted to any employee
(including officers) during the term of the Plan may not exceed 50% of the
shares of Common Stock covered by the Plan.
The power to administer the Plan with respect to executive officers and
directors of the Company and all persons who own 10% or more of the Company's
issued and outstanding stock rests exclusively with the Board of Directors or a
committee consisting of two or more non-employee directors who are appointed by
the Board of Directors. The power to administer the Plan with respect to other
persons is vested with the Board of Directors.
The Plan terminates in August 2006, and options may be granted at any time
during the life of the Plan for terms of up to 10 years. Options become
exercisable at such time as may be determined by the Board of Directors or the
Plan administrator upon the grant of the options. However, the Board of
Directors or the Plan administrator has the discretion to provide for the
automatic acceleration of the vesting of any options or awards (except for the
automatic option grants described below) in the event of a "Change in Control,"
which includes the following events: (i) the acquisition of beneficial ownership
by certain persons, acting alone or in concert with others, of 30% or more of
the combined voting power of the Company's then outstanding voting securities;
(ii) during any two-year period, members of the Company's Board at the beginning
of such period cease to constitute at least a majority thereof (except that any
new director approved by at least two-thirds of the Board then still in office,
who were directors at the beginning of such period, is considered to be a member
of the current Board); or (iii) approval by the Company's stockholders of
certain reorganizations, mergers, consolidations, liquidations, or sales of all
or substantially all of the Company's assets.
The exercise prices of options will be determined by the Board of Directors
or the Plan administrator, but if an option is intended to be an incentive stock
option, the exercise price may not be less than 100% (110% if the option is
granted to a stockholder who at the time of the grant of the option owns stock
possessing more than 10% of the total combined voting power of all classes of
stock of the Company) of the fair market value of the Common Stock at the time
of the grant.
AUTOMATIC OPTION GRANTS TO DIRECTORS
Each year at the meeting of the Board held immediately after the Company's
annual meeting of stockholders, each independent Board member automatically will
be granted an option to acquire 2,500 shares of Common Stock ("Annual Automatic
Option"). New independent members of the Board automatically will receive an
option to acquire 5,000 shares of Common Stock ("Initial Automatic Option") on
the date of their first appointment or election to the Board. Each automatic
Option will become exercisable and vest on the first anniversary of the
applicable grant date. An independent member of the Board is not eligible to
receive an Annual Automatic Option if the grant date is within 90 days of such
independent member receiving an Initial Automatic Option. The exercise price per
share of Common Stock subject to each Annual and Initial Automatic Option is
equal to 100% of the fair market value per share on the date of the grant of the
Annual or Initial Automatic Option, as the case may be. Cessation of service on
the Board terminates any Annual or Initial Automatic Options for shares that
were not vested at the time of such cessation.
The Plan is not intended to be the exclusive means by which the Company may
issue options or warrants to acquire its Common Stock, stock awards, or any
other type of award. To the extent permitted by applicable law and Nasdaq
requirements, the Company may issue any other options, warrants, or awards other
than pursuant to the Plan without stockholder approval.
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<PAGE> 48
LIMITATION OF DIRECTORS' LIABILITY AND INDEMNIFICATION
The Company's Certificate of Incorporation provides that no director of the
Company will be personally liable to the Company or its stockholders for
monetary damages for breach of a fiduciary duty as a director, except to the
extent such exemption or limitation of liability is not permitted under the
Delaware GCL. The effect of this provision in the Certificate of Incorporation
is to eliminate the rights of the Company and its stockholders, either directly
or through stockholders' derivative suits brought on behalf of the Company, to
recover monetary damages from a director for breach of the fiduciary duty of
care as a director except in those instances described under the Delaware GCL.
In addition, the Company has adopted provisions in its Bylaws that require the
Company to indemnify its directors, officers, and certain other representatives
of the Company against expenses and certain other liabilities arising out of
their conduct on behalf of the Company to the maximum extent and under all
circumstances permitted by law.
CERTAIN TRANSACTIONS
In October 1996, the Company entered into a Stock Repurchase Agreement with
Kenneth S. Bernstein, a co-founder of the Company with Mr. Leopold, pursuant to
which Mr. Bernstein agreed to sell all of his 807,851 shares of Common Stock to
the Company for $1.8 million payable upon consummation of the Offering. In 1993
and 1994, Mr. Bernstein entered into consent agreements with the SEC, the
National Association of Securities Dealers, Inc., and the Colorado state
securities commission with respect to allegations that Mr. Bernstein and others
failed to supervise adequately the activities of employees of a broker-dealer.
Mr. Bernstein agreed to fines, censure, and a suspension from supervising
employees of a broker-dealer for two years. In the course of preparing for the
Offering, including the listing of the Common Stock, the Company determined that
it was in the Company's best interest to purchase all of Mr. Bernstein's Common
Stock. Upon consummation of the Offering, Mr. Bernstein will no longer be a
stockholder of the Company and will have no other relationship with the Company.
Absent acquiescence of applicable listing authorities, the resumption of any
relationship between the Company and Mr. Bernstein could adversely affect the
listing and trading of the Common Stock.
PRINCIPAL STOCKHOLDERS
The following table sets forth information regarding beneficial ownership
of the Company's Common Stock as of the date of this Prospectus, and as adjusted
to reflect the sale of shares offered hereby, for (i) all directors, proposed
directors, the Chief Executive Officer, and the four other most highly
compensated executive officers, (ii) all directors, the proposed director, and
executive officers as a group, and (iii) each person known by the Company to own
beneficially 5% or more of the outstanding shares of Common Stock.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED OWNED
PRIOR TO PUBLIC AFTER PUBLIC
OFFERING OFFERING(1)
--------------------- ---------------------
NAME OF BENEFICIAL OWNER NUMBER PERCENT NUMBER PERCENT
- --------------------------------------------------- --------- ------- --------- -------
<S> <C> <C> <C> <C>
Sam L. Leopold(2).................................. 807,851 76.2% 853,306 22.5%
Thomas M. Clifford(3).............................. 161,571 15.2 161,571 4.3
David E. Ziegler(4)................................ 72,707 6.9 72,707 1.9
James A. Brooks(5)................................. 0 0.0 0 0.0
Daniel Howell(5)................................... 0 0.0 0 0.0
Sylvan Schefler(5)................................. 0 0.0 0 0.0
All directors and executive officers as a group
(six persons).................................... 1,042,129 98.3% 1,087,584 28.7%
</TABLE>
- ---------------
(1) Assumes that the Overallotment Option is not exercised.
(2) Assumes the purchase of $500,000 of Common Stock in the Offering.
(3) Mr. Clifford has options to acquire 161,571 shares at a price of $0.10 per
share. The options are exercisable at any time commencing June 29, 1999,
except that the Board of Directors may elect to
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<PAGE> 49
accelerate such options if the Company's earnings per share equal or exceed
$2.30 on a combined basis for fiscal years 1997 and 1998.
(4) On October 14, 1996, Mr. Ziegler received in connection with the
commencement of his employment options to acquire 72,707 shares. See
"Management -- Employment Agreements."
(5) Messrs. Brooks, Howell, and Schefler each will receive options to purchase
5,000 shares of Common Stock upon their election as directors, and each will
each receive options to purchase 2,500 shares of Common Stock following each
annual meeting of stockholders for as long as he remains a member of the
Board. See "Management -- 1996 Stock Option Plan."
DESCRIPTION OF CAPITAL STOCK
GENERAL
The Company's authorized capital stock consists of 10,000,000 shares of
Common Stock, par value $0.0001 per share, and 1,000,000 shares of serial
preferred stock ("Serial Preferred Stock"), par value $0.0001 per share. As of
October 31, 1996, there were issued and outstanding 807,851 shares of Common
Stock and no shares of Serial Preferred Stock.
COMMON STOCK
The holders of Common Stock are entitled to one vote for each share on all
matters submitted to a vote of stockholders and do not have cumulative voting
rights. Accordingly, the holders of a majority of the stock entitled to vote in
any election of directors may elect all of the directors standing for election.
Subject to the preferences that may be applicable to any then outstanding
preferred stock, the holders of Common Stock will be entitled to receive such
dividends, if any, as may be declared by the Board from time to time out of
legally available funds. Upon the liquidation, dissolution, or winding up of the
Company, the holders of Common Stock will be entitled to share ratably in all
assets of the Company that are legally available for distribution, after payment
of all debts and other liabilities and subject to the prior rights of holders of
any preferred stock then outstanding. The holders of Common Stock have no
preemptive, subscription, redemption, or conversion rights.
PREFERRED STOCK
The Board of Directors is authorized, subject to any limitations prescribed
by the laws of the state of Delaware, but without further action by the
Company's stockholders, to provide for the issuance of Serial Preferred Stock in
one or more series, to establish from time to time the number of shares to be
included in such series, to fix the designations, powers, preferences, and
rights of the shares of each such series and any qualifications, limitations, or
restrictions thereof, and to increase or decrease the number of shares of any
such series (but not below the number of shares of such series then outstanding)
without any further vote or action by the stockholders. The Board may authorize
and issue Serial Preferred Stock with voting or conversion rights that could
adversely affect the voting power or other rights of the holders of Common
Stock. In addition, the issuance of Serial Preferred Stock may have the effect
of delaying, deterring, or preventing a change in control of the Company. The
Company has no current plan to issue any shares of Serial Preferred Stock.
BRIDGE WARRANTS
Upon the completion of the Offering, Styling will issue 18,182 Bridge
Warrants to the holder of the Bridge Note. Each Bridge Warrant entitles the
holder thereof to purchase, at any time during the two-year period commencing on
the date of issuance of the warrant, one share of Common Stock at a price of
125% of the Offering Price per share, subject to adjustment in accordance with
the anti-dilution and other provisions referred to below. The shares of the
Company's Common Stock underlying the Bridge Warrants (the "Bridge Warrant
Shares"), when issued upon the exercise thereof and payment of the purchase
price, will be fully paid
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<PAGE> 50
and nonassessable. The holders of the Bridge Warrants do not have the rights or
privileges of holders of Common Stock.
The Bridge Warrants are subject to redemption by the Company, at any time,
commencing on the date of issuance, at a price of $.01 per share of Common Stock
purchasable upon exercise of the Bridge Warrants if the closing bid price of the
Common Stock equals or exceeds 250% of the Offering Price. Redemption of the
Bridge Warrants can be made only after 30 days' notice, during which period the
holders may exercise the Bridge Warrants.
The exercise price and the terms of the Bridge Warrants bear no relation to
any objective criteria of value and should not be regarded as an indication of
any future market price of the Common Stock offered hereby. The exercise price
and the number of shares of Common Stock purchasable upon the exercise of the
Bridge Warrants are subject to adjustment upon the occurrence of certain events,
including cash dividends, stock dividends, stock splits, and combinations or
reclassification on or of the Common Stock. Additionally, an adjustment would be
made in the case of a reclassification or exchange of Common Stock,
consolidation or merger of the Company with or into another corporation, or sale
of all or substantially all of the assets of the Company in order to enable
holders of Bridge Warrants to acquire the kind and number of shares of stock or
other securities or property receivable in such event by a holder of the number
of shares that might otherwise have been purchased upon the exercise of the
Bridge Warrants. No adjustments will be made unless such adjustment would
require an increase or decrease of at least 5% in the number of securities then
purchasable under the Bridge Warrants.
The Company has granted certain "piggy-back" registration rights with
respect to the shares of Common Stock purchasable pursuant to the exercise of
the Bridge Warrants. Pursuant to such registration rights, each holder of Common
Stock acquired pursuant to the exercise of Bridge Warrants may request the
Company to register such stock if the Company proposes to file a registration
statement at any time after the consummation of the Offering. The Company has
agreed to pay all expenses associated with any registration of the Common Stock
acquired pursuant to the exercise of the Bridge Warrants, except that any fees
of legal counsel of the holders and underwriter's fees, discounts, or
commissions relating to the Common Stock registered by such holders will be the
responsibility of the selling stockholder. In the event that the Company's
registration of Common Stock is for a public offering involving an underwriting,
the "piggy-back" registration rights described above will be conditioned on the
underwriter's approval and on the holder's participation in such underwriting.
The "piggy-back" registration rights of the Bridge Warrantholders expire two
years after the receipt of the shares of Common Stock underlying the Bridge
Warrants.
The Company also has granted certain "demand" registration rights with
respect to the shares of Common Stock purchasable pursuant to the exercise of
the Bridge Warrants. Pursuant to such registration rights, during the six-month
period commencing 120 days after the consummation of the Offering, the holders
of 50% or more of the Common Stock acquired pursuant to the terms of the Bridge
Note and pursuant to the exercise of the Bridge Warrants may request the Company
to register such stock. The Company is obligated to effect only one "demand"
registration. The Company, however, is not obligated to prepare and file a
registration statement registering such shares of Common Stock at any time that
the Company has given notice of its proposal to register its securities and is
undertaking to cause such registration to become effective, or for a period of
120 days following the effective date of any such registration. During such
period, the holders of the Bridge Note Shares and Bridge Warrant Shares would
have the right to exercise their "piggyback" registration rights as described in
the paragraph above.
DELAWARE GENERAL CORPORATION LAW AND CERTAIN CHARTER PROVISIONS
The provisions of the Company's Certificate of Incorporation and Bylaws and
the Delaware GCL summarized below may have the effect of discouraging, delaying,
or preventing hostile takeovers, including those that might result in a premium
over the market price, or discouraging, delaying, or preventing changes in
control or management of the Company.
Upon the completion of the Offering, the Company will be subject to the
provisions of Section 203 of the Delaware GCL. In general, this statute
prohibits a publicly held Delaware corporation from engaging, under certain
circumstances, in a "business combination" with an "interested stockholder" for
a period of three years
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<PAGE> 51
after the date of the transaction in which the person becomes an interested
stockholder, unless (i) prior to the date at which the stockholder became an
interested stockholder, the Board of Directors approved either the business
combination or the transaction in which the stockholder becomes an interested
stockholder; (ii) upon consummation of the transaction in which the stockholder
becomes an interested stockholder, the stockholder owned at least 85% of the
outstanding voting stock of the corporation (excluding shares held by directors
who are officers or held in certain employee stock plans); or (iii) the business
combination is approved by the Board of Directors and by two-thirds of the
outstanding voting stock of the corporation (excluding shares held by the
interested stockholder) at a meeting of stockholders (and not by written
consent) held on or subsequent to the date of the business combination. An
"interested stockholder" is a person who, together with affiliates and
associates, owns (or at any time within the prior three years did own) 15% or
more of the corporation's voting stock. Section 203 defines a "business
combination" to include mergers, consolidations, stock sales and asset based
transactions, and other transactions resulting in a financial benefit to the
interested stockholder.
The Company's Certificate of Incorporation and Bylaws contain a number of
other provisions relating to corporate governance and to the rights of
stockholders. These provisions include (a) the authority of the Board to fill
vacancies on the Board, and (b) the authority of the Board to issue preferred
stock in series with such voting rights and other powers as the Board may
determine.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is Corporate Stock
Transfer, Inc., Denver, Colorado.
LISTING
The Common Stock has been approved for quotation on the Nasdaq National
Market under the symbol "STYL."
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, the Company will have outstanding
3,792,149 shares of Common Stock (including options with an exercise price less
than the Offering Price). All of the 2,800,000 shares to be sold in the Offering
will be freely tradeable without restriction or further registration under the
Securities Act unless held by "affiliates" of the Company as that term is
defined in Rule 144 under the Securities Act. The 807,851 shares owned by Mr.
Leopold, which were acquired in June 1995, the 4,545 shares to be issued in
connection with the consummation of the Acquisitions, and the 18,182 Bridge Note
Shares will be "restricted securities" as that term is defined under Rule 144
(the "Restricted Shares"). The Restricted Shares may be subject to the volume
and other resale limitations described below.
The directors and executive officers of the Company have agreed, at the
request of the Representatives, not to sell or otherwise dispose of any shares
of Common Stock in the public market for a period of 270 days after the date of
this Prospectus without the prior written consent of the Representatives. See
"Underwriting." Mr. Leopold has agreed to similar restrictions on the shares he
will purchase in the Offering. These persons will own approximately 98.6% of the
Restricted Shares upon completion of the Offering. Subject to compliance with
the volume and other limitations of Rule 144 described below, in June 1997 and
November 1998, 807,851, and 22,727 Restricted Shares, respectively, will be
eligible for sale in the public market.
In general, under Rule 144 as currently in effect, any person (or persons
whose shares are aggregated for purposes of Rule 144) who beneficially owns
restricted securities with respect to which at least two years have elapsed
since the later of the date the shares were acquired from the Company or from an
affiliate of the Company, is entitled to sell, within any three-month period
commencing 90 days after the date of this Prospectus, a number of shares that
does not exceed the greater of (i) 1% of the then outstanding shares of Common
Stock of the Company (approximately 380,000 shares immediately after the
Offering) or (ii) the average weekly trading volume in Common Stock during the
four calendar weeks preceding such sale. Sales under Rule 144 also are subject
to certain manner-of-sale provisions and notice requirements and to the
availability of current public information about the Company. A person who is
not an affiliate, who has not been an affiliate within three months prior to
sale, and who beneficially owns restricted securities with respect to which at
least three years have elapsed since the later of the date the shares were
acquired from the
50
<PAGE> 52
Company or from an affiliate of the Company, is entitled to sell such shares
under Rule 144(k) without regard to any of the volume limitations or other
requirements described above.
The holders of 4,545 shares of Common Stock issued in connection with the
Acquisitions will be entitled to certain "piggyback" registration rights with
respect to the shares of Common Stock. Subject to certain conditions and
limitations, if at any time after the 180 day period following the date of
completion of the Offering, the Company proposes to register any of its
securities under the Securities Act, either for its own account or for the
account of other security holders, the Company will be required to include the
shares of Common Stock held by such persons in such registration. The Company's
obligation to register the shares of Common Stock held by such person expires
after two years from the issuance of such shares. See "Description of the
Acquisitions."
The holders of the Bridge Note Shares and the Bridge Warrant Shares may
exercise one-time demand registration rights and require the Company to register
the Bridge Note Shares and the Bridge Warrant Shares at any time during the
six-month period commencing 120 days after the completion of the Offering. The
holder of the Bridge Note Shares and the Bridge Warrant Shares also has
"piggyback" registration rights with respect to such shares as well. See
"Description of Capital Stock -- Bridge Warrants."
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Underwriters named below (the "Underwriters"), represented by Friedman,
Billings, Ramsey & Co., Inc. and Prime Charter Ltd. (the "Representatives"),
have severally agreed to purchase from the Company the following respective
number of shares of Common Stock at the Offering Price less the underwriting
discounts and commissions set forth on the cover page of this Prospectus:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
------------------------------------------------------------------ ---------
<S> <C>
Friedman, Billings, Ramsey & Co., Inc.............................
Prime Charter Ltd.................................................
---------
Total........................................................ 2,800,000
========
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters thereunder are subject to certain conditions precedent and that the
Underwriters will purchase all of the shares of Common Stock offered hereby if
any of such shares are purchased.
The Underwriters propose initially to offer the shares of Common Stock
offered hereby to the public at the price to public set forth on the cover page
of this Prospectus. The Underwriters may allow a concession to selected dealers
who are members of the National Association of Securities Dealers, Inc. ("NASD")
not in excess of $ per share, and the Underwriters may allow, and such
dealers may reallow, to members of the NASD a concession not in excess of
$ per share. After the initial public offering, the price to public,
the concession, and the reallowance may be changed by the Underwriters.
The Company has agreed to pay to the Representatives a non-accountable
expense allowance equal to the greater of 1 1/2% of the gross proceeds of the
Offering or $350,000, $67,000 of which has been paid, to cover some of the due
diligence expenses related to the Offering.
The Company has granted an option to the Underwriters, exercisable within
30 days after the date of this Prospectus, to purchase up to an additional
420,000 shares of Common Stock at the Offering Price, less underwriting
discounts and commissions and the non-accountable expense allowance. The
Underwriters may exercise the option solely to cover overallotments, if any,
made on the sale of the Common Stock offered hereby.
The Company, its executive officers and directors have agreed that, for a
period of 270 days after the date of closing of the Offering, they will not,
directly or indirectly, offer, sell, contract to sell, grant any option to sell
or otherwise dispose of, directly or indirectly, any shares of Common Stock (or
securities convertible into or
51
<PAGE> 53
exchangeable for, or any rights to purchase or acquire, Common Stock, other than
Options under the Plan and upon exercise of Options granted under the Plan)
without the prior written consent of the Representatives.
Prior to the Offering, there has been no market for the Common Stock, and
there can be no assurance that a regular trading market will develop upon the
completion of the Offering. The Offering Price was determined by negotiations
between the Company and the Representatives. The primary factors considered in
determining Offering Price included the history of and prospects for the
industry in which the Company competes, market valuations of comparable
companies, market conditions for public offerings, the history of and prospects
for the Company's business, the Acquired Businesses' past and present operations
and earnings and the trend of such earnings, the prospects for future earnings
of the Company, the Company's current financial position, an assessment of the
Company's management, the general condition of the securities markets, the
demand for similar securities of comparable companies, and other relevant
factors.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act.
The Representatives have advised the Company that the Underwriters do not
intend to confirm sales to any account over which they exercise discretionary
authority.
The Company has agreed to sell to the Representatives or their designees,
for nominal consideration, the Representatives' Warrants to purchase an
aggregate of 196,000 shares of Common Stock. The shares of Common Stock subject
to the Representatives' Warrants will be in all respects identical to the shares
of Common Stock offered to the public hereby. The Representatives' Warrants will
be exercisable for a five-year period commencing one year after the closing date
of the Offering at a per share exercise price equal to 120% of the Offering
Price. Neither the Representatives' Warrants nor the underlying shares of Common
Stock may be transferred, assigned, or hypothecated for a period of one year
from the closing of the Offering, except to the extent permitted by applicable
rules of the NASD. During the period beginning one year from the closing of the
Offering and ending five years after such effective date, the Company has agreed
at its expense to register under the Securities Act the shares of Common Stock
issued or issuable upon exercise of the Representatives' Warrants and, for the
period beginning one year from the date of this Prospectus of which this
Prospectus is a part and ending seven years after such effective date, to
include such shares of Common Stock in any appropriate registration statement
which is filed by the Company. The Representatives' Warrants will contain
anti-dilution provisions providing for appropriate adjustment of the exercise
price and number of shares that may be purchased upon the occurrence of certain
events. The Representatives' Warrants may be exercised by paying the exercise
price in cash, through the surrender of shares of Common Stock, through a
reduction in the number of shares covered thereby, or by using a combination of
such methods.
The Company has agreed that, for a period of three years from the date of
this Prospectus, the Representatives will have the right to send a
representative to observe each meeting of the Company's Board of Directors, or
in lieu of such observer, the Representatives may elect to require the Company
to use its best efforts to elect Sylvan Schefler, Vice Chairman of Prime Charter
Ltd., or another mutually acceptable designee, to the Company's Board of
Directors for such three-year period. The Company has agreed to elect Mr.
Schefler as a member of its Board of Directors.
LEGAL OPINIONS
The validity of the shares of Common Stock offered hereby will be passed
upon for the Company by O'Connor, Cavanagh, Anderson, Killingsworth & Beshears,
a professional association, Phoenix, Arizona, and for the Underwriters by
Brownstein Hyatt Farber & Strickland, P.C., Denver, Colorado. Brownstein Hyatt
Farber & Strickland, P.C. has provided legal services to the Company in the past
and may do so in the future.
EXPERTS
The financial statements included in this Prospectus and elsewhere in the
Registration Statement have been audited by Arthur Andersen LLP, independent
public accountants, as indicated in their reports with respect thereto, and are
included herein in reliance upon the authority of said firm as experts in giving
said reports.
52
<PAGE> 54
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement under
the Securities Act with respect to the Common Stock offered by this Prospectus.
This Prospectus does not contain all of the information set forth in the
Registration Statement and the exhibits thereto. For further information with
respect to the Company and the Common Stock offered by this Prospectus,
reference is made to the Registration Statement, including the exhibits thereto.
Statements contained in this Prospectus as to the contents of any contract or
other document referred to are not necessarily complete, and in each instance
reference is made to the copy of such contract or other document filed as an
exhibit to the Registration Statement, each such statement being qualified in
all respects by such reference. The Registration Statement, together with
exhibits thereto, may be inspected at the public reference facilities of the
Commission at 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549, without
charge and copies of the material contained therein may be obtained at
prescribed rates from the Commission's public reference facilities in
Washington, D.C. The Commission also maintains a Web site that contains reports,
proxy and information statements and other materials that are filed through the
Commission's Electronic Data Gathering, Analysis, and Retrieval system. This Web
site can be accessed at http://www.sec.gov.
53
<PAGE> 55
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
STYLING TECHNOLOGY CORPORATION PRO FORMA COMBINED
Introduction to Unaudited Pro Forma Combined Financial Statements................... F-2
Unaudited Pro Forma Combined Balance Sheet -- June 30, 1996......................... F-3
Notes to Unaudited Pro Forma Combined Balance Sheet................................. F-4
Unaudited Pro Forma Combined Statement of Operations for the Six Months
Ended June 30, 1996.............................................................. F-5
Unaudited Pro Forma Combined Statement of Operations for the Year Ended
December 31, 1995................................................................ F-6
Notes to Unaudited Pro Forma Combined Statements of Operations...................... F-7
BODY DRENCH (A DIVISION OF DESIGNS BY NORVELL, INC.)
Report of Independent Public Accountants............................................ F-8
Balance Sheets...................................................................... F-9
Statements of Operations............................................................ F-10
Statements of Changes in Owner's Investment......................................... F-11
Statements of Cash Flows............................................................ F-12
Notes to Financial Statements....................................................... F-13
GENA LABORATORIES, INC.
Report of Independent Public Accountants............................................ F-16
Balance Sheets...................................................................... F-17
Statements of Operations............................................................ F-18
Statements of Stockholders' Equity.................................................. F-19
Statements of Cash Flows............................................................ F-20
Notes to Financial Statements....................................................... F-21
JDS MANUFACTURING CO., INC.
Report of Independent Public Accountants............................................ F-27
Balance Sheets...................................................................... F-28
Statements of Operations............................................................ F-29
Statements of Stockholders' Equity.................................................. F-30
Statements of Cash Flows............................................................ F-31
Notes to Financial Statements....................................................... F-32
KOTCHAMMER INVESTMENTS, INC.
Report of Independent Public Accountants............................................ F-35
Balance Sheets...................................................................... F-36
Statements of Operations............................................................ F-37
Statements of Stockholders' Deficit................................................. F-38
Statements of Cash Flows............................................................ F-39
Notes to Financial Statements....................................................... F-40
STYLING TECHNOLOGY CORPORATION
Report of Independent Public Accountants............................................ F-43
Balance Sheets...................................................................... F-44
Notes to Balance Sheets............................................................. F-45
</TABLE>
F-1
<PAGE> 56
STYLING TECHNOLOGY CORPORATION AND ACQUIRED BUSINESSES
INTRODUCTION TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
The following pro forma combined financial statements include the pro forma
combined balance sheet of the Company as of June 30, 1996, and the pro forma
combined statement of operations for the year ended December 31, 1995 and the
six months ended June 30, 1996.
The pro forma financial statements have been prepared as if (a) the
acquisition of the Acquired Businesses, and (b) the planned initial public
offering (the "Offering") had been completed.
Simultaneously with the consummation of the Offering, the Company will
acquire the Acquired Businesses in four separate transactions, in exchange for
cash, notes, repayment or assumption of indebtedness, and shares of Common
Stock, pursuant to acquisition agreements with each of the Acquired Businesses
as described in "Description of the Acquisitions." The agreements provide for an
aggregate purchase price for the Acquired Businesses of approximately $23.23
million, subject to certain adjustments, consisting of (i) approximately $20.65
million to be paid in cash, (ii) approximately $2.53 million to be paid through
the issuance of debt, and (iii) approximately $50,000 in aggregate market value
of Common Stock, based on the initial public offering price. In addition, the
Company will assume approximately $0.3 million of existing debt of the related
Acquired Businesses. The acquisition of all of the Acquired Businesses by the
Company is a condition to the consummation of this Offering.
The pro forma combined balance sheet as of June 30, 1996 gives effect to
the Acquisitions and the Offering as if such transactions had occurred on June
30, 1996. The pro forma combined statement of operations for the year ended
December 31, 1995 and the six months ended June 30, 1996 assumes the Company had
completed the transactions on January 1, 1995.
The pro forma combined financial statements of the Acquired Businesses have
been derived from: (i) the audited historical financial statements of Gena for
the year ended February 29, 1996 and JDS for the year ended September 30, 1995,
and Body Drench for the year ended December 31, 1995; (ii) the unaudited
financial statements of KII as of and for the year ended December 31, 1995;
(iii) and the unaudited interim financial statements as of and for the six
months ended June 30, 1996 of the Acquired Businesses, except for Gena which is
as of May 31, 1996 and for the six months ended August 31, 1996. The fiscal year
end for each of the Acquired Businesses is within 93 days of the Company's
December 31 fiscal year end and no adjustments to conform fiscal year ends are
required. The pro forma combined statements of operations may not be indicative
of actual results that would have been achieved if the transactions had occurred
on the dates indicated or the results which may be realized in the future. The
pro forma combined statement of operations data contain adjustments which are
directly attributable to the transaction.
F-2
<PAGE> 57
STYLING TECHNOLOGY CORPORATION AND ACQUIRED BUSINESSES
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
JUNE 30, 1996
<TABLE>
<CAPTION>
STYLING BODY TOTAL
TECHNOLOGY GENA DRENCH JDS KII COMBINED
---------- ---------- ---------- -------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents..................... $ 100 $ 447,141 $ -- $ 66,368 $ 177,321 $ 690,930
Accounts receivable, net...................... -- 978,297 1,877,549 284,175 94,332 3,234,353
Inventory..................................... -- 1,065,889 2,081,187 242,072 258,197 3,647,345
Other......................................... 300,018 127,692 9,831 10,004 26,642 474,187
-------- ---------- ---------- -------- --------- ----------
Total current assets......................... 300,118 2,619,019 3,968,567 602,619 556,492 8,046,815
PP&E, net..................................... -- 826,822 252,766 22,571 64,824 1,166,983
Goodwill...................................... -- -- -- -- -- --
Other......................................... -- 261,294 -- 102,934 468 364,696
-------- ---------- ---------- -------- --------- ----------
Total assets................................. $300,118 $3,707,135 $4,221,333 $728,124 $ 621,784 $9,578,494
======== ========== ========== ======== ========= ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable.............................. $ -- $ 293,729 $3,377,620 $161,943 $ 21,777 $3,855,069
Accrued liabilities........................... 300,018 241,963 261,618 107,228 80,078 990,905
Current portion of debt....................... -- 102,340 -- -- 110,000 212,340
Other......................................... -- -- -- -- -- --
-------- ---------- ---------- -------- --------- ----------
Total current liabilities.................... 300,018 638,032 3,639,238 269,171 211,855 5,058,314
Long term debt................................ -- 309,687 -- 431,500 610,000 1,351,187
Other......................................... -- -- -- -- -- --
Stockholder's equity:
Common stock.................................. 100 10,000 -- 10,000 50,000 70,100
Additional paid in capital.................... -- 88,303 -- -- -- 88,303
Retained earnings (deficit)................... -- 2,661,113 582,095 17,453 (250,071) 3,010,590
Treasury stock................................
-------- ---------- ---------- -------- --------- ----------
Total liabilities and
stockholders' equity....................... $300,118 $3,707,135 $4,221,333 $728,124 $ 621,784 $9,578,494
======== ========== ========== ======== ========= ==========
<CAPTION>
ADJUSTED
PRO FORMA PRO FORMA PRO FORMA
ADJUSTMENTS COMBINED OFFERING COMBINED
------------ ------------ ----------- -----------
<S> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents..................... $(20,371,333)(A) $(19,680,403) $25,489,000(C)(D) $ 5,808,597
Accounts receivable, net...................... -- 3,234,353 -- 3,234,353
Inventory..................................... -- 3,647,345 -- 3,647,345
Other......................................... (170,000) 304,187 -- 304,187
------------ ------------ ----------- -----------
Total current assets......................... (20,541,333) (12,494,518) 25,489,000 12,994,482
PP&E, net..................................... -- 1,166,983 -- 1,166,983
Goodwill...................................... 18,060,091(A) 18,060,091 -- 18,060,091
Other......................................... (97,000)(A) 267,696 -- 267,696
------------ ------------ ----------- -----------
Total assets................................. $ (2,578,242) $ 7,000,252 $25,489,000 $32,489,252
============ ============ =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable.............................. $ (77,620)(A) $ 3,777,449 $ -- $ 3,777,449
Accrued liabilities........................... (211,618)(A) 779,287 -- 779,287
Current portion of debt....................... (110,000)(A) 102,340 -- 102,340
Other......................................... -- -- -- --
------------ ------------ ----------- -----------
Total current liabilities.................... (399,238) 4,659,076 -- 4,659,076
Long term debt................................ (1,051,620)(A) 299,567 -- 299,567
1,991,509(A) 1,991,509 1,991,509
-- --
-- --
Other......................................... -- -- --
Stockholder's equity:
Common stock.................................. (70,000)(B) 100 100
Additional paid in capital.................... (38,303)(B) 50,000 27,289,000(C) 27,339,000
Retained earnings (deficit)................... (3,010,590)(B) -- -- --
Treasury stock................................ (1,800,000)(D) (1,800,000)
------------ ------------ ----------- -----------
Total liabilities and
stockholders' equity....................... $ (2,578,242) $ 7,000,252 $25,489,000 $32,489,252
============ ============ =========== ===========
</TABLE>
F-3
<PAGE> 58
STYLING TECHNOLOGY CORPORATION AND ACQUIRED BUSINESSES
NOTES TO UNAUDITED PRO FORMA COMBINED BALANCE SHEET
NOTE 1. PRO FORMA BALANCE SHEET ADJUSTMENTS
The accompanying pro forma combined balance sheet as of June 30, 1996,
gives effect to the purchase of the Acquired Businesses and the Offering as if
such transactions had occurred on June 30, 1996.
(A) Adjustments to reflect the excess of the purchase price plus the liabilities
assumed less the fair value of the tangible net assets acquired.
<TABLE>
<CAPTION>
BODY STYLING
GENA DRENCH JDS KII TECHNOLOGY TOTAL
----------- ----------- ---------- -------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Purchase Price:
Cash portion....... $ 8,000,000 $ 7,821,333(1) $4,100,000 $450,000 $20,371,333
Seller carryback
financing....... 1,652,893(3) -- 318,687(1) 19,929(1) 1,991,509
Issuance of
equity.......... -- -- -- 50,000 50,000
Other.............. -- -- 97,000(4) -- 97,000
----------- ----------- ---------- -------- -------- -----------
Purchase price....... $ 9,652,893 $ 7,821,333 $4,515,687 $519,929 $22,509,842
Plus Liabilities of
Acquired
Businesses......... 947,719 3,639,238 700,671 821,855 6,109,483
Less liabilities not
assumed............ 10,119 289,238 431,500 720,000 1,450,857(1)
----------- ----------- ---------- -------- -------- -----------
10,590,493 11,171,333 4,784,858 621,784 27,168,468
Fair value of
assets(5).......... 3,707,135 4,221,333 728,124 621,784 9,278,376
Acquisition costs.... 170,000 170,000(2)
----------- ----------- ---------- -------- -------- -----------
Goodwill acquired.... $ 6,883,358 $ 6,950,000 $4,056,734 $ -- $170,000 $18,060,092
=========== =========== ========== ======== ======== ===========
</TABLE>
- ---------------
(1) Amount differs from what is stated in the purchase agreement, due to
contractual purchase price adjustments expected based upon the financial
position of the Acquired Businesses at June 30, 1996.
(2) Reflects consulting costs incurred related to the acquisition of the four
companies, estimated costs required to fund severance liabilities that will
arise as a result of the elimination of specific employees at each of the
four companies, and estimated relocation costs to be incurred as part of the
consolidation of Body Drench and JDS into Gena.
(3) Amount represents fair value of a $2,000,000 non-interest bearing note to
sellers of Gena, secured by 181,818 escrowed shares of Styling to be issued
at closing.
(4) Represents a portion of the purchase price to be satisfied by assignment of
the cash surrender value of a life insurance policy.
(5) Management estimates that the historical book value of assets to be acquired
approximate fair value. Therefore no step-up in the value of the assets of
the Acquired Businesses has been reflected.
(B) Reflects the elimination of the equity of the Acquired Businesses.
(C) Reflects the net proceeds from the Offering of 2,800,000 shares of $.0001
par value Common Stock at the Offering Price.
(D) Reflects the payment of cash in connection with the repurchase of Common
Stock.
F-4
<PAGE> 59
STYLING TECHNOLOGY CORPORATION AND ACQUIRED BUSINESSES
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
(SIX MONTHS ENDED JUNE 30, 1996)
<TABLE>
<CAPTION>
ADJUSTED
BODY TOTAL PRO FORMA PRO FORMA
GENA(1) DRENCH JDS KII COMBINED ADJUSTMENTS COMBINED
---------- ---------- ---------- -------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales....................... $4,704,984 $6,586,455 $1,664,932 $735,538 $13,691,909 $13,691,909
Cost of sales................... 2,545,241 3,465,259 675,132 343,014 7,028,646 7,028,646
---------- ---------- ---------- -------- ----------- ----------- -----------
Gross profit................ 2,159,743 3,121,196 989,800 392,524 6,663,263 6,663,263
Selling, general, and 1,432,336 2,402,064 928,214 328,925 5,091,539 (1,051,157 )(AA) 4,040,382
administrative.................. (BB)
(CC)
(DD)
---------- ---------- ---------- -------- ----------- ----------- -----------
Income from operations........ 727,407 719,132 61,586 63,599 1,571,724 1,051,157 2,622,881
Interest expense................ 21,226 8,783 19,961 38,675 88,645 99,796 (FF) 188,441
Other income (expense), net..... (6,073) -- 932 (160) (5,301) -- (5,301)
---------- ---------- ---------- -------- ----------- ----------- -----------
Income before income taxes...... 700,108 710,349 42,557 24,764 1,477,778 951,361 2,429,139
Provision for income taxes...... 258,015 269,933 16,600 -- 544,548 434,856 (EE) 979,404
---------- ---------- ---------- -------- ----------- ----------- -----------
Net income.................... $ 442,093 $ 440,416 $ 25,957 $ 24,764 $ 933,230 $ 516,505 $ 1,449,735
========== ========== ========== ======== =========== =========== ===========
Pro forma earnings per share.... $ 0.38
===========
Weighted average common and
common equivalent shares
outstanding................... $ 3,790,680(GG)
===========
</TABLE>
- ---------------
(1) Results for Gena are for six months ended August 31, 1996.
F-5
<PAGE> 60
STYLING TECHNOLOGY CORPORATION AND ACQUIRED BUSINESSES
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
(YEAR ENDED DECEMBER 31, 1995)
<TABLE>
<CAPTION>
ADJUSTED
BODY TOTAL PRO FORMA PRO FORMA
GENA DRENCH JDS KII COMBINED ADJUSTMENTS COMBINED
---------- ----------- ---------- ---------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales.................... $8,384,092 $11,871,171 $3,367,599 $1,557,709 $25,180,571 $25,180,571
Cost of sales................ 4,818,786 6,426,775 1,348,295 711,925 13,305,781 13,305,781
---------- ----------- ---------- ---------- ----------- ----------- -----------
Gross profit............. 3,565,306 5,444,396 2,019,304 845,784 11,874,790 -- 11,874,790
(AA)
(DD)
(CC)
Selling, general, and
administrative ............ 3,033,409 4,883,265 2,010,142 891,146 10,817,962 (2,102,313 )(BB) 8,715,649
---------- ----------- ---------- ---------- ----------- ----------- -----------
Income from operations..... 531,897 561,131 9,162 (45,362) 1,056,828 2,102,313 3,159,141
Interest expense............. 43,289 87,585 35,589 89,557 256,020 129,573 (FF) 385,593
Other income (expense),
net........................ 12,809 -- 41,951 -- 54,760 -- 54,760
---------- ----------- ---------- ---------- ----------- ----------- -----------
Income (loss) before income
taxes...................... 501,417 473,546 15,524 (134,919) 855,568 1,972,740 2,828,308
Provision (benefit) for
income taxes............... 184,790 179,947 6,950 -- 371,687 858,093 (EE) 1,229,780
---------- ----------- ---------- ---------- ----------- ----------- -----------
Net income (loss)........ $ 316,627 $ 293,599 $ 8,574 $ (134,919) $ 483,881 $1,114,647 $ 1,598,528
========== =========== ========== ========== =========== =========== ===========
Pro forma earnings (loss) per
share...................... $ 0.42
===========
Weighted average common and
common equivalent shares
outstanding................ 3,790,680(GG)
===========
</TABLE>
F-6
<PAGE> 61
STYLING TECHNOLOGY CORPORATION
NOTES TO UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS
NOTE 2. PRO FORMA STATEMENT OF OPERATIONS ADJUSTMENTS
The accompanying pro forma combined statement of operations for the year
ended December 31, 1995 assumes that Styling had completed the Acquisitions and
the Offering on January 1, 1995.
(AA) Reflects the elimination of salaries and benefits of specific
shareholders not continuing with the combined companies.
(BB) Reflects the reduction of salary costs related to the elimination of
specific positions within each of the four companies, net of the additional
costs and expenses of new officers, and the elimination of expenses related to
facility closures at Body Drench and JDS and the consolidation of operations at
Gena.
(CC) Reflects the reduction for goodwill amortization from Gena which
related to prior acquisitions.
(DD) To record the amortization of goodwill over 25 years.
(EE) Reflects the additional income tax provision based on applying the
statutory income tax rates of each company, adjusted for goodwill amortization
from the JDS and Gena acquisitions which is not deductible for income tax
reporting purposes.
(FF) Reflects the interest cost from the seller carryback financing, net of
interest expense eliminated from Body Drench.
(GG) Pro forma per share amounts are based on the weighted average shares
outstanding, including stock options granted to management and shares issued to
the holder of the Bridge Note, for each period.
F-7
<PAGE> 62
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Styling Technology Corporation:
We have audited the accompanying balance sheets of BODY DRENCH (a Division
of Designs by Norvell, Inc., a Tennessee corporation) as of December 31, 1994
and 1995, and the related statements of operations, changes in owners investment
and cash flows for each of the three years in the period ended December 31,
1995. These financial statements are the responsibility of the Division's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Body Drench as of December
31, 1994 and 1995, and the results of its operations and its cash flows for each
of the three years in the period ended December 31, 1995 in conformity with
generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Division will continue as a going concern. As discussed in Note 6 to the
financial statements, the Division's parent company has suffered recurring cash
flow difficulties that raise substantial doubt about its ability to continue as
a going concern. Management's plans in regard to these matters are also
described in Note 7. The financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
ARTHUR ANDERSEN LLP
Phoenix, Arizona,
June 28, 1996.
F-8
<PAGE> 63
BODY DRENCH
(A DIVISION OF DESIGNS BY NOVELL, INC.)
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------- JUNE 30,
1994 1995 1996
---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Accounts receivable, net of allowance for doubtful
accounts of $89,841, $58,242 and $115,733,
respectively...................................... $1,396,048 $1,234,966 $1,877,549
Inventories.......................................... 3,052,783 3,078,656 2,081,187
Other current assets................................. 5,152 150,713 9,831
---------- ---------- ----------
Total current assets......................... 4,453,983 4,464,335 3,968,567
---------- ---------- ----------
Equipment, net of accumulated depreciation of $245,424,
$297,176 and $363,611, respectively.................. 167,697 316,443 252,766
---------- ---------- ----------
Total assets................................. $4,621,680 $4,780,778 $4,221,333
========== ========== ==========
LIABILITIES AND OWNER'S INVESTMENT
Current liabilities:
Accounts payable..................................... $2,550,654 $3,221,337 $2,975,855
Bank overdraft....................................... 651,953 274,810 401,765
Accrued expenses and other........................... 296,546 257,813 261,618
---------- ---------- ----------
Total current liabilities.................... 3,499,153 3,753,960 3,639,238
---------- ---------- ----------
Commitments and contingencies (Note 4)
Owner's investment:.................................... 1,122,527 1,026,818 582,095
---------- ---------- ----------
Liabilities and owner's investment..................... $4,621,680 $4,780,778 $4,221,333
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-9
<PAGE> 64
BODY DRENCH
(A DIVISION OF DESIGNS BY NORVELL, INC.)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
------------------------------------------ -------------------------
1993 1994 1995 1995 1996
---------- ----------- ----------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
NET SALES........................... $6,653,488 $11,138,369 $11,871,171 $8,249,771 $6,586,455
COST OF SALES....................... 4,039,843 6,342,770 6,426,775 4,564,260 3,465,259
---------- ----------- ----------- ---------- ----------
GROSS PROFIT........................ 2,613,645 4,795,599 5,444,396 3,685,511 3,121,196
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES.......................... 2,054,919 4,075,756 4,883,265 2,971,173 2,402,064
---------- ----------- ----------- ---------- ----------
INCOME FROM OPERATIONS.............. 558,726 719,843 561,131 714,338 719,132
---------- ----------- ----------- ---------- ----------
INTEREST EXPENSE.................... 30,159 -- 87,585 43,792 8,783
---------- ----------- ----------- ---------- ----------
INCOME BEFORE PROVISION FOR INCOME
TAXES............................. 528,567 719,843 473,546 670,546 710,349
PROVISION FOR INCOME TAXES.......... 200,855 273,540 179,947 254,807 269,933
---------- ----------- ----------- ---------- ----------
NET INCOME.......................... $ 327,712 $ 446,303 $ 293,599 $ 415,739 $ 440,416
========== =========== =========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-10
<PAGE> 65
BODY DRENCH
(A DIVISION OF DESIGNS BY NORVELL, INC.)
STATEMENTS OF CHANGES IN OWNER'S INVESTMENT
<TABLE>
<S> <C>
BALANCE, December 31, 1992...................................................... $ (127,491)
Net income.................................................................... 327,712
Net payments to parent........................................................ (748,153)
----------
BALANCE, December 31, 1993...................................................... $ (547,932)
Net income.................................................................... 446,303
Net receipts from parent...................................................... 1,224,156
----------
BALANCE, December 31, 1994...................................................... $ 1,122,527
Net income.................................................................... 293,599
Net payments to parent........................................................ (389,308)
----------
BALANCE, December 31, 1995...................................................... $ 1,026,818
Net income (unaudited)........................................................ 440,416
Net payments to parent (unaudited)............................................ (885,139)
----------
BALANCE, June 30, 1996 (unaudited).............................................. $ 582,095
==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-11
<PAGE> 66
BODY DRENCH
(A DIVISION OF DESIGNS BY NORVELL, INC.)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE
YEARS ENDED DECEMBER 31, 30,
------------------------------------- -----------------------
1993 1994 1995 1995 1996
---------- ----------- ---------- --------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income......................... $ 327,712 $ 446,303 $ 293,599 $ 415,739 $ 440,416
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation..................... 67,244 36,619 51,752 48,016 66,435
Changes in operating assets and
liabilities
Accounts receivable, net...... (49,548) (1,099,273) 161,082 (999,045) (642,583)
Inventories................... (224,184) (2,024,887) (25,873) (154,770) 997,469
Other, net.................... (5,127) 2,084 (145,561) (103,022) 140,882
Accounts payable.............. 516,725 783,427 670,683 448,985 (245,482)
Accrued expenses.............. 177,767 33,284 (38,733) (195,598) 3,805
--------- ---------- --------- --------- ---------
Net cash provided by (used in)
operating activities.......... 810,589 (1,822,443) 966,949 (539,695) 760,942
--------- ---------- --------- --------- ---------
CASH FLOW FROM INVESTING
ACTIVITIES:
Purchases of PP&E................ (62,436) (53,666) (200,498) (97,975) (2,758)
CASH FLOW FROM FINANCING
ACTIVITIES:
Bank overdraft................... -- 651,953 (377,143) -- 126,955
Net payments to/receipts from
parent........................ (748,153) 1,224,156 (389,308) 637,670 (885,139)
--------- ---------- --------- --------- ---------
Net cash provided by (used in)
financing activities.......... (748,153) 1,876,109 (766,451) 637,670 (758,184)
--------- ---------- --------- --------- ---------
Net change in cash............... -- -- -- -- --
--------- ---------- --------- --------- ---------
CASH, beginning of period.......... -- -- -- -- --
CASH, end of period................ $ -- $ -- $ -- $ -- $ --
========= ========== ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-12
<PAGE> 67
BODY DRENCH
(A DIVISION OF DESIGNS BY NORVELL, INC.)
NOTES TO FINANCIAL STATEMENTS
NOTE 1. ORGANIZATION AND BASIS OF PRESENTATION
Acquisition Agreement and Basis of Presentation
In accordance with the terms of an Asset Purchase Agreement dated April 5,
1996, between Styling Technology Corporation (STC) and Designs by Norvell, Inc.
(Norvell), STC agreed to acquire the assets of Body Drench (a Division of
Designs by Norvell, Inc.), primarily consisting of trade receivables,
inventories, equipment and the assumption of certain liabilities. The terms also
include a purchase price of $8,100,000 in cash and the potential issuance of
stock rights to Norvell based on the amount of liabilities assumed on the
closing date of the transaction. Consummation of the transaction is subject to
several conditions, including the completion of a successful public securities
offering by STC.
The accompanying financial statements represent the accounts of the
Division pursuant to the terms of the Asset Purchase Agreement between STC and
Norvell. In addition, interest expense included in the statements of operations
represents allocations of parent company interest, as calculated by Norvell.
Nature and Seasonality of Operations
The Division is engaged in the manufacture and distribution of skin care,
sun care and body care products. Their products are sold to professional hair
and tanning salons, health clubs, beauty supply outlets and retail product based
salons, both domestic and international.
The Division's revenues are seasonal in nature, with the first six months
of the year having the majority of the volume.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Fair Value of Financial Instruments
The carrying values of receivables, accounts payable and accrued expenses
approximate fair values due to the short-term maturities of these instruments.
Concentration of Credit Risk
Financial instruments which potentially subject the Division to
concentrations of credit risk consist principally of trade receivables.
Concentrations of credit risk with respect to trade receivables are limited due
to the number of customers comprising the Division's customer base. The Division
establishes an allowance for doubtful accounts based upon factors surrounding
the credit risk of specific customers, historical trends and other information.
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,
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Final settlement amounts could differ from those estimates.
Interim Unaudited Financial Information
In management's opinion, the financial statements for the six-month periods
ended June 30, 1995 and 1996 include all adjustments, consisting of normal
recurring adjustments, necessary to present fairly the Division's financial
position and results of operations as of and for the period then ended. The
Division's revenues are seasonal in nature, with the first six months of the
year having the majority of the volume.
F-13
<PAGE> 68
BODY DRENCH
(A DIVISION OF DESIGNS BY NORVELL, INC.)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Operating results for the six-month period ending June 30, 1996, are not
necessarily indicative of the results that may be expected for the fiscal year
ending December 31, 1996.
Revenue Recognition
The Division recognizes revenue from sales at the time product is shipped.
Equipment
Equipment is recorded at cost and depreciation on equipment is provided on
the straight-line method over the estimated useful lives of the related assets.
Expenditures for major renewals and betterments are capitalized, while
expenditures for maintenance and repairs, which do not improve assets or extend
their useful lives are charged to expense as incurred. For the three years ended
December 31, 1995, and for the six months ended June 30, 1996 and 1995,
maintenance and repair expenses charged to cost of operations were approximately
$25,978, $26,117, $30,498, $18,052 (unaudited) and $23,296 (unaudited),
respectively.
Inventories
Inventories are stated at the lower of cost or market. Cost is determined
using the first-in, first-out method.
The components of inventories are summarized as follows:
<TABLE>
<CAPTION>
JUNE 30,
1996
1994 1995 -----------
---------- ---------- (UNAUDITED)
<S> <C> <C> <C>
Finished goods................................. $1,377,182 $1,495,284 $ 1,010,819
Raw materials and promotional.................. 1,675,601 1,583,372 1,070,368
---------- ---------- ----------
$3,052,783 $3,078,656 $ 2,081,187
========== ========== ==========
</TABLE>
NOTE 3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
JUNE 30,
1996
1994 1995 -----------
--------- --------- (UNAUDITED)
<S> <C> <C> <C>
Factory equipment............................... $ 134,880 $ 178,405 $ 178,405
Computer equipment.............................. 243,647 394,026 396,784
Furniture and fixtures.......................... 34,594 41,188 41,188
--------- --------- ---------
413,121 613,619 616,377
Less -- Accumulated depreciation................ (245,424) (297,176) (363,611)
--------- --------- ---------
$ 167,697 $ 316,443 $ 252,766
========= ========= =========
</TABLE>
NOTE 4. INCOME TAXES
The Division accounts for income taxes using Statement of Financial
Accounting Standards No. 109 "Accounting for Income Taxes" (SFAS 109). SFAS 109
requires the recording of deferred tax assets and liabilities based on
differences between the financial statement and tax bases of assets and
liabilities and the
F-14
<PAGE> 69
BODY DRENCH
(A DIVISION OF DESIGNS BY NORVELL, INC.)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
tax rates in effect when these differences are expected to reverse. In
accordance with SFAS 109, the Division has recorded a provision for income taxes
separately from Norvell.
NOTE 5. COMMITMENTS AND CONTINGENCIES
Leases
The Division leases certain facilities and equipment under operating lease
agreements.
Future minimum payments under noncancelable operating leases with terms in
excess of one year are as follows:
<TABLE>
<CAPTION>
December 31,
------------------------------------------------
<S> <C>
1996....................................... $ 79,455
1997....................................... 50,423
1998....................................... 41,067
1999....................................... 2,333
</TABLE>
Rental expense under such operating leases was $52,163, $101,217, $238,746,
$106,999 (unaudited) and $95,353 (unaudited), for the three years ended December
31, 1995, and the six months ended June 30, 1995 and 1996, respectively.
The Division is involved in certain legal proceedings arising in the normal
course of business. In the opinion of management, the Division's potential
exposure under the pending proceedings is adequately provided for in the
accompanying consolidated financial statements.
NOTE 6. SIGNIFICANT VENDORS
Two vendors accounted for 69.3%, 67.4%, 53.0%, 60.7%, and 48.6% of the
Division's total raw materials purchases from vendors for the years ended
December 31, 1993, 1994 and 1995 and the six months ended June 30, 1995 and
1996, respectively. Management does not believe that the loss of these vendors
would significantly impact the Division's operations.
NOTE 7. SUBSEQUENT EVENTS
On April 5, 1996, Norvell entered into an asset purchase agreement to sell
certain assets and liabilities of the Division for consideration aggregating
approximately $8.1 million. In addition, an employee of the Division has entered
into an employment agreement with STC as a result of the acquisition (see Note
1).
NOTE 8. FINANCIAL CONDITION OF NORVELL
The Division's financial statements for the year ended December 31, 1995,
have been prepared on a going concern basis which contemplates the realization
of assets and the settlement of liabilities in the normal course of business.
Certain assets of the Division are pledged as collateral for Norvell's
outstanding debt. Norvell has experienced recurring cash flow difficulties and
is unable to meet its debt repayment requirements and has negative working
capital. Management recognizes that Norvell must generate additional recourses
or consider modifications to its current operations. Certain proceeds of the
sale of the Division are to be used to pay down this debt and to free the
collateral for transfer to STC. Management's plans include the sale of the
Division to STC (see Note 1). Should the acquisition of the Division by STC not
occur, the Division may be unable to continue as a going concern.
F-15
<PAGE> 70
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Styling Technology Corporation:
We have audited the accompanying balance sheets of GENA LABORATORIES, INC.
(a Texas corporation) as of February 28, 1995 and February 29, 1996, and the
related statements of operations, stockholders' equity, and cash flows for each
of the three years in the period ended February 29, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Gena Laboratories, Inc. as
of February 28, 1995 and February 29, 1996, and the results of its operations
and its cash flows for each of the three years in the period ended February 29,
1996, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Phoenix, Arizona,
June 22, 1996.
F-16
<PAGE> 71
GENA LABORATORIES, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
AUGUST 31,
1996
FEBRUARY 28, FEBRUARY 29, -----------
1995 1996
------------ ------------ (UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................ $ 390,325 $ 250,644 $ 563,512
Investments.......................................... 14,999 46,500 --
Accounts receivable, net of allowance for doubtful
accounts of $120,347, $136,093 and $136,093,
repectively....................................... 863,208 965,615 1,028,487
Inventory............................................ 965,335 1,213,688 1,099,463
Deferred tax asset................................... 99,055 131,790 131,790
Other current assets................................. -- -- 110,630
---------- ---------- ----------
Total current assets......................... 2,332,922 2,608,237 2,933,882
---------- ---------- ----------
Property and equipment, net of accumulated depreciation
of $392,026 $471,771, and $497,063, repectively...... 884,638 830,093 814,486
---------- ---------- ----------
Deferred tax asset, net of current portion............. -- 19,870 19,870
---------- ---------- ----------
Other assets........................................... 346,866 256,770 207,150
---------- ---------- ----------
$ 3,564,426 $ 3,714,970 $ 3,975,388
========== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable..................................... $ 391,381 $ 382,926 $ 371,988
Accrued expenses..................................... 302,808 259,903 195,462
Current portion of note payable to related parties... 32,571 34,929 34,324
Current portion of long-term debt.................... 96,056 95,248 17,647
---------- ---------- ----------
Total current liabilities.................... 822,816 773,006 619,421
---------- ---------- ----------
Note payable to related parties, less current
portion.............................................. 342,464 307,358 290,786
---------- ---------- ----------
Long-term debt, net of current portion................. 124,186 11,518 --
---------- ---------- ----------
Commitments and contingencies
Stockholders' equity:
Common stock, $5 par value, 2,000 shares authorized,
issued and outstanding............................ 10,000 10,000 10,000
Additional paid-in capital........................... 88,303 88,303 88,303
Unrealized holding loss on investment................ (35,303) (3,802) --
Retained earnings.................................... 2,211,960 2,528,587 2,966,878
---------- ---------- ----------
Total stockholders' equity................... 2,274,960 2,623,088 3,065,181
---------- ---------- ----------
Total liabilities and stockholders' equity... $ 3,564,426 $ 3,714,970 $ 3,975,388
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-17
<PAGE> 72
GENA LABORATORIES, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED SIX MONTHS ENDED
------------------------------------------ -----------------------
FEBRUARY 28, FEBRUARY 28, FEBRUARY 29, AUGUST 31, AUGUST 31,
1994 1995 1996 1995 1996
------------ ------------ ------------ ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
NET SALES..................................... $ 6,426,416 $ 7,523,751 $ 8,384,092 $4,335,552 $4,704,984
COST OF SALES................................. 3,280,046 4,163,395 4,818,786 2,296,406 2,545,241
---------- ---------- ---------- ---------- ----------
GROSS PROFIT.................................. 3,146,370 3,360,356 3,565,306 2,039,146 2,159,743
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES.................................... 2,744,363 2,963,926 3,033,409 1,573,135 1,453,562
---------- ---------- ---------- ---------- ----------
INCOME FROM OPERATIONS........................ 402,007 396,430 531,897 466,011 706,181
OTHER INCOME AND (EXPENSE), net............... 35,092 (35,282) (30,480) (2,357) (6,073)
---------- ---------- ---------- ---------- ----------
INCOME BEFORE PROVISION FOR INCOME TAXES...... 437,099 361,148 501,417 463,654 700,108
PROVISION FOR INCOME TAXES.................... 158,613 129,606 184,790 185,091 258,015
---------- ---------- ---------- ---------- ----------
NET INCOME.................................... $ 278,486 $ 231,542 $ 316,627 $ 278,563 $ 442,093
========== ========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-18
<PAGE> 73
GENA LABORATORIES, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
------------------ PAID-IN RETAINED STOCKHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS EQUITY
------ ------- ---------- ---------- -------------
<S> <C> <C> <C> <C> <C>
BALANCE, February 28, 1993..................... 2,000 $10,000 $ 88,303 $1,687,828 $ 1,786,131
Net income................................... -- -- -- 278,486 278,486
Net change in unrealized holding loss........ -- -- -- 1,006 1,006
----- ------- ------- ---------- ----------
BALANCE, February 28, 1994..................... 2,000 10,000 88,303 1,967,320 2,065,623
Net income................................... -- -- -- 231,542 231,542
Net change in unrealized holding loss........ -- -- -- (22,205) (22,205)
----- ------- ------- ---------- ----------
BALANCE, February 28, 1995..................... 2000 10,000 88,303 2,176,657 2,274,960
Net income................................... -- -- -- 316,627 316,627
Net change in unrealized holding loss........ -- -- -- 31,501 31,501
----- ------- ------- ---------- ----------
BALANCE, February 29, 1996..................... 2,000 10,000 88,303 2,524,785 2,623,088
Net income for the six-month period ended
August 31, 1996 (unaudited)............. -- -- -- 442,093 442,093
Net change in unrealized holding loss
(unaudited)............................. -- -- -- 3,802 3,802
----- ------- ------- ---------- ----------
BALANCE, May 31, 1996 (unaudited).............. 2,000 $10,000 $ 88,303 $2,970,680 $ 3,068,983
===== ======= ======= ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-19
<PAGE> 74
GENA LABORATORIES, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED -----------------------
---------------------------------------------- AUGUST AUGUST
FEBRUARY 28, FEBRUARY 28, FEBRUARY 29, 31, 31,
1994 1995 1996 1995 1996
------------ ------------ ------------ --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................ $ 278,486 $ 231,542 $ 316,627 $ 247,953 $ 442,093
Adjustments to reconcile net income to
net cash provided by (used in)
operating activities --
Depreciation and amortization...... 114,021 155,185 168,685 84,343 69,492
Loss on sale of investments........ -- 32,513 -- --
Decrease (increase) in accounts
receivable....................... 38,647 (157,714) (102,407) (225,000) (62,872)
Decrease (increase) in inventory... (14,638) (118,638) (248,353) (256,414) 114,225
Decrease (increase) in prepaid and
other assets..................... 80,863 (30,814) (51,449) (147,478) (58,710)
(Decrease) increase in accounts
payable and accrued
liabilities...................... (122,813) 210,426 (51,360) 129,082 (75,379)
--------- --------- --------- --------- ---------
Net cash provided by (used in)
operating activities........ 374,566 322,500 31,743 (167,514) 428,849
--------- --------- --------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures.................. (331,996) (23,648) (25,200) (34,123) (9,684)
Cost incurred to acquire new
businesses......................... (180,213) (140,000) -- -- --
Proceeds from sale of investments..... -- -- -- -- --
--------- --------- --------- --------- ---------
Net cash provided by (used in)
investing activities........ (512,209) (163,648) (25,200) (34,123) (9,684)
--------- --------- --------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from (payments of)
long-term debt, net.............. 178,585 (136,668) (146,224) (72,767) (106,296)
--------- --------- --------- --------- ---------
Net cash provided by (used in)
financing activities........ 178,585 (136,668) (146,224) (72,767) (106,296)
--------- --------- --------- --------- ---------
NET INCREASE (DECREASE) IN CASH......... 40,942 22,184 (139,681) (274,404) 312,869
CASH AND CASH EQUIVALENTS, beginning of
year.................................. 327,199 368,141 390,325 390,325 250,644
--------- --------- --------- --------- ---------
CASH AND CASH EQUIVALENTS, end of
year.................................. $ 368,141 $ 390,325 $ 250,644 $ 115,921 $ 563,513
========= ========= ========= ========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Interest paid...................... $ 8,325 $ 54,401 $ 43,259 $ 22,412 $ 21,226
========= ========= ========= ========= =========
Income taxes paid.................. $ 137,580 $ 127,609 $ 232,417 $ 116,208 $ 200,088
========= ========= ========= ========= =========
FIXED ASSETS AND NEW BUSINESSES ACQUIRED
THROUGH FINANCING TRANSACTIONS........ $ 528,449 $ 24,911 $ -- $ -- $ --
========= ========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-20
<PAGE> 75
GENA LABORATORIES, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1. ORGANIZATION AND BASIS OF PRESENTATION
Acquisition Agreement
In accordance with the terms of an Acquisition Agreement between Styling
Technology Corporation, (STC) and Gena Laboratories, Inc. (the Company) dated
May 8, 1996, STC agreed to acquire all of the stock of the Company. The terms
include a purchase price of $10,000,000, which will be paid with $8,000,000 in
cash and the remainder with issuance of stock rights to be issued to the
stockholders of the Company. Consummation of the transaction is subject to
several conditions, including the completion of a successful public securities
offering by STC.
Organization and Nature of Operations
The Company was incorporated in 1930 to manufacture nail care and personal
care products. In 1979, the current owners purchased the Company and focused the
operation on professional salon care with an emphasis on nail products. The
Company is now a recognized quality manufacturer and distributor of professional
beauty products worldwide, and offers an extensive line of nail, skin and hair
care products as well as pedicure and other specialty beauty products and
accessories. Principally, its products are sold through wholesale distributors
of professional beauty products, hair and nail salons and professional beauty
supply outlets worldwide.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash and Cash Equivalents
All highly liquid investments purchased with original maturities of three
months or less are considered to be cash equivalents.
Investments
The Company considers all its investments as available for sale and
accordingly, recognizes any unrealized holding gains and losses as a separate
component of stockholders' equity, in accordance with SFAS No. 115, Accounting
for Certain Investments in Debt and Equity Securities.
Inventories
Inventories are stated at the lower of cost (first-in, first-out) or net
realizable value. Reserves are established against inventories for excess,
slow-moving and obsolete items and for items where the net realizable value is
less than cost.
Inventories consist of the following:
<TABLE>
<CAPTION>
FEBRUARY 28, FEBRUARY 29, AUGUST 31,
1995 1996 1996
------------ ------------ ----------
<S> <C> <C> <C>
(UNAUDITED)
Raw materials and work-in-process.............. $675,735 $ 849,582 $ 769,625
Finished goods................................. 289,600 364,106 329,839
-------- ---------- ----------
$965,335 $ 1,213,688 $1,099,464
======== ========== ==========
</TABLE>
Property and Equipment
Property and equipment are recorded at cost and depreciation on property
and equipment is provided on the straight-line method over the estimated useful
lives of the assets.
F-21
<PAGE> 76
GENA LABORATORIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Expenditures for major renewals and betterments are capitalized, while
expenditures for maintenance and repairs, which do not improve assets or extend
their useful lives are charged to expense as incurred. For the years ended
February 28, 1994 and 1995, February 29, 1996, and the six-month unaudited
period ended May 31, 1995 and 1996, maintenance and repair expenses charged to
cost of operations were approximately $26,000, $47,000, $23,000, $8,600 and
$22,100.
Concentration of Credit Risk
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of temporary cash investments
and trade receivables. The Company places its temporary cash investments in high
credit quality institutions. Concentrations of credit risk with respect to trade
receivables are described in Note 6. The Company establishes an allowance for
doubtful accounts based upon factors surrounding the credit risk of specific
customers, historical trends and other information.
Fair Value of Financial Instruments
The carrying values of cash and cash equivalents, receivables, accounts
payable and accrued expenses approximate fair values due to the short-term
maturities of these instruments. The carrying amount on the long-term debt is
estimated to approximate fair value as the actual interest rates are consistent
with rates estimated to be currently available for debt with similar terms and
remaining maturities.
Revenue Recognition
The Company recognizes revenue from sales at the time product is shipped.
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,
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Final settlement amounts could differ from those estimates.
Interim Unaudited Financial Information
In management's opinion, the financial statements for the six-month periods
ended August 31, 1995 and 1996, include all adjustments, consisting of normal
recurring adjustments, necessary to present fairly the Company's financial
position, results of operations as of and for the periods then ended. Operating
results for the six-month period ending August 31, 1996, are not necessarily
indicative of the results that may be expected for the fiscal year ending
February 28, 1997.
NOTE 3. OTHER ASSETS
Other assets consist primarily of goodwill, which represents the excess of
consideration paid over the fair market values of identifiable net assets
acquired. The goodwill is being amortized on a straight-line basis over 25
years. The Company has also recorded other intangible assets, which include
noncompete, consulting and trademark agreements, related to acquisitions of
various beauty companies. Such assets are being amortized on a straight-line
basis, over a period of 3 to 25 years. Accumulated amortization on such
intangibles was $349,423, $433,070 and $479,940 (unaudited) as of February 28,
1995, February 29, 1996 and August 31, 1996, respectively.
F-22
<PAGE> 77
GENA LABORATORIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 4. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
FEBRUARY 28, FEBRUARY 29, AUGUST 31,
1995 1996 1996
------------ ------------ ------------
<S> <C> <C> <C>
(UNAUDITED)
Land............................................... $ 150,000 $ 150,000 $ 150,000
Factory equipment.................................. 407,427 431,832 441,517
Computers.......................................... 43,030 43,825 43,825
Furniture, fixtures and autos...................... 108,875 108,875 108,875
Building and leasehold improvements................ 567,332 567,332 567,332
---------- ---------- ----------
1,276,664 1,301,864 1,311,549
Less -- Accumulated depreciation................... (392,026) (471,771) (497,063)
---------- ---------- ----------
$ 884,638 $ 830,093 $ 814,486
========== ========== ==========
</TABLE>
NOTE 5. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
FEBRUARY 28, FEBRUARY 29, AUGUST 31,
1995 1996 1996
------------ ------------ -----------
<S> <C> <C> <C>
(UNAUDITED)
-----------
Unsecured note payable, bearing interest at
prime (8.25% at February 29, 1996), unpaid
balance due by November 1996.................. $123,529 $ 52,942 $ 17,647
Various notes payable, bearing interest from
7.5% to 8.0%, maturing through 1998........... 96,713 53,824 --
-------- -------- --------
220,242 106,766 17,647
Less: Current maturities........................ (96,056) (95,248) (17,647)
-------- -------- --------
$124,186 $ 11,518 $ --
======== ======== ========
</TABLE>
In 1993, the Company entered into a $250,000 unsecured revolving line of
credit, which bears interest at prime and matures July 1997. As of February 28,
1995, February 29, 1996 and August 31, 1996, the Company had not drawn on this
facility.
Aggregate principal payments on long-term debt are as follows:
<TABLE>
<CAPTION>
FEBRUARY 28,
--------------------------------------------------
<S> <C>
1997......................................... $ 95,248
1998......................................... 11,518
--------
$106,766
========
</TABLE>
NOTE 6. MAJOR CUSTOMERS
The Company's strategy includes providing production and distribution
services to a major U.S. beauty distribution company. Sales to this customer as
a percentage of total sales approximated 31%, 28% and 28% for the years ended
February 28, 1994, 1995 and February 29, 1996, respectively.
F-23
<PAGE> 78
GENA LABORATORIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 7. INCOME TAXES
The Company accounts for income taxes using Statement of Financial
Accounting Standards No. 109, Accounting for Income Taxes (SFAS 109). SFAS 109
requires the use of an asset and liability approach in accounting for income
taxes. Deferred tax assets and liabilities are recorded based on the differences
between the financial statement and tax bases of assets and liabilities and the
tax rates in effect when these differences are expected to reverse. These
differences result principally from the recognition of revenues and expenses
using the cash basis of accounting and the use of different depreciation and
amortization methods for income tax reporting.
The components of the income tax provision consist of the following:
<TABLE>
<CAPTION>
YEARS ENDED SIX MONTHS ENDED
------------------------------------------ AUGUST 31,
FEBRUARY 28, FEBRUARY 28, FEBRUARY 29, -----------------------
1994 1995 1996 1995 1996
------------ ------------ ------------ -------- --------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
Current:
Federal........................ $134,927 $139,468 $208,499 $139,462 $229,313
State.......................... 18,699 19,329 28,896 19,327 31,778
-------- -------- -------- -------- --------
153,626 158,797 237,395 158,789 261,091
Deferred provision (benefit)..... 4,987 (29,191) (52,605) (26,302) --
-------- -------- -------- -------- --------
Provision for income taxes..... $158,613 $129,606 $184,790 $185,091 $261,091
======== ======== ======== ======== ========
</TABLE>
The components of deferred taxes are as follows:
<TABLE>
<CAPTION>
FEBRUARY 28, FEBRUARY 29, AUGUST 31,
1995 1996 1996
------------ ------------ -----------
<S> <C> <C> <C>
(UNAUDITED)
-----------
Deferred tax assets:
Inventory reserve............................. $ 6,707 $ 8,376 $ 8,376
Uniform inventory cost capitalization......... 50,233 62,739 62,739
Capital losses in excess of capital gains..... 1,544 10,362 10,362
Allowance for doubtful accounts............... 44,492 50,314 50,314
Amortization.................................. 15,773 38,586 38,586
-------- -------- --------
Total gross deferred tax assets............ 118,749 170,377 170,377
-------- -------- --------
Deferred tax liabilities:
Depreciation.................................. (19,694) (18,717) (18,717)
-------- -------- --------
Total gross deferred tax liabilities....... (19,694) (18,717) (18,717)
-------- -------- --------
Net deferred tax asset..................... $ 99,055 $151,660 $ 151,660
======== ======== ========
</TABLE>
F-24
<PAGE> 79
GENA LABORATORIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The following is a reconciliation of income taxes provided at the federal
statutory rate with income taxes recorded by the Company:
<TABLE>
<CAPTION>
YEARS ENDED SIX MONTHS
------------------------------------------ ENDED AUGUST 31,
FEBRUARY 28, FEBRUARY 28, FEBRUARY 29, ---------------------
1994 1995 1996 1995 1996
------------ ------------ ------------ -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Tax provision at statutory rate...... 148,614 122,790 170,482 157,642 226,050
Expense (benefit) of permanent
differences resulting from the
recognition of interest income and
travel and entertainment expenses,
and the effect of state taxes...... 9,999 6,816 14,308 27,449 35,041
-------- -------- -------- ------- -------
Income tax provision....... $158,613 $129,606 $184,790 $185,091 $261,091
======== ======== ======== ======= =======
</TABLE>
NOTE 8. RELATED PARTY TRANSACTIONS
In the fiscal year ended February 28, 1994, the Company purchased land and
building amounting to $650,000, from a partnership (the Partnership) of which
three of the four partners are shareholders of the Company. The sales price
approximated the book value as recorded by the Partnership. Prior to the
transaction the Company leased this real estate from the Partnership. The
Company acquired the land and building using cash, and financed the remaining
portion with a note due the Partnership. Interest and principal of $5,105 are
payable monthly. The loan bears interest at 7%, and fully matures in 2003.
The total of the related party note payable is as follows:
<TABLE>
<CAPTION>
AUGUST 31,
1996
FEBRUARY 28, FEBRUARY 29, -----------
1995 1996
------------ ------------ (UNAUDITED)
<S> <C> <C> <C>
Total shareholder note payable.................. $375,035 $342,287 $ 325,110
Less: Current maturities...................... (32,571) (34,929) (34,324)
-------- -------- --------
Shareholder note payable, net of current
portion....................................... $342,464 $307,358 $ 290,786
======== ======== ========
</TABLE>
Principal maturities related to this loan are as follows:
<TABLE>
<CAPTION>
YEAR ENDING
FEBRUARY 28, TOTAL
-------------------------------------------------- --------
<S> <C>
1997......................................... $ 34,929
1998......................................... 37,454
1999......................................... 40,162
2000......................................... 43,065
2001......................................... 46,178
Thereafter................................... 140,499
--------
$342,287
========
</TABLE>
The Company also entered into a lease with the Partnership in 1991, for
approximately 10,000 square feet for storage and production purposes. Lease
expense related to this space totaled approximately $83,049, $44,346, $51,346,
$25,778, and $44,518 for the years ended February 28, 1994 and 1995, February
29, 1996, and the six-month unaudited periods ended August 31, 1995 and 1996,
respectively.
F-25
<PAGE> 80
GENA LABORATORIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 9. COMMITMENTS AND CONTINGENCIES
In the normal course of business, the Company is named as a defendant in
various litigation matters. In management's opinion, the ultimate resolution of
these matters will not have a material impact on the Company's financial
statements.
Lease commitments related primarily to a warehouse space lease are as
follows:
<TABLE>
<CAPTION>
YEARS ENDING
FEBRUARY 28, TOTAL
-------------------------------------------------- --------
<S> <C>
1997............................................ $ 41,100
1998............................................ 41,100
1999............................................ 41,100
2000............................................ 41,100
2001............................................ 41,100
Thereafter...................................... 202,500
--------
$408,000
========
</TABLE>
NOTE 10. SUBSEQUENT EVENT
The Company entered into an asset purchase agreement with STC dated May 8,
1996 (see Note 1). In addition, an employee of the Company has entered into an
employment agreement with STC as a result of the proposed acquisition.
F-26
<PAGE> 81
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Styling Technology Corporation:
We have audited the accompanying balance sheet of JDS MANUFACTURING CO.,
INC. (a California corporation) as of September 30, 1995, and the related
statements of operations, stockholders' equity, and cash flows for each of the
two years in the period ended September 30, 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, the financial statements referred to above present fairly,
in all material respects, the financial position of JDS Manufacturing Co., Inc.
as of September 30, 1995, and the results of its operations and its cash flows
for each of the two years in the period ended September 30, 1995, in conformity
with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Phoenix, Arizona,
July 10, 1996.
F-27
<PAGE> 82
JDS MANUFACTURING CO., INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30,
1995
-------------
JUNE 30,
1996
-----------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash........................................................ $ 57,397 $ 66,368
Accounts receivable, net of allowance for doubtful accounts
of $10,000 and $10,000, respectively..................... 329,965 284,175
Inventory................................................... 264,347 242,072
Prepaid expenses............................................ 11,861 10,004
------- -------
Total current assets................................ 663,570 602,619
------- -------
Property and equipment, net of accumulated depreciation of
$100,031 and $111,808, respectively......................... 30,292 22,571
------- -------
Other assets.................................................. 102,934 102,934
------- -------
$ 796,796 $ 728,124
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable............................................ $ 196,309 $ 161,943
Accrued expenses............................................ 53,740 107,228
------- -------
Total current liabilities........................... 250,049 269,171
------- -------
Notes payable to related parties.............................. 516,200 431,500
------- -------
Commitments and contingencies
Stockholders' equity:
Common stock, $10 par value, 10,000 shares authorized, 1,000
shares issued and outstanding............................ 10,000 10,000
Retained earnings........................................... 20,547 17,453
------- -------
Total stockholders' equity.......................... 30,547 27,453
------- -------
Total liabilities and stockholders' equity.......... $ 796,796 $ 728,124
======= =======
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-28
<PAGE> 83
JDS MANUFACTURING CO., INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED NINE MONTHS
SEPTEMBER 30, ENDED JUNE 30,
------------------------- -------------------------
1994 1995 1995 1996
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
(UNAUDITED)
SALES..................................... $3,577,779 $3,367,599 $2,591,653 $2,339,344
COST OF SALES............................. 1,463,622 1,348,295 1,030,235 949,991
-------- -------- -------- --------
Gross profit............................ 2,114,157 2,019,304 1,561,418 1,389,353
SELLING, GENERAL, AND ADMINISTRATIVE
EXPENSES................................ 2,170,271 2,045,731 1,548,930 1,393,109
-------- -------- -------- --------
Income (loss) from operations........... (56,114) (26,427) 12,488 (3,756)
OTHER INCOME, net......................... 44,191 41,951 29,831 1,462
-------- -------- -------- --------
INCOME (LOSS) BEFORE PROVISION FOR INCOME
TAXES................................... (11,923) 15,524 42,319 (2,294)
PROVISION FOR INCOME TAXES................ 4,571 6,950 19,044 800
-------- -------- -------- --------
NET INCOME (LOSS)......................... $ (16,494) $ 8,574 $ 23,275 $ (3,094)
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-29
<PAGE> 84
JDS MANUFACTURING CO., INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK TOTAL
------------------ RETAINED STOCKHOLDERS'
SHARES AMOUNT EARNINGS EQUITY
------ ------- -------- --------
<S> <C> <C> <C> <C>
BALANCE, September 30, 1993........................ 1,000 $10,000 $ 28,467 $ 38,467
Net loss......................................... -- -- (16,494) (16,494)
---- ------ ------ ------
BALANCE, September 30, 1994........................ 1,000 10,000 11,973 21,973
Net income....................................... -- -- 8,574 8,574
---- ------ ------ ------
BALANCE, September 30, 1995........................ 1,000 10,000 20,547 30,547
Net loss, for the nine-month period ending June
30, 1996 (unaudited).......................... -- -- (3,094) (3,094)
---- ------ ------ ------
BALANCE, June 30, 1996 (unaudited)................. 1,000 $10,000 $ 17,453 $ 27,453
==== ====== ====== ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-30
<PAGE> 85
JDS MANUFACTURING CO., INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED NINE MONTHS
SEPTEMBER 30, ENDED JUNE 30,
--------------------- ----------------------
1994 1995 1995 1996
-------- -------- --------- --------
(UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)............................ $(16,494) $ 8,574 $ 37,437 $ (3,094)
Adjustments to reconcile net income (loss) to
net cash used in operating activities --
Depreciation.............................. 18,735 15,661 10,581 11,777
Decrease (increase) in accounts
receivable.............................. (4,438) 89,139 101,297 45,790
Decrease (increase) in inventory.......... 14,441 (34,089) (41,036) 22,275
Decrease (increase) in other assets....... (33,786) (35,112) (7,208) 1,857
Increase (decrease) in accounts payable
and accrued liabilities................. 4,263 (47,256) (16,456) 18,723
-------- -------- --------- --------
Net cash provided by (used in)
operating activities............... (17,279) (3,083) 84,615 97,328
-------- -------- --------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures......................... (10,582) (8,203) (3,968) (3,657)
-------- -------- --------- --------
Net cash used in investing
activities......................... (10,582) (8,203) (3,968) (3,657)
-------- -------- --------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from (payments to) shareholder notes
payable, net.............................. 24,012 (5,692) (106,174) (84,700)
-------- -------- --------- --------
Net cash (used in) provided by
financing activities............... 24,012 (5,692) (106,174) (84,700)
-------- -------- --------- --------
NET INCREASE (DECREASE) IN CASH................ (3,849) (16,978) (25,527) 8,971
CASH, beginning of period...................... 78,224 74,375 74,375 57,397
-------- -------- --------- --------
CASH, end of period............................ $ 74,375 $ 57,397 $ 48,848 $ 66,368
======== ======== ========= ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Interest paid................................ $ 36,134 $ 35,589 $ 27,255 $ 30,432
======== ======== ========= ========
Income taxes paid............................ $ 4,090 $ 4,571 $ 3,371 $ 7,400
======== ======== ========= ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-31
<PAGE> 86
JDS MANUFACTURING CO., INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1. ORGANIZATION AND BASIS OF PRESENTATION
Acquisition Agreement and Basis of Presentation
In accordance with the terms of an Acquisition Agreement dated October
1995, between Styling Technology Corporation, (STC) and JDS Manufacturing Co.,
Inc., STC agreed to acquire all of the stock of the Company. The terms include a
purchase price of $4,516,000, which will be paid primarily with cash and the
remainder to be funded with a promissory note. Consummation of the transaction
is subject to several conditions, including the completion of a successful
public securities offering by STC.
Organization and Nature of Operations
The Company was incorporated in 1987. Since 1989, the Company has been a
manufacturer and distributor of several extensive lines of high quality,
brand-recognized nail enhancement application products and nail accessories. Its
products are sold throughout the United States, principally to professional
supply outlets, beauty distributors, professional nail salons and professional
manicurists.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash and Cash Equivalents
All highly liquid investments purchased with original maturities of three
months or less are considered to be cash equivalents.
Fair Value of Financial Instruments
The carrying values of cash, receivables, accounts payable and accrued
expenses approximate fair values due to the short-term maturities of these
instruments. The carrying amount on the long-term debt is estimated to
approximate fair value as the actual interest rates are consistent with rates
estimated to be currently available for debt with similar terms and remaining
maturities.
Inventories
Inventories approximate the lower of cost (first-in, first-out) or net
realizable value. Reserves are established against inventories for excess,
slow-moving and obsolete items and for items where the net realizable value is
less than cost.
Inventories consist of the following:
<TABLE>
<CAPTION>
JUNE 30,
1996
SEPTEMBER 30, ---------
1995
------------- (UNAUDITED)
<S> <C> <C>
Raw material and work-in process........................ $ 31,722 $ 29,049
Finished goods.......................................... 232,625 213,023
------- -------
$ 264,347 $242,072
======= =======
</TABLE>
Property and Equipment
Property and equipment are recorded at cost and depreciation on property
and equipment is provided on the straight-line method over their estimated
useful lives.
Expenditures for major renewals and betterments are capitalized, while
expenditures for maintenance and repairs, which do not improve assets or extend
their useful lives are charged to expense as incurred. For the years ended
September 30, 1994, and 1995, and the nine month unaudited periods ending June
30, 1995 and
F-32
<PAGE> 87
JDS MANUFACTURING CO., INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
1996, maintenance and repair expenses charged to cost of operations were $5,452,
$4,507, $3,765 and $2,004, respectively.
Concentration of Credit Risk
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of temporary cash investments
and trade receivables. The Company places its temporary cash investments in high
quality credit institutions. Concentrations of credit risk with respect to trade
receivables are limited due to the number of customers comprising the Company's
customer base. The Company establishes an allowance for doubtful accounts based
upon factors surrounding the credit risk of specific customers, historical
trends and other information.
Revenue Recognition
The Company recognizes revenue from sales at the time product is shipped.
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,
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Final settlement amounts could differ from those estimates.
Interim Unaudited Financial Information
In management's opinion, the financial statements for the nine-month
periods ended June 30, 1995 and 1996, include all adjustments, consisting of
normal recurring adjustments, necessary to present fairly the Company's
financial position and results of operations as of and for the period then
ended. Operating results for the nine-month period ending June 30, 1996, are not
necessarily indicative of the results that may be expected for the fiscal year
ending September 30, 1996.
NOTE 3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
JUNE 30,
1996
SEPTEMBER 30, -----------
1995
------------- (UNAUDITED)
<S> <C> <C>
Furniture and equipment.................................... $ 98,490 $ 102,546
Automobiles................................................ 13,976 13,976
Leaseholds and other....................................... 17,857 17,857
-------- --------
130,323 134,379
Less: accumulated depreciation............................. 100,031 111,808
-------- --------
$ 30,292 $ 22,571
======== ========
</TABLE>
NOTE 4. NOTES PAYABLE TO RELATED PARTIES
As of September 30, 1995 and June 30, 1996 (unaudited), the Company had
notes payable due to its two principal shareholders of $516,200 and $431,500,
respectively. These notes originated in October 1994, and bear interest at 8%.
Loan advances and repayments are made at the shareholders' discretion, with the
entire balance becoming due on September 30, 1997. As such, the entire balance
is classified as long-term.
F-33
<PAGE> 88
JDS MANUFACTURING CO., INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 5. INCOME TAXES
The Company accounts for income taxes using Statement of Financial
Accounting Standards No. 109 (SFAS 109), Accounting for Income Taxes. SFAS 109
requires the use of an asset and liability approach in accounting for income
taxes. Deferred tax assets and liabilities are recorded based on the differences
between the financial statement and tax bases of assets and liabilities and the
tax rates in effect when these difference are expected to reverse. These
differences, resulting principally from use of accelerated depreciation methods
for income tax reporting, were not material at the balance sheet dates.
NOTE 6. COMMITMENTS AND CONTINGENCIES
In the normal course of business, the Company is named as a defendant in
various litigation matters. In management's opinion, the ultimate resolution of
these matters will not have a material impact on the Company's financial
statements.
Total future commitments for operating leases are $15,596 through September
30, 1997.
NOTE 7. SUBSEQUENT EVENT
The Company entered into an acquisition agreement with STC during October
1995 (See Note 1). In addition, an employee of the Company has entered into an
employment agreement with STC as a result of the acquisition.
F-34
<PAGE> 89
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Styling Technology Corporation, Inc.:
We have audited the accompanying balance sheet of KOTCHAMMER INVESTMENTS,
INC. (a California corporation) as of December 31, 1995, and the related
statement of operations, stockholders' deficit, and cash flows for the year then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Kotchammer Investment, Inc.
as of December 31, 1995, and the results of its operations and its cash flows
for the year then ended, in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Phoenix, Arizona,
August 13, 1996.
F-35
<PAGE> 90
KOTCHAMMER INVESTMENTS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
1995
------------ JUNE 30,
1996
-----------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents......................................... $ 96,364 $ 177,321
Accounts receivable............................................... 136,971 94,332
Inventory, net.................................................... 403,730 258,197
Prepaid expenses & other.......................................... 21,799 26,642
------- -------
Total current assets...................................... 658,864 556,492
------- -------
Property and equipment.............................................. 75,472 64,824
------- -------
Other assets........................................................ 1,026 468
------- -------
$ 735,362 $ 621,784
======= =======
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable.................................................. $ 14,015 $ 21,777
Accrued expenses.................................................. 121,183 80,078
Line of credit.................................................... 215,000 110,000
Current portion of notes payable to shareholders.................. 270,000 270,000
------- -------
Total current liabilities................................. 620,198 481,855
------- -------
Notes payable to shareholders, net of current portion............... 340,000 340,000
------- -------
Commitments and contingencies
Stockholders' deficit:
Common stock, $20 par value, 2,500 shares authorized, 2,500 shares
issued and outstanding......................................... 50,000 50,000
Retained deficit.................................................. (274,836) (250,071)
------- -------
Total stockholders' deficit............................... (224,836) (200,071)
Total liabilities and stockholders' deficit............... $ 735,362 $ 621,784
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-36
<PAGE> 91
KOTCHAMMER INVESTMENTS, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED JUNE 30,
DECEMBER 31, ----------------------
1995 1995 1996
------------- --------- --------
<S> <C> <C> <C>
(UNAUDITED)
NET SALES............................................. $ 1,557,709 $ 777,460 $735,538
COST OF SALES......................................... 711,925 372,192 343,013
-------- -------- --------
Gross profit........................................ 845,784 405,268 392,525
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES......... 891,146 476,481 328,925
-------- -------- --------
Income (loss) from operations....................... (45,362) (71,213) 63,600
Interest expense and other, net....................... (89,557) (45,397) (38,835)
-------- -------- --------
NET INCOME (LOSS)..................................... $ (134,919) $(116,610) $ 24,765
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-37
<PAGE> 92
KOTCHAMMER INVESTMENTS, INC.
STATEMENTS OF STOCKHOLDERS' DEFICIT
<TABLE>
<CAPTION>
COMMON STOCK TOTAL
------------------ RETAINED STOCKHOLDERS'
SHARES AMOUNT EARNINGS EQUITY
------ ------- --------- ------------
<S> <C> <C> <C> <C>
BALANCE, December 31, 1994....................... 2,500 $50,000 $(139,917) $ (89,917)
Net loss....................................... -- -- (134,919) (134,919)
----- ------- --------- ---------
BALANCE, December 31, 1995....................... 2,500 50,000 (274,836) (224,836)
Net income..................................... -- -- 24,765 24,765
----- ------- --------- ---------
BALANCE, June 30, 1996 (unaudited)............... 2,500 $50,000 $(250,071) $ (200,071)
===== ======= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-38
<PAGE> 93
KOTCHAMMER INVESTMENTS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS
DECEMBER 31, ENDED JUNE 30,
------------ -----------------------
1995 1995 1996
------------ --------- ---------
(UNAUDITED)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss).................................... $ (134,919) $(116,610) $ 24,765
Adjustments to reconcile net income (loss) to net
cash used in operating activities --
Depreciation...................................... 23,436 10,011 10,648
Decrease (increase) in accounts receivable........ 43,004 27,496 42,639
Decrease (increase) in inventory.................. (45,278) (74,554) 145,533
Decrease (increase) in prepaids and other
assets.......................................... 63,372 34,426 (4,285)
Increase (decrease) in accounts payable and
accrued liabilities............................. (43,234) (24,042) (33,343)
-------- -------- ---------
Net cash provided by (used in) operating
activities................................. (93,619) (143,273) 185,957
-------- -------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures................................. (17,215) (8,000) --
-------- -------- ---------
Net cash used in investing activities........ (17,215) (8,000) --
-------- -------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from (payments to) shareholder notes
payable, net...................................... 100,000 100,000 --
Proceeds from (payments to) line of credit, net...... (5,000) 24,060 (105,000)
-------- -------- ---------
Net cash (used in) provided by financing
activities................................. 95,000 124,060 (105,000)
-------- -------- ---------
NET INCREASE (DECREASE) IN CASH........................ (15,834) (27,213) 80,957
CASH, beginning of period.............................. 112,198 112,198 96,364
-------- -------- ---------
CASH, end of period.................................... $ 96,364 $ 84,985 $ 177,321
======== ======== =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid........................................ $ 72,916 $ 64,866 $ 7,257
======== ======== =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-39
<PAGE> 94
KOTCHAMMER INVESTMENTS, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1. ORGANIZATION AND BASIS OF PRESENTATION
Acquisition Agreement and Basis of Presentation
In accordance with the terms of an Acquisition Agreement dated October 1996
between Styling Technology Corporation, Inc. (STC) and Kotchammer Investments,
Inc. (the Company), STC agreed to acquire all of the stock of the Company. The
terms include a purchase price of $700,000, which will be paid primarily with
cash and the remainder to be funded with a promissory note and common stock.
Consummation of the transaction is subject to several conditions, including the
completion of a successful public securities offering by STC.
Organization and Nature of Operations
The Company was incorporated in December 1993 to acquire a division of
Redken Laboratories, Inc. The Company distributes and markets professional salon
appliances and salonwear. Its products are sold throughout the United States,
principally to professional supply outlets, beauty distributors and professional
hair stylists.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash and Cash Equivalents
All highly liquid investments purchased with original maturities of three
months or less are considered to be cash equivalents.
Fair Value of Financial Instruments
The carrying values of cash, receivables, accounts payable and accrued
expenses approximate fair values due to the short-term maturities of these
instruments. The carrying amount on the long-term debt is estimated to
approximate fair value as the actual interest rates are consistent with rates
estimated to be currently available for debt with similar terms and remaining
maturities.
Inventories
Inventories consist of finished goods and are stated at the lower of cost
(first-in, first-out) or net realizable value. Reserves are established against
inventories for excess, slow-moving and obsolete items and for items where the
net realizable value is less than cost.
Property and Equipment
Property and equipment are recorded at cost and depreciation on property
and equipment is provided on the straight-line method over their estimated
useful lives.
Concentration of Credit Risk
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of temporary cash investments
and trade receivables. The Company places its temporary cash investments in high
quality credit institutions. Concentrations of credit risk with respect to trade
receivables are limited due to the number of customers comprising the Company's
customer base.
Revenue Recognition
The Company recognizes revenue from sales at the time product is shipped.
F-40
<PAGE> 95
KOTCHAMMER INVESTMENTS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Final settlement amounts could differ from those estimates.
Interim Unaudited Financial Information
In management's opinion, the financial statements for the six-month periods
ended June 30, 1995 and 1996, include all adjustments, consisting of normal
recurring adjustments, necessary to present fairly the Company's financial
position and results of operations as of and for the period then ended.
Operating results for the six-month period ending June 30, 1996, are not
necessarily indicative of the results that may be expected for the fiscal year
ending December 31, 1996.
NOTE 3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following
<TABLE>
<CAPTION>
ESTIMATED DECEMBER 31,
USEFUL LIFE 1995
----------- -------------
JUNE 30,
1996
-----------
(UNAUDITED)
<S> <C> <C> <C>
Furniture & Fixtures........................... 7 years $ 76,803 $ 76,700
Machinery & Equipment.......................... 5 years 22,458 22,458
Computer Equipment............................. 5 years 16,652 16,652
--------
115,913 115,810
Less - Accumulated depreciation................ (40,441) (50,986)
--------
$ 75,472 $ 64,824
========
</TABLE>
NOTE 4. LINE OF CREDIT
At December 31, 1995, the Company had a $220,000 line of credit facility
with a bank which expired in August of 1996 and carried an interest rate of
9.75%. Subsequent to June 30, 1996, the line of credit was repaid.
F-41
<PAGE> 96
KOTCHAMMER INVESTMENTS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 5. NOTES PAYABLE TO SHAREHOLDERS
Notes payable to shareholders consisted of the following:
<TABLE>
<CAPTION>
JUNE 30,
1996
DECEMBER 31, -----------
1995
------------ (UNAUDITED)
<S> <C> <C>
Note payable dated December 8, 1993 interest at a bank's
reference rate plus 1.25% (11% at December 31, 1995),
maturing Jan. 15, 2004.................................... $120 $ 120
Note payable dated December 8, 1993 interest at a bank's
reference rate plus 1.25% (11% at December 31, 1995),
maturing Jan. 15, 2004.................................... 120 120
Note payable dated December 8, 1993 interest at a bank's
reference rate plus 1.25% (11% at December 31, 1995),
maturing Jan. 15, 2004.................................... 270 270
Note payable dated May 3, 1995, interest at a bank's
reference rate plus 1.25% (11% at December 31, 1995),
maturing January 31, 2004................................. 70 70
Note payable dated June 5, 1995, interest at a bank's
reference rate, plus 1.25% (11% at December 31, 1995),
maturing January 31, 2004................................. 30 30
------ -----------
$610 $ 610
========== =========
</TABLE>
As of December 31, 1995 and June 30, 1996, one of the notes payable to
shareholders was classified as current as a result of the Company incurring a
technical default with a certain financial covenant.
NOTE 6. INCOME TAXES
The Company has elected S Corporation status under Subchapter S of the
Internal Revenue Code. This election results in substantially all U.S. federal
taxable income being taxed to the stockholders. Accordingly, there is no
provision for income taxes reflected in these financial statements for the year
ended December 31, 1995 and the six-month periods ended June 30, 1995 and 1996.
NOTE 7. COMMITMENTS AND CONTINGENCIES
In the normal course of business, the Company is named as a defendant in
various litigation matters. In management's opinion, the ultimate resolution of
these matters will not have a material impact on the Company's financial
statements.
Total future commitments for operating leases are $45,851 through July
1997. Rent expense incurred under operating leases was $35,363, $16,981 and
$14,276 for the year ended December 31, 1995 and for the six months ended June
30, 1995 and 1996, respectively.
NOTE 8. SUBSEQUENT EVENT
The Company entered into an acquisition agreement with STC dated October
1996 (See Note 1). In addition, an employee of the Company has entered into an
employment agreement with STC as a result of the acquisition.
F-42
<PAGE> 97
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Styling Technology Corporation:
We have audited the accompanying balance sheet of STYLING TECHNOLOGY
CORPORATION (a Delaware corporation), as of December 31, 1995. This financial
statement is the responsibility of the Company's management. Our responsibility
is to express an opinion on this financial statement based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statement referred to above presents fairly,
in all material respects, the financial position of Styling Technology
Corporation, as of December 31, 1995, in conformity with generally accepted
accounting principles.
The accompanying financial statements have been prepared assuming the
Company will continue as a going concern. As discussed in Notes 1 and 3 to the
financial statements, the Company's future operations are dependent upon the
Company's ability to finance acquisitions through an initial public offering of
stock, which as a result, raises substantial doubt about the Company's ability
to continue as a going concern. Management's plans in regard to these matters
are also described in Note 3. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
ARTHUR ANDERSEN LLP
Phoenix, Arizona,
September 12, 1996.
F-43
<PAGE> 98
STYLING TECHNOLOGY CORPORATION
BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30,
1996
DECEMBER 31, -----------
1995
------------ (UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash............................................................. $ 200 $ 200
Deferred offering and acquisition costs.......................... 66,202 300,018
------ -------
Total assets............................................. $ 66,402 $ 300,218
====== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities......................... $ 66,202 $ 300,018
------ -------
Total liabilities
Stockholders' equity:
Preferred stock, $.0001 par value, 1,000,000 shares authorized,
no shares issued and outstanding.............................. -- --
Common stock, $.0001 par value, 10,000,000 shares authorized,
1,616,000 shares issued and outstanding....................... 200 200
------ -------
Total stockholders' equity............................... 200 200
------ -------
Total liabilities and stockholders' equity............... $ 66,402 $ 300,218
====== =======
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-44
<PAGE> 99
STYLING TECHNOLOGY CORPORATION
NOTES TO BALANCE SHEETS
NOTE 1. BUSINESS AND ORGANIZATION
Styling Technology Corporation (the Company) is a newly-organized
corporation, formed in June 1995. The Company intends to complete an initial
public offering (IPO) of its common stock, while simultaneously acquiring four
companies involved in the professional beauty industry (see below for a
description of the industry). Subsequent to the IPO, the Company intends to make
similar acquisitions of companies that manufacture and distribute high-quality
professional hair, nail, skin and body care products, and beauty accessories
(i.e., curling irons, hairdryers) to salons, spas, health clubs and beauty and
barber distributors.
The Company's sole assets at December 31, 1995 and June 30, 1996, are cash
and deferred offering and acquisition costs. The Company has not conducted any
operations and all activities to date have related to the acquisitions and the
IPO. There is no assurance that the pending acquisitions discussed below will be
completed and that the Company will be able to generate future operating
revenues. The Company has negotiated definitive agreements to acquire four
businesses (Acquired Business) to be effective with the completion of the IPO.
The four companies to be acquired are Body Drench, Gena Laboratories, JDS
Manufacturing and Kotchammer Investments. The aggregate consideration that will
be paid by the Company to acquire these companies is approximately $23.2
million, consisting of cash, common stock, debt and assumption of long-term
liabilities of approximately $300,000. The Company is dependent upon the IPO to
fund the cash portion of the purchase price for these pending acquisitions and
additional working capital purposes.
NOTE 2. STOCKHOLDERS' EQUITY
In connection with the organization and initial capitalization of the
Company in June 1995, the Company issued 1,616,000 shares of common stock for
par value, a portion of which were repurchased subsequent to June 1995. In
addition, in June 1995 the Company issued 161,571 options with an exercise price
of $.10 per share to an officer of the Company, which approximated fair value at
the time of issuance. The options become exercisable on June 29, 1999, but
vesting may accelerate based on the Company meeting certain minimum earnings per
share requirements in future periods.
NOTE 3. SUBSEQUENT EVENTS
Subsequent to June 30, 1996, the Company obtained bridge loan financing
(Bridge Note) to fund approximately $400,000 of deferred issuance and
acquisition costs, including reimbursements of amounts advanced by the
stockholders on behalf of the Company. The Bridge Note bears interest at an
annual rate of 10% and is to be repaid on the earlier of January 31, 1997, or
upon consummation of the IPO. In connection with the Bridge Note, the Company
will issue shares amounting to $200,000 worth of common stock to the holders
upon the consummation of the IPO. The Company will also issue warrants to
purchase an equal amount of shares at an exercise price of 125% of the offering
price in the IPO, subject to certain adjustments.
Subsequent to June 30, 1996, the Company adopted the 1996 Stock Option Plan
(the Plan), which provides for the grant of incentive and nonqualified stock
options to acquire common stock of the Company to key personnel, directors,
consultants, and independent contractors. The Company also hired a chief
financial officer under an employment agreement. The agreement included the
issuance of options for 72,707 shares of common stock under the Plan, at an
exercise price equal to the offering price of the IPO.
As a result of the four anticipated acquisitions and the IPO, the Company
has incurred significant liabilities. The Company currently has no operations,
and as a result, must generate additional resources to
F-45
<PAGE> 100
STYLING TECHNOLOGY CORPORATION
NOTES TO BALANCE SHEETS -- (CONTINUED)
fund these liabilities. Management's plans to repay these amounts consist solely
of the funds expected to be received from the IPO. Should the IPO not occur, the
Company may be unable to continue as a going concern. See "Description of the
Acquisitions" in the Company's Registration Statement on Form S-1 for further
discussion of the terms of the anticipated acquisitions.
Subsequent to June 30, 1996, the Company affected a 0.808-for-1 reverse
stock split on all its outstanding common stock. As a result, all share amounts
have been adjusted to give effect to the split, including the option terms as
discussed herein.
In October 1996, the Company entered into a Stock Repurchase Agreement with
Kenneth S. Bernstein, pursuant to which Mr. Bernstein agreed to sell 807,851
shares of the Company's Common Stock to the Company for $1.8 million, payable
upon consummation of the Offering. Accordingly, upon consummation of the
Offering, Mr. Bernstein will no longer be a stockholder of the Company.
The Company has obtained letters of intent, subject to completion of
customary due diligence, from several financial institutions to provide a
working capital line of credit and an acquisition line of credit.
F-46
<PAGE> 101
- ------------------------------------------------------
- ------------------------------------------------------
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS 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 A SOLICITATION OF AN
OFFER TO BUY, TO ANY PERSON OR BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER
OR SOLICITATION WOULD BE UNLAWFUL OR TO ANY PERSON TO WHOM IT IS UNLAWFUL.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY OFFER OR SALE MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO
CHANGE IN THE AFFAIRS OF THE COMPANY OR THAT THE INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 3
Summary Financial Data................ 5
Risk Factors.......................... 8
The Company........................... 15
Description of the Acquisitions....... 16
Use of Proceeds....................... 17
Dividend Policy....................... 17
Dilution.............................. 18
Capitalization........................ 19
Selected Combined Financial Data...... 20
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 23
Business.............................. 34
Management............................ 42
Certain Transactions.................. 47
Principal Stockholders................ 47
Description of Capital Stock.......... 48
Underwriting.......................... 51
Legal Opinions........................ 52
Experts............................... 52
Additional Information................ 53
Index to Combined Financial
Statements.......................... F-1
</TABLE>
------------------------
UNTIL , 1996 (25 DAYS AFTER THE DATE
HEREOF), ALL DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER
A PROSPECTUS WHEN ACTING AS UNDERWRITERS WITH RESPECT TO THEIR UNSOLD ALLOTMENTS
OR SUBSCRIPTIONS.
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
2,800,000 SHARES
LOGO
LOGO
COMMON STOCK
-----------------
PROSPECTUS
-----------------
FRIEDMAN, BILLINGS, RAMSEY
& CO., INC.
PRIME CHARTER LTD.
, 1996
- ------------------------------------------------------
- ------------------------------------------------------
<PAGE> 102
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Certificate of Incorporation and Bylaws of the Registrant provide that
the Registrant will indemnify and advance expenses, to the fullest extent
permitted by the Delaware General Corporation Law, to each person who is or was
a director or officer of the Registrant, or who serves or served any other
enterprise or organization at the request of the Registrant (an "Indemnitee").
Under Delaware law, to the extent that an Indemnitee is successful on the
merits in defense of a suit or proceeding brought against him or her by reason
of the fact that he or she is or was a director, officer or agent of the
Registrant, or serves or served any other enterprise or organization at the
request of the Registrant, the Registrant shall indemnify him or her against
expenses (including attorneys' fees) actually and reasonably incurred in
connection with such action.
If unsuccessful in defense of a third-party civil suit or a criminal suit,
or if such a suit is settled, an Indemnitee may be indemnified under Delaware
law against both (i) expenses, including attorney's fees, and (ii) judgments,
fines and amounts paid in settlement if he or she acted in good faith and in a
manner he or she reasonably believed to be in, or not opposed to, the best
interests of the Company, and, with respect to any criminal action, had no
reasonable cause to believe his or her conduct was unlawful.
If unsuccessful in defense of a suit brought by or in the right of the
Registrant, where the suit is settled, an Indemnitee may be indemnified under
Delaware law only against expenses (including attorneys' fees) actually and
reasonably incurred in the defense or settlement of the suit if he or she acted
in good faith and in a manner he or she reasonably believed to be in, or not
opposed to, the best interests of the Registrant except that if the Indemnitee
is adjudged to be liable for negligence or misconduct in the performance of his
or her duty to the Registrant, he or she cannot be made whole even for expenses
unless a court determines that he or she is fully and reasonably entitled to
indemnification for such expenses.
Also under Delaware law, expenses incurred by an officer or director in
defending a civil or criminal action, suit or proceeding may be paid by the
Registrant in advance of the final disposition of the suit, action or proceeding
upon receipt of an undertaking by or on behalf of the officer or director to
repay such amount if it is ultimately determined that he or she is not entitled
to be indemnified by the Registrant. The Registrant may also advance expenses
incurred by other employees and agents of the Registrant upon such terms and
conditions, if any, that the Board of Directors of the Registrant deems
appropriate.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the expenses in connection with the offering
described in the Registration Statement.
<TABLE>
<S> <C>
SEC registration fee...................................................... $ 14,320
NASD filing fee........................................................... 4,653
Nasdaq fees............................................................... 23,646
Transfer agent and registrar fees......................................... 2,000
Accountants' fees and expenses............................................ 400,000
Legal fees and expenses................................................... 300,000
Printing and engraving expenses........................................... 100,000
Miscellaneous fees........................................................ 48,381
--------
Total........................................................... $893,000
========
</TABLE>
II-1
<PAGE> 103
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
No securities which were not registered under the Securities Act of 1933,
as amended, have been sold by the Registrant within the past three years except
for the following:
In June 1995, the Registrant issued 807,851 shares of Common Stock to
Messrs. Leopold and Bernstein, respectively, for an aggregate of $200 and
options to purchase 161,571 shares of Common Stock to each of Mr. Clifford for
$0.10 per share in connection with the incorporation of the Registrant. The
shares were issued in reliance upon an exemption from registration pursuant to
Section 4(2) of the Securities Act of 1933, as amended, as a transaction not
involving a public offering.
In September 1996, the Registrant sold to a single foreign investor a
promissory note in the principal amount of $400,000 that bears interest at the
rate of 10% per annum with a maturity date of January 31, 1997, subject to a
prepayment obligation upon the completion of the Offering. Upon the completion
of the Offering, the Company will issue (i) shares of Common Stock having a
market value of $200,000 based on the Offering Price, (ii) warrants to purchase
a like number of shares of Common Stock at an exercise price of equal to 125% of
the Offering Price, and (iii) options to purchase 5,000 shares of Common Stock
at an exercise price equal to the Offering Price to Mr. Schefler upon his
election as a director of the Company. The note was issued in reliance upon an
exemption from registration pursuant to Section 4(2) of the Securities Act of
1933, as amended, as a transaction not involving a public offering.
ITEM 27. EXHIBITS.
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
- ------ ------------------------------------------------------------------------------------
<C> <S>
1 Form of Underwriting Agreement++
3.1 Certificate of Incorporation of the Registrant++
3.2 Certificate of Amendment of Certificate of Incorporation++
3.3 Bylaws of the Registrant++
4.1 Specimen of Stock Certificate+
4.2 Specimen of Redeemable Common Stock Warrant++
5.1 Opinion of O'Connor, Cavanagh, Anderson, Killingsworth & Beshears, a professional
association+
10.1 Stock Purchase Agreement by and among Registrant and Donald N. Black, Howard Black,
Barbara Black, Robert Black, Don Cottam, Jim Cottam and the Cottam Family
Partnership, L.P. (Shareholders) with respect to Gena Laboratories, Inc.++
10.2 Stock Purchase Agreement by and among Registrant and Jack Sperling and Gary Sperling
(Shareholders) with respect to JDS Manufacturing Co., Inc.++
10.3 Asset Purchase Agreement by and among Registrant, Designs by Norvell, Inc. and Joy
Norvell Martin (Stockholder) with respect to the Body Drench division of Designs by
Norvell, Inc.++
10.4 Asset Purchase Agreement by and among Registrant, Kotchammer Investments, Inc. and
The Hammer Family Living Trust, The Jones Family Trust and Gerald Kotch
(Stockholders)+
10.5 Employment Agreement between Registrant and Sam L. Leopold+
10.6 Employment Agreement between Registrant and Thomas M. Clifford+
10.7 Employment Agreement between Registrant and David E. Ziegler+
10.8 Form of Employment Agreement between Registrant and Richard E. Norvell+
10.9 Form of Employment Agreement between Registrant and Gerald L. Kotch+
10.10 Employment Agreement between Registrant and Donald L. Black+
10.11 1996 Stock Option Plan+
10.12 Stock Repurchase Agreement, as amended, between Registrant and Kenneth S. Bernstein+
</TABLE>
II-2
<PAGE> 104
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
- ------ ------------------------------------------------------------------------------------
<C> <S>
10.13 Bridge Note+
11 Statement regarding computation of per share earnings+
23.1 Consent of Counsel (included in Exhibit 5.1)+
23.2 Consent of Arthur Andersen LLP+
23.3 Consent of Sylvan Schefler++
24.1 Power of Attorney of Directors and Executive Officers (included on the Signature
Page of the Registration Statement)+
27 Financial Data Schedule++
</TABLE>
- ---------------
+ Filed herewith
++ Previously filed
+++ To be filed by amendment
(b) Financial Statement Schedules
None
ITEM 17. UNDERTAKINGS.
The undersigned registrant hereby undertakes to provide to the underwriter
at the closing specified in the underwriting agreement, certificates in such
denominations and registered in such names as required by the underwriter to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the registrant pursuant to Rule 424(b)(1), or
(4), or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time the Commission declared it effective.
(2) For purposes of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-3
<PAGE> 105
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this amendment to registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Phoenix,
State of Arizona, on November 1, 1996.
STYLING TECHNOLOGY CORPORATION
By: /s/ SAM L. LEOPOLD
------------------------------------
Chairman of the Board and
Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the person whose signature appears
below constitutes and appoints jointly and severally, Sam L. Leopold and Thomas
M. Clifford and each one of them, as his true and lawful attorneys-in-fact and
agents, with full power of substitution and resubstitution, for him and in his
name, place and stead, in any and all capacities, to sign any and all amendments
(including pre-effective and post-effective amendments) to this registration
statement and to sign any registration statement and amendments thereto for the
same offering files pursuant to Rule 462(b), and to file the same, with all
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in connection therewith,
as fully to all intents and purposes as he might or could do in person, hereby
ratifying and confirming all which said attorneys-in-fact and agents, or any of
them, or their or his substitute or substitutes, may lawfully do, or cause to be
done by virtue hereof.
In accordance with the requirements of the Securities Act of 1933, this
amendment to registration statement was signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------- --------------------------------- -------------------
<S> <C> <C>
/s/ SAM L. LEOPOLD Chairman of the Board and Chief November 1, 1996
- ------------------------------------- Executive Officer
Sam L. Leopold
THOMAS M. CLIFFORD* President and Director November 1, 1996
- -------------------------------------
Thomas M. Clifford
/s/ DAVID E. ZEIGLER Chief Financial Officer, November 1, 1996
- ------------------------------------- Treasurer, and Secretary
David E. Zeigler (Principal Financial and
Accounting Officer)
/s/ JAMES A. BROOKS Director November 1, 1996
- -------------------------------------
James A. Brooks
DANIEL HOWELL* Director November 1, 1996
- -------------------------------------
Daniel Howell
</TABLE>
*By: /s/ SAM L. LEOPOLD
-----------------------------------------------
Sam L. Leopold
(Attorney-in-fact)
II-4
<PAGE> 106
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER EXHIBIT PAGE
- ------ -------------------------------------------------------------------------- ------------
<C> <S> <C>
1 Form of Underwriting Agreement++..........................................
3.1 Certificate of Incorporation of the Registrant++..........................
3.2 Certificate of Amendment of Certificate of Incorporation++................
3.3 Bylaws of the Registrant++................................................
4.1 Specimen of Stock Certificate+............................................
4.2 Specimen of Redeemable Common Stock Warrant++.............................
5.1 Opinion of O'Connor, Cavanagh, Anderson, Killingsworth & Beshears, a
professional association+.................................................
10.1 Stock Purchase Agreement by and among Registrant and Donald N. Black,
Howard Black, Barbara Black, Robert Black, Don Cottam, Jim Cottam and the
Cottam Family Partnership, L.P. (Shareholders) with respect to Gena
Laboratories, Inc.++......................................................
10.2 Stock Purchase Agreement by and among Registrant and Jack Sperling and
Gary Sperling (Shareholders) with respect to JDS Manufacturing Co.,
Inc.++....................................................................
10.3 Asset Purchase Agreement by and among Registrant, Designs by Norvell, Inc.
and Joy Norvell Martin (Stockholder) with respect to the Body Drench
division of Designs by Norvell, Inc.++....................................
10.4 Asset Purchase Agreement by and among Registrant, Kotchammer Investments,
Inc. and The Hammer Family Living Trust, The Jones Family Trust and Gerald
Kotch (Stockholders)+.....................................................
10.5 Employment Agreement between Registrant and Sam L. Leopold+...............
10.6 Employment Agreement between Registrant and Thomas M. Clifford+...........
10.7 Employment Agreement between Registrant and David E. Ziegler+.............
10.8 Form of Employment Agreement between Registrant and Richard E. Norvell+...
10.9 Form of Employment Agreement between Registrant and Gerald L. Kotch+......
10.10 Employment Agreement between Registrant and Donald L. Black+..............
10.11 1996 Stock Option Plan+...................................................
10.12 Stock Repurchase Agreement, as amended, between Registrant and Kenneth S.
Bernstein+
10.13 Bridge Note+
11 Statement regarding computation of per share earnings+....................
23.1 Consent of Counsel (included in Exhibit 5.1)+.............................
23.2 Consent of Arthur Andersen LLP+...........................................
23.3 Consent of Sylvan Schefler++..............................................
24.1 Power of Attorney of Directors and Executive Officers (included on the
Signature Page of the Registration Statement)+............................
27 Financial Data Schedule+..................................................
</TABLE>
- ---------------
+ Filed herewith
++ Previously filed
<PAGE> 1
EXHIBIT 4.1
STOCK CERTIFICATE
Stock Certificate with a Certificate No., the number of shares and the Styling
Technology Corporation emblem, with the following text:
"Styling Technology Corporation, incorporated under the laws of Delaware, CUSIP
No. 863905 10 5. The Corporation is authorized to issue 10,000,000 shares of
Common Stock, par value $.0001 each. This certifies that ________________ is the
registered holder of ________ shares of the Common Stock of Styling Technology
Corporation, transferable only on the books of the Corporation by the holder
hereof in person or by Attorney upon surrender of this Certificate properly
endorsed. This Certificate is not valid until countersigned and registered by
the Transfer Agent and Registrar. In witness whereof, the said Corporation has
caused this Certificate to be signed by its duly authorized officers and its
Corporate Seal to be hereunto affixed this _____ day of _______, 19___."
Countersigned and Registered:
CORPORATE STOCK TRANSFER, INC. STYLING TECHNOLOGY CORPORATION
_____________________________ _______________________________
Secretary President
Corporate Seal
Back of Certificate: various abbreviations and the language:
"THE CORPORATION WILL FURNISH TO ANY SHAREHOLDER UPON REQUEST AND WITHOUT
CHARGE, A FULL STATEMENT OF THE DESIGNATIONS, PREFERENCES, LIMITATIONS, AND
RELATIVE RIGHTS OF THE SHARES OF EACH CLASS AUTHORIZED TO BE ISSUED.
For value received, ____________ hereby sell, sign and transfer unto
_____________ Shares represented by the within Certificate, and do hereby
irrevocably constitute and appoint _____________ Attorney to transfer the said
Shares on the books of the within named Corporation with full power of
substitution in the premises.
Dated: ___________________________, 19 __.
In presence of __________________________.
Notice: The signature of the Assignment must correspond with the name as written
upon the face of the Certificate and every particular without alteration or
enlargement or any change whatever. Social security or other identifying number
of Assignee."
<PAGE> 1
Robert S. Kant
602-263-2606
File No.: 31114-100
October 29, 1996
Styling Technology Corporation
One East Camelback Road
Suite 1100
Phoenix, Arizona 85012
RE: REGISTRATION STATEMENT ON FORM S-1
STYLING TECHNOLOGY CORPORATION
Ladies and Gentlemen:
As legal counsel to Styling Technology Corporation, a Delaware
corporation (the "Company"), we have assisted in the preparation of the
Company's Registration Statement on Form S-1, Registration No. 333-12469 (the
"Registration Statement"), filed with the Securities and Exchange Commission in
connection with the registration under the Securities Act of 1933, as amended,
of the shares of common stock of the Company covered by the Registration
Statement (the "Shares"). The facts, as we understand them, are set forth in the
Registration Statement.
With respect to the opinion set forth below, we have examined
originals, certified copies, or copies otherwise identified to our satisfaction
as being true copies, only of the following:
A. The Certificate of Incorporation of the Company, as amended
to date;
B. The Bylaws of the Company;
C. The Registration Statement; and
D. The Resolutions of the Board of Directors of the Company
relating to the organization of the Company and the approval of the filing of
the Registration Statement and the transactions in connection therewith.
<PAGE> 2
Styling Technology Corporation
October 29, 1996
Page 2
Subject to the assumptions that (i) the documents and
signatures examined by us are genuine and authentic and (ii) the persons
executing the documents examined by us have the legal capacity to execute such
documents, and subject to the further limitations and qualifications set forth
below, it is our opinion that, when (a) the Registration Statement as then
amended shall have been declared effective by the Commission, (b) the
Underwriting Agreement shall have been duly executed and delivered, and (c) the
Shares have been duly issued, executed, authenticated, delivered, paid for and
sold by the Company as described in the Registration Statement and in accordance
with the provisions of the Underwriting Agreement, the Shares will be validly
issued, fully paid and nonassessable.
Please be advised that we are members of the State Bar of
Arizona, and our opinion is limited to the legality of matters under the laws of
the State of Arizona. Further, our opinion is based solely upon existing laws,
rules and regulations, and we undertake no obligation to advise you of any
changes that may be brought to our attention after the date hereof.
We hereby expressly consent to any reference to our firm in
the Registration Statement, the inclusion of this Opinion as an exhibit to the
Registration Statement, and to the filing of this Opinion with any other
appropriate governmental agency.
Very truly yours,
O'Connor, Cavanagh, Anderson,
Killingsworth & Beshears, P.A.
<PAGE> 1
EXHIBIT
================================================================================
ASSET PURCHASE AGREEMENT
by and among
STYLING TECHNOLOGY CORPORATION
("Purchaser")
KOTCHAMMER INVESTMENTS, INC.
("Seller")
and
JOHN M. HAMMER AND SONJA J. HAMMER,
TRUSTEES, THE HAMMER FAMILY LIVING TRUST,
THE JONES FAMILY TRUST
AND
GERALD KOTCH
(collectively "Stockholders")
Dated: October 29, 1996
================================================================================
<PAGE> 2
ASSET PURCHASE AGREEMENT
THIS ASSET PURCHASE AGREEMENT ("Agreement") is made and
entered into this 29th day of October, 1996, by and among STYLING TECHNOLOGY
CORPORATION, a Delaware corporation ("Purchaser"); KOTCHAMMER INVESTMENTS, INC.,
a California corporation, dba Styling Research Company ("Seller"); and JOHN M.
HAMMER AND SONJA J. HAMMER, TRUSTEES, THE HAMMER FAMILY LIVING TRUST dated July
3, 1993 ("Hammer Trust") ; THE JONES FAMILY TRUST dated December 19, 1989
("Jones Trust") ; and GERALD KOTCH ("Stockholders").
R E C I T A L S
A. Seller is engaged in the distribution of hair care
products, accessories and equipment on a wholesale basis in the United States
("Seller's Business").
B. Stockholders collectively own 100 percent (100%) of the
issued and outstanding capital stock of Seller.
C. Seller desires to sell to Purchaser and Purchaser desires
to purchase from Seller, certain of Seller's assets free and clear of any and
all liens, claims, charges, liabilities, encumbrances and security interests of
whatsoever kind and nature, subject only to certain of Seller's liabilities, all
on the terms and subject to the conditions contained in this Agreement.
D. Stockholders desire to cause Seller to perform its
obligations under this Agreement and to make certain representations to
Purchaser in connection with the transactions contemplated by this Agreement.
A G R E E M E N T
NOW, THEREFORE, in consideration of the mutual covenants
contained herein and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto hereby agree as
follows:
ARTICLE I
PURCHASE AND SALE OF ASSETS
1.1 AGREEMENT TO PURCHASE AND SELL. On the terms and subject
to the conditions contained in this Agreement, Purchaser agrees to purchase from
Seller, and Seller agrees to sell to Purchaser (and Stockholders agree to cause
Seller to sell to Purchaser), certain of the assets, properties and rights of
Seller (tangible and intangible), which are used or associated with Seller's
Business (hereinafter collectively referred to in this Agreement as the
"Purchased Assets"), as more particularly referenced in Section hereof. All of
the Purchased Assets shall be sold to Purchaser free and clear of any and all
liens, claims, charges, liabilities, obligations, encumbrances and security
interests of every kind and nature, except only the specific liabilities of
Seller to be assumed by Purchaser pursuant to Section hereof.
<PAGE> 3
1.2 ENUMERATION OF PURCHASED ASSETS. The Purchased Assets are
the following items:
(a) ACCOUNTS RECEIVABLE. All of Seller's accounts
receivable and notes and other receivables (including accounts receivable from
employees) (the "Accounts Receivable") satisfying Section 4.4(f)(iii) hereof,
including but not limited to, those set forth on Schedule 1.2(a) hereto, which
sets forth the amount of each receivable (note or otherwise) and the name and
phone number of the payee of each note or receivable as of October 24, 1996 and
which will set forth the name and mailing address of the payee of each note or
receivable as of the Closing Date as defined in Section 7.1 hereof.
(b) FURNITURE, FIXTURES AND EQUIPMENT. The Seller's
furniture, fixtures, equipment, machinery, parts, tools and molds set forth on
Schedule 1.2(b) hereto (the "Equipment").
(c) INVENTORY. All inventory satisfying Section
4.4(f)(ii) hereof (the "Inventory"), including, but not limited to, the
Inventory set forth on Schedule 1.2(c) hereto.
(d) CLAIMS AND RIGHTS TO PURCHASED ASSETS. All claims
and rights (and benefits arising therefrom) related to the Purchased Assets
against all persons and entities, including, without limitation, all rights
against suppliers under warranties covering any of the Equipment and Inventory.
(e) INTELLECTUAL PROPERTY. All intellectual property
rights, if any, that are owned by or licensed to Seller, including, without
limitation, all patents and applications therefor, know-how, unpatented
inventions, trade secrets, secret formulas, business and marketing plans, ideas
for products or production (to the extent of Seller's right, title, and interest
therein), copyrights and applications therefor, trademarks and applications
therefor, service marks and applications therefor, trade names and applications
therefor, and all names and slogans used by Seller (the "Intellectual
Property"), including, but not limited to, the Intellectual Property set forth
on Schedule 1.2(e) hereto; provided, however, that "Intellectual Property" shall
not include the trade name "AMINOPURE." Attached to Schedule 1.2(e) are copies
of all such business and marketing plans, license agreements, trademarks and
trade names and all patents, and all applications therefor with respect to and
used by Seller in Seller's Business.
(f) COMPUTER SOFTWARE AND HARDWARE. The computer
software and hardware owned or licensed by or to Seller that is not otherwise
prohibited from transfer by contract between Seller and the owner thereof or
applicable law set forth on Schedule 1.2(f) hereto.
(g) REAL PROPERTY LEASEHOLD IMPROVEMENTS AND
INTERESTS. The leasehold interest created by the lease of real property under
which Seller is a lessee of the premises located at 5959 Topanga Canyon
Boulevard, Suite 175, Woodland Hills, California (the "Lease"), together with
all leasehold improvements thereon (such real property which Seller is leasing
as lessee shall hereinafter be referred to as the "Leased Realty"). Schedule
1.2(g) hereto sets forth an itemized list of the Leased Realty and attached
thereto are copies of all the lease agreements and amendments thereto.
(h) LEASED PERSONALTY. The leasehold interests
created by lease of personal property used with respect to Seller's Business,
under which Seller is a lessee, set forth on Schedule 1.2(h) hereof, and any
maintenance contracts and deposits in connection therewith (such personal
property
2
<PAGE> 4
that Seller is leasing as lessee and that is set forth on Schedule 1.2(h) hereof
shall herein be referred to as "Leased Personalty"). Attached to Schedule 1.2(h)
are copies of all the lease agreements listed on Schedule 1.2(h).
(i) NAMES. All right, title and interest in and to
the names "Styling Research Company" and "SRC" and any derivations thereof (the
"Names").
(j) DEPOSITS AND PREPAID EXPENSES. The deposits and
prepaid expenses (the "Deposits"), set forth on Schedule 1.2(j) hereto
(including any deposits with respect to the Lease assumed by Purchaser pursuant
to Section 2.1(b) hereof). "Deposits" shall not include any prepaid expense for
which the independent certified public accountants selected by Purchaser cannot
determine a value under generally accepted accounting principles.
(k) REDKEN AGREEMENT. Seller's rights under that
certain Asset Purchase Agreement dated December 3, 1993 between Seller and
Redken Laboratories, Inc. ("Redken") (the "Redken Agreement"), including,
without limitation, the rights to all formulas and other intellectual property
under the Redken Agreement other than rights to the "AMINOPURE" trademark.
(l) NOBLE DISTRIBUTION SYSTEMS AGREEMENT. Seller's
rights under that certain warehousing agreement dated June 1, 1996 between Noble
Distribution Systems and Seller ("Noble Distribution Agreement").
1.3 EXCLUDED ASSETS. All other assets of Seller shall be
excluded from the purchase and sale contemplated by this Agreement and shall be
retained by Seller (the "Excluded Assets"), including, but not limited to, all
insurance policies of Seller and all rights thereunder and all cash on hand and
in banks and all right, title and interest in and to Seller's bank accounts.
ARTICLE II
ASSUMPTION OF LIABILITIES
2.1 ASSUMED LIABILITIES. At the Closing as defined in Section
7.1 hereof, Purchaser shall assume only the following liabilities and
obligations of Seller ("Assumed Liabilities"):
(a) LIABILITIES FOR LEASED PERSONALTY. Liabilities
and obligations arising under those operating leases and capitalized leases for
the Leased Personalty described in Section 1.2(h) hereof.
(b) LIABILITIES FOR THE LEASED REALTY. Liabilities
and obligations arising under the Lease.
(c) LIABILITIES RESPECTING NOBLE DISTRIBUTION
AGREEMENT. All obligations and liabilities arising under the Noble Distribution
Agreement.
(d) REDKEN AGREEMENT. Seller's obligations arising
under the Redken Agreement and all obligations and liabilities of John Hammer
and Gerald Kotch, respectively, under those certain Guaranty Agreements in favor
of Redken dated December 8, 1993 (the "Redken Guarantees").
3
<PAGE> 5
(e) OPEN PURCHASE ORDERS. All of Seller's obligations
under its purchase orders for merchandise for which the merchandise ordered
thereunder remains unshipped or undelivered as of the Closing Date; provided,
however, that the obligations shall only be assumed pursuant to this Section
2.1(e) if, as of the Closing Date, such related merchandise is not included in
the calculation of Total Current Assets.
2.2 EXCLUDED LIABILITIES. Except only with respect to the
Assumed Liabilities set forth in Section 2.1 hereof, Purchaser shall not
directly or indirectly pay, perform or discharge any other claims, obligations
or liabilities of Seller or Stockholders.
ARTICLE III
PURCHASE PRICE AND MANNER OF PAYMENT
3.1 PURCHASE PRICE. The total purchase price of the Purchased
Assets (the "Purchase Price") shall be the sum of (a) Four Hundred Fifty
Thousand Dollars ($450,000) (the "Cash Component"), (b) a promissory note of
Purchaser with a principal amount of $200,000, subject to adjustment as set
forth in Section 3.2(d) hereof, as set forth in Section 3.2(b) below (the
"Purchaser Note"), (c) the common stock of Purchaser with a value on the Closing
Date of $50,000 as set forth in Section 3.2(c) below ("Purchaser Stock"), and
(d) the assumption of the Assumed Liabilities.
3.2 PAYMENT OF PURCHASE PRICE. At the Closing, Seller shall be
entitled to receive an amount equal to the Purchase Price payable as follows:
(a) CASH. At the Closing, Purchaser shall pay to
Seller, by wire transfer, the Cash Component less the Earnest Deposit provided
in Section 3.3 hereof.
(b) PURCHASER NOTE. At the Closing, Purchaser shall
deliver to Seller the Purchaser Note which shall be secured by a first lien on
the Purchased Assets (as defined in Section 1.1 hereof) pursuant to the terms of
a security agreement (the "Security Agreement"), in form and substance
reasonably acceptable to Purchaser and Seller, shall bear simple interest at ten
percent (10%) per annum, shall provide for quarterly payments of principal and
interest amortized over a period of thirty (30) months and shall be prepaid,
without penalty, within five (5) days following Purchaser's second public
financing (or in the event the financing of this acquisition is from funds other
than the proceeds of an initial public financing, then following Purchaser's
initial public financing). The Purchaser Note shall be subject to a right of
offset to the extent of any Accounts Receivable (not previously excluded under
Section 3.2(d) in determining Total Current Assets) that have not been collected
within the 90 days following the Closing Date. In addition, the Purchaser Note
may be assigned to one or more Stockholders or their affiliates.
(c) COMMON STOCK. At the Closing, Purchaser shall
deliver to Seller shares of Common Stock of Purchaser (the "Purchaser Stock")
equal in value on the Closing Date to Fifty Thousand Dollars ($50,000), based on
the initial public offering price per share of the Purchaser Stock; provided,
however, that in the event that the Purchaser Stock shall not have been the
subject of an initial public offering at the time of the Closing, Seller may
elect to (i) receive such Purchaser Stock based on the fair market value per
share of the Purchaser Stock as determined by an independent securities dealer
acceptable to Seller and Purchaser, or (ii) require Purchaser to issue to Seller
a convertible subordinate debenture in the principal amount of Fifty Thousand
Dollars ($50,000) and bearing interest at ten percent
4
<PAGE> 6
(10%) (the "Convertible Debenture"). Such Convertible Debenture would have a
term of five years, would require quarterly payments of interest only, would be
secured by a lien on the Purchased Assets (as defined in Section 1.1 hereof)
second only to the lien securing the Purchaser Note, and would be convertible
into Purchaser Stock during the ten (10) day period commencing on the date of
Purchaser's initial public offering. To the extent reasonably required by
Purchaser, Seller shall, prior to the delivery of the Purchaser Stock, execute a
Subscription Agreement with respect to the issuance of the Purchaser Stock in a
form reasonably acceptable to Seller. The Purchaser Stock or the Convertible
Debenture, as the case may be, shall be subject to the terms of a separate
Escrow Agreement in form and substance reasonably satisfactory to Purchaser and
Seller which provides for a right of offset to the extent of any liabilities
owing by Seller or any Stockholder pursuant to Article IX or Article X hereof.
(d) ADJUSTMENT TO PURCHASE PRICE. If the Purchased
Assets have a total tangible asset value as defined by generally accepted
accounting principles (the "Total Current Assets"), as of the Closing Date (as
determined by Arthur Andersen LLP), that is less than Six Hundred Fifty Thousand
Dollars ($650,000) (the "Minimum Asset Level"), then the Purchase Price set
forth in Section 3.1 shall be reduced by reducing the Purchaser Note component
by an amount equal to the difference between the Minimum Asset Level and the
value of the Total Current Assets as of the Closing Date. In determining Total
Current Assets, (i) Accounts Receivable shall only include those Accounts
Receivable satisfying Section 4.4(f)(iii); (ii) Inventories shall only include
those Inventories satisfying Section 4.4(f)(ii) hereof together with shaded
salonwear covered by the Kotch Guarantee referred to in Section 8.7 hereof.
Notwithstanding any other provision of this Agreement, neither Seller nor any
Stockholder shall have any liability for breach of the representations and
warranties contained in Sections 4.4(f)(ii) and 4.4(f)(iii) with respect to
Accounts Receivable or Inventories excluded in determining Total Current Assets.
3.3 DEPOSIT. Upon Purchaser's approval of the results of the
audit and due diligence review as set forth in Section 6.2(h) and Section 6.2(i)
hereof, Purchaser shall deliver to Seller a cashier's check in the amount of
Fifty Thousand Dollars ($50,000) on account of the Purchase Price (the "Earnest
Deposit"); provided, however, that if such audit or due diligence review has not
been completed by November 30, 1996, Purchaser shall deliver the Earnest Deposit
to Seller but shall retain the right to approve the results of the audit and due
diligence review as set forth in Section 6.2(h) and Section 6.2(i) hereof. In
the event the Closing does not occur, the Earnest Deposit shall be retained or
returned as specified in Article XI hereof.
3.4 ALLOCATION OF PURCHASE PRICE. The Purchase Price shall be
allocated among the Purchased Assets as set forth in Schedule 3.4 hereto. The
allocations will be made in accordance with the rules promulgated under Section
1060 of the Internal Revenue Code of 1986, as amended.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES
4.1 GENERAL STATEMENT. The parties make the representations
and warranties to each other that are set forth in this Article IV. All such
representations and warranties and all representations and warranties that are
set forth elsewhere in this Agreement shall survive the Closing (and none shall
merge into any instrument of conveyance), regardless of any knowledge or belief,
investigation or lack of investigation by any of the parties to this Agreement.
No specific representation or warranty shall limit the generality or
applicability of a more general representation or warranty. Representations and
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warranties of the parties are initially made as of the date hereof and are to be
true and correct as of the Closing Date except as otherwise provided in Sections
6.1(d) and 6.2(d) hereof.
4.2 REPRESENTATIONS AND WARRANTIES OF PURCHASER. To induce
Seller and Stockholders to enter into this Agreement and to perform Seller's and
Stockholders' obligations hereunder, and with full knowledge that Seller and
Stockholders will rely thereon, Purchaser represents and warrants the truth,
accuracy and completeness of the following, and subject only to the information
specifically set forth in the disclosure schedules called for by this Agreement
(the "Purchaser Disclosure Schedules"):
(a) ORGANIZATION. Purchaser is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Delaware.
(b) POWER AND AUTHORITY. Purchaser has full corporate
power and authority to execute and deliver this Agreement and the Other
Purchaser Agreements, and to consummate the transactions contemplated hereby and
thereby. The execution and delivery of this Agreement and the Other Purchaser
Agreements by Purchaser, and the consummation of the transactions contemplated
hereby and thereby, have been duly authorized and approved by Purchaser's board
of directors, and no other corporate proceedings on the part of Purchaser are
required to authorize the execution and delivery of this Agreement, the Other
Purchaser Agreements or the consummation of the transactions contemplated hereby
or thereby. As used in this Agreement, the term "Other Purchaser Agreements"
means, collectively, the Purchaser Note, the Assumption Agreement, the Lease
Assumption Agreement, the Security Agreement, the Escrow Agreement, the Kotch
Employment Agreement and, if applicable, the Convertible Debenture.
(c) ENFORCEABILITY. This Agreement and the Other
Purchaser Agreements have been or will be duly executed and delivered by
Purchaser and constitute legal, valid and binding obligations of Purchaser,
enforceable against Purchaser in accordance with their respective terms.
(d) CONFLICTS; CONSENTS. Neither the execution and
delivery of this Agreement and the Other Purchaser Agreements, nor the
consummation of the transactions contemplated hereby or thereby, will conflict
with, violate or result in a breach of or default under (with or without the
giving of notice or the passage of time, or both): (i) the Certificate of
Incorporation or the Bylaws of Purchaser; (ii) any license, instrument, contract
or agreement to which Purchaser is a party or by which Purchaser is bound; or
(iii) any law, order, rule, regulation, writ, injunction or decree that is
applicable to Purchaser. Neither the execution and delivery of this Agreement or
the Other Purchaser Agreements by Purchaser, nor the consummation by Purchaser
of the transactions contemplated hereby or thereby, will require any consent or
approval of, or any filing with, any governmental entity or other person.
(e) ACCURACY OF DOCUMENTS, REPRESENTATIONS AND
WARRANTIES. The copies of all documents identified on Schedule 4.2(e) hereof
furnished to Seller and its representatives by or on behalf of Purchaser and its
representatives are true, complete and correct in all material respects. No
representation or warranty of Purchaser contained in this Agreement, and no
statement contained in the Exhibits, the Schedules or the other documents
delivered by or on behalf of Purchaser or its representatives pursuant to or in
connection with this Agreement or any of the transactions contemplated hereby or
thereby contains any untrue statement of a material fact, or omits to state any
material fact
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<PAGE> 8
required to be stated herein or therein in order to make the statements
contained herein or therein not misleading.
(f) STATUS OF COMMON STOCK TO BE ISSUED. The shares
of Common Stock to be issued pursuant to Section 3.2(c) hereof will be, when
issued, validly authorized and issued, fully paid, nonassessable, and free of
preemptive or other similar rights.
4.3 REPRESENTATIONS AND WARRANTIES OF STOCKHOLDERS. To induce
Purchaser to enter into this Agreement and to perform Purchaser's obligations
hereunder, and with full knowledge that Purchaser will rely thereon, each
Stockholder represents and warrants, severally and not jointly, as to himself,
the truth, accuracy and completeness of the following as of the Closing Date,
unless otherwise noted, and subject to the information expressly set forth in
the disclosure schedules of the Stockholders called for by this Agreement (the
"Stockholder Disclosure Schedules"):
(a) OWNERSHIP. Except as set forth in Schedule
4.3(a), such Stockholder owns the percent of the issued and outstanding capital
stock of Seller set forth below free and clear of any and all liens, claims,
charges, liabilities, encumbrances and security interests of whatsoever kind and
nature:
<TABLE>
<S> <C>
John M. Hammer and Sonja J. Hammer,
Trustees, the Hammer Family
Living Trust dated July 3, 1993 45%
The Jones Family Trust
dated December 19, 1989 20%
Gerald Kotch 35%
</TABLE>
(b) POWER AND AUTHORITY. Such Stockholder has full
right, power and authority to execute and deliver this Agreement and to
consummate the transactions contemplated hereby.
(c) ENFORCEABILITY. This Agreement has been duly
executed and delivered by such Stockholder and constitutes the legal, valid and
binding obligation of Stockholder, enforceable against such Stockholder in
accordance with its terms.
(d) CONFLICTS; CONSENTS. Neither the execution and
delivery of this Agreement nor the consummation of the transactions contemplated
hereby, will conflict with, violate or result in a breach of or default under
(with or without the giving of notice or the passage of time, or both): (i) any
license, instrument, contract or agreement to which such Stockholder is a party
or by which such Stockholder is bound; or (ii) any law, order, rule, regulation,
writ, injunction or decree that is applicable to such Stockholder. Neither the
execution and delivery of this Agreement by such Stockholder, nor the
consummation by such Stockholder of the transactions contemplated hereby, will
result in the creation of any lien, claim, charge, encumbrance or security
interest of any nature or type whatsoever with respect to the Purchased Assets.
Except as set forth in Schedule 4.4(e), neither the execution and delivery of
this Agreement by such Stockholder, nor the consummation by Stockholder of the
transactions contemplated hereby, will require any consent or approval of, or
any filing with, any governmental entity or other person.
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<PAGE> 9
(e) ACCURACY OF DOCUMENTS, REPRESENTATIONS AND
WARRANTIES. No representation or warranty of such Stockholder contained in this
Agreement contains any untrue statement of a material fact, or omits to state
any material fact required to be stated herein or therein in order to make the
statements contained herein not misleading.
4.4 REPRESENTATIONS AND WARRANTIES OF SELLER AND STOCKHOLDERS.
To induce Purchaser to enter into this Agreement and to perform Purchaser's
obligations hereunder, and with full knowledge that Purchaser will rely thereon,
Seller and each Stockholder, jointly and severally, represent and warrant the
truth, accuracy and completeness of the following, subject only to the
information specifically set forth in the schedules called for by this Agreement
(the "Seller Disclosure Schedules").
(a) ORGANIZATION. Seller is a corporation duly
organized, validly existing and in good standing under the laws of the State of
California.
(b) QUALIFICATION. Seller has qualified as a foreign
corporation, and is in good standing, under the laws of all jurisdictions where
the failure to qualify would have a material adverse effect on its business (all
of such jurisdictions are referred to herein collectively as the "Foreign
Jurisdictions"). Schedule 4.4(b) hereto contains a list of the Foreign
Jurisdictions and a list of all addresses at which Seller conducts business or
owns or holds assets.
(c) POWER AND AUTHORITY. Seller has full corporate
power and authority to execute and deliver this Agreement and the Other Seller
Agreements, and to consummate the transactions contemplated hereby and thereby.
The execution and delivery of this Agreement and the Other Seller Agreements by
Seller, and the consummation of the transactions contemplated hereby and
thereby, have been duly authorized and approved by Seller's board of directors
and stockholders, and no other corporate proceedings on the part of Seller are
required to authorize the execution and delivery of this Agreement, the Other
Seller Agreements or the consummation of the transactions contemplated hereby
and thereby. As used in this Agreement, the term "Other Seller Agreements"
means, collectively, the consents, the assignments of the Contracts, and the
Bill of Sale.
(d) ENFORCEABILITY. This Agreement and the Other
Seller Agreements have been or will be duly executed and delivered on behalf of
Seller and constitute legal, valid and binding obligations of Seller,
enforceable against Seller in accordance with their respective terms.
(e) CONFLICTS; CONSENTS. Except as set forth in
Schedule 4.4(e) hereof, neither the execution and delivery of this Agreement and
the Other Seller Agreements, nor the consummation of the transactions
contemplated hereby or thereby, will conflict with, violate or result in a
breach of or default under (with or without the giving of notice or the passage
of time, or both): (i) the Articles of Incorporation or Bylaws of Seller; (ii)
any material license, instrument, contract or agreement to which Seller is a
party or by which Seller is bound; or (iii) any law, order, rule regulation,
writ, injunction or decree that is applicable to Seller. Except as set forth in
Schedule 4.4(e) hereof, neither the execution and delivery of this Agreement or
the Other Seller Agreements by Seller, nor the consummation by Seller of the
transactions contemplated hereby or thereby, will require any consent or
approval of, or any filing with, any governmental entity or other person.
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<PAGE> 10
(f) ASSETS.
(i) Except as set forth in Schedule 4.4(f),
Seller has good and marketable title to and rightful possession of all of the
Purchased Assets, free and clear of any and all mortgages, liens, pledges,
privileges, claims, rights, charges, encumbrances and security interests of
whatsoever kind or nature.
(ii) The Inventories of Seller are stated at
not more than the lower of cost or market, with adequate adjustments for
obsolete, obsolescent or otherwise not readily marketable items. The Inventories
of Seller are in good and merchantable condition and none of such Inventories is
obsolete (except that this representation shall not apply to shaded salon wear
listed on Schedule 4.4(f)(ii)).
(iii) The Accounts Receivable reflected in
the Balance Sheet and those existing since the date of the Balance Sheet or
existing on the books of Seller at the Closing are good and collectible within
ninety (90) days after the Closing Date, and none of such Accounts Receivable
are subject to the return of the merchandise or other property the selling price
of which is represented thereby, or to offsets or counterclaims, the extent of
which is in excess of any reserves for collectibility thereof reflected therein.
(iv) The Equipment of the Seller as defined
in Section 1.2(b) is being sold "as is" without representation or warranty.
(g) CONTRACTS. Attached hereto are true, complete and
correct copies of the Redken Agreement, the Redken Guarantees, the Noble
Distribution Agreement, the Lease and all agreements relating to Leased
Personalty and open purchase orders, together with all amendments thereto or
interpretations thereof, such as arbitration decisions and the like, to which
Seller is a party or is bound. All of the foregoing contracts and agreements are
referred to herein collectively as the "Contracts." Each of the Contracts is in
full force and effect and enforceable in accordance with its respective terms
and conditions, and (i) there is not existing any default, or event or condition
which, with the giving of notice or the passage of time, or both, would
constitute an event of default, by Seller or Stockholders or any of them, or, to
the best knowledge and belief of Seller and each Stockholder, any other party
thereto under any of the Contracts; (ii) no party to any of the Contracts has
given any notice of default or termination, nor does any Stockholder or Seller
have any reason to believe that such notice shall be given; and (iii) Seller has
not waived any material right under or with respect to any of the Contracts.
(h) INTELLECTUAL PROPERTY. Seller owns or holds all
of the rights to use all trademarks, trade names, fictitious names, service
marks, patents and copyrights that are used in the conduct of its business. To
the best knowledge and belief of Seller and each Stockholder, none of the
matters covered by the Intellectual Property, nor any of the products or
services sold or provided by Seller, nor any of the processes used or the
business practices followed by Seller, infringes or has infringed upon any
trademark, trade name, fictitious name, service mark, patent or copyright owned
by any person or entity, or constitutes unfair competition. To the best
knowledge and belief of Seller and each Stockholder, Seller is not obligated to
pay any royalty or other payment with respect to any of the Intellectual
Property. To the best knowledge and belief of each Stockholder and Seller, no
person or entity is producing, providing, selling or using products or services
that would constitute an infringement of any of the Intellectual Property.
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<PAGE> 11
(i) LITIGATION. There is no litigation or proceeding,
in law or in equity, and there are no proceedings or investigations or inquiries
before any commission or other governmental or private administrative authority
pending, or to the best knowledge and belief of Seller and each Stockholder,
threatened, against Seller with respect or affecting the business or financial
condition of Seller, or the consummation of the transaction herein contemplated,
or with respect to or affecting the use of the Purchased Assets of Seller
(either by Purchaser or Seller after the Closing Date or by Seller prior
thereto).
(j) UNASSERTED CLAIMS. There are no facts that, if
known by a potential claimant or governmental authority, would give rise to a
claim or proceeding that, if asserted or conducted with results unfavorable to
Seller, would have a material adverse effect on the business or financial
condition of Seller or the consummation of the transactions herein contemplated,
or the use of the Purchased Assets after the Closing.
(k) ABSENCE OF PRODUCT OR SERVICE WARRANTIES. Except
as set forth in Schedule 4.4(k), there are no material claims pending or, to the
best knowledge and belief of Seller and each Stockholder, anticipated or
threatened against Seller with respect to the quality of or absence of defects
in Seller's products or services. Seller has not been required to pay direct,
incidental or consequential damages to any person in connection with any of such
products or services at any time since Seller acquired Seller's business on
December 8, 1993.
(l) ABSENCE OF JUDICIAL ORDERS. Seller is not a party
to any decree, order or arbitration award (or agreement entered into in any
administrative, judicial or arbitration proceeding with any governmental
authority) with respect to or affecting the Purchased Assets.
(m) COMPLIANCE WITH LAW. Seller, the conduct of
Seller's Business, the use by Seller of Seller's properties, assets and
personnel, the provision of Seller's services, and the business activities of
Seller are in compliance with all applicable laws, and Seller is not in
violation of, or delinquent in respect to, any decree, order or arbitration
award or law or regulation of or agreement with, or any license, permit,
approval or authority from, any governmental or private authority or body to
which any of its properties, assets, personnel or business activities are
subject, the non-compliance with, or violation of, which would have a material
and adverse effect on the Purchased Assets. Except as set forth in Schedule
4.4(m) hereto, Seller has not received notice of any violation of a type
referred to in any portion of this Section 4.4(m).
(n) ACCURACY OF DOCUMENTS, REPRESENTATIONS AND
WARRANTIES. The copies of all documents identified in Schedule 4.4(n) hereto
furnished to Purchaser, or any of its representatives by or on behalf of Seller
or any of its representatives are true, complete and correct in all material
respects. No representation or warranty of Seller or of any Stockholder
contained in this Agreement contains any untrue statement of a material fact, or
omits to state any material fact required to be stated herein or therein in
order to make the statements contained herein or therein not misleading. The
Stockholder has no knowledge or belief that any statement contained in the
Exhibits or the Seller Disclosure Schedules delivered by or on behalf of Seller
or its representatives pursuant to or in connection with this Agreement or any
of the transactions contemplated hereby or thereby contains any untrue statement
of a material fact, or omits to state any material fact required to be stated
herein or therein in order to make the statements contained herein or therein
not misleading.
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<PAGE> 12
4.5 FURTHER REPRESENTATIONS AND WARRANTIES OF SELLER. To
induce Purchaser to enter into this Agreement and for the benefit of Purchaser,
Seller further represents and warrants as follows:
(a) ABILITY TO BEAR RISKS; BUSINESS AND FINANCIAL
KNOWLEDGE AND EXPERIENCE. Seller (i) can bear the economic risk of the
acquisition of the Purchaser Stock, including the complete loss of its
investment, and (ii) has sufficient knowledge and experience in business and
financial matters as to be capable of evaluating the merits and risks of its
acquisition of the Purchaser Stock.
(b) KNOWLEDGE RESPECTING PURCHASER. Seller (i) knows
or has had the opportunity to acquire all information concerning the business,
affairs, financial condition, plans and prospects of Purchaser which Seller
deems relevant to make a fully informed decision respecting the acquisition of
the Purchaser Stock, (ii) has been encouraged and has had the opportunity to
rely upon the advice of Seller's legal counsel and accountants and other
advisers with respect to the acquisition of the Purchaser Stock, and (iii) has
had the opportunity to ask such questions and receive such answers and
information respecting, among other things, the business, affairs, financial
condition, plans and prospects of Purchaser and the terms and conditions of the
purchase of the Purchaser Stock as Purchaser has requested so as to more fully
understand its investment.
(c) ABSENCE OF REPRESENTATIONS AND WARRANTIES. Seller
confirms that neither Purchaser nor anyone purportedly acting on behalf of
Purchaser has made any representations, warranties, agreements or statements
other than those contained herein respecting the business, affairs, financial
condition, plans or prospects of Purchaser nor has Seller relied on any
representations, warranties, agreements or statements in the belief that they
were made on behalf of any of the foregoing nor has Seller relied on the absence
of any such representations, warranties, agreements or statements in reaching
its decision to acquire the Purchaser Stock.
(d) NO DISTRIBUTION. Seller is acquiring the
Purchaser Stock for Seller's own account without a view to public distribution
or resale, and Seller does not have any contract, undertaking, agreement or
arrangement to transfer, sell or otherwise dispose of any portion of the
Purchaser Stock or any interest therein to any other person except to
Stockholders.
(e) STOCK TO BE RESTRICTED. Seller understands that
the Purchaser Stock may be restricted securities within the meaning of Rule 144
under the Securities Act of 1933, as amended (the "1933 Act").
(f) NO REGISTRATION. Except as provided in Section
9.2 hereof, Seller understands that the Purchaser Stock may not be registered
under the 1933 Act or the securities laws of any state and must be held
indefinitely without any transfer, sale or other disposition unless the
Purchaser Stock is registered under the 1933 Act and the securities laws of any
applicable states or, in the opinion of counsel for Seller, registration is not
required under the 1933 Act or such state securities laws as the result of an
available exemption.
(g) NO OBLIGATION TO REGISTER. Seller understands
that (i) Purchaser will be under no obligation to register the Purchaser Stock
under the 1933 Act or the securities laws of any state or to take any action
which would make available any exemption from such registration and (ii) Seller
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<PAGE> 13
therefor may be precluded from transferring, selling or otherwise disposing of
the Purchaser Stock or any interest therein for an indefinite period of time or
at any particular time.
(h) LEGEND ON CERTIFICATE. Seller understands and
agrees that there shall be endorsed on the certificates evidencing the Purchaser
Stock a legend substantial to the following effect:
THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. NO
REGISTRATION OF TRANSFER OF SUCH SECURITIES WILL BE MADE ON
THE BOOKS OF THE ISSUER UNLESS SUCH TRANSFER IS MADE IN
CONNECTION WITH AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH
ACT OR PURSUANT TO AN EXEMPTION FROM THE REGISTRATION
REQUIREMENTS OF SUCH ACT OR SUCH ACT DOES NOT APPLY.
(i) STOP ORDERS. Seller understands that Purchaser
and its transfer agent, if any, may refuse to effect a transfer, sale or other
disposition of any of the Purchaser Stock by Seller or its successors or assigns
otherwise than as contemplated hereby. Notwithstanding the provisions of this
Section 4.5, Seller shall have the right to transfer, sell or dispose of its
Purchaser Stock at any time, subject to applicable federal and state securities
law.
(j) RELIANCE UPON INFORMATION. Seller understands
that the Purchaser Stock may be issued in reliance on specific exemptions from
the registration requirements of federal and state securities laws and that
Purchaser may be relying upon the truth and accuracy of the representations,
warranties, agreements, acknowledgements and understandings set forth herein in
order to determine the suitability of Seller to acquire the Purchaser Stock.
ARTICLE V
CONDUCT PRIOR TO THE CLOSING
5.1 GENERAL. Seller, Stockholders and Purchaser shall have the
rights and obligations with respect to the period between the date hereof and
the Closing Date which are set forth in the remainder of this Article V.
5.2 SELLER AND STOCKHOLDERS. The following are the obligations
of Seller and/or Stockholders:
(a) ACCESS TO RECORDS. Seller, Stockholders and
Seller's officers, agents, representatives and accountants shall fully cooperate
with Purchaser, and shall give to Purchaser's officers, agents, representatives,
employees, attorneys, consultants and accountants reasonable access during
normal business hours to all of the properties, books, contracts, documents and
records of Seller, excluding the minutes of Seller's meetings and negotiations
with other prior prospective purchasers of the stock or assets of Seller, and
shall furnish to Purchaser such information as Purchaser may at any time and
from time to time reasonably request. Seller and Stockholders understand and
agree that prior to the Closing, Purchaser's certified public accountants shall
perform an audit with respect to Seller, and Seller and Stockholders agree to
cooperate fully with Purchaser's accountants.
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<PAGE> 14
(b) CERTAIN TRANSACTIONS. Seller shall not, without
the prior written consent of Purchaser (which consent shall not be unreasonably
withheld); (i) create or suffer to exist any material liens or encumbrances with
respect to any of the Purchased Assets which shall not be discharged at or prior
to the Closing Date, other than liens for nondelinquent taxes; (ii) sell or
transfer any Purchased Assets or property (including sales and transfers to a
person or entity controlling, controlled by or under common control with Seller)
other than in the ordinary course of business; (iii) make any material change in
the conduct or nature of any aspect of its business, whether or not in the
ordinary course of business or whether or not the change has or will have a
material adverse affect on the Purchased Assets; and (iv) waive any material
rights with respect to the Purchased Assets.
(c) CONFIDENTIALITY. Seller and each Stockholder
shall maintain as confidential the discussions between them and Purchaser, and
the terms and conditions of this Agreement, and except as required by law shall
not make any trade press or other announcement or disclosure in relation to such
discussions whether before or after Closing, and if the Closing shall not occur
then at all times thereafter, without the prior written consent of Purchaser.
(d) EXCLUSIVITY. Seller and each Stockholder shall
negotiate the sale of the Purchased Assets with Purchaser and its affiliates
only, and shall not directly or indirectly enter into any discussion with or
disclose any information in relation to Seller to any other person unless this
Agreement has been terminated in accordance herewith, with a view to the sale of
the assets or stock of Seller. Seller and Stockholders shall promptly advise
Purchaser of any initiatives after the date hereof by any other person, firm or
other entity to so acquire the assets or stock of Seller and the terms and
conditions thereof.
(e) CONSENTS. Seller and each Stockholder shall use
their reasonable efforts and make every good faith attempt to obtain any consent
and estoppel letters necessary in connection with the assignment of the
Purchased Assets to Purchaser hereunder, including, without limitation, any
required consent from Redken, but excluding any consents or estoppel letters
relating to the Accounts Receivable and which may be required for such
assignment to be effective, the failure to obtain any of which would have a
material adverse effect on Purchaser's use or enjoyment of the Purchased Assets.
Purchaser shall cooperate with Seller in its attempts to obtain such consents
and estoppel letters.
5.3 PURCHASER CONFIDENTIALITY. From and after the date of this
Agreement until the Closing, or in the event that the Closing shall not occur
then thereafter, except as required by the Securities and Exchange Commission,
other state or federal regulatory agencies, or others as required relating to
the anticipated securities offering, Purchaser shall not disclose to any third
party (other than to its directors, officers and employees having a need to know
such information in connection with the transaction contemplated hereby, or to
its attorneys, accountants, consultants, lenders, investment bankers, and their
attorneys), or use for any purpose other than as contemplated by this Agreement,
any proprietary information regarding Seller, the discussions between it and
Seller and the terms and conditions of this Agreement. Purchaser acknowledges
that during the negotiations leading to this Agreement and as required by the
terms and conditions hereof, Seller shall have disclosed certain information
relating to all aspects of its business, including but not limited to Seller's
finances, its methods of doing business, and its pricing (internal and that of
its customers). Purchaser acknowledges that certain of this information may be
proprietary information of Seller which information, if proprietary, Purchaser
agrees not to disseminate to others except as hereinabove described, nor to use
or permit to be used through its agents, employees or others on behalf of
Purchaser to damage Seller. The preceding
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<PAGE> 15
two sentences shall not apply to information that (i) is, was or becomes
generally known or available to the public or the industry other than as a
result of a disclosure by Purchaser in violation of this Agreement; (ii) was
previously known by Purchaser; (iii) is subsequently obtained by Purchaser from
an independent third-party source having no obligation of confidentiality to
Seller; or (iv) is required to be disclosed by law. Purchaser shall timely
advise Seller of any request, including a subpoena or similar legal inquiry, to
disclose any such confidential information so that Seller can seek appropriate
legal relief.
5.4 JOINT OBLIGATIONS. The following shall apply with equal
force to Seller, Stockholders and Purchaser:
(a) NOTICE. Each party shall promptly give the other
party written notice of the existence or occurrence of any condition which would
make any representation or warranty of the notifying party untrue or that might
reasonably be expected to prevent the consummation of the transactions herein
contemplated.
(b) PERFORMANCE. No party shall intentionally perform
any act that, if performed, or intentionally omit to perform any act that, if
omitted to be performed, would prevent or excuse the performance of this
Agreement by any party hereto or that would result in any representation or
warranty herein contained of that party being untrue in any material respect as
of the date hereof and as if originally made on and as of the Closing Date.
ARTICLE VI
CONDITIONS PRECEDENT TO CLOSING
6.1 CONDITIONS PRECEDENT TO SELLER'S OBLIGATIONS. The
obligation of Seller to consummate the transactions contemplated hereby is
subject to fulfillment by Purchaser or written waiver by Seller, of each of the
following conditions precedent on or prior to the Closing Date.
(a) TRUTH OF REPRESENTATIONS AND WARRANTIES. Each and
every representation and warranty made by Purchaser shall have been true and
complete in all material respects when made and shall be true and complete in
all material respects as if originally made on and as of the Closing Date.
(b) ASSUMED LIABILITIES. Purchaser shall have entered
into the Assumption Agreement (the "Assumption Agreement"), in form and
substance reasonably satisfactory to Purchaser and Seller pursuant to which
Purchaser shall have assumed the Assumed Liabilities and a lease assumption
agreement (the "Lease Assumption Agreement") pursuant to which Purchaser shall
have assumed the Lease.
(c) OBLIGATIONS PERFORMED BY PURCHASER. All
obligations of Purchaser to be performed hereunder through, and including on,
the Closing Date (including, without limitation, all obligations that Purchaser
would be required to perform at the Closing if the transaction contemplated
hereby was consummated) shall have been performed in all material respects.
(d) PURCHASER'S CLOSING CERTIFICATE. Purchaser shall
have executed a closing certificate, dated as of the Closing Date, in form and
substance reasonably satisfactory to Purchaser hereto ("Purchaser's Closing
Certificate"), pursuant to which (i) Purchaser shall represent and warrant
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to Seller that Purchaser's representations and warranties to Seller are true and
complete as of the Closing Date as if then originally made (or, if any such
representation or warranty is untrue or incomplete in any respect, specifying
the respect in which the same is untrue or incomplete), (ii) that all covenants
required by the terms hereof to be performed by Purchaser on or before the
Closing have been so performed, and (iii) that all documents to be executed and
delivered by Purchaser at or prior to the Closing have been executed by a duly
authorized officer of Purchaser.
(e) NO SUIT, PROCEEDING OR INVESTIGATION. No suit,
proceeding or investigation shall have been commenced or threatened by any
governmental authority or private person on any grounds to restrain, enjoin or
hinder, or to seek material damages on account of, the consummation of the
transactions herein contemplated.
(f) EMPLOYMENT AGREEMENT. Purchaser shall have
executed an Employment Agreement between Purchaser and Gerald Kotch (the "Kotch
Employment Agreement") in form and content satisfactory to Gerald Kotch and
Purchaser.
(g) RECEIPT OF OPINION OF COUNSEL FOR PURCHASER.
Seller shall have received a favorable opinion of O'Connor, Cavanagh, Anderson,
Killingsworth & Beshears, P.A., counsel for Purchaser, in form and substance
satisfactory to Seller's counsel, confirming the following:
(i) Purchaser is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Delaware and has the corporate power to own its assets and properties and to
carry on its business as it is now being conducted and qualified to do business
and in good standing under the laws of each jurisdiction which requires such
qualification because of ownership or leasing of any assets or properties or any
operations relating to its business except where the failure to so qualify would
not have a material adverse effect on Purchaser.
(ii) The execution and delivery of this
Agreement and the Other Purchaser Agreements, the consummation of the
transactions contemplated hereby and thereby, and the fulfillment of the terms
hereof and thereof, will not violate any provision of Purchaser's certificate of
incorporation or bylaws nor will they result in the breach of any term or
provision of, or constitute a default under, or conflict with, or cause the
acceleration of any obligation under, any loan agreement, note, debenture,
indenture, mortgage, deed of trust, lease, contract, agreement or other
obligation of any description of which such counsel has knowledge to which
Purchaser is a party or by which it is bound, or any judgment, decree, order or
award of any court, governmental body or arbitrator of which such counsel has
knowledge, or any applicable law, rule or regulation.
(iii) Purchaser has full power and authority
to execute, deliver and perform this Agreement, and this Agreement is the legal
and binding obligation of it and is enforceable against it in accordance with
its terms.
(iv) Such counsel has no knowledge of any
suits, actions, claims, arbitrations, administrative or other proceedings or
governmental investigations pending or threatened against or affecting
Purchaser, its business or its assets and properties, or of any litigation
affecting the right of Purchaser to enter into or perform this Agreement in any
court or before or by any federal, state or governmental department or agency or
of the existence of any order, judgment, decree or ruling of
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any court or governmental department or agency affecting Purchaser's business or
its assets and properties.
(v) The Purchaser Stock, when authorized,
issued and delivered in connection with the transactions contemplated by this
Agreement, will be legally issued, fully paid and non-assessable.
6.2 CONDITIONS PRECEDENT TO PURCHASER'S OBLIGATIONS. The
obligations of Purchaser to consummate the transactions contemplated hereby are
subject to the fulfillment by Seller and/or Stockholders or written waiver by
Purchaser, of each of the following conditions precedent on or prior to the
Closing Date.
(a) REPRESENTATIONS AND WARRANTIES. Each and every
representation and warranty made by Seller and/or Stockholders shall be true and
correct in all material respects when made and shall be true and correct in all
material respects as if originally made on and as of the Closing Date.
(b) OBLIGATIONS PERFORMED BY SELLER AND STOCKHOLDERS.
All obligations of Seller and/or Stockholders to be performed hereunder through
and including on the Closing Date (including, without limitation, all
obligations which Seller and/or Stockholder would be required to perform at the
Closing if the transaction contemplated hereby was consummated) shall have been
performed in all material respects.
(c) CONSENTS. All of the consents and estoppel
letters referred to in Section 5.2(e) hereof shall have been obtained.
(d) CLOSING CERTIFICATE OF SELLER AND STOCKHOLDERS.
Seller and each Stockholder shall have executed a closing certificate, dated the
Closing Date, in form and substance reasonably satisfactory to Purchaser and
Seller ("Seller's Closing Certificate"), pursuant to which Seller and each
Stockholder severally and not jointly represent and warrant to Purchaser that
except as otherwise expressly provided for in this Agreement (i) between the
date of this Agreement and the Closing Date there shall have been no material
adverse change in the assets of Seller, and (ii) that (A) Seller's and
Stockholder's representations and warranties to Purchaser are true and complete
as of the Closing Date as if then originally made (or if any such representation
or warranty is untrue or incomplete in any respect, specifying the respect in
which the same is untrue or incomplete); (B) all covenants and obligations
required by the terms hereof to be performed by Seller and each Stockholder on
or before the Closing Date have been fully performed; and (C) all documents to
be executed and delivered by Seller and/or Stockholders at or prior to the
Closing have been executed by duly authorized officers of Seller and/or
Stockholder.
(e) EMPLOYMENT AGREEMENT. Gerald Kotch shall have
entered into the Kotch Employment Agreement in form and content satisfactory to
Gerald Kotch and Purchaser.
(f) ABSENCE OF SUITS. No suit, proceeding or
investigation shall have been commenced or threatened by any governmental
authority or private person on any grounds to restrain, enjoin or hinder, or to
seek material damages on account of, the consummation of the transactions herein
contemplated.
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(g) BILL OF SALE AND DOCUMENTS OF TITLE. Seller shall
have delivered to Purchaser the Bill of Sale and the Assumption Agreement
together with such other documents of title and transfer as Purchaser may
reasonably request transferring to Purchaser all right, title and interest in
and to the Purchased Assets free and clear of all liens, claims, charges,
liabilities, encumbrances and security interests of whatsoever kind and nature,
subject only to the Assumed Liabilities.
(h) RECEIPT OF SATISFACTORY AUDIT REPORT. Purchaser
shall have received and approved, in Purchaser's sole discretion, the audit
report by a certified public accounting firm engaged by Purchaser. If for any
reason whatsoever, the transactions contemplated by this Agreement are not
consummated, Purchaser shall deliver to Seller the audit results.
(i) PURCHASER'S DUE DILIGENCE. Purchaser shall have
completed its due diligence investigation of Seller and the results of such due
diligence shall have been satisfactory to Purchaser, in its sole discretion.
Such due diligence shall include, but shall not be limited to, Purchaser's
review of the Redken Agreement and the Redken Guarantees, and the inventory
related thereto, all of which shall be satisfactory to Purchaser in its sole
discretion.
(j) CONSENTS AND APPROVALS. Purchaser shall have
received all necessary consents and approvals with respect to the issuance of
the Purchaser Stock pursuant to this Agreement.
(k) RECEIPT OF OPINION OF COUNSEL FOR SELLER.
Purchaser shall have received a favorable opinion of Arter & Hadden, counsel for
Seller, in form and substance satisfactory to Purchaser's counsel, dated the
Closing Date, and confirming the following:
(i) Seller is a corporation duly organized,
validly existing and in good standing under the laws of the State of California
and has the corporate power to own its assets and properties and to carry on its
business as it is now being conducted and qualified to do business and in good
standing under the laws of each jurisdiction which requires such qualification,
except where the failure to so qualify would not have a material adverse effect
on Seller.
(ii) The execution and delivery of this
Agreement and the Other Seller Agreements (except any of such Other Seller
Agreements that are consents), the consummation of the transactions contemplated
hereby and thereby, and the fulfillment of the terms hereof and thereof, will
not violate any provision of Seller's articles of incorporation or bylaws nor
will they result in the breach of any term or provision of, or constitute a
default under, or conflict with, or cause the acceleration of any obligation
under, any loan agreement, note, debenture, indenture, mortgage, deed of trust,
lease, contract, agreement or other obligation of any description of which such
counsel has knowledge to which Seller is a party or by which Seller is bound, or
any judgment, decree, order or award of any court, governmental body or
arbitrator of which such counsel has knowledge, or any applicable law, rule or
regulation.
(iii) Seller has full power and authority to
execute, deliver and perform this Agreement, and this Agreement is the legal and
binding obligation of Seller and is enforceable against Seller in accordance
with its terms.
(iv) Such counsel has no knowledge of any
suits, actions, claims, arbitrations, administrative or other proceedings or
governmental investigations pending or threatened
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against or affecting Seller, its business or its assets and properties, or of
any litigation affecting the right of Seller to enter into or perform this
Agreement in any court or before or by any federal, state or governmental
department or agency or of the existence of any order, judgment, decree or
ruling of any court or governmental department or agency affecting Seller's
business or its assets and properties.
(l) FINANCING. Purchaser shall have received proceeds
of its financing in an amount and on terms acceptable to Purchaser (in its
reasonable discretion).
ARTICLE VII
CLOSING
7.1 TIME AND PLACE OF CLOSING. The transactions contemplated
by this Agreement shall be consummated within 30 days after the fulfillment of
all conditions precedent to closing set forth in Article VI hereof (the
"Closing"), or at such later date as the parties may mutually agree in writing
(the "Closing Date"), at 10:00 a.m., prevailing business time, at the offices of
O'Connor, Cavanagh, Anderson, Killingsworth & Beshears, P.A., One East Camelback
Road, Suite 1100, Phoenix, Arizona 85012-1656, or such other date, or at such
other place, as shall mutually be agreed upon by Seller, Stockholders and
Purchaser.
7.2 FORM OF DOCUMENTS. At the Closing, the parties shall
deliver to the other the documents, and shall perform the other acts, that are
set forth in this Article VII. All documents that Seller and/or Stockholders
shall deliver shall be in form and content reasonably satisfactory to Purchaser.
All documents that Purchaser shall deliver shall be in form and content
reasonably satisfactory to Seller and Stockholders.
7.3 PURCHASER'S DELIVERIES. Subject to the fulfillment or
written waiver of the conditions precedent set forth in Section 6.2, hereof,
Purchaser, shall execute and/or deliver to Seller at the Closing all of the
following:
(a) PURCHASE PRICE. That portion of the Purchase
Price to be paid in cash at the Closing by wire transfer.
(b) PURCHASER NOTE. The Purchaser Note and the
Security Agreement in each case in form and substance reasonably satisfactory to
Seller and Purchaser, each executed by Purchaser.
(c) PURCHASER STOCK/DEBENTURE. The Purchaser Stock or
if an election is made by Seller in the event an initial public offering has not
occurred, the Convertible Debenture.
(d) GOOD STANDING CERTIFICATE. A certificate of good
standing of Purchaser, issued not earlier than three (3) days prior to the
Closing Date by the Secretary of the State of Delaware.
(e) BILL OF SALE; ASSUMPTION AGREEMENT. The Bill of
Sale and the Assumption Agreement, each executed by Purchaser.
(f) INCUMBENCY CERTIFICATE. An incumbency and
specimen signature certificate with respect to the officers of Purchaser
executing this Agreement, and any other document delivered hereunder, on behalf
of Purchaser.
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(g) CORPORATE RESOLUTIONS. A certified copy of
resolutions of Purchaser's board of directors authorizing the execution,
delivery and performance of this Agreement, the Other Purchaser Agreements, and
the transactions contemplated hereby and thereby.
(h) OPINION OF COUNSEL. The legal opinion of
O'Connor, Cavanagh, Anderson, Killingsworth & Beshears, P.A.
(i) CLOSING CERTIFICATE. Purchaser's Closing
Certificate executed by the Purchaser.
(j) OTHER DOCUMENTS. The Lease Assumption Agreement,
the Kotch Employment Agreement, and the Escrow Agreement, all signed by
Purchaser, and without limitation by specific enumeration of the foregoing, all
other documents reasonably required by Seller to consummate the transaction
herein contemplated.
7.4 SELLER'S AND STOCKHOLDERS' DELIVERIES. Subject to the
fulfillment or waiver of the conditions set forth in Section 6.1 hereof, Seller
and Stockholders shall deliver to Purchaser at the Closing physical possession
of all Purchased Assets (other than the molds), and shall execute (where
applicable in recordable form) and/or deliver to Purchaser all of the following:
(a) GOOD STANDING CERTIFICATES. Certificates of good
standing of Seller, issued not earlier than three (3) days prior to the Closing
Date by the Secretary of State of California and by the Secretary of State of
each state in which Seller is qualified to transact business.
(b) INCUMBENCY CERTIFICATE. An incumbency and
specimen signature certificate with respect to the officers of Seller executing
this Agreement, and any other document delivered hereunder, on behalf of Seller.
(c) CORPORATE RESOLUTIONS. A certified copy of
resolutions of Seller's board of directors and stockholders authorizing the
execution, delivery and performance of this Agreement, the Other Seller
Agreements, and the transactions contemplated hereby and thereby.
(d) BILL OF SALE; ASSUMPTION AGREEMENT. The Bill of
Sale and the Assumption Agreement executed by Seller, transferring, conveying
and assigning all of the Purchased Assets to Purchaser, free and clear of any
and all liens, claims, charges, liabilities, encumbrances and security interests
of every kind and nature, subject only to the Assumed Liabilities.
(e) CLOSING CERTIFICATE. Seller's Closing Certificate
executed by Seller and Stockholders.
(f) OPINION OF COUNSEL. The legal opinion Arter &
Hadden.
(g) CONSENTS AND ESTOPPEL LETTERS. All consents and
estoppel letters referred to in Section 5.2(e) for the assignment of the
Purchased Assets, or permitted alternate arrangements with respect thereto.
(h) THE LEASE. The Lease Assumption Agreement
executed by Seller.
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(i) EMPLOYMENT AGREEMENT. The Employment Agreement
executed by Gerald Kotch.
(j) SUBSCRIPTION AGREEMENT. A Subscription Agreement
executed by Seller with respect to the Purchaser Stock or Convertible Debenture,
as the case may be.
(k) STOCK ESCROW AGREEMENT. The Stock Escrow
Agreement (the "Escrow Agreement"), in form and substance reasonably
satisfactory to Seller and Purchaser, executed by Seller, Stockholders and the
Representative (as defined therein).
(l) OTHER DOCUMENTS. Without limitation by specific
enumeration of the foregoing, all other documents reasonably required to
consummate the transaction herein contemplated including, without limitation,
all documents and instruments reasonably requested by Purchaser to assure itself
that it receives good and marketable title to the Purchased Assets free and
clear of all liens, claims, charges, liabilities, encumbrances and security
interests of every kind and nature, subject only to the Assumed Liabilities.
ARTICLE VIII
POST-CLOSING AGREEMENTS
8.1 MAINTENANCE OF EXISTENCE. Seller shall retain its
corporate existence and Stockholders shall cause Seller to remain in good
standing under the laws of the State of California at least until December 31,
1997.
8.2 USE OF TRADEMARKS. Neither Seller nor any Stockholder
shall use or license or authorize any third party to use, any name or trademark
that is deceptively similar to any of the names or trademarks that are included
among the Purchased Assets.
8.3 BACK-UP. Seller and Stockholders shall, at Purchaser's
cost and request, furnish complete detailed back-up material with respect to the
Purchased Assets, the past financial statements of Seller and the Assumed
Liabilities as are then in Seller's or Stockholders' possession or are otherwise
reasonably available to Seller or Stockholders, provided that Purchaser executes
and delivers to Seller and Stockholders a confidentiality agreement in a form
reasonably acceptable to Seller and Stockholders with respect to the past
financial statements and with respect to any contract or other agreement that
contains confidentiality provisions.
8.4 THIRD-PARTY CLAIMS. The parties shall cooperate with each
other with respect to the prosecution or defense of any claims or litigation
made or commenced by or against third parties subsequent to the Closing Date
regardless of whether such claims or litigation are subject to the
indemnification provisions contained in Article X, and access to the books and
records of Seller pertaining to a state of facts in existence on or prior to the
Closing Date shall be provided.
8.5 FURTHER ASSURANCES. The parties shall execute such further
documents, and perform such further acts, as may be necessary to transfer and
convey the Purchased Assets to Purchaser on the terms herein contained, and to
otherwise comply with the terms of this Agreement and consummate the transaction
herein provided.
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8.6 PAYMENTS OF ACCOUNTS RECEIVABLE.
(a) DELIVERY OF ACCOUNTS RECEIVABLE. In the event
Seller shall, after the Closing, receive any instruments of payment of any of
the Accounts Receivable, Seller shall immediately thereafter deliver it to
Purchaser, endorsed where necessary, without recourse, in favor of Purchaser.
(b) NONPAYMENT OF CURRENT ACCOUNTS RECEIVABLE. In the
event any Account Receivable which was not excluded in calculating Total Current
Assets is not fully paid to Purchaser within ninety (90) days of the Closing,
Purchaser may tender it to Seller for the immediate payment by Seller at the
face amount or the unpaid portion thereof. If payment is not made as provided
herein then, without limitation of any other remedy available to it, Purchaser
may offset any amount owed by it (i) first, under the Purchaser Note and (ii)
second, if the remaining amounts owed by Purchaser under the Purchaser Note are
insufficient to satisfy the unpaid portion of an Account Receivable, then as
provided in the Escrow Agreement.
8.7 GUARANTEE RESPECTING SHADED SALONWEAR. In the event that
any of the shaded salonwear listed on Schedule 4.4(f)(ii) hereto remains unsold
after 120 days following the Closing Date, Purchaser may reduce any amount owed
by it to Gerald Kotch under the Employment Agreement by the amount of the
Purchase Price paid by Purchaser for such Inventories as set forth in Schedule
4.4(f)(ii).
ARTICLE IX
POST CLOSING OBLIGATIONS
9.1 OBLIGATIONS OF SELLER AND STOCKHOLDERS.
(a) TRADE SECRETS AND OTHER INFORMATION. After the
Closing, neither Seller nor any Stockholder will communicate or divulge to, or
use for the benefit of, any person, firm or corporation other than Purchaser, or
its or their agents and representatives, any of the trade secrets, methods,
formulas, business and/or marketing plans, processes or any other proprietary or
confidential information with respect to Purchaser or Seller, and its or their
business, financial condition, business operations or methods, or business
prospects. The preceding sentence shall not apply to information that (i) is,
was or becomes generally known or available to the public or the industry other
than as a result of a disclosure by Seller or any Stockholder in violation of
this Agreement, or (ii) is required to be disclosed by law, including in
connection with any legal proceeding or a tax return or audit. Seller and
Stockholders shall advise Purchaser, in writing, of any request, including a
subpoena or similar legal inquiry, to disclose any such confidential
information, such that Purchaser can seek appropriate legal relief.
(b) EQUITABLE RELIEF. Each of Seller and Stockholders
acknowledges that the covenant contained in paragraph (a) of this Section 9.1 is
a material inducement for Purchaser to execute and deliver this Agreement and to
consummate the transactions contemplated hereby. Accordingly, each Stockholder
acknowledges that the restriction contained in paragraph (a) of this Section 9.1
is reasonable and necessary for the protection of Purchaser's investment in the
Purchased Assets, and that a breach of any such restriction could not adequately
be compensated by damages in an action at law. In the event of a breach or
threatened breach by any Stockholder of any of the provision of paragraph (a) of
this Section 9.1, Purchaser shall be entitled to obtain, without the necessity
of posting bond therefor, an injunction (preliminary or permanent, or a
temporary restraining order) restraining the breaching entity
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from the activity or threatened activity constituting, or that would constitute,
a breach of this Agreement, as well as damages and an equitable accounting of
all earnings, profits and other benefits arising from such a violation, which
right shall be cumulative and in addition to any other rights or remedies to
which Purchaser may be entitled.
9.2 OBLIGATIONS OF PURCHASER.
(a) REGISTRATION RIGHTS. For purposes of this Section
9.2:
(i) The terms "register", "registered", and
"registration" refer to a registration effected by preparing and filing a
registration statement on Form S-1 or Form SB-2 or similar document in
compliance with the 1933 Act, and the declaration or ordering of effectiveness
of such registration statement or document;
(ii) The term "Registrable Securities" means
the shares of Common Stock issuable in accordance with Section 3.2(c) hereof;
and
(iii) The term "Holders" means the
Stockholders.
(b) PIGGYBACK REGISTRATION. Commencing 180 days after
the Purchaser has completed an initial registered offering of its Common Stock,
if Purchaser proposes to register (including for this purpose a registration
effected by Purchaser for stockholders other than the Holders) any of its shares
of Common Stock under the 1933 Act in connection with the public offering of
such securities solely for cash (other than a registration of securities to be
offered to employees pursuant to an employee benefit plan on Form S-8, a
registration in connection with an exchange offer or any acquisition, or a
registration on any form which does not include substantially the same
information as would be required to be included in a registration statement
covering the sale of the Registrable Securities), Purchaser shall give each
Holder written notice of such proposed registration at least thirty (30) days
prior to filing the registration statement respecting such proposed
registration. Upon the written request of any Holder given within twenty (20)
days after the giving of such notice by Purchaser in accordance with Section
12.3, Purchaser shall cause to be registered under the Securities Act all of the
Registrable Securities that each such Holder has requested to be registered,
subject to Sections 9.2(c) and (e) hereof.
(c) INFORMATION CONCERNING HOLDER. It shall be a
condition precedent of the obligations of Purchaser to take any action pursuant
to this Section 9.2 that the selling Holders shall furnish to Purchaser such
information regarding themselves, the Registrable Securities held by them, and
the intended method of disposition of such securities as shall be required to
effect the registration of their Registrable Securities.
(d) EXPENSES. All expenses incurred in connection
with the registration pursuant to Section 9.2 (other than underwriter's
commissions and fees or any fees of others employed by selling Holder, including
attorneys' fees), including without limitation all registration, filing and
qualification fees, printer's and accounting fees, and fees and disbursements of
counsel for Purchaser, shall be borne by Purchaser.
(e) ACCEPTANCE OF UNDERWRITING AGREEMENT. Purchaser
shall not be required under Section 9.2 to include any of the Registrable
Securities in an underwriting of securities being issued by
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Purchaser unless all the Holders thereof accept the terms of the underwriting
agreement as agreed upon between Purchaser and the underwriter selected by
Purchaser, and then only in such quantity, if any, as will not, in the opinion
of the managing underwriter, jeopardize or in any way reduce the success of the
offering by Purchaser.
(f) EXPIRATION OF REGISTRATION RIGHTS. Any obligation
of Purchaser to register the Registrable Securities pursuant to this Section
9.2(f) shall expire on the third anniversary of the receipt by Holders of the
Common Stock.
ARTICLE X
INDEMNIFICATION
10.1 INDEMNIFICATION BY SELLER AND STOCKHOLDERS.
(a) GENERAL. Seller and Stockholders, severally and
not jointly, covenant and agree to defend, indemnify and hold Purchaser harmless
for, from and against any and all damages, losses, liabilities (absolute and
contingent), fines, penalties, costs and expenses (including, without
limitation, reasonable counsel fees and costs and expenses incurred in the
investigation, defense or settlement of any claim covered by this indemnity),
whether or not involving a third-party claim arising, directly or indirectly,
from or in connection with: (i) any of the liabilities of Seller, not expressly
assumed hereunder; or (ii) the failure to comply with, or the breach, or the
default by Seller or Stockholder of any of the covenants, warranties or
agreements made by Seller or any Stockholder contained in this Agreement, or any
of the agreements, certificates, documents, exhibits or schedules delivered in
connection with this Agreement. Purchaser shall be entitled to offset any amount
owed to Purchaser under this Article X or under Section 9.1 by Seller or any
Stockholder against the Purchaser Stock or the Convertible Debenture (in each
such case as provided in accordance with the Stock Escrow Agreement), to Seller
or any Stockholder or affiliate. To the extent that any claim covered by this
indemnity can be offset by a claim or right included in the Purchased Assets
pursuant to Section 1.2(d) hereof, Purchaser shall first assert such claims or
rights prior to seeking indemnification pursuant to this Section 10(a).
(b) BULK SALES MATTERS. Purchaser hereby waives
compliance by Seller with the provisions of the Bulk Sales Law of any state, and
Seller warrants and agrees to pay and discharge when due all claims of Seller's
creditors which could be asserted against Purchaser by reason of such
non-compliance. Seller and each of the Stockholders, jointly and severally,
hereby indemnify and agree to hold Purchaser harmless from, against and in
respect of (and shall on demand reimburse Purchaser for) any loss, liability,
cost or expense, including, without limitation, attorneys' fees, suffered or
incurred by Purchaser by reason of the failure of Seller to pay or discharge
such claims.
(c) EXCLUSION FROM INDEMNIFICATION. Seller and
Stockholders shall have no obligation to defend, indemnify or hold Purchaser
harmless pursuant to Section 10.1 hereof with respect to any liability that is
included within the Assumed Liabilities expressly set forth in Section 2.1
hereof or any liability covered by Purchaser's indemnification obligations under
Section 10.2 hereof.
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(d) LIMITATION ON INDEMNITY. Seller and Stockholders
shall have no obligation to defend, indemnify, or hold Purchaser harmless
pursuant to this Section 10.1 for any claim or other matter otherwise covered by
this Section 10.1 unless such claim or other matter exceeds $1,000. In no event
shall the aggregate liabilities of Seller or any Stockholder under or in
connection with this Agreement or the transactions contemplated hereby,
including, without limitation, liabilities under Section 10.1 exceed his or its
pro rata share of the Purchase Price. The limitation set forth in this
subsection shall not apply to (i) with respect to each Stockholder, any claim or
other loss caused by fraud or willful or wanton misconduct by such Stockholder
or, (ii) with respect to Seller, Hammer Trust and Kotch only, any breach of the
representations contained in Section 4.4(g) to the extent the breach applies to
the Redken Agreement.
10.2 INDEMNIFICATION BY PURCHASER.
(a) GENERAL. Purchaser covenants and agrees to
defend, indemnify and hold Seller and Stockholders harmless for, from and
against any and all damages, losses, liabilities (absolute and contingent),
fines, penalties, costs and expenses (including, without limitation, reasonable
counsel fees and costs and expenses incurred in the investigation, defense or
settlement of any claim covered by this indemnity), whether or not involving a
third-party claim arising, directly or indirectly from or in connection with:
(i) the inaccuracy of any of the representations or warranties of Purchaser
contained in this Agreement, or any of the agreements, certificates, documents,
exhibits or schedules delivered in connection with this Agreement; (ii) any
Assumed Liabilities; (iii) the failure to comply with, the breach or the default
by Purchaser of any of the covenants, warranties or agreements made by Purchaser
in this Agreement, or any of the agreements, certificates, documents, exhibits
or schedules delivered in connection with this Agreement; or (iv) the operation
of Seller's Business following the Closing.
(b) EXCLUSION FROM INDEMNIFICATION. Purchaser shall
have no obligation to defend, indemnify and hold Seller or any Stockholder
harmless pursuant to Section 10.2(a) hereof with respect to any liability that
is an Excluded Liability set forth in Section 2.2 hereof or any liability
covered by Seller's and Stockholders' indemnification obligations under Section
10.1 hereof.
(c) LIMITATION ON INDEMNITY. Purchaser shall have no
obligation to defend, indemnify, or hold Seller or any Stockholder harmless
pursuant to this Section 10.2 for any claim or other matter otherwise covered by
this Section 10.2 unless such claim or other matter exceeds $1,000. In no event
shall the aggregate liabilities of Purchaser under this Section 10.2 exceed the
Purchase Price; provided, however, that this limitation shall not apply to any
claim against Seller, Hammer Trust or Kotch arising as a result of Purchaser's
failure to assume Seller's obligations under the Redken Agreement. The
limitation set forth in this subsection shall not apply to any claim or other
loss caused by fraud or willful or wanton misconduct.
(d) JOHN HAMMER INDEMNIFICATION. In connection with
Purchaser's assumption of the Redken Guarantee by John Hammer, Purchaser shall
indemnify, defend and hold John Hammer harmless with respect to any liability
arising under such Redken Guarantee from and after the Closing Date. The
limitation set forth in Section 10.2(c) shall not apply to the indemnification
set forth in this Section 10.2(d).
24
<PAGE> 26
10.3 NOTICE AND RIGHT TO DEFEND THIRD-PARTY CLAIMS. Promptly
upon receipt of notice of any claim, demand or assessment or the commencement of
any suit, action or proceeding with respect to which indemnity may be sought
pursuant to this Agreement, the party seeking to be indemnified or held harmless
(the "Indemnitee") shall notify in writing, within sufficient time to respond to
such claim or answer or otherwise plead in such action (but in any event within
ten (10) days), the party from whom indemnification is sought (the
"Indemnitor"). In case any claim, demand or assessment shall be asserted, or
suit, action or proceeding commenced against the Indemnitee, the Indemnitor
shall be entitled, at the Indemnitor's expense, to participate therein and, to
the extent that it may wish, to assume the defense, conduct or settlement
thereof, at its own expense, with counsel satisfactory to the Indemnitee, whose
consent to the selection of counsel shall not be unreasonably withheld or
delayed. The Indemnitor shall have the right to settle or compromise monetary
claims without the consent of Indemnitee; however, as to any other claim, the
Indemnitor shall first obtain the prior written consent from the Indemnitee,
which consent shall be exercised in the sole discretion of the Indemnitee. After
notice from the Indemnitor to the Indemnitee of Indemnitor's intent so to assume
the defense, conduct, settlement or compromise of such action, the Indemnitor
shall not be liable to the Indemnitee for any legal or other expenses
(including, without limitation, settlement costs) subsequently incurred by the
Indemnitee in connection with the defense, conduct or settlement of such action
while the Indemnitor is diligently defending, conducting, settling or
compromising such action. The Indemnitor shall keep the Indemnitee apprised of
the status of the suit, action or proceeding and shall make Indemnitor's counsel
available to the Indemnitee to advise the Indemnitee of the status, at the
Indemnitor's expense, upon the request of the Indemnitee. The Indemnitee shall
cooperate with the Indemnitor in connection with any such claim and shall make
personnel, books and records and other information relevant to the claim
available to the Indemnitor to the extent that such personnel, books and records
and other information are in the possession and/or control of the Indemnitee. If
the Indemnitor decides not to participate, the Indemnitee shall be entitled, at
the Indemnitor's expense, to defend, conduct, settle or compromise such matter
with counsel satisfactory to the Indemnitor, whose consent to the selection of
counsel shall not be unreasonably withheld or delayed.
10.4 EXCLUSIVE REMEDIES. The indemnification and defense
provided in this Article X is the sole and exclusive remedy of the parties
hereto for any matter arising under this Agreement after the Closing Date except
to the extent that the claim, demand or assertion arises from fraud or willful
or wanton misconduct of one or more parties to this Agreement.
ARTICLE XI
TERMINATION
11.1 RIGHT TO TERMINATE. Notwithstanding anything to the
contrary contained herein, this Agreement and the transactions contemplated
hereby may be terminated at any time prior to the Closing: (a) by Seller if the
conditions precedent set forth in Section 6.1 are not satisfied or waived in
writing by Seller; (b) by Purchaser if the conditions precedent set forth in
Section 6.2 are not satisfied or waived in writing by Purchaser; or (c) by
either Seller or Purchaser if the Closing has not occurred by December 31, 1996.
In addition, in the event Purchaser has not acknowledged in writing to Seller
and the Stockholders by November 30, 1996 that the conditions set forth in
Sections 6.2(h) and 6.2(i) have been satisfied, Seller and the Stockholders may
terminate this Agreement.
11.2 REMEDIES. No party shall be limited to the termination
right granted in Section 11.1 hereof by reason of the nonfulfillment of any
condition precedent to such party's closing obligations
25
<PAGE> 27
or a breach of another party's representations and warranties, but may, in the
alternative, elect to do one of the following:
(a) PROCEED TO CLOSE. Proceed to Closing despite the
nonfulfillment of any condition precedent to its obligation to proceed to
Closing, it being understood that consummation of the transactions contemplated
herein shall not be deemed a waiver of a breach of any representation, warranty
or covenant or of any party's rights and remedies with respect thereto.
(b) DECLINE TO CLOSE. Decline to proceed to Closing,
terminate this Agreement as provided in Section 11.1 hereof, and thereafter seek
damages to the extent permitted in Sections 11.4 and 11.5 hereof.
11.3 EVENTS ON TERMINATION. In the event the transactions
contemplated hereby shall fail to be consummated for any reason whatsoever, the
officers, directors, agents and representatives of Seller and Stockholders shall
return to Purchaser, and Purchaser, its officers, directors, agents and
representatives shall return to Seller, all written material obtained in
connection with the proposed transactions, and shall keep confidential all
confidential information acquired and shall not use such confidential
information to unfairly compete with the other. Further, Purchaser shall destroy
any internal analysis and spread sheet data compiled utilizing confidential or
financial information pertaining to Seller. In the event this Agreement is
terminated by Purchaser pursuant to Section 11.1(b) hereof (except by reason of
failure of the conditions set forth in Sections 6.2(h) or 6.2(i) hereof), Seller
and Stockholders shall immediately repay to Purchaser the Earnest Deposit.
Except as provided in the preceding sentence and except in the event of any
violation or breach by Seller or a Stockholder of any of its or his obligations
hereunder that gives rise to the termination of this Agreement, Seller and
Stockholders shall be entitled to retain the Earnest Deposit.
11.4 RIGHT TO DAMAGES. If this Agreement is terminated, no
party hereto shall have any liability or obligation to the other; provided,
however, that each party shall remain liable for (i) any wanton or willful
breach of any of the party's representations and warranties or the terms of this
Agreement; (ii) any wanton or willful failure by the party to perform any of his
or its obligations or agreements contained in this Agreement; or (iii) any
violation or breach of the party's obligations pursuant to Sections 5.2(b),
5.2(c) or 11.3 hereof or any other section hereof that specifically survives
termination of this Agreement, in which case the party shall be liable for all
of the other parties' out-of-pocket costs and expenses that were incurred in
connection with the negotiations, due diligence reviews, preparation of this
Agreement, and all of the other documents related to this transaction, and those
costs and expenses that are incurred by the other party in pursuing such rights
and remedies (including reasonable attorneys' fees).
11.5 RIGHT TO DAMAGES. If Seller and or any Stockholder fails
to proceed with the Closing for any reason other than in accordance with Section
11.1 hereof, Seller and Stockholders shall be jointly and severally liable to
pay Purchaser (a) out of pocket expenses (including all legal and accounting
fees and expenses) up to $25,000 (the "Termination Fee"), and (b) the Earnest
Deposit, which amount shall be payable by wire transfer of same day funds within
two (2) days after the date such amount becomes due. Seller and Stockholders
acknowledge that the agreements contained in this Section 11.5 are an integral
part of the transactions contemplated by this Agreement and that without these
agreements, Purchaser would not enter into this Agreement; accordingly, if
Seller and Stockholders fail to promptly pay the Termination Fee, Seller and
Stockholders shall also pay Purchaser all its costs and
26
<PAGE> 28
expenses incurred by it in pursuing payment of such Termination Fee (including
reasonable attorneys' fees).
11.6 LIMITATION ON DAMAGES. None of the damages permitted to
either party under this Article XI shall exceed the Purchase Price except to the
extent the damages result from fraud or willful or wanton misconduct of one or
more parties to this Agreement.
ARTICLE XII
MISCELLANEOUS
12.1 ASSIGNABILITY. Purchaser may assign all or part of its
rights under this Agreement to any entity which it controls, is controlled by or
is under common control with, and which entity shall assume all of Purchaser's
obligations hereunder with respect to the rights so assigned; provided, however,
that any such assignment shall be subject to Seller's consent, which consent
shall not be unreasonably withheld.
12.2 FEES. Seller, Stockholders and Purchaser each represent
and warrant to the other that the respective warrantor has not dealt with and is
not aware of any dealings with any person, firm or corporation who is or may be
entitled to a broker's commission, finder's fee, investment banker's fee or
similar payment from the other party for arranging these transactions or
introducing the parties to each other. Except as otherwise provided in this
Agreement, Seller and Stockholders shall be solely responsible for their own
fees and expenses incurred in connection with the negotiation, execution and
consummation of this transaction, including without limitation legal and
accounting fees and expenses, none of which shall be borne directly or
indirectly by Purchaser. Purchaser shall be solely responsible for its own fees
and expenses incurred in connection with the negotiation, execution and
consummation of this transaction, including without limitation legal and
accounting fees and expenses, none of which shall be borne by Stockholders or
Seller.
12.3 NOTICES. All notices required or permitted to be given
hereunder shall be in writing and shall be deemed given when delivered in
person, or three (3) business days after being placed in the hands of a courier
service (e.g., DHL or Federal Express) prepaid or faxed provided that a
confirming copy is delivered forthwith as herein provided, addressed as follows:
If to Seller:
Kotchammer Investments, Inc.
5959 Topanga Canyon Boulevard, Suite 175
Woodland Hills, California 91367
Attention: Gerald Kotch
FAX: (818) 999-1638
With a copies to:
John M. Hammer
300 East 56th Street, No. 28F
New York, New York 10022
27
<PAGE> 29
and
Arter & Hadden
5959 Topanga Canyon Boulevard, Suite 175
Woodland Hills, California 91367
Attention: Michael Lewis, Esq.
FAX: (818) 346-6502
If to Stockholders:
John M. Hammer and Sonja J. Hammer,
Trustees of the Hammer Family Living Trust
dated July 3, 1993
300 East 56th Street, No. 28F
New York, New York 10022
FAX:
------------------------------
Gerald Kotch
-----------------------------------
-----------------------------------
FAX:
------------------------------
The Jones Family Trust
dated December 19, 1989
-----------------------------------
-----------------------------------
FAX:
------------------------------
If to Purchaser:
Styling Technology Corporation
One East Camelback Road, Suite 1100
Phoenix, Arizona 85012
With a copy to:
O'Connor, Cavanagh, Anderson,
Killingsworth & Beshears, P.A.
One East Camelback Road, Suite 1100
Phoenix, Arizona 85012-1656
Attention: Robert S. Kant, Esq.
FAX: (602) 263-2900
and/or to such other respective addresses and/or addressees as may be designated
by notice given in accordance with the provisions of this Section.
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<PAGE> 30
12.4 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. All
representations and warranties made by each of the parties hereto shall survive
the Closing for a period of two (2) years.
12.5 LEGAL AND OTHER COSTS.
(a) Subject to Article X hereof, in the event any
party defaults (the "Defaulting Party") in his or its obligations under this
Agreement and, as a result thereof, the other party (the "Non-Defaulting Party")
seeks to legally enforce his or its rights hereunder against the Defaulting
Party, then, in addition to all damages and other remedies to which the
Non-Defaulting Party is entitled by reason of such default, the Defaulting Party
shall promptly pay to the Non-Defaulting Party an amount equal to all costs and
expenses (including reasonable attorneys' fees) paid or incurred by the
Non-Defaulting Party in connection with such enforcement.
(b) Subject to Article X hereof, in the event that
the Non-Defaulting Party is entitled to receive an amount of money by reason of
the Defaulting Party's default hereunder, then, in addition to such amount of
money, the Defaulting Party shall promptly pay to the Non-Defaulting Party a sum
equal to interest on such amount of money accruing at the rate of ten percent
(10%) per annum (but if such rate is not permitted under the laws of the State
of California, then at the highest rate which is permitted to be paid under the
laws of the State of California) during the period between the date such payment
should have been made hereunder and the date of the actual payment thereof.
12.6 ENTIRE AGREEMENT. This Agreement constitutes the entire
agreement between the parties and shall be binding upon and inure to the benefit
of the parties hereto and their respective legal representatives, successors and
permitted assigns. Each exhibit and schedule shall be considered incorporated
into this Agreement. Any amendments or alternative or supplementary provisions
to this Agreement must be made in writing and duly executed by an authorized
representative or agent of each of the parties hereto.
12.7 NON-WAIVER. The failure in any one or more instances of a
party to insist upon performance of any of the terms, covenants or conditions of
this Agreement, to exercise any right or privilege in this Agreement conferred,
or the waiver by said party of any breach of any of the terms, covenants or
conditions of this Agreement, shall not be construed as a subsequent waiver of
any such terms, covenants, conditions, rights or privileges, but the same shall
continue and remain in full force and effect as if no such forbearance or waiver
had occurred. No waiver shall be effective unless it is in writing and signed by
an authorized representative of the waiving party. A breach of any
representation, warranty or covenant shall not be affected by the fact that a
more general or more specific representation, warranty or covenant was not also
breached.
12.8 COUNTERPARTS. This Agreement may be executed in multiple
counterparts, each of which shall be deemed to be an original, and all such
counterparts shall constitute but one instrument.
12.9 SEVERABILITY. The invalidity of any provision of this
Agreement or portion of a provision shall not affect the validity of any other
provision of this Agreement or the remaining portion of the applicable
provision.
29
<PAGE> 31
12.10 APPLICABLE LAW. This Agreement shall be governed and
controlled as to validity, enforcement, interpretation, construction, effect and
in all other respects by the internal laws of the State of California applicable
to contracts made in that state.
12.11 CONSTRUCTION. The parties hereto acknowledge and agree
that each party has participated in the drafting of this Agreement and that this
document has been reviewed by the respective legal counsel for the parties
hereto and that the normal rule of construction to the effect that any
ambiguities are to be resolved against the drafting party shall not be applied
to the interpretation of this Agreement. No inference in favor of, or against,
any party shall be drawn from the fact that one party has drafted any portion
hereof.
IN WITNESS WHEREOF, the parties have executed this Agreement
as of the date first above written.
SELLER: STOCKHOLDERS:
KOTCHAMMER INVESTMENTS, INC. JOHN M. HAMMER AND SONJA J.
HAMMER, Trustees, The Hammer Family
Living Trust dated July 3, 1993
By:
-----------------------------
Name:
-----------------------------
Its: By:
----------------------------- -----------------------------
John Hammer, Trustee
PURCHASER: By:
-----------------------------
STYLING TECHNOLOGY CORPORATION Sonja Hammer, Trustee
THE JONES FAMILY TRUST dated December
By: 19, 1989
-----------------------------
Name:
-----------------------------
Its:
-----------------------------
By:
-----------------------------
Wally Jones, Trustee
By:
-----------------------------
Betty Jones, Trustee
-----------------------------------
Gerald Kotch
30
<PAGE> 1
EXHIBIT 10.5
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT ("Agreement") is made this ____ day of
September, 1996, by and between LEOPOLD STYLING PRODUCTS, INC., a Delaware
corporation (hereinafter called "Employer") and SAM L. LEOPOLD (hereinafter
called ("Employee").
W I T N E S S E T H:
A. Employee currently serves as Chief Executive Officer and Chairman of
the Board of Directors of Employer.
B. Employer is in the process of preparing for an initial public
offering of its Common Stock (the "Offering").
C. Employer and Employee desire to enter into an employment agreement
pursuant to which Employer shall employ Employee on the terms and conditions set
forth in this Agreement effective on the consummation of the Offering (the
"Effective Date").
NOW, THEREFORE, in consideration of the premises and of the mutual
covenants set forth in this Agreement, the parties hereto agree as follows:
1. EMPLOYMENT. On the Effective Date, Employer shall employ Employee,
and Employee shall accept such employment, as Chief Executive Officer and
Chairman of the Board of Employer and in such other capacities and for such
other duties and services as shall from time to time be mutually agreed upon by
Employer and Employee.
2. FULL TIME OCCUPATION. Commencing on the Effective Date, Employee
shall devote no less than 90% of Employee's business time, attention and efforts
to the performance of Employee's duties under this Agreement, and shall serve
Employer faithfully and diligently.
3. COMPENSATION AND OTHER BENEFITS.
(a) SALARY. Commencing on the Effective Date, Employer shall
pay to Employee, as full compensation for the services rendered by Employee,
during Employee's employment under this Agreement, a salary at a rate of
$150,000 for the first year, $200,000 for the second year and $250,000 per annum
for the remaining term of this Agreement, to be paid in equal monthly
installments, or in such other periodic installments upon which Employer and
Employee shall mutually agree.
(b) ANNUAL BONUS. Employee shall be eligible to participate in
a bonus pool established and administered in the sole discretion of the Board of
Directors of Employer or by a committee appointed by the Board of Directors for
the payment of annual bonuses to senior officers ("Bonus Pool"). Employer will
have the right but not the obligation to establish a Bonus Pool. Employee will
be eligible to receive an annual bonus to be determined by the Board of
Directors in its discretion.
<PAGE> 2
(c) INSURANCE AND OTHER BENEFITS. Employee shall be entitled to
participate in or receive benefits under all employee and executive benefit
plans or arrangements and prerequisites of employment, including without
limitation, plans or arrangements providing for health and disability insurance
coverage, life insurance for the benefit of Employee's beneficiaries, deferred
compensation and pension benefits, all at the highest level that is available
through Employer to other senior officers of Employer subject to the same terms
and conditions as apply to such other senior officers.
4. TERM OF EMPLOYMENT.
(a) EMPLOYMENT TERM. The term of Employee's employment under
this Agreement shall commence on the Effective Date and shall continue for five
years thereafter and from year to year thereafter, unless and until terminated
by either party giving written notice to the other not less than 60 days prior
to the end of the then current term.
(b) TERMINATION UNDER CERTAIN CIRCUMSTANCES. Notwithstanding
anything to the contrary herein contained:
(i) Employee's employment shall be automatically
terminated, without notice, effective upon the date of Employee's death;
(ii) If Employee shall fail, for a period of more than
90 consecutive days, to perform any of Employee's duties under this Agreement as
the result of illness or other incapacity, Employer may, at its option, upon
notice to Employee, terminate Employee's employment effective on the date of
that notice; and
(iii) If Employee shall breach or violate any of the
provisions of this Agreement, or fail to perform in a manner reasonably
satisfactory to Employer any of the duties required of Employee and such breach,
violation or failure shall continue for a period of 45 days after Employer shall
have given Employee written notice specifying the nature thereof in reasonable
detail, Employer may, at its option, upon notice to Employee, terminate
Employee's employment effective on the date of that notice.
5. COMPETITION AND CONFIDENTIAL INFORMATION.
(a) INTERESTS TO BE PROTECTED. The parties acknowledge that
during the term of Employee's employment with Employer, Employee will perform
essential services for Employer. Employee will be exposed to, have access to,
and be required to work with, a considerable amount of Confidential Information
(as defined below). The parties also expressly recognize and acknowledge that
the personnel of Employer have been trained by, and are valuable to, Employer
and that if Employer must hire new personnel or retrain existing personnel to
fill vacancies, it will incur substantial expense in recruiting and training
such personnel. The parties expressly recognize that should Employee compete
with Employer in any manner whatsoever, it could seriously impair the good will
and diminish the value of Employer's business. The parties acknowledge that this
covenant has an extended duration; however, they agree that this covenant is
reasonable and it is necessary for the protection of Employer, its stockholders
and employees. For these and other reasons, and the fact that there are many
other employment opportunities available to Employee if he should terminate his
employment, the parties are in full and complete agreement that the following
restrictive covenants are fair and reasonable and are
2
<PAGE> 3
freely, voluntarily and knowingly entered into. Furthermore, each party was
given the opportunity to consult with independent legal counsel before entering
into this Agreement.
(b) NON-COMPETITION. During the term of Employee's employment
with Employer and for the period ending 12 months after the termination of
Employee's employment with Employer, regardless of the reason therefor, Employee
shall not (whether directly or indirectly, as owner, principal, agent,
stockholder, director, officer, manager, employee, partner, participant, or in
any other capacity) engage or become financially interested in any competitive
business conducted within the Restricted Territory or solicit, canvas or accept,
or authorize any other person, firm or entity to solicit, canvas or accept, from
any customers of Employer, any business within the Restricted Territory for
Employee or for any other person, firm or entity. As used herein, customers of
Employer shall mean any persons, firms or entities that purchased goods or
services from Employer during the period of Employee' s employment with
Employer; competitive business shall mean any business which sells or provides
or attempts to sell or provide products or services the same as or substantially
similar to the products or services sold or provided by Employer; and the
Restricted Territory shall mean any area in which Employer conducts business.
(c) NON-SOLICITATION OF EMPLOYEES. During the term of
Employee's employment and for a period of 12 months after the termination of
Employee's employment with Employee, regardless of the reason therefor, Employee
shall not directly or indirectly, for himself, or on behalf of, or in
conjunction with, any other person(s), company, partnership, corporation, or
governmental entity, seek to hire, and/or hire any of Employer's personnel or
employees for the purpose of having such employee engage in services that are
the same, similar or related to the services that such employee provided for
Employer.
(d) CONFIDENTIAL INFORMATION. Employee shall maintain in strict
secrecy all confidential or trade secret information relating to the business of
Employer (the "Confidential Information") obtained by Employee in the course of
Employee's employment, and Employee shall not, unless first authorized in
writing by Employer, disclose to, or use for Employee's benefit or for the
benefit of any person, firm or entity at any time either during or subsequent to
the term of Employee's employment, any Confidential Information, except as
required in the performance of Employee's duties on behalf of Employer. For
purposes hereof, Confidential Information shall include without limitation any
trade secrets, knowledge or information with respect to processes, inventions,
formulae, machinery, manufacturing techniques or know-how; any business methods
or forms; any names or addresses of customers or data on customers or suppliers;
and any business policies or other information relating to or dealing with the
purchasing, sales or distribution policies or practices of Employer.
(e) RETURN OF BOOKS AND PAPERS. Upon the termination of
Employee's employment with Employer for any reason, Employee shall deliver
promptly to Employer all catalogues, manuals, memoranda, drawings, and
specifications; all cost, pricing and other financial data; all customer
information; all other written or printed materials which are the property of
Employer (and any copies of them); and all other materials which may contain
Confidential Information relating to the business of Employer, which Employee
may then have in Employee's possession whether prepared by Employee or not.
(f) DISCLOSURE OF INFORMATION. Employee shall disclose
promptly to Employer, or its nominee, any and all ideas, designs, processes and
improvements of any kind relating to the business
3
<PAGE> 4
of Employer, whether patentable or not, conceived or made by Employee, either
alone or jointly with others, during working hours or otherwise, during the
entire period of Employee's employment with Employer, or within six months
thereafter.
(g) ASSIGNMENT. Employee hereby assigns to Employer or its
nominee, the entire right, title and interest in and to all discoveries and
improvements, whether patentable or not, which Employee may conceive or make
during Employee's employment with Employer, or within six months thereafter, and
which relate to the business of Employer.
(h) EQUITABLE RELIEF. In the event a violation of any of the
restrictions contained in this paragraph is established, Employer shall be
entitled to preliminary and permanent injunctive relief as well as damages and
an equitable accounting of all earnings, profits and other benefits arising from
such violation, which right shall be cumulative and in addition to any other
rights or remedies to which Employer may be entitled. In the event of a
violation of any provision of subparagraph (a), (d) or (e) of this paragraph,
the period for which those provisions would remain in effect shall be extended
for a period of time equal to that period beginning when such violation
commenced and ending when the activities constituting such violation shall have
been finally terminated in good faith.
(i) RESTRICTIONS SEPARABLE. Each and every restriction set
forth in this paragraph is independent and severable from the others, and no
such restriction shall be rendered unenforceable by virtue of the fact that, for
any reason, any other or others of them may be unenforceable in whole or in
part.
6. MISCELLANEOUS.
(a) NOTICES. All notices, requests, demands and other
communications required or permitted under this Agreement shall be in writing
and shall be deemed to have been duly given, made and received when delivered
against receipt or when deposited in the United States mails, first class
postage prepaid, addressed as set forth below:
(i) If to Employer:
----------------------------------------
----------------------------------------
----------------------------------------
Attention:
------------------------------
with a copy to:
O'Connor, Cavanagh, Anderson,
Killingsworth & Beshears, P.A.
One East Camelback Road, Suite 1100
Phoenix, Arizona 85012
Attention: Robert S. Kant, Esq.
(ii) If to Employee:
4
<PAGE> 5
----------------------------------------
----------------------------------------
Attention:
------------------------------
with a copy to:
----------------------------------------
----------------------------------------
Attention:
------------------------------
Either party may alter the address to which communications or copies are to be
sent by giving notice of such change of address in conformity with the
provisions of this paragraph for the giving of notice.
(b) INDULGENCES. Neither any failure nor any delay on the part
of either party to exercise any right, remedy, power or privilege under this
Agreement shall operate as a waiver thereof, nor shall any single or partial
exercise of any right, remedy, power or privilege preclude any other or further
exercise of the same or of any other right, remedy, power or privilege, nor
shall any waiver of any right, remedy, power or privilege with respect to any
occurrence be construed as a waiver of such right, remedy, power or privilege
with respect to any other occurrence.
(c) CONTROLLING LAW. This Agreement and all questions relating
to its validity, interpretation, performance and enforcement, shall be governed
by and construed in accordance with the laws of the State of Arizona,
notwithstanding any Arizona or other conflict-of-interest provisions to the
contrary.
(d) BINDING NATURE OF AGREEMENT. This Agreement shall be
binding upon and inure to the benefit of the parties hereto and their respective
heirs, personal representatives, successors and assigns except that no party may
assign or transfer such party's rights or obligations under this Agreement
without the prior written consent of the other party.
(e) EXECUTION IN COUNTERPART. This Agreement may be executed in
any number of counterparts, each of which shall be deemed to be an original as
against any party whose signature appears thereon, and all of which shall
together constitute one and the same instrument. This Agreement shall become
binding when one or more counterparts hereof, individually or taken together,
shall bear the signatures of the parties reflected hereon as the signatories.
(f) PROVISIONS SEPARABLE. The provisions of this Agreement are
independent of and separable from each other, and no provision shall be affected
or rendered invalid or unenforceable by virtue of the fact that for any reason
any other or others of them may be invalid or unenforceable in whole or in part.
5
<PAGE> 6
(g) ENTIRE AGREEMENT. This Agreement contains the entire
understanding between the parties hereto with respect to the subject matter
hereof, and supersedes all prior and contemporaneous agreements and
understandings, inducements and conditions, express or implied, oral or written,
except as herein contained. The express terms hereof control and supersede any
course of performance and/or usage of the trade inconsistent with any of the
terms hereof. This Agreement may not be modified or amended other than by an
agreement in writing.
(h) PARAGRAPH HEADINGS. The paragraph headings in this
Agreement are for convenience only; they form no part of this Agreement and
shall not affect its interpretation.
(i) GENDER. Words used herein, regardless of the number and
gender specifically used, shall be deemed and construed to include any other
number, singular or plural, and any other gender, masculine, feminine or neuter,
as the context requires.
(j) NUMBER OF DAYS. In computing the number of days for
purposes of this Agreement, all days shall be counted, including Saturdays,
Sundays and holidays; provided, however, that if the final day of any time
period falls on a Saturday, Sunday or holiday, then the final day shall be
deemed to be the next day which is not a Saturday, Sunday or holiday.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
EMPLOYER:
LEOPOLD STYLING PRODUCTS, INC.
By:
------------------------------------
Name:
------------------------------------
Its:
------------------------------------
EMPLOYEE:
-----------------------------------------
Sam L. Leopold
6
<PAGE> 1
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT ("Agreement") is made this ____ day of
September, 1996, by and between LEOPOLD STYLING PRODUCTS, INC., a Delaware
corporation (hereinafter called "Employer") and THOMAS M. CLIFFORD (hereinafter
called ("Employee").
W I T N E S S E T H:
A. Employee currently serves as President of Employer.
B. Employer is in the process of preparing for an initial public
offering of its Common Stock (the "Offering").
C. Employer and Employee desire to enter into an employment agreement
pursuant to which Employer shall employ Employee on the terms and conditions set
forth in this Agreement effective on the consummation of the Offering (the
"Effective Date").
NOW, THEREFORE, in consideration of the premises and of the mutual
covenants set forth in this Agreement, the parties hereto agree as follows:
1. EMPLOYMENT. On the Effective Date, Employer hereby employs Employee,
and Employee hereby accepts such employment, as President of Employer and in
such other capacities and for such other duties and services as shall from time
to time be mutually agreed upon by Employer and Employee.
2. FULL TIME OCCUPATION. Commencing on the Effective Date, Employee
shall devote Employee's entire business time, attention and efforts to the
performance of Employee's duties under this Agreement, and shall serve Employer
faithfully and diligently and shall not engage in any other employment while
employed by Employer.
3. COMPENSATION AND OTHER BENEFITS.
(a) SALARY. Commencing on the Effective Date, Employer shall
pay to Employee, as full compensation for the services rendered by Employee,
during Employee's employment under this Agreement, a salary at a rate of
$150,000 for the first year, $200,000 for the second year and $250,000 per annum
for the remaining term of this Agreement, to be paid in equal monthly
installments, or in such other periodic installments upon which Employer and
Employee shall mutually agree.
(b) ANNUAL BONUS. Employee shall be eligible to participate in
a bonus pool established and administered in the sole discretion of the Board of
Directors of Employer or by a committee appointed by the Board of Directors for
the payment of annual bonuses to senior officers ("Bonus Pool"). Employer will
have the right but not the obligation to establish a Bonus Pool.
<PAGE> 2
Employee will be eligible to receive an annual bonus to be determined by the
Board of Directors in his discretion.
(c) INSURANCE AND OTHER BENEFITS. Employee shall be entitled to
participate in or receive benefits under all employee and executive benefit
plans or arrangements and prerequisites of employment, including without
limitation, plans or arrangements providing for health and disability insurance
coverage, life insurance for the benefit of Employee's beneficiaries, deferred
compensation and pension benefits, all at the highest level that is available
through Employer to other senior officers of Employer subject to the same terms
and conditions as apply to such other senior officers.
4. TERM OF EMPLOYMENT.
(a) EMPLOYMENT TERM. The term of Employee's employment under
this Agreement shall commence upon the consummation of the IPO and shall
continue for five years thereafter and from year to year thereafter, unless and
until terminated by either party giving written notice to the other not less
than 60 days prior to the end of the then current term.
(b) TERMINATION UNDER CERTAIN CIRCUMSTANCES. Notwithstanding
anything to the contrary herein contained:
(i) Employee's employment shall be automatically
terminated, without notice, effective upon the date of Employee's death;
(ii) If Employee shall fail, for a period of more than
90 consecutive days, to perform any of Employee's duties under this Agreement as
the result of illness or other incapacity, Employer may, at its option, upon
notice to Employee, terminate Employee's employment effective on the date of
that notice; and
(iii) If Employee shall breach or violate any of the
provisions of this Agreement, or fail to perform in a manner reasonably
satisfactory to Employer any of the duties required of Employee and such breach,
violation or failure shall continue for a period of 45 days after Employer shall
have given Employee written notice specifying the nature thereof in reasonable
detail, Employer may, at its option, upon notice to Employee, terminate
Employee's employment effective on the date of that notice.
5. COMPETITION AND CONFIDENTIAL INFORMATION.
(a) INTERESTS TO BE PROTECTED. The parties acknowledge that
during the term of Employee's employment with Employer, Employee will perform
essential services for Employer. Employee will be exposed to, have access to,
and be required to work with, a considerable amount of Confidential Information
(as defined below). The parties also expressly recognize and acknowledge that
the personnel of Employer have been trained by, and are valuable
<PAGE> 3
to, Employer and that if Employer must hire new personnel or retrain existing
personnel to fill vacancies, it will incur substantial expense in recruiting and
training such personnel. The parties expressly recognize that should Employee
compete with Employer in any manner whatsoever, it could seriously impair the
good will and diminish the value of Employer's business. The parties acknowledge
that this covenant has an extended duration; however, they agree that this
covenant is reasonable and it is necessary for the protection of Employer, its
stockholders and employees. For these and other reasons, and the fact that there
are many other employment opportunities available to Employee if he should
terminate his employment, the parties are in full and complete agreement that
the following restrictive covenants are fair and reasonable and are freely,
voluntarily and knowingly entered into. Furthermore, each party was given the
opportunity to consult with independent legal counsel before entering into this
Agreement.
(b) NON-COMPETITION. During the term of Employee's employment
with Employer and for the period ending three months after the termination of
Employee's employment with Employer, regardless of the reason therefor, Employee
shall not (whether directly or indirectly, as owner, principal, agent,
stockholder, director, officer, manager, employee, partner, participant, or in
any other capacity) engage or become financially interested in any competitive
business conducted within the Restricted Territory or solicit, canvas or accept,
or authorize any other person, firm or entity to solicit, canvas or accept, from
any customers of Employer, any business within the Restricted Territory for
Employee or for any other person, firm or entity. As used herein, customers of
Employer shall mean any persons, firms or entities that purchased goods or
services from Employer during the period of Employee' s employment with
Employer; competitive business shall mean any business which sells or provides
or attempts to sell or provide products or services the same as or substantially
similar to the products or services sold or provided by Employer; and the
Restricted Territory shall mean any area in which Employer conducts business.
(c) NON-SOLICITATION OF EMPLOYEES. During the term of
Employee's employment and for a period of 12 months after the termination of
Employee's employment with Employee, regardless of the reason therefor, Employee
shall not directly or indirectly, for himself, or on behalf of, or in
conjunction with, any other person(s), company, partnership, corporation, or
governmental entity, seek to hire, and/or hire any of Employer's personnel or
employees for the purpose of having such employee engage in services that are
the same, similar or related to the services that such employee provided for
Employer.
(d) CONFIDENTIAL INFORMATION. Employee shall maintain in strict
secrecy all confidential or trade secret information relating to the business of
Employer (the "Confidential Information") obtained by Employee in the course of
Employee's
<PAGE> 4
employment, and Employee shall not, unless first authorized in writing by
Employer, disclose to, or use for Employee's benefit or for the benefit of any
person, firm or entity at any time either during or subsequent to the term of
Employee's employment, any Confidential Information, except as required in the
performance of Employee's duties on behalf of Employer. For purposes hereof,
Confidential Information shall include without limitation any trade secrets,
knowledge or information with respect to processes, inventions, formulae,
machinery, manufacturing techniques or know-how; any business methods or forms;
any names or addresses of customers or data on customers or suppliers; and any
business policies or other information relating to or dealing with the
purchasing, sales or distribution policies or practices of Employer.
(e) RETURN OF BOOKS AND PAPERS. Upon the termination of
Employee's employment with Employer for any reason, Employee shall deliver
promptly to Employer all catalogues, manuals, memoranda, drawings, and
specifications; all cost, pricing and other financial data; all customer
information; all other written or printed materials which are the property of
Employer (and any copies of them); and all other materials which may contain
Confidential Information relating to the business of Employer, which Employee
may then have in Employee's possession whether prepared by Employee or not.
(f) DISCLOSURE OF INFORMATION. Employee shall disclose promptly
to Employer, or its nominee, any and all ideas, designs, processes and
improvements of any kind relating to the business of Employer, whether
patentable or not, conceived or made by Employee, either alone or jointly with
others, during working hours or otherwise, during the entire period of
Employee's employment with Employer, or within six months thereafter.
(g) ASSIGNMENT. Employee hereby assigns to Employer or its
nominee, the entire right, title and interest in and to all discoveries and
improvements, whether patentable or not, which Employee may conceive or make
during Employee's employment with Employer, or within six months thereafter, and
which relate to the business of Employer.
(h) EQUITABLE RELIEF. In the event a violation of any of the
restrictions contained in this paragraph is established, Employer shall be
entitled to preliminary and permanent injunctive relief as well as damages and
an equitable accounting of all earnings, profits and other benefits arising from
such violation, which right shall be cumulative and in addition to any other
rights or remedies to which Employer may be entitled. In the event of a
violation of any provision of subparagraph (a), (d) or (e) of this paragraph,
the period for which those provisions would remain in effect shall be extended
for a period of time equal to that period beginning when such violation
commenced and ending when the activities constituting such violation shall have
been finally terminated in good faith.
<PAGE> 5
(i) RESTRICTIONS SEPARABLE. Each and every restriction set
forth in this paragraph is independent and severable from the others, and no
such restriction shall be rendered unenforceable by virtue of the fact that, for
any reason, any other or others of them may be unenforceable in whole or in
part.
6. MISCELLANEOUS.
(a) NOTICES. All notices, requests, demands and other
communications required or permitted under this Agreement shall be in writing
and shall be deemed to have been duly given, made and received when delivered
against receipt or when deposited in the United States mails, first class
postage prepaid, addressed as set forth below:
(i) If to Employer:
Attention:
with a copy to:
O'Connor, Cavanagh, Anderson,
Killingsworth & Beshears, P.A.
One East Camelback Road, Suite 1100
Phoenix, Arizona 85012
Attention: Robert S. Kant, Esq.
(ii) If to Employee:
Attention:
with a copy to:
Attention:
Either party may alter the address to which communications or copies are to be
sent by giving notice of such change of address in conformity with the
provisions of this paragraph for the giving of notice.
(b) INDULGENCES. Neither any failure nor any delay on the part
of either party to exercise any right, remedy, power or privilege under this
Agreement shall operate as a waiver thereof, nor shall any single or partial
exercise of any right, remedy, power or privilege preclude any other or further
exercise of the
<PAGE> 6
same or of any other right, remedy, power or privilege, nor shall any waiver of
any right, remedy, power or privilege with respect to any occurrence be
construed as a waiver of such right, remedy, power or privilege with respect to
any other occurrence.
(c) CONTROLLING LAW. This Agreement and all questions relating
to its validity, interpretation, performance and enforcement, shall be governed
by and construed in accordance with the laws of the State of Arizona,
notwithstanding any Arizona or other conflict-of-interest provisions to the
contrary.
(d) BINDING NATURE OF AGREEMENT. This Agreement shall be
binding upon and inure to the benefit of the parties hereto and their respective
heirs, personal representatives, successors and assigns except that no party may
assign or transfer such party's rights or obligations under this Agreement
without the prior written consent of the other party.
(e) EXECUTION IN COUNTERPART. This Agreement may be executed in
any number of counterparts, each of which shall be deemed to be an original as
against any party whose signature appears thereon, and all of which shall
together constitute one and the same instrument. This Agreement shall become
binding when one or more counterparts hereof, individually or taken together,
shall bear the signatures of the parties reflected hereon as the signatories.
(f) PROVISIONS SEPARABLE. The provisions of this Agreement are
independent of and separable from each other, and no provision shall be affected
or rendered invalid or unenforceable by virtue of the fact that for any reason
any other or others of them may be invalid or unenforceable in whole or in part.
(g) ENTIRE AGREEMENT. This Agreement contains the entire
understanding between the parties hereto with respect to the subject matter
hereof, and supersedes all prior and contemporaneous agreements and
understandings, inducements and conditions, express or implied, oral or written,
except as herein contained. The express terms hereof control and supersede any
course of performance and/or usage of the trade inconsistent with any of the
terms hereof. This Agreement may not be modified or amended other than by an
agreement in writing.
(h) PARAGRAPH HEADINGS. The paragraph headings in this
Agreement are for convenience only; they form no part of this Agreement and
shall not affect its interpretation.
(i) GENDER. Words used herein, regardless of the number and
gender specifically used, shall be deemed and construed to include any other
number, singular or plural, and any other gender, masculine, feminine or neuter,
as the context requires.
(j) NUMBER OF DAYS. In computing the number of days for
purposes of this Agreement, all days shall be counted, including
<PAGE> 7
Saturdays, Sundays and holidays; provided, however, that if the final day of any
time period falls on a Saturday, Sunday or holiday, then the final day shall be
deemed to be the next day which is not a Saturday, Sunday or holiday.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
EMPLOYER:
LEOPOLD STYLING PRODUCTS, INC.
By:
-----------------------------------
Name:
----------------------------
Its:
-----------------------------------
EMPLOYEE:
-----------------------------------------
Thomas M. Clifford
<PAGE> 1
EXHIBIT 10.7
EMPLOYMENT AGREEMENT
DATED AS OF SEPTEMBER 19, 1996
BETWEEN
LEOPOLD STYLING PRODUCTS, INC.
AND
DAVID E. ZIEGLER
<PAGE> 2
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT ("Agreement") is made this 19th day of
September, 1996, by and between LEOPOLD STYLING PRODUCTS, INC., a Delaware
corporation (hereinafter called "Employer") and DAVID E. ZIEGLER (hereinafter
called ("Employee").
W I T N E S S E T H:
Employer desires to employ Employee and Employee desires to accept such
employment, all on the terms and conditions hereinafter set forth.
NOW, THEREFORE, in consideration of the premises and of the mutual
covenants set forth in this Agreement, the parties hereto agree as follows:
1. EMPLOYMENT. Employer hereby employs Employee, and Employee hereby
accepts such employment, as Chief Financial Officer of Employer and in such
other capacities and for such other duties and services as shall from time to
time be mutually agreed upon by Employer and Employee.
2. FULL TIME OCCUPATION. Employee shall devote Employee's entire
business time, attention and efforts to the performance of Employee's duties
under this Agreement, and shall serve Employer faithfully and diligently and
shall not engage in any other employment while employed by Employer.
3. COMPENSATION AND OTHER BENEFITS.
(a) SALARY. Beginning upon completion of the initial public
offering of Employer's common stock (the "IPO"), Employer shall pay to Employee,
as full compensation for the services rendered by Employee, during Employee's
employment under this Agreement, a salary at a rate of $140,000 for the first
year, 165,000 for the second year, and $190,000 per annum for the remaining term
of this Agreement to be paid in equal monthly installments, or in such other
periodic installments upon which Employer and Employee shall mutually agree.
(b) ANNUAL BONUS. Employer shall be eligible to participate in
a bonus pool established and administered in the sole discretion of the Board of
Directors of Employer or by a committee appointed by the Board of Directors for
the payment of annual bonuses to senior officers ("Bonus Pool"). Employer will
have the right but not the obligation to establish a Bonus Pool. Employee will
be eligible to receive an annual bonus to be determined by the Board of
Directors in its discretion.
<PAGE> 3
(c) SIGNING BONUS. Employee will receive a one-time $20,000
bonus payment upon the successful completion of the IPO. Except for the bonus
provided for in this subparagraph 3(c) and stock options being granted to
Employee, Employee shall receive no compensation for the period beginning on
September 19, 1996 and ending on the IPO.
(d) AUTOMOBILE ALLOWANCE. Employer will pay Employee a $300.00
automobile allowance payable monthly during the first year and a $400.00
automobile allowance payable monthly during the remainder of the term of
Employee's employment hereunder .
(e) INSURANCE AND OTHER BENEFITS.
(i) Employee shall be entitled to participate in or receive
benefits under all employee and executive benefit plans or arrangements and
prerequisites of employment, including without limitation, plans or arrangements
providing for health and disability insurance coverage, life insurance for the
benefit of Employee's beneficiaries, deferred compensation and pension benefits,
all at the highest level that is available through Employer to other senior
officers of Employer subject to the same terms and conditions as apply to such
other senior officers.
(ii) Employee shall be entitled to receive not less than three
weeks paid vacation per year.
(f) REIMBURSEMENT. Employer shall reimburse Employee for all
reasonable travel and entertainment expenses and other ordinary and necessary
business expenses incurred by Employee in connection with the initial public
offering of Employer; provided, however, that Employee shall not incur such
expenses in an amount in excess of $5,000 during any month without written
authorization from Employer. The term "business expenses" shall not include any
item not deductible by Employer for federal income tax purposes. To obtain
reimbursement, Employee shall submit to Employer receipts, bills or sales slips
for the expenses incurred. Reimbursements shall be made by Employer monthly
within 10 days of presentation by Employee of evidence of the expenses incurred.
4. TERM OF EMPLOYMENT.
(a) EMPLOYMENT TERM. The term of Employee's employment
hereunder shall commence on September 19, 1996 and shall continue until
September 19, 2000 and from year to year thereafter, unless and until terminated
by either party giving written notice to the other not less than 60 days prior
to the end of the then current term.
(b) TERMINATION UNDER CERTAIN CIRCUMSTANCES. Notwithstanding
anything to the contrary herein contained:
(i) Employee's employment shall be automatically
terminated, without notice, effective upon the date of Employee's death;
2
<PAGE> 4
(ii) If Employee shall fail, for a period of more than
30 consecutive days, or for 30 days within any 60 day period, to perform any of
Employee's duties under this Agreement as the result of illness or other
incapacity, Employer may, at its option, upon notice to Employee, terminate
Employee's employment effective on the date of that notice;
(iii) If Employee shall breach or violate any of the
provisions of this Agreement, or fail to perform in a manner reasonably
satisfactory to Employer any of the duties required of Employee and such breach,
violation or failure shall continue for a period of 10 days after Employer shall
have given Employee written notice specifying the nature thereof in reasonable
detail, Employer may, at its option, upon notice to Employee, terminate
Employee's employment effective on the date of that notice.
(iv) Employer may terminate Employee's employment at
any time without cause by giving 30 days prior written notice thereof.
(c) PAYMENTS UPON TERMINATION. In the event Employer terminates
Employee's employment pursuant to subparagraph 4(b)(iv), Employer shall be
obligated to pay Employee as liquidated damages Employee's salary pursuant to
subparagraph 3(a), excluding any additional stock options, for (i) 90 days after
such termination, if such termination occurred on or before the second
anniversary of the IPO or (ii) 180 days after such termination, if such
termination occurred after the second anniversary of the IPO. Employer shall pay
such liquidated damages in installments in accordance with subparagraph 3(a)
hereof. Employee shall receive no further compensation after the termination of
Employee's employment as a result of any other circumstances.
5. COMPETITION AND CONFIDENTIAL INFORMATION.
(a) INTERESTS TO BE PROTECTED. The parties acknowledge that
during the term of Employee's employment with Employer, Employee will perform
essential services for Employer. Employee will be exposed to, have access to,
and be required to work with, a considerable amount of Confidential Information
(as defined below). The parties also expressly recognize and acknowledge that
the personnel of Employer have been trained by, and are valuable to, Employer
and that if Employer must hire new personnel or retrain existing personnel to
fill vacancies, it will incur substantial expense in recruiting and training
such personnel. The parties expressly recognize that should Employee compete
with Employer in any manner whatsoever, it could seriously impair the good will
and diminish the value of Employer's business. The parties acknowledge that this
covenant has an extended duration; however, they agree that this covenant is
reasonable and it is necessary for the protection of Employer, its stockholders
and employees. For these and other reasons, and the fact that there are many
other employment opportunities available to Employee if he should terminate his
employment, the parties are in full and complete agreement that the following
restrictive covenants are fair and reasonable and are freely, voluntarily and
knowingly entered into. Furthermore, each party was given the opportunity to
consult with independent legal counsel before entering into this Agreement.
3
<PAGE> 5
(b) NON-COMPETITION. During the term of Employee's employment
with Employer and for the period ending 12 months after the termination of
Employee's employment with Employer, regardless of the reason therefor, Employee
shall not (whether directly or indirectly, as owner, principal, agent,
stockholder, director, officer, manager, employee, partner, participant, or in
any other capacity) engage or become financially interested in any competitive
business conducted within the Restricted Territory or solicit, canvas or accept,
or authorize any other person, firm or entity to solicit, canvas or accept, from
any customers of Employer, any business within the Restricted Territory for
Employee or for any other person, firm or entity. As used herein, customers of
Employer shall mean any persons, firms or entities that purchased goods or
services from Employer during the period of Employee' s employment with
Employer; competitive business shall mean any business which sells or provides
or attempts to sell or provide products or services the same as or substantially
similar to the products or services sold or provided by Employer; and the
Restricted Territory shall mean any area in which Employer conducts business.
(c) NON-SOLICITATION OF EMPLOYEES. During the term of
Employee's employment and for a period of 12 months after the termination of
Employee's employment with Employee, regardless of the reason therefor, Employee
shall not directly or indirectly, for himself, or on behalf of, or in
conjunction with, any other person(s), company, partnership, corporation, or
governmental entity, seek to hire, and/or hire any of Employer's personnel or
employees for the purpose of having such employee engage in services that are
the same, similar or related to the services that such employee provided for
Employer.
(d) CONFIDENTIAL INFORMATION. Employee shall maintain in strict
secrecy all confidential or trade secret information relating to the business of
Employer (the "Confidential Information") obtained by Employee in the course of
Employee's employment, and Employee shall not, unless first authorized in
writing by Employer, disclose to, or use for Employee's benefit or for the
benefit of any person, firm or entity at any time either during or subsequent to
the term of Employee's employment, any Confidential Information, except as
required in the performance of Employee's duties on behalf of Employer. For
purposes hereof, Confidential Information shall include without limitation any
trade secrets, knowledge or information with respect to processes, inventions,
formulae, machinery, manufacturing techniques or know-how; any business methods
or forms; any names or addresses of customers or data on customers or suppliers;
and any business policies or other information relating to or dealing with the
purchasing, sales or distribution policies or practices of Employer.
(e) RETURN OF BOOKS AND PAPERS. Upon the termination of
Employee's employment with Employer for any reason, Employee shall deliver
promptly to Employer all catalogues, manuals, memoranda, drawings, and
specifications; all cost, pricing and other financial data; all customer
information; all other written or printed materials which are the property of
Employer (and any copies of them); and all other materials which may contain
Confidential Information relating to the business of Employer, which Employee
may then have in Employee's possession whether prepared by Employee or not.
4
<PAGE> 6
(f) DISCLOSURE OF INFORMATION. Employee shall disclose promptly
to Employer, or its nominee, any and all ideas, designs, processes and
improvements of any kind relating to the business of Employer, whether
patentable or not, conceived or made by Employee, either alone or jointly with
others, during working hours or otherwise, during the entire period of
Employee's employment with Employer, or within six months thereafter.
(g) ASSIGNMENT. Employee hereby assigns to Employer or its
nominee, the entire right, title and interest in and to all discoveries and
improvements, whether patentable or not, which Employee may conceive or make
during Employee's employment with Employer, or within six months thereafter, and
which relate to the business of Employer.
(h) EQUITABLE RELIEF. In the event a violation of any of the
restrictions contained in this paragraph is established, Employer shall be
entitled to preliminary and permanent injunctive relief as well as damages and
an equitable accounting of all earnings, profits and other benefits arising from
such violation, which right shall be cumulative and in addition to any other
rights or remedies to which Employer may be entitled. In the event of a
violation of any provision of subparagraph (a), (d) or (e) of this paragraph,
the period for which those provisions would remain in effect shall be extended
for a period of time equal to that period beginning when such violation
commenced and ending when the activities constituting such violation shall have
been finally terminated in good faith.
(i) RESTRICTIONS SEPARABLE. Each and every restriction set
forth in this paragraph is independent and severable from the others, and no
such restriction shall be rendered unenforceable by virtue of the fact that, for
any reason, any other or others of them may be unenforceable in whole or in
part.
6. MISCELLANEOUS.
(a) NOTICES. All notices, requests, demands and other
communications required or permitted under this Agreement shall be in writing
and shall be deemed to have been duly given, made and received when delivered
against receipt or when deposited in the United States mails, first class
postage prepaid, addressed as set forth below:
(i) If to Employer:
One East Camelback Road
Suite 1100
Phoenix, Arizona 85012
Attention: Sam Leopold
5
<PAGE> 7
with a copy to:
O'Connor, Cavanagh, Anderson,
Killingsworth & Beshears, P.A.
One East Camelback Road
Phoenix, Arizona 85012
Attention: Robert S. Kant, Esq.
(ii) If to Employee:
7033 Midcrest
Dallas, Texas 75240
Either party may alter the address to which communications or copies are to be
sent by giving notice of such change of address in conformity with the
provisions of this paragraph for the giving of notice.
(b) INDULGENCES. Neither any failure nor any delay on the part
of either party to exercise any right, remedy, power or privilege under this
Agreement shall operate as a waiver thereof, nor shall any single or partial
exercise of any right, remedy, power or privilege preclude any other or further
exercise of the same or of any other right, remedy, power or privilege, nor
shall any waiver of any right, remedy, power or privilege with respect to any
occurrence be construed as a waiver of such right, remedy, power or privilege
with respect to any other occurrence.
(c) CONTROLLING LAW. This Agreement and all questions relating
to its validity, interpretation, performance and enforcement, shall be governed
by and construed in accordance with the laws of the State of Arizona,
notwithstanding any Arizona or other conflict-of-interest provisions to the
contrary.
(d) BINDING NATURE OF AGREEMENT. This Agreement shall be
binding upon and inure to the benefit of the parties hereto and their respective
heirs, personal representatives, successors and assigns except that no party may
assign or transfer such party's rights or obligations under this Agreement
without the prior written consent of the other party.
(e) EXECUTION IN COUNTERPART. This Agreement may be executed in
any number of counterparts, each of which shall be deemed to be an original as
against any party whose signature appears thereon, and all of which shall
together constitute one and the same instrument. This Agreement shall become
binding when one or more counterparts hereof, individually or taken together,
shall bear the signatures of the parties reflected hereon as the signatories.
(f) PROVISIONS SEPARABLE. The provisions of this Agreement are
independent of and separable from each other, and no provision shall be affected
or rendered invalid or unenforceable by virtue of the fact that for any reason
any other or others of them may be invalid or unenforceable in whole or in part.
6
<PAGE> 8
(g) ENTIRE AGREEMENT. This Agreement contains the entire
understanding between the parties hereto with respect to the subject matter
hereof, and supersedes all prior and contemporaneous agreements and
understandings, inducements and conditions, express or implied, oral or written,
except as herein contained. The express terms hereof control and supersede any
course of performance and/or usage of the trade inconsistent with any of the
terms hereof. This Agreement may not be modified or amended other than by an
agreement in writing.
(h) PARAGRAPH HEADINGS. The paragraph headings in this
Agreement are for convenience only; they form no part of this Agreement and
shall not affect its interpretation.
(i) GENDER. Words used herein, regardless of the number and
gender specifically used, shall be deemed and construed to include any other
number, singular or plural, and any other gender, masculine, feminine or neuter,
as the context requires.
(j) NUMBER OF DAYS. In computing the number of days for
purposes of this Agreement, all days shall be counted, including Saturdays,
Sundays and holidays; provided, however, that if the final day of any time
period falls on a Saturday, Sunday or holiday, then the final day shall be
deemed to be the next day which is not a Saturday, Sunday or holiday.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
EMPLOYER:
LEOPOLD STYLING PRODUCTS, INC.
By: _____________________________________
Name: ___________________________________
Its: ____________________________________
EMPLOYEE:
_________________________________________
David E. Ziegler
7
<PAGE> 9
EXHIBIT 4.1
STOCK CERTIFICATE
Stock Certificate with a Certificate No., the number of shares and the Styling
Technology Corporation emblem, with the following text:
"Styling Technology Corporation, incorporated under the laws of Delaware, CUSIP
No. 863905 10 5. The Corporation is authorized to issue 10,000,000 shares of
Common Stock, par value $.0001 each. This certifies that ________________ is the
registered holder of ________ shares of the Common Stock of Styling Technology
Corporation, transferable only on the books of the Corporation by the holder
hereof in person or by Attorney upon surrender of this Certificate properly
endorsed. This Certificate is not valid until countersigned and registered by
the Transfer Agent and Registrar. In witness whereof, the said Corporation has
caused this Certificate to be signed by its duly authorized officers and its
Corporate Seal to be hereunto affixed this _____ day of _______, 19___."
Countersigned and Registered:
CORPORATE STOCK TRANSFER, INC. STYLING TECHNOLOGY CORPORATION
_____________________________ _______________________________
Secretary President
Corporate Seal
Back of Certificate: various abbreviations and the language:
"THE CORPORATION WILL FURNISH TO ANY SHAREHOLDER UPON REQUEST AND WITHOUT
CHARGE, A FULL STATEMENT OF THE DESIGNATIONS, PREFERENCES, LIMITATIONS, AND
RELATIVE RIGHTS OF THE SHARES OF EACH CLASS AUTHORIZED TO BE ISSUED.
For value received, ____________ hereby sell, sign and transfer unto
_____________ Shares represented by the within Certificate, and do hereby
irrevocably constitute and appoint _____________ Attorney to transfer the said
Shares on the books of the within named Corporation with full power of
substitution in the premises.
Dated: ___________________________, 19 __.
In presence of __________________________.
Notice: The signature of the Assignment must correspond with the name as written
upon the face of the Certificate and every particular without alteration or
enlargement or any change whatever. Social security or other identifying number
of Assignee."
<PAGE> 10
THIS OFFERING IS BEING MADE PURSUANT TO SECTION 4(2) OF THE SECURITIES ACT OF
1933. THE SECURITIES OFFERED HEREBY HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933 OR UNDER ANY STATE ACTS AND MAY NOT BE SOLD, TRANSFERRED,
PLEDGED, OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT
UNDER SUCH ACTS OR AN OPINION OF COUNSEL ACCEPTABLE TO THE COMPANY TO THE EFFECT
THAT REGISTRATION IS NOT REQUIRED.
SEPTEMBER 9, 1996 $400,000.00
----------
NON-NEGOTIABLE UNSECURED PROMISSORY NOTE
FOR VALUE RECEIVED, LEOPOLD STYLING PRODUCTS, INC., a Delaware
corporation ("Maker"), hereby promises to pay to HOLDEN HOLDINGS LIMITED, a
company organized under the Republic of Ireland ("Payee"), the principal sum of
Four Hundred Thousand and 00/100 Dollars ($400,000.00) in lawful money of the
United States, together with simple interest thereon at the Interest Rate (as
hereinafter defined).
1. INTEREST. The principal balance hereof shall bear interest at a rate
of 10% per annum (the "Interest Rate") computed on a 360-day year and 30-day
month basis.
2. PAYMENTS. The principal sum of this Note together with the interest
due hereunder shall be due and payable in full on the date (the "Due Date") that
is the first to occur of (a) January 31, 1997 or (b) ten (10) business days
following the successful consummation of the acquisitions by Maker of Gena
Laboratories, Inc., the Body Drench division of Designs by Norvell, Inc., JDS
Manufacturing, Inc., and Styling Research, Inc. (collectively, the
"Acquisitions").
All amounts due hereunder shall be payable to the order of
______________________________________________________________, or at such other
place as Payee may from time to time designate in writing to Maker. Maker shall
not be deemed in default of this Note unless Maker has failed to make any
payment due hereunder and has failed to cure such nonpayment within seven (7)
days following the date Maker receives notice in writing from Payee (the
"Default Notice") demanding payment of such unpaid installment.
3. COMMON STOCK. In addition to the payments due hereunder, upon the
consummation of an initial public offering ("IPO") of Maker's common stock
pursuant to a registration statement filed by Maker under the Securities Act of
1933 (the "Act") or a private placement for cash of Maker's Common Stork, Maker
shall deliver to Payee (i) the number of shares of Maker's common stock (the
"Shares") determined by dividing one-half (1/2) of the principal sum of this
Note by the initial public offering price per share and (ii) warrants to
<PAGE> 11
purchase a like number of shares of Common Stock at an exercise price equal to
125% of such public or private offering price per share during the two-year
period commencing with the issuance of the warrants (the "Warrants").
4. REGISTRATION RIGHTS. For purposes of this Section 4:
(A) DEFINITIONS.
(i) The terms "register", "registered", and
"registration" refer to a registration effected by preparing and filing a
registration statement on Form S-1 or Form SB-2 or similar document in
compliance with the Act, and the declaration or ordering of effectiveness of
such registration statement or document;
(ii) The term "Registrable Securities" means the
shares of Common Stock issuable in accordance with Section 3 above and the
shares of Common Stock issuable pursuant to the exercise of the Warrants
issuable in accordance with Section 3 above; and
(iii) The term "Holder" means Payee.
(B) DEMAND REGISTRATION.
(i) At any time during the six-month period
commencing 120 days after Maker has completed an IPO of its Common Stock, the
holders of fifty percent (50%) or more of the Registrable Securities may demand
that Maker prepare and file a registration statement covering all of the
Registrable Securities. In such event, Maker shall promptly give each Holder
notice of Maker's intent to prepare and file such a registration statement.
Notwithstanding the foregoing, Maker shall have no obligation to prepare and
file a registration statement under this Section 4(b) at any time the Company
has given Holders notice pursuant to Section 4(c) below of the Company's
proposal to register securities and is undertaking in good faith to cause such
registration to become effective, or for a period of 180 days following the
effective date of any such registration. During any such period, the Holders
shall be entitled to exercise the registration rights granted to them under
Section 4(c). The Holders shall be entitled to only one demand registration
pursuant to this Section 4(b).
(ii) If any Holders intend to distribute Registrable
Securities by means of an underwriting, they shall so notify the Company not
later than the date twenty (20) days after the date of the Company's mailing of
its notice of intent to prepare and file a registration statement. All Holders
proposing to distribute their Registrable Securities through such underwriting
shall be responsible for underwriting commissions and fees applicable to the
sale of such Holder's securities and shall enter into an underwriting agreement
in customary form with the underwriter or underwriters selected for such
underwriting by the Company.
(iii) The Company is obligated to effect only one
demand registration pursuant to this Section 4(b).
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<PAGE> 12
(C) PIGGYBACK REGISTRATION. Commencing after Maker has
completed an IPO of its Common Stock, if Maker proposes to register (including
for this purpose a registration effected by Maker for stockholders other than
Holder) any of its shares of Common Stock under the Act in connection with the
public offering of such securities solely for cash (other than a registration of
securities to be offered to employees pursuant to an employee benefit plan on
Form S-8, a registration in connection with an exchange offer or any
acquisition, or a registration on any form which does not include substantially
the same information as would be required to be included in a registration
statement covering the sale of the Registrable Securities), Maker shall give
Holder written notice of such proposed registration at least thirty (30) days
prior to filing the registration statement respecting such proposed
registration. Upon the written request of Holder given within twenty (20) days
after mailing of such notice by Maker in accordance with Section 11 hereof,
Maker shall cause to be registered under the Securities Act all of the
Registrable Securities that Holder has requested to be registered, subject to
Sections 4(d) and 4(f) below.
(D) INFORMATION CONCERNING HOLDER. It shall be a condition
precedent of the obligations of Maker to take any action pursuant to this
Section 4 that Holder shall furnish to Maker such information regarding itself,
the Registrable Securities held by Holder, and the intended method of
disposition of such securities as shall be required to effect the registration
of the Registrable Securities.
(E) EXPENSES. All expenses incurred in connection with the
registration pursuant to this Section 4 (other than underwriter's commissions
and fees or any fees of others employed by Holder, including attorneys' fees),
including without limitation all registration, filing and qualification fees,
printer's and accounting fees, and fees and disbursements of counsel for Maker,
shall be borne by Maker.
(F) ACCEPTANCE OF UNDERWRITING AGREEMENT. Maker shall not be
required under this Section 4 to include any of the Registrable Securities in an
underwriting of securities being issued by Maker unless Holder accepts the terms
of the underwriting agreement as agreed upon between Maker and the underwriter
selected by Maker, and then only in such quantity, if any, as will not, in the
opinion of the managing underwriter, jeopardize or in any way reduce the success
of the offering by Maker.
(G) EXPIRATION OF PIGGYBACK REGISTRATION RIGHTS. Any
obligation of Maker to register the Registrable Securities pursuant to Section
4(c) shall expire on the second anniversary of the receipt by Holder of the
Shares.
5. PREPAYMENT. Notwithstanding anything to the contrary
contained in this Note, Maker shall have the right and privilege to prepay all
or any part of the unpaid principal balance of this Note and any interest
accrued thereon at any time or times without premium or penalty.
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<PAGE> 13
6. WAIVERS. Acceptance by Payee of any payment which is less than the
full amount then due and owing hereunder shall not constitute a waiver of
Payee's right to receive payment in full at such time or at any prior or
subsequent time. No delay or omission on the part of Payee in exercising any
right hereunder shall operate as a waiver of such right or any other right under
this Note. A waiver on any one occasion shall not be construed as a bar to or
waiver of any such right or remedy on any future occasion.
7. COSTS OF COLLECTION. Maker shall be liable for any and all costs and
expenses of collection paid by Payee, including reasonable attorneys' fees,
arising by virtue of default of this Note.
8. ACCELERATION. If Maker is in default of this Note and such default
(unless waived in writing by Payee) is not cured within fifteen (15) days of the
applicable Default Notice, then and in each and every case, unless the entire
then unpaid principal amount of this Note shall have already become due and
payable, Payee may, by a notice in writing to Maker (the "Acceleration Notice"),
declare the principal of and the accrued interest on this Note to be due and
payable within seven (7) days following the date Maker receives the Acceleration
Notice.
9. DEFAULT INTEREST. Maker shall pay interest at the rate of four
percent (4%) per annum plus the interest rate borne by this Note on the amount
of any principal with respect to which Maker is in default hereunder or which
has been declared due but remains unpaid as a result of the application of
Section 7 above and, to the extent that payment of such interest is enforceable
under applicable law, upon overdue installments of interest at the same rates to
the date of payment.
10. AMENDMENT. This Note may not be changed, modified or terminated,
nor may any provision of this Note be waived except by an agreement in writing
signed by the party to be charged.
11. NOTICES. All notices required or permitted to be given hereunder
shall be in writing and shall be deemed given and received when delivered in
person, or two (2) business days after being placed in the hands of a courier
service (e.g., DHL or Federal Express) prepaid, or faxed provided that a
confirming copy is delivered forthwith as otherwise herein provided, addressed
as follows:
If to Payee:
___________________________
___________________________
___________________________
FAX: ______________________
4
<PAGE> 14
With a copy to:
___________________________
___________________________
___________________________
FAX: ______________________
If to Maker:
Leopold Styling Products, Inc.
One East Camelback Road, Suite 1100
Phoenix, Arizona 85012
FAX: (602) 263-2900
With a copy to:
O'Connor, Cavanagh, Anderson,
Killingsworth & Beshears, P.A.
One East Camelback Road, Suite 1100
Phoenix, Arizona 85012-1656
Attention: Robert S. Kant, Esq.
FAX: (602) 263-2900
and/or to such other respective addresses and/or addressees as may be designated
by notice given in accordance with the provisions of this Section 11.
12. CONSTRUCTION. By acceptance of this Note, Payee acknowledges and
agrees that Maker and Payee have each participated in the drafting of this Note
and that this Note has been reviewed by the respective legal counsel for such
parties and that the normal rule of construction to the effect that any
ambiguities are to be resolved against the drafting party shall not be applied
to the interpretation of this Note. No inference in favor of, or against, any
party shall be drawn from the fact that one party has drafted any portion
hereof.
13. SEVERABILITY. If any provision herein shall be unenforceable, such
unenforceable provision shall not render the remaining provisions hereof
unenforceable or invalid.
14. CONTROLLING LAW. THIS NOTE SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF ARIZONA, NOTWITHSTANDING THE CONFLICT
OF LAW PRINCIPLES OF SUCH STATE.
5
<PAGE> 15
15. ASSIGNMENT. Except as otherwise provided below, this Note inures to the
benefit of, and binds, the respective successors and assigns of Payee and Maker.
Neither Payee nor Maker may assign or transfer this Note or assign or delegate
any of its respective rights or obligations hereunder without the prior written
consent of the other party in each instance; provided, however, Maker may assign
or transfer this Note to any entity that is controlled by Maker, or is under
common control with Maker, and which entity shall assume all of Maker's
obligations hereunder with respect to this Note.
IN WITNESS WHEREOF, the parties have executed this Note as of the date
first set forth above.
MAKER:
LEOPOLD STYLING PRODUCTS, INC.
By: _____________________________________
Name: ___________________________________
Its: ____________________________________
The undersigned hereby accepts and agrees to be bound by the above
terms and conditions.
PAYEE:
By: _____________________________________
Name: ___________________________________
Its: ____________________________________
6
<PAGE> 1
EXHIBIT 10.8
EMPLOYMENT AGREEMENT
DATED AS OF NOVEMBER __, 1996
BETWEEN
STYLING TECHNOLOGY CORPORATION
AND
RICHARD E. NORVELL
<PAGE> 2
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT ("Agreement") is made this ____ day of
November, 1996, by and between STYLING TECHNOLOGY CORPORATION, a Delaware
corporation (hereinafter called "Employer") and RICHARD E. NORVELL (hereinafter
called ("Employee").
W I T N E S S E T H:
A. Employee currently serves as Vice President of the Body Drench
Division ("Body Drench") of Designs By Norvell, Inc. ("DBN").
B. Employer has entered into an asset purchase agreement providing for
Employer to acquire Body Drench (the "Acquisition").
C. Employer is in the process of preparing for an initial public
offering of its Common Stock (the "Offering").
D. It is contemplated that the consummation of the Acquisition and the
closing of the Offering will occur simultaneously.
E. Employer desires to employ Employee and Employee desires to accept
such employment, all on the terms and conditions set forth in this Agreement
effective on the consummation of the Acquisition and the closing of the Offering
(the "Effective Date").
NOW, THEREFORE, in consideration of the premises and of the mutual
covenants set forth in this Agreement, the parties hereto agree as follows:
1. EMPLOYMENT. On the Effective Date, Employer shall employ Employee,
and Employee shall accept such employment, as Vice President of Employer's Body
Drench Division and in such other capacities and for such other duties and
services as shall from time to time be mutually agreed upon by Employer and
Employee.
2. FULL TIME OCCUPATION. Commencing on the Effective Date, Employee
shall devote at least 80% of Employee's business time, attention and efforts to
the performance of Employee's duties under this Agreement, and shall serve
Employer faithfully and diligently. In addition, Employee shall not engage in
any other employment or other business activity (whether directly or indirectly,
as owner, principal, agent, stockholder, director, officer, manager, employee,
partner, participant or other capacity other than as less than a 5% stockholder
of a public company subject to the reporting requirements under the Securities
Exchange Act of 1934) during the term of this Agreement, except that Employee
may be a stockholder of, and may be employed by (subject to the first sentence
of this Section 2) Designs By Norvell, Inc. and/or Professional Laundry
Management, Inc.
<PAGE> 3
3. COMPENSATION AND OTHER BENEFITS.
(a) SALARY. Beginning on the Effective Date, Employer shall pay
to Employee, as full compensation for the services rendered by Employee, during
Employee's employment under this Agreement, a salary at a rate of $125,000 per
annum to be paid in equal monthly installments, or in such other periodic
installments upon which Employer and Employee shall mutually agree.
Notwithstanding the foregoing, if Greg Norvell's employment with Employer is
terminated voluntarily or involuntarily, then Employee's salary shall be
increased to a rate of $200,000 per annum to be paid in equal monthly
installments for the remainder of the term of this Agreement beginning with the
next pay period immediately following the termination of Greg Norvell's
employment with Employer.
(b) STOCK OPTION PROGRAM. In the event Employer adopts a
management incentive Stock Option Program, Employee shall be eligible to
participate in such Program provided that such participation shall be at the
sole discretion of Employer's Board of Directors.
(c) INSURANCE AND OTHER BENEFITS. Employee shall be entitled to
participate in or receive benefits under all employee and executive benefit
plans or arrangements and prerequisites of employment, including without
limitation, plans or arrangements providing for health and disability insurance
coverage, life insurance for the benefit of Employee's beneficiaries, deferred
compensation and pension benefits all at a level determined by the Employer's
Board of Directors and subject to the such terms and conditions as the Board of
Directors may establish.
4. TERM OF EMPLOYMENT.
(a) EMPLOYMENT TERM. The term of Employee's employment
hereunder shall commence on the completion of Employer's acquisition of
substantially all of the assets of the Body Drench Division and shall continue
for three years thereafter and from year to year thereafter, unless and until
terminated by either party giving written notice to the other not less than 60
days prior to the end of the then current term.
(b) TERMINATION UNDER CERTAIN CIRCUMSTANCES. Notwithstanding
anything to the contrary herein contained:
(i) Employee's employment shall be automatically
terminated, without notice, effective upon the date of Employee's death;
(ii) If Employee shall fail, for a period of more than
60 consecutive days, or for 60 days within any 90 day period, to perform any of
Employee's duties under this Agreement as the result of illness or other
incapacity, Employer may, at its option, upon notice to Employee, terminate
Employee's employment effective on the date of that notice, and Employer's
obligation to pay Employee pursuant to Section 3(a) hereof shall automatically
terminate;
(iii) Employer may, at its option, terminate
Employee's employment, the effective on the date of that notice. In the event of
such termination, Employee shall be entitled to receive a salary as set forth in
Section 3(a) hereof for the remainder of the applicable term set forth in
Section 4(a) above.
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<PAGE> 4
(iv) Employee may, at his option, upon 30 days notice
to Employer, terminate his employment under this Agreement. In the event of the
termination of Employee's employment pursuant to this subparagraph, Employer's
obligation to pay Employee pursuant to Section 3(a) hereof shall automatically
terminate on the last day of such notice period.
(v) If Employee shall breach or violate any of the
provisions of this Agreement, or fail to perform in a manner reasonably
satisfactory to Employer any of the duties required of Employee and such breach,
violation or failure shall continue for a period of 10 days after Employer shall
have given Employee written notice specifying the nature thereof in reasonable
detail, Employer may, at its option, upon notice to Employee, terminate
Employee's employment effective on the date of that notice, and Employer's
obligation to pay Employee pursuant to Section 3(a) hereof shall automatically
terminate.
(vi) If Employee engages in an act or acts involving a
felony crime, moral turpitude (as determined by reference to statutory or case
law), fraud or dishonesty, Employer may, at its option, upon notice to Employee,
terminate Emplpoyee's employment effective on the date of that notice and
Employer's obligation to pay Employee pursuant to Section 3(a) hereof shall
automatically terminate.
(vii) If (1) revenues and earnings from continuing
operations for calendar year 1997 for Employer's Body Drench Division (the
"Division") do not increase by 12% from the revenues and earnings from
continuing operations for the Division from calendar year 1996 (as recasted by
Company's certified public accountants) or (2) revenues and earnings from
continuing operations for each of calendar years 1998 and 1999 for the Division
do not increase by 12% from the revenues and earnings from continuing operations
from the previous calendar year, Company may at its option, upon notice to
Employee, terminate Employee's engagement effective on the date of that notice
and Employer's obligation to pay Employee pursuant to Section 3(a) hereof shall
automatically terminate.
5. RIGHT TO OFFSET. Employer shall be entitled to offset any amount
owed to Employer by Designs By Norvell, Inc. or Joy Norvell Martin under the
Asset Purchase Agreement against any amount owing from Employer to Employee
under this Agreement.
6. COMPETITION AND CONFIDENTIAL INFORMATION.
(a) INTERESTS TO BE PROTECTED. The parties acknowledge that
during the term of Employee's employment with Employer, Employee will perform
essential services for Employer. Employee will be exposed to, have access to,
and be required to work with, a considerable amount of Confidential Information
(as defined below). The parties also expressly recognize and acknowledge that
the personnel of Employer have been trained by, and are valuable to, Employer
and that if Employer must hire new personnel or retrain existing personnel to
fill vacancies, it will incur substantial expense in recruiting and training
such personnel. The parties expressly recognize that should Employee compete
with Employer in any manner whatsoever, it could seriously impair the good will
and diminish the value of Employer's business. The parties acknowledge that this
covenant has an extended duration; however, they agree that this covenant is
reasonable and it is necessary for the protection of Employer, its stockholders
and employees. For these and other reasons, and the fact that there are many
other employment opportunities available to Employee if he should terminate his
employment, the parties are in full and complete agreement that the following
restrictive covenants are fair and reasonable and are
3
<PAGE> 5
freely, voluntarily and knowingly entered into. Furthermore, each party was
given the opportunity to consult with independent legal counsel before entering
into this Agreement.
(b) NON-COMPETITION. During the term of Employee's employment
with Employer and for the period ending 12 months after the termination of
Employee's employment with Employer, regardless of the reason therefor, Employee
shall not (whether directly or indirectly, as owner, principal, agent,
stockholder, director, officer, manager, employee, partner, participant, or in
any other capacity) engage or become financially interested in any competitive
business conducted within the Restricted Territory or solicit, canvas or accept,
or authorize any other person, firm or entity to solicit, canvas or accept, from
any customers of Employer, any business within the Restricted Territory for
Employee or for any other person, firm or entity. As used herein, customers of
Employer shall mean any persons, firms or entities that purchased goods or
services from Employer during the period of Employee' s employment with
Employer; competitive business shall mean any business which sells or provides
or attempts to sell or provide products or services the same as or substantially
similar to the products or services sold or provided by Employer; and the
Restricted Territory shall mean any area in which Employer conducts or attempts
to conduct business during the term of this Agreement.
(c) NON-SOLICITATION OF EMPLOYEES. During the term of
Employee's employment and for a period of 12 months after the termination of
Employee's employment with Employee, regardless of the reason therefor, Employee
shall not directly or indirectly, for himself, or on behalf of, or in
conjunction with, any other person(s), company, partnership, corporation, or
governmental entity, seek to hire, and/or hire any of Employer's personnel or
employees for the purpose of having such employee engage in services that are
the same, similar or related to the services that such employee provided for
Employer.
(d) CONFIDENTIAL INFORMATION. Employee shall maintain in strict
secrecy all confidential or trade secret information relating to the business of
Employer (the "Confidential Information") obtained by Employee in the course of
Employee's employment, and Employee shall not, unless first authorized in
writing by Employer, disclose to, or use for Employee's benefit or for the
benefit of any person, firm or entity at any time either during or subsequent to
the term of Employee's employment, any Confidential Information, except as
required in the performance of Employee's duties on behalf of Employer. For
purposes hereof, Confidential Information shall include without limitation any
trade secrets, knowledge or information with respect to processes, inventions,
formulae, machinery, manufacturing techniques or know-how; any business methods
or forms; any names or addresses of customers or data on customers or suppliers;
and any business policies or other information relating to or dealing with the
purchasing, sales or distribution policies or practices of Employer.
(e) RETURN OF BOOKS AND PAPERS. Upon the termination of
Employee's employment with Employer for any reason, Employee shall deliver
promptly to Employer all catalogues, manuals, memoranda, drawings, and
specifications; all cost, pricing and other financial data; all customer
information; all other written or printed materials which are the property of
Employer (and any copies of them); and all other materials which may contain
Confidential Information relating to the business of Employer, which Employee
may then have in Employee's possession whether prepared by Employee or not.
(f) DISCLOSURE OF INFORMATION. Employee shall disclose promptly
to Employer, or its nominee, any and all ideas, designs, processes and
improvements of any kind relating to the business
4
<PAGE> 6
of Employer, whether patentable or not, conceived or made by Employee, either
alone or jointly with others, during working hours or otherwise, during the
entire period of Employee's employment with Employer, or within six months
thereafter.
(g) ASSIGNMENT. Employee hereby assigns to Employer or its
nominee, the entire right, title and interest in and to all discoveries and
improvements, whether patentable or not, which Employee may conceive or make
during Employee's employment with Employer, or within six months thereafter, and
which relate to the business of Employer.
(h) EQUITABLE RELIEF. In the event a violation of any of the
restrictions contained in this paragraph is established, Employer shall be
entitled to preliminary and permanent injunctive relief as well as damages and
an equitable accounting of all earnings, profits and other benefits arising from
such violation, which right shall be cumulative and in addition to any other
rights or remedies to which Employer may be entitled. In the event of a
violation of any provision of subparagraph (a), (d) or (e) of this paragraph,
the period for which those provisions would remain in effect shall be extended
for a period of time equal to that period beginning when such violation
commenced and ending when the activities constituting such violation shall have
been finally terminated in good faith.
(i) RESTRICTIONS SEPARABLE. Each and every restriction set
forth in this paragraph is independent and severable from the others, and no
such restriction shall be rendered unenforceable by virtue of the fact that, for
any reason, any other or others of them may be unenforceable in whole or in
part.
7. MISCELLANEOUS.
(a) NOTICES. All notices, requests, demands and other
communications required or permitted under this Agreement shall be in writing
and shall be deemed to have been duly given, made and received when delivered
against receipt or when deposited in the United States mails, first class
postage prepaid, addressed as set forth below:
(i) If to Employer:
_____________________________
_____________________________
_____________________________
Attention: __________________
with a copy to:
O'Connor, Cavanagh, Anderson,
Killingsworth & Beshears, P.A.
One East Camelback Road, Suite 1100
Phoenix, Arizona 85012
Attention: Robert S. Kant, Esq.
5
<PAGE> 7
(ii) If to Employee:
_____________________________
_____________________________
_____________________________
Attention: __________________
with a copy to:
_____________________________
_____________________________
_____________________________
Attention: __________________
Either party may alter the address to which communications or copies are to be
sent by giving notice of such change of address in conformity with the
provisions of this paragraph for the giving of notice.
(b) INDULGENCES. Neither any failure nor any delay on the part
of either party to exercise any right, remedy, power or privilege under this
Agreement shall operate as a waiver thereof, nor shall any single or partial
exercise of any right, remedy, power or privilege preclude any other or further
exercise of the same or of any other right, remedy, power or privilege, nor
shall any waiver of any right, remedy, power or privilege with respect to any
occurrence be construed as a waiver of such right, remedy, power or privilege
with respect to any other occurrence.
(c) CONTROLLING LAW. This Agreement and all questions relating
to its validity, interpretation, performance and enforcement, shall be governed
by and construed in accordance with the laws of the State of Arizona,
notwithstanding any Arizona or other conflict-of-interest provisions to the
contrary.
(d) BINDING NATURE OF AGREEMENT. This Agreement shall be
binding upon and inure to the benefit of the parties hereto and their respective
heirs, personal representatives, successors and assigns except that no party may
assign or transfer such party's rights or obligations under this Agreement
without the prior written consent of the other party.
(e) EXECUTION IN COUNTERPART. This Agreement may be executed in
any number of counterparts, each of which shall be deemed to be an original as
against any party whose signature appears thereon, and all of which shall
together constitute one and the same instrument. This Agreement shall become
binding when one or more counterparts hereof, individually or taken together,
shall bear the signatures of the parties reflected hereon as the signatories.
(f) PROVISIONS SEPARABLE. The provisions of this Agreement are
independent of and separable from each other, and no provision shall be affected
or rendered invalid or unenforceable by virtue of the fact that for any reason
any other or others of them may be invalid or unenforceable in whole or in part.
6
<PAGE> 8
(g) ENTIRE AGREEMENT. This Agreement contains the entire
understanding between the parties hereto with respect to the subject matter
hereof, and supersedes all prior and contemporaneous agreements and
understandings, inducements and conditions, express or implied, oral or written,
except as herein contained. The express terms hereof control and supersede any
course of performance and/or usage of the trade inconsistent with any of the
terms hereof. This Agreement may not be modified or amended other than by an
agreement in writing.
(h) PARAGRAPH HEADINGS. The paragraph headings in this
Agreement are for convenience only; they form no part of this Agreement and
shall not affect its interpretation.
(i) GENDER. Words used herein, regardless of the number and
gender specifically used, shall be deemed and construed to include any other
number, singular or plural, and any other gender, masculine, feminine or neuter,
as the context requires.
(j) NUMBER OF DAYS. In computing the number of days for
purposes of this Agreement, all days shall be counted, including Saturdays,
Sundays and holidays; provided, however, that if the final day of any time
period falls on a Saturday, Sunday or holiday, then the final day shall be
deemed to be the next day which is not a Saturday, Sunday or holiday.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
EMPLOYER:
STYLING TECHNOLOGY CORPORATION
By: ________________________________
Name: ______________________________
Its: _______________________________
EMPLOYEE:
____________________________________
Richard E. Norvell
7
<PAGE> 1
EMPLOYMENT AGREEMENT
DATED AS OF NOVEMBER __, 1996
BETWEEN
STYLING TECHNOLOGY CORPORATION
AND
GERALD L. KOTCH
<PAGE> 2
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT ("Agreement") is made this ____ day of
November, 1996, by and between STYLING TECHNOLOGY CORPORATION, a Delaware
corporation (hereinafter called "Employer") and GERALD L. KOTCH (hereinafter
called ("Employee").
W I T N E S S E T H:
A. Employer has entered into a stock purchase agreement providing for
Employer to acquire Kotchammer Investments, Inc., dba Styling Research Company
("SRC"), (the "Acquisition").
B. Employer desires to employ Employee and Employee desires to accept
such employment, all on the terms and conditions set forth in this Agreement
effective on the consummation of the Acquisition (the "Effective Date").
NOW, THEREFORE, in consideration of the premises and of the mutual
covenants set forth in this Agreement, the parties hereto agree as follows:
1. EMPLOYMENT. On the Effective Date, Employer shall employ Employee,
and Employee shall accept such employment, as Vice President of the SRC Division
of Employer and in such other capacities and for such other duties and services
as shall from time to time be mutually agreed upon by Employer and Employee.
2. FULL TIME OCCUPATION. Commencing on the Effective Date, Employee
shall devote Employee's entire business time, attention and efforts to the
performance of Employee's duties under this Agreement, and shall serve Employer
faithfully and diligently and shall not engage in any other employment while
employed by Employer.
3. COMPENSATION AND OTHER BENEFITS.
(a) SALARY. Commencing on the Effective Date, Employer shall
pay to Employee, as full compensation for the services rendered by Employee,
during Employee's employment under this Agreement, a salary at a rate of
$114,000 per annum to be paid in equal monthly installments, or in such other
periodic installments upon which Employer and Employee shall mutually agree.
(b) ANNUAL BONUS. For each calendar year during Employee's
employment under this Agreement including calendar 1996, Employer shall consider
the payment to Employee of a bonus with the amount of any bonus to be determined
by the Board of Directors of Employer based upon performance standards
established by the Board of Directors of Employer. Neither Employee, to the
extent Employee is a member of the Board of Directors
<PAGE> 3
of Employer, nor any other employee of Employer who is a member of such Board of
Directors, shall participate in any deliberations or vote on any such bonus with
the amount of such bonus, if any, to be determined by the majority of the other
directors of Employer. The bonus for any calendar year during Employee's
employment under this Agreement shall be paid to Employee within 120 days after
the end of such calendar year; provided, however, no bonus shall be payable if
Employee leaves the employ of Employer prior to the payment of any such bonus
for any reason other than death or disability.
(c) STOCK OPTION PROGRAM. In the event Employer adopts a
management incentive Stock Option Program, Employee shall be eligible to
participate in such Program provided that such participation shall be at the
sole discretion of Employer's Board of Directors.
(d) INSURANCE AND OTHER BENEFITS. During the term of
Employee's Employment under this Agreement,
(i) Employee shall be entitled to participate in or
receive benefits under all employee and executive benefit plans or arrangements
and perquisites of employment, including without limitation, plans or
arrangements providing for health and disability insurance coverage, life
insurance for the benefit of Employee's beneficiaries, deferred compensation and
pension benefits, incentive stock option plans, all at the highest level that is
available through Employer to other employees at Employee's level subject to the
same terms and conditions as apply to such other employees.
(ii) Employee shall be entitled to receive not less
than three weeks paid vacation per year.
4. TERM OF EMPLOYMENT.
(a) EMPLOYMENT TERM. The term of Employee's employment
hereunder shall commence on the Effective Date and shall continue for one year
thereafter, unless and until terminated by either party giving written notice to
the other not less than 60 days prior to the end of the then current term.
(b) TERMINATION UNDER CERTAIN CIRCUMSTANCES. Notwithstanding
anything to the contrary herein contained:
(i) Employee's employment shall be automatically
terminated, without notice, effective upon the date of Employee's death;
(ii) If Employee shall fail, for a period of more
than 30 consecutive days, or for 30 days within any 60 day period, to perform
any of Employee's duties under this Agreement as the result of illness or other
incapacity, Employer may, at its option, upon notice to Employee, terminate
Employee's employment effective on the date of that notice;
2
<PAGE> 4
(iii) Employer may, at its option, upon notice to
Employee, terminate Employee's employment effective on the date of that notice.
(iv) Employee may, at his option, upon notice to
Employer, terminate Employee's employment effective on the date of that notice.
(v) If Employee shall breach or violate any of the
provisions of this Agreement, or fail to perform in a manner reasonably
satisfactory to Employer any of the duties required of Employee and such breach,
violation or failure shall continue for a period of 10 days after Employer shall
have given Employee written notice specifying the nature thereof in reasonable
detail, Employer may, at its option, upon notice to Employee, terminate
Employee's employment effective on the date of that notice.
(vi) If Employee engages in an act or acts involving
a crime, moral turpitude, fraud or dishonesty, Employer may, at its option, upon
notice to Employee, terminate Employee's employment effective on the date of
that notice.
(c) RESULT OF TERMINATION. In the event of the termination of
Employee's employment pursuant to paragraphs 4(b)(i) above, this Agreement and
Employee's employment hereunder shall terminate as of the date of the death of
Employee, and his estate or personal representative shall be entitled to receive
fixed salary prorated through the date of Employee's death. In the event of the
termination of Employee's employment pursuant to paragraph 4(b)(iii) above,
Employee shall continue to receive Employee's fixed compensation through the
six-month period commencing on the first day of the month next following the
date of termination. In the event of the termination of Employee pursuant to
paragraph 4(b)(ii), (iv), (v) or (vi) above, Employee shall receive no further
compensation under this Agreement.
5. COMPETITION AND CONFIDENTIAL INFORMATION.
(a) INTERESTS TO BE PROTECTED. The parties acknowledge that
during the term of Employee's employment with Employer, Employee will perform
essential services for Employer. Employee will be exposed to, have access to,
and be required to work with, a considerable amount of Confidential Information
(as defined below). The parties also expressly recognize and acknowledge that
the personnel of Employer have been trained by, and are valuable to, Employer
and that if Employer must hire new personnel or retrain existing personnel to
fill vacancies, it will incur substantial expense in recruiting and training
such personnel. The parties expressly recognize that should Employee compete
with Employer in any manner whatsoever, it could seriously impair the good will
and diminish the value of Employer's business. The parties acknowledge that this
covenant has an extended duration; however, they agree that this covenant is
reasonable and it is necessary for the protection of Employer, its stockholders
and employees. For these and other reasons, and the fact that there are many
other employment opportunities available to Employee if he should terminate his
employment, the parties are in full and complete agreement that the following
restrictive covenants are fair and
3
<PAGE> 5
reasonable and are freely, voluntarily and knowingly entered into. Furthermore,
each party was given the opportunity to consult with independent legal counsel
before entering into this Agreement.
(b) NON-COMPETITION. During the term of Employee's employment
with Employer and a period of the same duration as the length of Employee's
employment with Employer (but in no event less than six months nor greater than
36 months) after the expiration or termination of Employee's employment with
Employer, regardless of the reason therefor, Employee shall not (whether
directly or indirectly, as owner, principal, agent, stockholder, director,
officer, manager, employee, partner, participant, or in any other capacity)
engage or become financially interested in any competitive business conducted
within the Restricted Territory or solicit, canvas or accept, or authorize any
other person, firm or entity to solicit, canvas or accept, from any customers of
Employer, any business within the Restricted Territory for Employee or for any
other person, firm or entity. As used herein, customers of Employer shall mean
any persons, firms or entities that purchased goods or services from Employer
during the period of Employee' s employment with Employer; competitive business
shall mean any business which sells or provides or attempts to sell or provide
products or services the same as or substantially similar to the products or
services sold or provided by Employer; and the Restricted Territory shall mean
any area in which Employer conducts business.
(c) NON-SOLICITATION OF EMPLOYEES. During the term of
Employee's employment and for a period of 36 months after the termination of
Employee's employment with Employee, regardless of the reason therefor, Employee
shall not directly or indirectly, for himself, or on behalf of, or in
conjunction with, any other person(s), company, partnership, corporation, or
governmental entity, seek to hire, and/or hire any of Employer's personnel or
employees for the purpose of having such employee engage in services that are
the same, similar or related to the services that such employee provided for
Employer.
(d) CONFIDENTIAL INFORMATION. Employee shall maintain in
strict secrecy all confidential or trade secret information relating to the
business of Employer (the "Confidential Information") obtained by Employee in
the course of Employee's employment, and Employee shall not, unless first
authorized in writing by Employer, disclose to, or use for Employee's benefit or
for the benefit of any person, firm or entity at any time either during or
subsequent to the term of Employee's employment, any Confidential Information,
except as required in the performance of Employee's duties on behalf of
Employer. For purposes hereof, Confidential Information shall include without
limitation any trade secrets, knowledge or information with respect to
processes, inventions, formulae, machinery, manufacturing techniques or
know-how; any business methods or forms; any names or addresses of customers or
data on customers or suppliers; and any business policies or other information
relating to or dealing with the purchasing, sales or distribution policies or
practices of Employer.
(e) RETURN OF BOOKS AND PAPERS. Upon the termination
of Employee's employment with Employer for any reason, Employee shall deliver
promptly to Employer all catalogues, manuals, memoranda, drawings, and
specifications; all cost, pricing and other
4
<PAGE> 6
financial data; all customer information; all other written or printed materials
which are the property of Employer (and any copies of them); and all other
materials which may contain Confidential Information relating to the business of
Employer, which Employee may then have in Employee's possession whether prepared
by Employee or not.
(f) DISCLOSURE OF INFORMATION. Employee shall disclose
promptly to Employer, or its nominee, any and all ideas, designs, processes and
improvements of any kind relating to the business of Employer, whether
patentable or not, conceived or made by Employee, either alone or jointly with
others, during working hours or otherwise, during the entire period of
Employee's employment with Employer, or within six months thereafter.
(g) ASSIGNMENT. Employee hereby assigns to Employer or its
nominee, the entire right, title and interest in and to all discoveries and
improvements, whether patentable or not, which Employee may conceive or make
during Employee's employment with Employer, or within six months thereafter, and
which relate to the business of Employer.
(h) EQUITABLE RELIEF. In the event a violation of any of the
restrictions contained in this paragraph is established, Employer shall be
entitled to preliminary and permanent injunctive relief as well as damages and
an equitable accounting of all earnings, profits and other benefits arising from
such violation, which right shall be cumulative and in addition to any other
rights or remedies to which Employer may be entitled. In the event of a
violation of any provision of subparagraph (a), (d) or (e) of this paragraph,
the period for which those provisions would remain in effect shall be extended
for a period of time equal to that period beginning when such violation
commenced and ending when the activities constituting such violation shall have
been finally terminated in good faith.
(i) RESTRICTIONS SEPARABLE. Each and every restriction set
forth in this paragraph is independent and severable from the others, and no
such restriction shall be rendered unenforceable by virtue of the fact that, for
any reason, any other or others of them may be unenforceable in whole or in
part.
6. MISCELLANEOUS.
(a) NOTICES. All notices, requests, demands and other
communications required or permitted under this Agreement shall be in writing
and shall be deemed to have been duly given, made and received when delivered
against receipt or when deposited in the United States mails, first class
postage prepaid, addressed as set forth below:
(i) If to Employer:
One East Camelback Road
Suite 1100
Phoenix, Arizona 85012
Attention: Sam Leopold
5
<PAGE> 7
with a copy to:
O'Connor, Cavanagh, Anderson,
Killingsworth & Beshears, P.A.
One East Camelback Road
Suite 1100
Phoenix, Arizona 85012
Attention: Robert S. Kant, Esq.
(ii) If to Employee:
Gerald L. Kotch
_________________________________
_________________________________
with a copy to:
Attention: ______________________
Either party may alter the address to which communications or copies are to be
sent by giving notice of such change of address in conformity with the
provisions of this paragraph for the giving of notice.
(b) INDULGENCES. Neither any failure nor any delay on the part
of either party to exercise any right, remedy, power or privilege under this
Agreement shall operate as a waiver thereof, nor shall any single or partial
exercise of any right, remedy, power or privilege preclude any other or further
exercise of the same or of any other right, remedy, power or privilege, nor
shall any waiver of any right, remedy, power or privilege with respect to any
occurrence be construed as a waiver of such right, remedy, power or privilege
with respect to any other occurrence.
(c) CONTROLLING LAW. This Agreement and all questions relating
to its validity, interpretation, performance and enforcement, shall be governed
by and construed in accordance with the laws of the State of Arizona,
notwithstanding any Arizona or other conflict- of-interest provisions to the
contrary.
(d) BINDING NATURE OF AGREEMENT. This Agreement shall be
binding upon and inure to the benefit of the parties hereto and their respective
heirs, personal representatives, successors and assigns except that no party may
assign or transfer such party's rights or obligations under this Agreement
without the prior written consent of the other party.
6
<PAGE> 8
(e) EXECUTION IN COUNTERPART. This Agreement may be executed
in any number of counterparts, each of which shall be deemed to be an original
as against any party whose signature appears thereon, and all of which shall
together constitute one and the same instrument. This Agreement shall become
binding when one or more counterparts hereof, individually or taken together,
shall bear the signatures of the parties reflected hereon as the signatories.
(f) PROVISIONS SEPARABLE. The provisions of this Agreement are
independent of and separable from each other, and no provision shall be affected
or rendered invalid or unenforceable by virtue of the fact that for any reason
any other or others of them may be invalid or unenforceable in whole or in part.
(g) ENTIRE AGREEMENT. This Agreement contains the entire
understanding between the parties hereto with respect to the subject matter
hereof, and supersedes all prior and contemporaneous agreements and
understandings, inducements and conditions, express or implied, oral or written,
except as herein contained. The express terms hereof control and supersede any
course of performance and/or usage of the trade inconsistent with any of the
terms hereof. This Agreement may not be modified or amended other than by an
agreement in writing.
(h) PARAGRAPH HEADINGS. The paragraph headings in this
Agreement are for convenience only; they form no part of this Agreement and
shall not affect its interpretation.
(i) GENDER. Words used herein, regardless of the number and
gender specifically used, shall be deemed and construed to include any other
number, singular or plural, and any other gender, masculine, feminine or neuter,
as the context requires.
(j) NUMBER OF DAYS. In computing the number of days for
purposes of this Agreement, all days shall be counted, including Saturdays,
Sundays and holidays; provided, however, that if the final day of any time
period falls on a Saturday, Sunday or holiday, then the final day shall be
deemed to be the next day which is not a Saturday, Sunday or holiday.
7
<PAGE> 9
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
EMPLOYER:
STYLING TECHNOLOGY CORPORATION
By: ________________________________
Name: ______________________________
Its: _______________________________
EMPLOYEE:
____________________________________
Gerald L. Kotch
8
<PAGE> 1
EXHIBIT 10.10
EMPLOYMENT AGREEMENT
DATED AS OF OCTOBER __, 1996
BETWEEN
STYLING TECHNOLOGY CORPORATION
AND
DONALD N. BLACK
<PAGE> 2
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT ("Agreement") is made this ____ day of
October, 1996, by and between STYLING TECHNOLOGY CORPORATION, a Delaware
corporation (hereinafter called "Employer") and DONALD N. BLACK (hereinafter
called ("Employee").
W I T N E S S E T H:
A. Employee currently serves as President of Gena Laboratories, Inc.
("Gena").
B. Employer has entered into a stock purchase agreement providing for
Employer to acquire Gena (the "Acquisition").
C. Employer is in the process of preparing for an initial public
offering of its Common Stock (the "Offering").
D. It is contemplated that the consummation of the Offering Acquisition
and the closing of the Offering will occur simultaneously.
E. Employer desires to employ Employee and Employee desires to accept
such employment, all on the terms and conditions set forth in this Agreement
effective on the consummation of the Acquisition and the closing of the Offering
(the "Effective Date").
NOW, THEREFORE, in consideration of the premises and of the mutual
covenants set forth in this Agreement, the parties hereto agree as follows:
1. EMPLOYMENT. On the Effective Date, Employer shall employ Employee,
and Employee shall accept such employment, as Vice President of Employer's Gena
Division and in such other capacities and for such other duties and services as
shall from time to time be mutually agreed upon by Employer and Employee.
2. FULL TIME OCCUPATION. Commencing on the Effective Date, Employee
shall devote Employee's entire business time, attention and efforts to the
performance of Employee's duties under this Agreement during the first six
months of employment, and shall serve Employer faithfully and diligently. It is
recognized that the Employee does maintain certain other business interests, but
the performance of these other interests shall not affect his ability to perform
the duties under this Agreement. During the second six month period of
employment, the Employee's hours, responsibilities, duties, and services shall
be reduced. It is anticipated that in no event will the Employee devote more or
less than twenty (20) hours per average week to the business of the Employee
during this period. During this period, the Employee may also pursue other
business pursuits not inconsistent with this Agreement.
<PAGE> 3
3. COMPENSATION AND OTHER BENEFITS.
(a) SALARY. Beginning on the Effective Date, Employer shall
pay to Employee, as full compensation for the services rendered by Employee,
during Employee's employment under this Agreement, a salary of $115,494.00. This
salary is to be paid as follows: $76,998.00 at the rate of $12,833 per month for
the first six months and a salary of $38,496.00 to be paid at the rate of $6,416
per month for the second six months.
(b) INSURANCE AND OTHER BENEFITS. During the term of
Employee's Employment under this Agreement,
(i) Employee shall be entitled to participate in or
receive benefits under all employee and executive benefit plans or arrangements
and perquisites of employment, including without limitation, plans or
arrangements providing for health and disability insurance coverage, life
insurance for the benefit of Employee's beneficiaries, deferred compensation and
pension benefits, incentive stock option plans, all at the highest level that is
available through Employer to other division vice presidents of Employer subject
to the same terms and conditions as apply to such other division vice
presidents.
(ii) Employee shall be entitled to receive not less
than three weeks paid vacation per year.
4. TERM OF EMPLOYMENT.
(a) EMPLOYMENT TERM. The term of Employee's employment
hereunder shall commence on the completion of Employer's acquisition of Gena
Laboratories, Inc. and shall continue for one year thereafter, unless and until
terminated by either party giving written notice to the other not less than 60
days prior to the end of the then current term.
(b) TERMINATION UNDER CERTAIN CIRCUMSTANCES. Notwithstanding
anything to the contrary herein contained:
(i) Employee's employment shall be automatically
terminated, without notice, effective upon the date of Employee's death;
(ii) If Employee shall fail, for a period of more
than 30 consecutive days, or for 30 days within any 60 day period, to perform
any of Employee's duties under this Agreement as the result of illness or other
incapacity, Employer may, at its option, upon notice to Employee, terminate
Employee's employment effective on the date of that notice;
(iii) If Employee shall breach or violate any of the
provisions of this Agreement, or fail to perform in a manner reasonably
satisfactory to Employer any of the duties required of Employee and such breach,
violation or failure shall continue for a period of 10 days after Employer shall
have given Employee written notice specifying the nature thereof in reasonable
detail, Employer may, at its option, upon notice to Employee, terminate
Employee's employment effective on the date of that notice.
2
<PAGE> 4
(iv) Employer may terminate Employee's employment at
any time without cause by giving 30 days prior written notice thereof.
(c) PAYMENTS UPON TERMINATION. In the event Employer
terminates Employee's employment pursuant to subparagraph 4(b)(iv), Employer
shall be obligated to pay Employee as liquidated damages Employee's salary
pursuant to subparagraph 3(a), excluding any additional stock options, for (i)
30 days after such termination, if such termination occurred on or before the
six month anniversary of the IPO or (ii) 60 days after such termination, if such
termination occurred after the six month anniversary of the IPO. Employer shall
pay such liquidated damages in installments in accordance with subparagraph 3(a)
hereof. Employee shall receive no further compensation after the termination of
Employee's employment as a result of any other circumstances.
5. COMPETITION AND CONFIDENTIAL INFORMATION.
(a) INTERESTS TO BE PROTECTED. The parties acknowledge that
during the term of Employee's employment with Employer, Employee will perform
essential services for Employer. Employee will be exposed to, have access to,
and be required to work with, a considerable amount of Confidential Information
(as defined below). The parties also expressly recognize and acknowledge that
the personnel of Employer have been trained by, and are valuable to, Employer
and that if Employer must hire new personnel or retrain existing personnel to
fill vacancies, it will incur substantial expense in recruiting and training
such personnel. The parties expressly recognize that should Employee compete
with Employer in any manner whatsoever, it could seriously impair the good will
and diminish the value of Employer's business. The parties acknowledge that this
covenant has an extended duration; however, they agree that this covenant is
reasonable and it is necessary for the protection of Employer, its stockholders
and employees. For these and other reasons, and the fact that there are many
other employment opportunities available to Employee if he should terminate his
employment, the parties are in full and complete agreement that the following
restrictive covenants are fair and reasonable and are freely, voluntarily and
knowingly entered into. Furthermore, each party was given the opportunity to
consult with independent legal counsel before entering into this Agreement.
(b) NON-COMPETITION. During the term of Employee's employment
with Employer and for the period consistent with the term of the Stock Purchase
Agreement, dated as of May 8, 1996, among Leopold Styling Products, Inc., Don
Black, Howard Black, Barbara Black, Robert Black, Don Cottam, Jim Cottam, and
the Cottam Family Partnership, L.P., a Texas Limited Partnership, after the
termination of Employee's employment with Employer, regardless of the reason
therefor, Employee shall not (whether directly or indirectly, as owner,
principal, agent, stockholder, director, officer, manager, employee, partner,
participant, or in any other capacity) engage or become financially interested
in any competitive business conducted within the Restricted Territory or
solicit, canvas or accept, or authorize any other person, firm or entity to
solicit, canvas or accept, from any customers of Employer, any business within
the Restricted Territory for Employee or for any other person, firm or entity.
As used herein, customers of Employer shall mean any persons, firms or entities
that purchased goods or services from Employer during the period of Employee' s
employment with Employer; competitive business shall mean any business which
sells or provides or attempts to sell or provide products or services the same
as or substantially similar to the products or services sold or provided by
Employer; and the Restricted Territory shall mean any area in which Employer
conducts business.
3
<PAGE> 5
(c) NON-SOLICITATION OF EMPLOYEES. During the term of
Employee's employment and for a period of 12 months after the termination of
Employee's employment with Employee, regardless of the reason therefor, Employee
shall not directly or indirectly, for himself, or on behalf of, or in
conjunction with, any other person(s), company, partnership, corporation, or
governmental entity, seek to hire, and/or hire any of Employer's personnel or
employees for the purpose of having such employee engage in services that are
the same, similar or related to the services that such employee provided for
Employer.
(d) CONFIDENTIAL INFORMATION. Employee shall maintain in
strict secrecy all confidential or trade secret information relating to the
business of Employer (the "Confidential Information") obtained by Employee in
the course of Employee's employment, and Employee shall not, unless first
authorized in writing by Employer, disclose to, or use for Employee's benefit or
for the benefit of any person, firm or entity at any time either during or
subsequent to the term of Employee's employment, any Confidential Information,
except as required in the performance of Employee's duties on behalf of
Employer. For purposes hereof, Confidential Information shall include without
limitation any trade secrets, knowledge or information with respect to
processes, inventions, formulae, machinery, manufacturing techniques or
know-how; any business methods or forms; any names or addresses of customers or
data on customers or suppliers; and any business policies or other information
relating to or dealing with the purchasing, sales or distribution policies or
practices of Employer.
(e) RETURN OF BOOKS AND PAPERS. Upon the termination of
Employee's employment with Employer for any reason, Employee shall deliver
promptly to Employer all catalogues, manuals, memoranda, drawings, and
specifications; all cost, pricing and other financial data; all customer
information; all other written or printed materials which are the property of
Employer (and any copies of them); and all other materials which may contain
Confidential Information relating to the business of Employer, which Employee
may then have in Employee's possession whether prepared by Employee or not.
(f) DISCLOSURE OF INFORMATION. Employee shall disclose
promptly to Employer, or its nominee, any and all ideas, designs, processes and
improvements of any kind relating to the business of Employer, whether
patentable or not, conceived or made by Employee, either alone or jointly with
others, during working hours or otherwise, during the entire period of
Employee's employment with Employer, or within six months thereafter.
(g) ASSIGNMENT. Employee hereby assigns to Employer or its
nominee, the entire right, title and interest in and to all discoveries and
improvements, whether patentable or not, which Employee may conceive or make
during Employee's employment with Employer, or within six months thereafter, and
which relate to the business of Employer.
(h) EQUITABLE RELIEF. In the event a violation of any of the
restrictions contained in this paragraph is established, Employer shall be
entitled to preliminary and permanent injunctive relief as well as damages and
an equitable accounting of all earnings, profits and other benefits arising from
such violation, which right shall be cumulative and in addition to any other
rights or remedies to which Employer may be entitled. In the event of a
violation of any provision of subparagraph (a), (d) or (e) of this paragraph,
the period for which those provisions would remain in effect shall be extended
for a period of time equal to that period beginning when such violation
commenced and ending when the activities constituting such violation shall have
been finally terminated in good faith.
4
<PAGE> 6
(i) RESTRICTIONS SEPARABLE. Each and every restriction set
forth in this paragraph is independent and severable from the others, and no
such restriction shall be rendered unenforceable by virtue of the fact that, for
any reason, any other or others of them may be unenforceable in whole or in
part.
6. MISCELLANEOUS.
(a) NOTICES. All notices, requests, demands and other
communications required or permitted under this Agreement shall be in writing
and shall be deemed to have been duly given, made and received when delivered
against receipt or when deposited in the United States mails, first class
postage prepaid, addressed as set forth below:
(i) If to Employer:
One East Camelback Road
Suite 1100
Phoenix, Arizona 85012
Attention: Sam Leopold
with a copy to:
O'Connor, Cavanagh, Anderson,
Killingsworth & Beshears, P.A.
One East Camelback Road
Suite 1100
Phoenix, Arizona 85012
Attention: Robert S. Kant, Esq.
(ii) If to Employee:
_______________________________
_______________________________
_______________________________
Attention: ____________________
with a copy to:
_______________________________
_______________________________
_______________________________
Attention: ____________________
Either party may alter the address to which communications or copies are to be
sent by giving notice of such change of address in conformity with the
provisions of this paragraph for the giving of notice.
5
<PAGE> 7
(b) INDULGENCES. Neither any failure nor any delay on the part
of either party to exercise any right, remedy, power or privilege under this
Agreement shall operate as a waiver thereof, nor shall any single or partial
exercise of any right, remedy, power or privilege preclude any other or further
exercise of the same or of any other right, remedy, power or privilege, nor
shall any waiver of any right, remedy, power or privilege with respect to any
occurrence be construed as a waiver of such right, remedy, power or privilege
with respect to any other occurrence.
(c) CONTROLLING LAW. This Agreement and all questions relating
to its validity, interpretation, performance and enforcement, shall be governed
by and construed in accordance with the laws of the State of Texas,
notwithstanding any Texas or other conflict-of-interest provisions to the
contrary.
(d) BINDING NATURE OF AGREEMENT. This Agreement shall be
binding upon and inure to the benefit of the parties hereto and their respective
heirs, personal representatives, successors and assigns except that no party may
assign or transfer such party's rights or obligations under this Agreement
without the prior written consent of the other party.
(e) EXECUTION IN COUNTERPART. This Agreement may be executed
in any number of counterparts, each of which shall be deemed to be an original
as against any party whose signature appears thereon, and all of which shall
together constitute one and the same instrument. This Agreement shall become
binding when one or more counterparts hereof, individually or taken together,
shall bear the signatures of the parties reflected hereon as the signatories.
(f) PROVISIONS SEPARABLE. The provisions of this Agreement are
independent of and separable from each other, and no provision shall be affected
or rendered invalid or unenforceable by virtue of the fact that for any reason
any other or others of them may be invalid or unenforceable in whole or in part.
(g) ENTIRE AGREEMENT. This Agreement contains the entire
understanding between the parties hereto with respect to the subject matter
hereof, and supersedes all prior and contemporaneous agreements and
understandings, inducements and conditions, express or implied, oral or written,
except as herein contained. The express terms hereof control and supersede any
course of performance and/or usage of the trade inconsistent with any of the
terms hereof. This Agreement may not be modified or amended other than by an
agreement in writing.
(h) PARAGRAPH HEADINGS. The paragraph headings in this
Agreement are for convenience only; they form no part of this Agreement and
shall not affect its interpretation.
(i) GENDER. Words used herein, regardless of the number and
gender specifically used, shall be deemed and construed to include any other
number, singular or plural, and any other gender, masculine, feminine or neuter,
as the context requires.
(j) NUMBER OF DAYS. In computing the number of days for
purposes of this Agreement, all days shall be counted, including Saturdays,
Sundays and holidays; provided, however, that if the final day of any time
period falls on a Saturday, Sunday or holiday, then the final day shall be
deemed to be the next day which is not a Saturday, Sunday or holiday.
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<PAGE> 8
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
EMPLOYER:
STYLING TECHNOLOGY CORPORATION
By: _________________________________
Name: _______________________________
Its: ________________________________
EMPLOYEE:
_____________________________________
Donald N. Black
7
<PAGE> 9
Robert S. Kant
602-263-2606
File No.: 31114-100
October 29, 1996
Styling Technology Corporation
One East Camelback Road
Suite 1100
Phoenix, Arizona 85012
RE: REGISTRATION STATEMENT ON FORM S-1
STYLING TECHNOLOGY CORPORATION
Ladies and Gentlemen:
As legal counsel to Styling Technology Corporation, a Delaware
corporation (the "Company"), we have assisted in the preparation of the
Company's Registration Statement on Form S-1, Registration No. 333-12469 (the
"Registration Statement"), filed with the Securities and Exchange Commission in
connection with the registration under the Securities Act of 1933, as amended,
of the shares of common stock of the Company covered by the Registration
Statement (the "Shares"). The facts, as we understand them, are set forth in the
Registration Statement.
With respect to the opinion set forth below, we have examined
originals, certified copies, or copies otherwise identified to our satisfaction
as being true copies, only of the following:
A. The Certificate of Incorporation of the Company, as amended
to date;
B. The Bylaws of the Company;
C. The Registration Statement; and
D. The Resolutions of the Board of Directors of the Company
relating to the organization of the Company and the approval of the filing of
the Registration Statement and the transactions in connection therewith.
<PAGE> 10
Styling Technology Corporation
October 29, 1996
Page 2
Subject to the assumptions that (i) the documents and
signatures examined by us are genuine and authentic and (ii) the persons
executing the documents examined by us have the legal capacity to execute such
documents, and subject to the further limitations and qualifications set forth
below, it is our opinion that, when (a) the Registration Statement as then
amended shall have been declared effective by the Commission, (b) the
Underwriting Agreement shall have been duly executed and delivered, and (c) the
Shares have been duly issued, executed, authenticated, delivered, paid for and
sold by the Company as described in the Registration Statement and in accordance
with the provisions of the Underwriting Agreement, the Shares will be validly
issued, fully paid and nonassessable.
Please be advised that we are members of the State Bar of
Arizona, and our opinion is limited to the legality of matters under the laws of
the State of Arizona. Further, our opinion is based solely upon existing laws,
rules and regulations, and we undertake no obligation to advise you of any
changes that may be brought to our attention after the date hereof.
We hereby expressly consent to any reference to our firm in
the Registration Statement, the inclusion of this Opinion as an exhibit to the
Registration Statement, and to the filing of this Opinion with any other
appropriate governmental agency.
Very truly yours,
O'Connor, Cavanagh, Anderson,
Killingsworth & Beshears, P.A.
<PAGE> 1
EXHIBIT 10.11
LEOPOLD STYLING PRODUCTS, INC.
1996 STOCK OPTION PLAN
ARTICLE I
GENERAL
1.1 PURPOSE OF PLAN; TERM
(a) ADOPTION. On September 19, 1996, the Board of Directors
(the "Board") of Leopold Styling Products, Inc., a Delaware corporation (the
"Company"), adopted a stock option plan to be known as the 1996 Stock Option
Plan (the "Plan").
(b) DEFINED TERMS. All initially capitalized terms used hereby
shall have the meaning set forth in Article V hereto.
(c) GENERAL PURPOSE. The Plan shall be divided into two
programs: the Discretionary Grant Program and the Automatic Grant Program.
(i) DISCRETIONARY GRANT PROGRAM. The purpose of the
Discretionary Grant Program is to further the interests of the Company and its
stockholders by encouraging key persons associated with the Company (or Parent
or Subsidiary Corporations) to acquire shares of the Company's Stock, thereby
acquiring a proprietary interest in its business and an increased personal
interest in its continued success and progress. Such purpose shall be
accomplished by providing for the discretionary granting of options to acquire
the Company's Stock ("Discretionary Options"), the direct granting of the
Company's Stock ("Stock Awards"), the granting of stock appreciation rights
("SARs"), or the granting of other cash awards ("Cash Awards") (Stock Awards,
SARs and Cash Awards shall be collectively referred to herein as "Awards").
(ii) AUTOMATIC GRANT PROGRAM. The purpose of the
Automatic Grant Program is to promote the interests of the Company by providing
non-employee members of the Company's Board of Directors (the "Board") the
opportunity to acquire a proprietary interest, or otherwise increase their
proprietary interest, in the Company and to thereby have an increased personal
interest in its continued success and progress. Such purpose shall be
accomplished by providing for the automatic grant of options to acquire the
Company's Stock ("Automatic Options").
(d) CHARACTER OF OPTIONS. Discretionary Options granted under
this Plan to employees of the Company (or Parent or Subsidiary Corporations)
that are intended to qualify as "incentive stock options" as defined in Code
section 422 ("Incentive Stock Options") will be specified in the applicable
stock option agreement. All other Options granted under this Plan will be
nonqualified options.
(e) RULE 16B-3 PLAN. If the Company becomes subject to the
reporting requirements of the Securities Exchange Act of 1934, as amended (the
"1934 Act"), the Plan is thereafter intended to comply with all applicable
conditions of Rule 16b-3 (and all subsequent revisions thereof) promulgated
under the 1934 Act. To the extent any provision of the Plan or action by a Plan
Administrator fails to so comply, it shall be deemed null and void, to the
extent permitted by law and deemed advisable by such Plan Administrator. In
addition, the Board may amend the Plan from time to time as it deems necessary
<PAGE> 2
in order to meet the requirements of any amendments to Rule 16b-3 without the
consent of the stockholders of the Company.
(f) DURATION OF PLAN. The term of the Plan is 10 years
commencing on the date of adoption of the Plan by the Board as specified in
Section 1.1(a) hereof. No Option or Award shall be granted under the Plan unless
granted within 10 years of the adoption of the Plan by the Board, but Options or
Awards outstanding on that date shall not be terminated or otherwise affected by
virtue of the Plan's expiration.
1.2 STOCK AND MAXIMUM NUMBER OF SHARES SUBJECT TO PLAN.
(a) DESCRIPTION OF STOCK AND MAXIMUM SHARES ALLOCATED. The
shares of stock subject to the provisions of the Plan and issuable upon the
grant of Stock Awards or upon the exercise of SARs or Options granted under the
Plan are shares of the Company's common stock, $.0001 par value per share (the
"Stock"), which may be either unissued or treasury shares, as the Board may from
time to time determine. The Company may not issue more than 400,000 shares of
Stock pursuant to the Plan, unless the Plan is amended as provided in Section
1.3 or the maximum number of shares subject to the Plan is adjusted as provided
in Section 4.1.
(b) CALCULATION OF AVAILABLE SHARES. The number of shares of
Stock available under the Plan shall be reduced: (i) by any shares of Stock
issued (including any shares of Stock withheld for tax withholding requirements)
upon exercise of an Option and (ii) by any shares of Stock issued (including any
shares of Stock withheld for tax withholding requirements) upon the grant of a
Stock Award or the exercise of a SAR.
(c) RESTORATION OF UNPURCHASED SHARES. If an Option or SAR
expires or terminates for any reason prior to its exercise in full and before
the term of the Plan expires, the shares of Stock subject to, but not issued
under, such Option or SAR shall, without further action or by or on behalf of
the Company, again be available under the Plan.
1.3 APPROVAL; AMENDMENTS.
(a) APPROVAL BY STOCKHOLDERS. The Plan shall be submitted to
the stockholders of the Company for their approval at a regular or special
meeting to be held within 12 months after the adoption of the Plan by the Board.
Stockholder approval shall be evidenced by the affirmative vote of the holders
of a majority of the shares of the Company's Common Stock present in person or
by proxy and voting at the meeting. The date such stockholder approval has been
obtained shall be referred to herein as the "Effective Date."
(b) COMMENCEMENT OF PROGRAMS. The Automatic Grant Program will
not be effective until the later of the Effective Date or the Registration Date.
The "Registration Date" will be the first date that any equity security of the
Company becomes registered under Section 12 of the 1934 Act. The Discretionary
Grant Program is effective immediately, but if the Plan is not approved by the
stockholders within 12 months after its adoption by the Board, the Plan and all
Discretionary Options and Awards made under the Discretionary Grant Program will
automatically terminate and be forfeited to the same extent and with the same
effect as though the Plan had never been adopted.
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<PAGE> 3
(c) AMENDMENTS TO PLAN. The Board may, without action on the
part of the Company's stockholders, make such amendments to, changes in and
additions to the Plan as it may, from time to time, deem necessary or
appropriate and in the best interests of the Company; provided, the Board may
not, without the consent of the applicable Optionholder, take any action which
disqualifies any Discretionary Option previously granted under the Plan for
treatment as an Incentive Stock Option or which adversely affects or impairs the
rights of the Optionholder of any Discretionary Option outstanding under the
Plan, and further provided that, except as provided in Article IV hereof, the
Board may not, without the approval of the Company's stockholders, (i) increase
the aggregate number of shares of Stock subject to the Plan, (ii) reduce the
exercise price at which Discretionary Options may be granted or the exercise
price at which any outstanding Discretionary Option may be exercised, (iii)
extend the term of the Plan, (iv) change the class of persons eligible to
receive Discretionary Options or Awards under the Plan, or (v) materially
increase the benefits accruing to participants under the Plan. Notwithstanding
the foregoing, Discretionary Options or Awards may be granted under this Plan to
purchase shares of Stock in excess of the number of shares then available for
issuance under the Plan if (A) an amendment to increase the maximum number of
shares issuable under the Plan is adopted by the Board prior to the initial
grant of any such Option or Award and within one year thereafter such amendment
is approved by the Company's stockholders and (B) each such Discretionary Option
or Award granted does not become exercisable or vested, in whole or in part, at
any time prior to the obtaining of such stockholder approval.
ARTICLE II
DISCRETIONARY GRANT PROGRAM
2.1 PARTICIPANTS; ADMINISTRATION.
(a) ELIGIBILITY AND PARTICIPATION. Discretionary Options and
Awards may be granted only to persons ("Eligible Persons") who at the time of
grant are (i) key personnel (including officers and directors) of the Company or
Parent or Subsidiary Corporations, or (ii) consultants or independent
contractors who provide valuable services to the Company or Parent or Subsidiary
Corporations; provided that (1) Incentive Stock Options may only be granted to
key personnel of the Company (and its Parent or Subsidiary Corporations) who are
also employees of the Company (or its Parent or Subsidiary Corporations); and
(2) the maximum number of shares of stock with respect to which Options or SARs
may be granted to any employee during the term of the Plan shall not exceed 50
percent of the shares of stock covered by the Plan. A Plan Administrator shall
have full authority to determine which Eligible Persons in its administered
group are to receive Discretionary Option grants under the Plan, the number of
shares to be covered by each such grant, whether or not the granted
Discretionary Option is to be an Incentive Stock Option, the time or times at
which each such Discretionary Option is to become exercisable, and the maximum
term for which the Discretionary Option is to be outstanding. A Plan
Administrator shall also have full authority to determine which Eligible Persons
in such group are to receive Awards under the Discretionary Grant Program and
the conditions relating to such Award.
(b) GENERAL ADMINISTRATION. The Eligible Persons under the
Discretionary Grant Program shall be divided into two groups and there shall be
a separate administrator for each group. One group will be comprised of Eligible
Persons that are Affiliates. For purposes of this Plan, the term "Affiliates"
shall mean all "officers" (as that term is defined in Rule 16a-1(f) promulgated
under the 1934 Act) and directors of the Company and all persons who own ten
percent or more of the Company's issued and outstanding equity securities.
Initially, the power to administer the Discretionary Grant Program with
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<PAGE> 4
respect to Eligible Persons that are Affiliates shall be vested with the Board.
At any time, however, the Board may vest the power to administer the
Discretionary Grant Program with respect to Persons that are Affiliates
exclusively with a committee (the "Senior Committee") comprised of two or more
Non-Employee Directors which are appointed by the Board. The Senior Committee,
in its sole discretion, may require approval of the Board for specific grants of
Discretionary Options or Awards under the Discretionary Grant Program. The
administration of all Eligible Persons that are not Affiliates
("Non-Affiliates") shall be vested exclusively with the Board. The Board,
however, may at any time appoint a committee (the "Employee Committee") of two
or more persons who are members of the Board and delegate to such Employee
Committee the power to administer the Discretionary Grant Program with respect
to the Non-Affiliates. In addition, the Board may establish an additional
committee or committees of persons who are members of the Board and delegate to
such other committee or committees the power to administer all or a portion of
the Discretionary Grant program with respect to all or a portion of the Eligible
Persons. Members of the Senior Committee, Employee Committee or any other
committee allowed hereunder shall serve for such period of time as the Board may
determine and shall be subject to removal by the Board at any time. The Board
may at any time terminate all or a portion of the functions of the Senior
Committee, the Employee Committee, or any other committee allowed hereunder and
reassume all or a portion of powers and authority previously delegated to such
committee. The Board in its discretion may also require the members of the
Senior Committee, the Employee Committee or any other committee allowed
hereunder to be "outside directors" as that term is defined in any applicable
regulations promulgated under Code section 162(m).
(c) PLAN ADMINISTRATORS. The Board, the Employee Committee,
Senior Committee, and/or any other committee allowed hereunder, whichever is
applicable, shall be each referred to herein as a "Plan Administrator." Each
Plan Administrator shall have the authority and discretion, with respect to its
administered group, to select which Eligible Persons shall participate in the
Discretionary Grant Program, to grant Discretionary Options or Awards under the
Discretionary Grant Program, to establish such rules and regulations as they may
deem appropriate with respect to the proper administration of the Discretionary
Grant Program and to make such determinations under, and issue such
interpretations of, the Discretionary Grant Program and any outstanding
Discretionary Option or Award as they may deem necessary or advisable. Unless
otherwise required by law or specified by the Board with respect to any
committee, decisions among the members of a Plan Administrator shall be by
majority vote. Decisions of a Plan Administrator shall be final and binding on
all parties who have an interest in the Discretionary Grant Program or any
outstanding Discretionary Option or Award.
(d) GUIDELINES FOR PARTICIPATION. In designating and selecting
Eligible Persons for participation in the Discretionary Grant Program, a Plan
Administrator shall consult with and give consideration to the recommendations
and criticisms submitted by appropriate managerial and executive officers of the
Company. A Plan Administrator also shall take into account the duties and
responsibilities of the Eligible Persons, their past, present and potential
contributions to the success of the Company and such other factors as a Plan
Administrator shall deem relevant in connection with accomplishing the purpose
of the Plan.
2.2 TERMS AND CONDITIONS OF DISCRETIONARY OPTIONS
(a) ALLOTMENT OF SHARES. A Plan Administrator shall determine
the number of shares of Stock to be optioned from time to time and the number of
shares to be optioned to any Eligible Person (the "Optioned Shares"). The grant
of a Discretionary Option to a person shall neither entitle such person
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<PAGE> 5
to, nor disqualify such person from, participation in any other grant of Options
or Stock Awards under this Plan or any other stock option plan of the Company.
(b) EXERCISE PRICE. Upon the grant of any Discretionary
Option, a Plan Administrator shall specify the option price per share. If the
Discretionary Option is intended to qualify as an Incentive Stock Option under
the Code, the option price per share may not be less than 100 percent of the
fair market value per share of the stock on the date the Discretionary Option is
granted (110 percent if the Discretionary Option is granted to a stockholder who
at the time the Discretionary Option is granted owns or is deemed to own stock
possessing more than 10 percent of the total combined voting power of all
classes of stock of the Company or of any Parent or Subsidiary Corporation). The
determination of the fair market value of the Stock shall be made in accordance
with the valuation provisions of Section 4.5 hereof.
(c) INDIVIDUAL STOCK OPTION AGREEMENTS. Discretionary Options
granted under the Plan shall be evidenced by option agreements in such form and
content as a Plan Administrator from time to time approves, which agreements
shall substantially comply with and be subject to the terms of the Plan,
including the terms and conditions of this Section 2.2. As determined by a Plan
Administrator, each option agreement shall state (i) the total number of shares
to which it pertains, (ii) the exercise price for the shares covered by the
Option, (iii) the time at which the Options vest and become exercisable and (iv)
the Option's scheduled expiration date. The option agreements may contain such
other provisions or conditions as a Plan Administrator deems necessary or
appropriate to effectuate the sense and purpose of the Plan, including covenants
by the Optionholder not to compete and remedies for the Company in the event of
the breach of any such covenant.
(d) OPTION PERIOD. No Discretionary Option granted under the
Plan that is intended to be an Incentive Stock Option shall be exercisable for a
period in excess of 10 years from the date of its grant (five years if the
Discretionary Option is granted to a stockholder who at the time the
Discretionary Option is granted owns or is deemed to own stock possessing more
than 10 percent of the total combined voting power of all classes of stock of
the Company or of any Parent or any Subsidiary Corporation), subject to earlier
termination in the event of termination of employment, retirement or death of
the Optionholder. A Discretionary Option may be exercised in full or in part at
any time or from time to time during the term of the Discretionary Option or
provide for its exercise in stated installments at stated times during the
Option's term.
(e) VESTING; LIMITATIONS. The time at which Optioned Shares
vest with respect to an Optionholder shall be in the discretion of that
Optionholder's Plan Administrator. Notwithstanding the foregoing, to the extent
a Discretionary Option is intended to qualify as an Incentive Stock Option, the
aggregate fair market value (determined as of the respective date or dates of
grant) of the Stock for which one or more Options granted to any person under
this Plan (or any other option plan of the Company or its Parent or Subsidiary
Corporations) may for the first time become exercisable as Incentive Stock
Options during any one calendar year shall not exceed the sum of $100,000
(referred to herein as the "$100,000 Limitation"). To the extent that any person
holds two or more Options which become exercisable for the first time in the
same calendar year, the foregoing limitation on the exercisability as an
Incentive Stock Option shall be applied on the basis of the order in which such
Options are granted.
(f) NO FRACTIONAL SHARES. Options shall be exercisable only
for whole shares; no fractional shares will be issuable upon exercise of any
Discretionary Option granted under the Plan.
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<PAGE> 6
(g) METHOD OF EXERCISE. To exercise a Discretionary Option, an
Optionholder (or in the case of an exercise after an Optionholder's death, such
Optionholder's executor, administrator, heir or legatee, as the case may be)
must take the following action:
(i) execute and deliver to the Company a written
notice of exercise signed in writing by the person exercising the Discretionary
Option specifying the number of shares of Stock with respect to which the
Discretionary Option is being exercised;
(ii) pay the aggregate Option Price in one of the
alternate forms as set forth in Section 2.2(h) below; and
(iii) furnish appropriate documentation that the
person or persons exercising the Discretionary Option (if other than the
Optionholder) has the right to exercise such Option.
As soon as practicable after the Exercise Date, the Company will mail or deliver
to or on behalf of the Optionholder (or any other person or persons exercising
this Discretionary Option under the Plan) a certificate or certificates
representing the Stock acquired upon exercise of the Discretionary Option. In no
event may any Discretionary Option be exercised for any fractional shares.
(h) PAYMENT OF OPTION PRICE. The aggregate Option Price shall
be payable in one of the alternative forms specified below:
(i) Full payment in cash or check made payable to the
Company's order; or
(ii) Full payment in shares of Stock held for the
requisite period necessary to avoid a charge to the Company's reported earnings
and valued at fair market value on the Exercise Date (as determined in
accordance with Section 4.5 hereof); or
(iii) If a cashless exercise program has been
implemented by the Board, full payment through a sale and remittance procedure
pursuant to which the Optionholder (A) shall provide irrevocable written
instructions to a designated brokerage firm to effect the immediate sale of the
Optioned Shares to be purchased and remit to the Company, out of the sale
proceeds available on the settlement date, sufficient funds to cover the
aggregate exercise price payable for the Optioned Shares to be purchased and (B)
shall concurrently provide written directives to the Company to deliver the
certificates for the Optioned Shares to be purchased directly to such brokerage
firm in order to complete the sale transaction.
(i) REPURCHASE RIGHT. The Plan Administrator may, in its sole
discretion, set forth other terms and conditions upon which the Company (or its
assigns) shall have the right to repurchase shares of Stock acquired by an
Optionholder pursuant to a Discretionary Option. Any repurchase right of the
Company shall be exercisable by the Company (or its assignees) upon such terms
and conditions as the Plan Administrator may specify in the Stock Repurchase
Agreement evidencing such right. The Plan Administrator may also in its
discretion establish as a term and condition of one or more Discretionary
Options granted under the Plan that the Company shall have a right of first
refusal with respect to any proposed sale or other disposition by the
Optionholder of any shares of Stock issued upon the exercise of such
Discretionary Options. Any such right of first refusal shall be exercisable by
the
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<PAGE> 7
Company (or its assigns) in accordance with the terms and conditions set forth
in the Stock Repurchase Agreement.
(j) TERMINATION OF INCENTIVE STOCK OPTIONS.
(i) TERMINATION OF SERVICE. If any Optionholder
ceases to be in Service to the Company for a reason other than death, then such
Optionholder must, within 90 days after the date of termination of such Service,
but in no event after the Incentive Stock Option's stated expiration date,
exercise some or all of the Incentive Stock Options that the Optionholder was
entitled to exercise on the date the Optionholder's Service terminated;
provided, that if the Optionholder is discharged for Cause or commits acts
detrimental to the Company's interests after the Service of the Optionholder has
been terminated, then the Incentive Stock Option will thereafter be void for all
purposes. "Cause" shall mean a termination of Service based upon a finding by
the applicable Plan Administrator that the Optionholder: (i) has committed a
felony involving dishonesty, fraud, theft or embezzlement; (ii) after written
notice from the Company has repeatedly failed or refused, in a material respect,
to follow reasonable policies or directives established by the Company; (iii)
after written notice from the Company, has willfully and persistently failed to
attend to material duties or obligations; (iv) has performed an act or failed to
act, which, if he were prosecuted and convicted, would constitute a theft of
money or property of the Company; or (v) has misrepresented or concealed a
material fact for purposes of securing employment with the Company. If any
Optionholder ceases to be in Service to the Company by reason of permanent
disability within the meaning of section 22(e)(3) of the Code (as determined by
the applicable Plan Administrator), the Optionholder will have 12 months after
the date of termination of Service, but in no event after the stated expiration
date of the Optionholder's Incentive Stock Options, to exercise Incentive Stock
Options that the Optionholder was entitled to exercise on the date the
Optionholder's Service terminated as a result of the disability.
(ii) DEATH OF OPTIONHOLDER. If an Optionholder dies
while in the Company's Service, the Optionholder's vested Incentive Stock
Options on the date of death will be exercisable within three months after such
date or until the stated expiration date of the Optionholder's Incentive Stock
Option, whichever occurs first, by the person or persons ("successors") to whom
the Optionholder's rights pass under a will or by the laws of descent and
distribution. As soon as practicable after receipt by the Company of the notice
of exercise and of payment in full of the Option Price as specified in Sections
2.2(g) and (h) hereof, a certificate or certificates representing the Optioned
Shares shall be registered in the name or names specified by the successors in
the written notice of exercise and shall be delivered to the successors.
(k) TERMINATION OF NONQUALIFIED OPTIONS. Any Options which are
not Incentive Stock Options and which are outstanding at the time an
Optionholder dies while in Service to the Company or otherwise ceases to be in
Service to the Company shall remain exercisable for such period of time
thereafter as determined by the Plan Administrator at the time of grant and set
forth in the documents evidencing such Options; provided, however, that no
Option shall be exercisable after the Option's stated expiration date, and
provided further, that if the Optionholder is discharged for Cause (as defined
in Section 2.2(j)(i) hereof), then the Option will thereafter be void for all
purposes.
(l) OTHER PLAN PROVISIONS STILL APPLICABLE. If a Discretionary
Option is exercised upon the termination of Service or death of an Optionholder
under this Section 2.2, the other provisions
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<PAGE> 8
of the Plan shall still be applicable to such exercise, including the
requirement that the Optionholder or its successor may be required to enter into
a Stock Repurchase Agreement.
(m) DEFINITION OF "SERVICE". For purposes of this Plan, unless
it is evidenced otherwise in the option agreement with the Optionholder, the
Optionholder shall be deemed to be in "Service" to the Company so long as such
individual renders continuous services on a periodic basis to the Company (or to
its Parent or Subsidiary Corporations) in the capacity of an employee, director,
or an independent consultant or advisor. In the discretion of the applicable
Plan Administrator, an Optionholder shall be considered to be rendering
continuous services to the Company even if the type of services change, e.g.,
from employee to independent consultant. The Optionholder will be considered to
be an employee for so long as such individual remains in the employ of the
Company or one or more of its Parent or Subsidiary Corporations.
2.3 TERMS AND CONDITIONS OF STOCK AWARDS
(a) ELIGIBILITY. All Eligible Persons shall be eligible to
receive Stock Awards. The Plan Administrator of each administered group shall
determine the number of shares of Stock to be awarded from time to time to any
Eligible Person in such group. Except as provided otherwise in this Plan, the
grant of a Stock Award to a person (a "Grantee") shall neither entitle such
person to, nor disqualify such person from participation in, any other grant of
options or awards by the Company, whether under this Plan or under any other
stock option or award plan of the Company.
(b) AWARD FOR SERVICES RENDERED. Stock Awards shall be granted
in recognition of an Eligible Person's services to the Company. The grantee of
any such Stock Award shall not be required to pay any consideration to the
Company upon receipt of such Stock Award, except as may be required to satisfy
any applicable Delaware corporate law, employment tax and/or income tax
withholding requirements.
(c) CONDITIONS TO AWARD. All Stock Awards shall be subject to
such terms, conditions, restrictions, or limitations as the applicable Plan
Administrator deems appropriate, including, by way of illustration but not by
way of limitation, restrictions on transferability, requirements of continued
employment, individual performance or the financial performance of the Company,
or payment by the recipient of any applicable employment or withholding taxes.
Such Plan Administrator may modify or accelerate the termination of the
restrictions applicable to any Stock Award under the circumstances as it deems
appropriate.
(d) AWARD AGREEMENTS. A Plan Administrator may require as a
condition to a Stock Award that the recipient of such Stock Award enter into an
award agreement in such form and content as that Plan Administrator from time to
time approves.
2.4 TERMS AND CONDITIONS OF SARS
(a) ELIGIBILITY. All Eligible Persons shall be eligible to
receive SARs. The Plan Administrator of each administered group shall determine
the SARs to be awarded from time to time to any Eligible Person in such group.
The grant of a SAR to a person shall neither entitle such person to, nor
disqualify such person from participation in, any other grant of options or
awards by the Company, whether under this Plan or under any other stock option
or award plan of the Company.
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(b) AWARD OF SARS. Concurrently with or subsequent to the
grant of any Discretionary Option to purchase one or more shares of Stock, the
Plan Administrator may award to the Optionholder with respect to each share of
Stock underlying the Option, a related SAR permitting the Optionholder to be
paid the appreciation on the Stock underlying the Discretionary Option in lieu
of exercising the Option. In addition, a Plan Administrator may award to any
Eligible Person a SAR permitting the Eligible Person to be paid the appreciation
on a designated number of shares of the Stock, whether or not such Shares are
actually issued.
(c) CONDITIONS TO SAR. All SARs shall be subject to such
terms, conditions, restrictions or limitations as the applicable Plan
Administrator deems appropriate, including, by way of illustration but not by
way of limitation, restrictions on transferability, requirements of continued
employment, individual performance, financial performance of the Company, or
payment by the recipient of any applicable employment or withholding taxes. Such
Plan Administrator may modify or accelerate the termination of the restrictions
applicable to any SAR under the circumstances as it deems appropriate.
(d) SAR AGREEMENTS. A Plan Administrator may require as a
condition to the grant of a SAR that the recipient of such SAR enter into a SAR
agreement in such form and content as that Plan Administrator from time to time
approves.
(e) EXERCISE. An Eligible Person who has been granted a SAR
may exercise such SAR subject to the conditions specified by the Plan
Administrator in the SAR agreement.
(f) AMOUNT OF PAYMENT. The amount of payment to which the
grantee of a SAR shall be entitled upon the exercise of each SAR shall be equal
to the amount, if any, by which the fair market value of the specified shares of
Stock on the exercise date exceeds the fair market value of the specified shares
of Stock on the date the Discretionary Option related to the SAR was granted or
became effective, or, if the SAR is not related to any Option, on the date the
SAR was granted or became effective.
(g) FORM OF PAYMENT. The SAR may be paid in either cash or
Stock, as determined in the discretion of the applicable Plan Administrator and
set forth in the SAR agreement. If the payment is in Stock, the number of shares
to be paid to the participant shall be determined by dividing the amount of the
payment determined pursuant to Section 2.4(f) by the fair market value of a
share of Stock on the exercise date of such SAR. As soon as practical after
exercise, the Company shall deliver to the SAR grantee a certificate or
certificates for such shares of Stock.
(h) TERMINATION OF EMPLOYMENT; DEATH. Section 2.2(j),
applicable to Incentive Stock Options, and Section 2.2(k), applicable to
nonqualified options, shall apply to SARs.
2.5 OTHER CASH AWARDS
(a) IN GENERAL. The Plan Administrator of each administered
group shall have the discretion to make other awards of cash to Eligible Persons
in such group ("Cash Awards"). Such Cash Awards may relate to existing Options
or to the appreciation in the value of the Stock or other Company securities.
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(b) CONDITIONS TO AWARD. All Cash Awards shall be subject to
such terms, conditions, restrictions or limitations as the applicable Plan
Administrator deems appropriate, and such Plan Administrator may require as a
condition to such Cash Award that the recipient of such Cash Award enter into an
award agreement in such form and content as the Plan Administrator from time to
time approves.
ARTICLE III
AUTOMATIC GRANT PROGRAM
3.1 ELIGIBLE DIRECTORS UNDER THE AUTOMATIC GRANT PROGRAM. The Automatic
Grant Program shall commence as of the date set forth in Section 1.3(b) hereof.
The persons eligible to participate in the Automatic Grant Program shall be
limited to Board members who are not employed by the Company, whether or not
such persons qualify as Non-Employee Directors as defined herein ("Eligible
Directors"). Persons who are eligible under the Automatic Grant Program may also
be eligible to receive Discretionary Options or Awards under the Discretionary
Grant Program or option grants or direct stock issuances under other plans of
the Company.
3.2 TERMS AND CONDITIONS OF AUTOMATIC OPTION GRANTS.
(a) AMOUNT AND DATE OF GRANT. During the term of this Plan,
grants of Automatic Options shall be made to each Eligible Director
("Optionholder") as follows:
(i) ANNUAL GRANTS. Each year on the Annual Grant Date
an Automatic Option to acquire 2,500 shares of Stock shall be granted to each
Eligible Director for so long as there are shares of Stock available under
Section 1.2 hereof. The "Annual Grant Date" shall be the date of the Company's
annual stockholders meeting commencing as of the next annual meeting occurring
after the Effective Date. Notwithstanding the foregoing, (i) any Eligible
Director whose term ended on the Annual Grant Date and who was not re-elected on
that date shall not be eligible to receive any Automatic Options on that Annual
Grant Date, and (ii) any Eligible Director that was granted an Automatic Option
under Section 3.2(a)(ii) hereof within 90 days of an Annual Grant Date shall be
ineligible to receive an Automatic Option Grant pursuant to this Section
3.2(a)(i) on such Annual Grant Date.
(ii) INITIAL NEW DIRECTOR GRANTS. On the Initial
Grant Date, every new member of the Board who is an Eligible Director and has
not previously received an Automatic Option grant under this Section 3.2(a)(ii)
shall be granted an Automatic Option to acquire 5,000 shares of Stock as long as
there are shares of Stock available under Section 1.2 hereof. The "Initial Grant
Date" shall be the date that an Eligible Director is first appointed or elected
to the Board. Any Eligible Director that was granted an Automatic Option on the
Effective Date pursuant to Section 3.2(a)(iii) shall be ineligible to receive an
Automatic Option grant pursuant to this Section 3.2(a)(ii).
(iii) INITIAL EXISTING DIRECTOR GRANTS. On the
commencement date of the Automatic Grant Program, each Eligible Director shall
be granted an Automatic Option to acquire 5,000 shares of Stock.
(b) EXERCISE PRICE. The exercise price per share of Stock (the
"Optioned Shares") subject to each Automatic Option grant shall be equal to 100
percent of the fair market value per share
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of the Stock on the date the Automatic Option was granted as determined in
accordance with the valuation provisions of Section 4.5 hereof (the "Option
Price").
(c) VESTING. Each Automatic Option grant shall become
exercisable and vest on the first anniversary of the date of such grant. Each
Automatic Option shall only vest and become exercisable if the Optionholder has
not ceased serving as a Board member as of such anniversary date.
(d) METHOD OF EXERCISE. In order to exercise an Automatic
Option with respect to any vested Optioned Shares, an Optionholder (or in the
case of an exercise after an Optionholder's death, such Optionholder's executor,
administrator, heir or legatee, as the case may be) must take the following
action:
(i) execute and deliver to the Company a written
notice of exercise signed in writing by the person exercising the Automatic
Option specifying the number of shares of Stock with respect to which the
Automatic Option is being exercised;
(ii) pay the aggregate Option Price in one of the
alternate forms as set forth in Section 3.2(e) below; and
(iii) furnish appropriate documentation that the
person or persons exercising the Automatic Option (if other than the
Optionholder) has the right to exercise such Option.
As soon as practicable after the Exercise Date, the Company shall mail or
deliver to or on behalf of the Optionholder (or any other person or persons
exercising the Automatic Option in accordance herewith) a certificate or
certificates representing the Stock for which the Automatic Option has been
exercised in accordance with the provisions of this Plan. In no event may any
Automatic Option be exercised for any fractional shares.
(e) PAYMENT OF OPTION PRICE. The aggregate Option Price shall
be payable in one of the alternative forms specified below:
(i) full payment in cash or check made payable to the
Company's order; or
(ii) full payment in shares of Stock held for the
requisite period necessary to avoid a charge to the Company's reported earnings
and valued at fair market value on the Exercise Date (as determined in
accordance with Section 4.5 hereof); or
(iii) if a cashless exercise program has been
implemented by the Board, full payment through a sale and remittance procedure
pursuant to which the Optionholder (A) shall provide irrevocable written
instructions to a designated brokerage firm to effect the immediate sale of the
Optioned Shares to be purchased and remit to the Company, out of the sale
proceeds available on the settlement date, sufficient funds to cover the
aggregate exercise price payable for the Optioned Shares to be purchased and (B)
shall concurrently provide written directives to the Company to deliver the
certificates for the Optioned Shares to be purchased directly to such brokerage
firm in order to complete the sale transaction.
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(f) TERM OF OPTION. Each Automatic Option shall expire on the
tenth anniversary of the date on which an Automatic Option grant was made
("Expiration Date"). Except as provided in Article IV hereof, should an
Optionholder's service as a Board member cease prior to the Expiration Date for
any reason while an Automatic Option remains outstanding and unexercised, then
the Automatic Option term shall immediately end and the Automatic Option shall
cease to be outstanding in accordance with the following provisions:
(i) The Automatic Option shall immediately terminate
and cease to be outstanding for any Optioned Shares of Stock which were not
vested at the time of the Optionholder's cessation of Board service.
(ii) Should an Optionholder cease, for any reason
other than death, to serve as a member of the Board, then the Optionholder shall
have 90 days measured from the date of such cessation of Board service in which
to exercise the Automatic Options which vested prior to the time of such
cessation of Board service. In no event, however, may any Automatic Option be
exercised after the Expiration Date of such Automatic Option.
(iii) Should an Optionholder die while serving as a
Board member or within 90 days after cessation of Board service, then the
personal representative of the Optionholder's estate (or the person or persons
to whom the Automatic Option is transferred pursuant to the Optionholder's will
or in accordance with the laws of descent and distribution) shall have a 90 day
period measured from the date of the Optionholder's cessation of Board service
in which to exercise the Automatic Options which vested prior to the time of
such cessation of Board service. In no event, however, may any Automatic Option
be exercised after the Expiration Date of such Automatic Option.
ARTICLE IV
MISCELLANEOUS
4.1 CAPITAL ADJUSTMENTS. The aggregate number of shares of Stock
subject to the Plan, the number of shares of Stock covered by outstanding
Options and Awards and the price per share stated in such Options and Awards,
and the number of Automatic Options to be granted pursuant to the Automatic
Grant Program shall be proportionately adjusted for any increase or decrease in
the number of outstanding shares of Stock of the Company resulting from a
subdivision or consolidation of shares or any other capital adjustment or the
payment of a stock dividend or any other increase or decrease in the number of
such shares effected without the Company's receipt of consideration therefor in
money, services or property.
4.2 MERGERS, ETC. If the Company is the surviving corporation in any
merger or consolidation (not including a Corporate Transaction), any Option or
Award granted under the Plan shall pertain to and apply to the securities to
which a holder of the number of shares of Stock subject to the Option or Award
would have been entitled prior to the merger or consolidation. Except as
provided in Section 4.3 hereof, a dissolution or liquidation of the Company
shall cause every Option or Award outstanding hereunder to terminate.
4.3 CORPORATE TRANSACTION. In the event of stockholder approval of a
Corporate Transaction, (a) all unvested Automatic Options shall automatically
accelerate and immediately vest so that each outstanding Automatic Option shall,
one week prior to the specified effective date for the
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Corporate Transaction, become fully exercisable for all of the Optioned Shares
and (b) the Plan Administrator shall have the discretion and authority,
exercisable at any time, to provide for the automatic acceleration of one or
more of the outstanding Discretionary Options or Awards granted by it under the
Plan. Upon the consummation of the Corporate Transaction, all Options shall, to
the extent not previously exercised, terminate and cease to be outstanding.
4.4 CHANGE IN CONTROL.
(a) AUTOMATIC GRANT PROGRAM. In the event of a Change in
Control, all unvested Automatic Options shall automatically accelerate and
immediately vest so that each outstanding Automatic Option shall, immediately
prior to the effective date of such Change in Control, become fully exercisable
for all of the Optioned Shares. Thereafter, each Automatic Option shall remain
exercisable until the Expiration Date of such Automatic Option.
(b) DISCRETIONARY GRANT PROGRAM. In the event of a Change in
Control, a Plan Administrator shall have the discretion and authority,
exercisable at any time, whether before or after the Change in Control, to
provide for the automatic acceleration of one or more outstanding Discretionary
Options or Awards granted by it under the Plan upon the occurrence of such
Change in Control. A Plan Administrator may also impose limitations upon the
automatic acceleration of such Options or Awards to the extent it deems
appropriate. Any Options or Awards accelerated upon a Change in Control will
remain fully exercisable until the expiration or sooner termination of the
Option term.
(c) INCENTIVE STOCK OPTION LIMITS. The exercisability of any
Discretionary Options which are intended to qualify as Incentive Stock Options
and which are accelerated by the Plan Administrator in connection with a pending
Corporation Transaction or Change in Control shall, except as otherwise provided
in the discretion of the Plan Administrator and the Optionholder, remain subject
to the $100,000 Limitation and vest as quickly as possible without violating the
$100,000 Limitation.
4.5 CALCULATION OF FAIR MARKET VALUE OF STOCK. The fair market value of
a share of Stock on any relevant date shall be determined in accordance with the
following provisions:
(a) If the Stock is not at the time listed or admitted to
trading on any stock exchange but is traded in the over-the-counter market, the
fair market value shall be the mean between the highest bid and lowest asked
prices (or, if such information is available, the closing selling price) per
share of Stock on the date in question in the over-the-counter market, as such
prices are reported by the National Association of Securities Dealers through
its Nasdaq system or any successor system. If there are no reported bid and
asked prices (or closing selling price) for the Stock on the date in question,
then the mean between the highest bid price and lowest asked price (or the
closing selling price) on the last preceding date for which such quotations
exist shall be determinative of fair market value.
(b) If the Stock is at the time listed or admitted to trading
on any stock exchange, then the fair market value shall be the closing selling
price per share of Stock on the date in question on the stock exchange
determined by the Board to be the primary market for the Stock, as such price is
officially quoted in the composite tape of transactions on such exchange. If
there is no reported sale of Stock on such exchange on the date in question,
then the fair market value shall be the closing selling price on the exchange on
the last preceding date for which such quotation exists.
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(c) If the Stock at the time is neither listed nor admitted to
trading on any stock exchange nor traded in the over-the-counter market, then
the fair market value shall be determined by the Board after taking into account
such factors as the Board shall deem appropriate, including one or more
independent professional appraisals.
4.6 USE OF PROCEEDS. The proceeds received by the Company from the sale
of Stock pursuant to the exercise of Options or Awards hereunder, if any, shall
be used for general corporate purposes.
4.7 CANCELLATION OF OPTIONS. Each Plan Administrator shall have the
authority to effect, at any time and from time to time, with the consent of the
affected Optionholders, the cancellation of any or all outstanding Discretionary
Options granted under the Plan by that Plan Administrator and to grant in
substitution therefore new Discretionary Options under the Plan covering the
same or different numbers of shares of Stock as long as such new Discretionary
Options have an exercise price per share of Stock no less than the minimum
exercise price as set forth in Section 2.2(b) hereof on the new grant date.
4.8 REGULATORY APPROVALS. The implementation of the Plan, the granting
of any Option or Award hereunder, and the issuance of Stock upon the exercise of
any such Option or Award shall be subject to the procurement by the Company of
all approvals and permits required by regulatory authorities having jurisdiction
over the Plan, the Options or Awards granted under it and the Stock issued
pursuant to it.
4.9 INDEMNIFICATION. In addition to such other rights of
indemnification as they may have, the members of a Plan Administrator shall be
indemnified and held harmless by the Company, to the extent permitted under
applicable law, for, from and against all costs and expenses reasonably incurred
by them in connection with any action, legal proceeding to which any member
thereof may be a party by reason of any action taken, failure to act under or in
connection with the Plan or any rights granted thereunder and against all
amounts paid by them in settlement thereof or paid by them in satisfaction of a
judgment of any such action, suit or proceeding, except a judgment based upon a
finding of bad faith.
4.10 PLAN NOT EXCLUSIVE. This Plan is not intended to be the exclusive
means by which the Company may issue options or warrants to acquire its Stock,
stock awards or any other type of award. To the extent permitted by applicable
law, any such other option, warrants or awards may be issued by the Company
other than pursuant to this Plan without stockholder approval.
4.11 COMPANY RIGHTS. The grants of Options shall in no way affect the
right of the Company to adjust, reclassify, reorganize or otherwise change its
capital or business structure or to merge, consolidate, dissolve, liquidate or
sell or transfer all or any part of its business or assets.
4.12 PRIVILEGE OF STOCK OWNERSHIP. An Optionholder shall not have any
of the rights of a stockholder with respect to Optioned Shares until such
individual shall have exercised the Option and paid the Option Price for the
Optioned Shares. No adjustment will be made for dividends or other rights for
which the record date is prior to the date of such exercise and full payment for
such Optioned Shares.
4.13 ASSIGNMENT. The right to acquire Stock or other assets under the
Plan may not be assigned, encumbered or otherwise transferred by any
Optionholder except as specifically provided herein. Except as may be
specifically allowed by a Plan Administrator at the time of grant and set forth
in the documents evidencing an Option or Award, no Option or Award granted under
the Plan or any of
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the rights and privileges conferred thereby shall be assignable or transferable
by an Optionholder or grantee other than by will or the laws of descent and
distribution, and such Option or Award shall be exercisable during the
Optionholder's or grantee's lifetime only by the Optionholder or grantee. The
provisions of the Plan shall inure to the benefit of, and be binding upon, the
Company and its successors or assigns, and the Optionholders, the legal
representatives of their respective estates, their respective heirs or legatees
and their permitted assignees.
4.14 SECURITIES RESTRICTIONS
(a) LEGEND ON CERTIFICATES. All certificates representing
shares of Stock issued under the Plan shall be endorsed with a legend reading as
follows:
The shares of Common Stock evidenced by this
certificate have been issued to the registered owner
in reliance upon written representations that these
shares have been purchased solely for investment.
These shares may not be sold, transferred or assigned
unless in the opinion of the Company and its legal
counsel such sale, transfer or assignment will not be
in violation of the Securities Act of 1933, as
amended, and the rules and regulations thereunder.
(b) PRIVATE OFFERING FOR INVESTMENT ONLY. The Options and
Awards are and shall be made available only to a limited number of present and
future key personnel who have knowledge of the Company's financial condition,
management and its affairs. The Plan is not intended to provide additional
capital for the Company, but to encourage ownership of Stock among the Company's
key personnel. By the act of accepting an Option or Award, each grantee agrees
(i) that, any shares of Stock acquired will be solely for investment and not
with any intention to resell or redistribute those shares and (ii) such
intention will be confirmed by an appropriate certificate at the time the Stock
is acquired if requested by the Company. The neglect or failure to execute such
a certificate, however, shall not limit or negate the foregoing agreement.
(c) REGISTRATION STATEMENT. If a Registration Statement
covering the shares of Stock issuable upon exercise of Options granted under the
Plan is filed under the Securities Act of 1933, as amended, and is declared
effective by the Securities Exchange Commission, the provisions of Sections
4.14(a) and (b) shall terminate during the period of time that such Registration
Statement, as periodically amended, remains effective.
4.15 TAX WITHHOLDING.
(a) GENERAL. The Company's obligation to deliver Stock under
the Plan shall be subject to the satisfaction of all applicable federal, state
and local income tax withholding requirements.
(b) SHARES TO PAY FOR WITHHOLDING. The Board may, in its
discretion and in accordance with the provisions of this Section 4.15(b) and
such supplemental rules as it may from time to time adopt, or provide any or all
Optionholders or Grantees with the right to use shares of Stock in satisfaction
of all or part of the federal, state and local income tax liabilities incurred
by such Optionholders or Grantees in connection with the receipt of Stock
("Taxes"). Such right may be provided to any such Optionholder or Grantee in
either or both of the following formats:
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(i) STOCK WITHHOLDING. An Optionholder or Grantee may
be provided with the election, which may be subject to approval by the Plan
Administrator, to have the Company withhold, from the Stock otherwise issuable,
a portion of those shares of Stock with an aggregate fair market value equal to
the percentage of the applicable Taxes (not to exceed 100 percent) designated by
the Optionholder or Grantee.
(ii) STOCK DELIVERY. The Board may, in its
discretion, provide the Optionholder or Grantee with the election to deliver to
the Company, at the time the Option is exercised or Stock is awarded, one or
more shares of Stock previously acquired by such individual (other than pursuant
to the transaction triggering the Taxes) with an aggregate fair market value
equal to the percentage (not to exceed 100 percent) of the taxes incurred in
connection with such Option exercise or Stock Award designated by the
Optionholder or Grantee.
4.16 GOVERNING LAW. The Plan shall be governed by and all questions
hereunder shall be determined in accordance with the laws of the State of
Arizona.
ARTICLE V
DEFINITIONS
The following capitalized terms used in this Plan shall have the
meaning described below:
"AFFILIATES" shall mean all "officers" (as that term is defined in Rule
16a-1(f) promulgated under the 1934 Act) and directors of the Company and all
persons who own ten percent or more of the Company's issued and outstanding
Stock.
"ANNUAL GRANT DATE" shall mean the date of the Company's annual
stockholder meeting.
"AUTOMATIC GRANT PROGRAM" shall mean that program set forth in Article
III of this Agreement pursuant to which Eligible Directors, as defined herein,
are automatically granted Options upon certain events.
"AUTOMATIC OPTION GRANT" shall mean those automatic option grants made
on the Annual Grant Date, on the Initial Grant Date, and on the Effective Date.
"AUTOMATIC OPTIONS" shall mean those Options granted pursuant to the
Automatic Grant Program.
"AWARD" shall mean a Stock Award, SAR or Cash Award under the
Discretionary Grant Program.
"BOARD" shall mean the Board of Directors of the Company.
"CASH AWARD" shall mean an award to be paid in cash and granted under
Section 2.5 hereunder.
"CHANGE IN CONTROL" shall mean and include the following transactions
or situations:
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(i) A sale, transfer, or other disposition by the Company
through a single transaction or a series of transactions of securities of the
Company representing 30 percent or more of the combined voting power of the
Company's then outstanding securities to any "Unrelated Person" or "Unrelated
Persons" acting in concert with one another. For purposes of this definition,
the term "Person" shall mean and include any individual, partnership, joint
venture, association, trust corporation, or other entity (including a "group" as
referred to in Section 13(d)(3) of the 1934 Act). For purposes of this
definition, the term "Unrelated Person" shall mean and include any Person other
than the Company, a wholly-owned subsidiary of the Company, or an employee
benefit plan of the Company.
(ii) A sale, transfer, or other disposition through a single
transaction or a series of transactions of all or substantially all of the
assets of the Company to an Unrelated Person or Unrelated Persons acting in
concert with one another.
(iii) A change in the ownership of the Company through a
single transaction or a series of transactions such that any Unrelated Person or
Unrelated Persons acting in concert with one another become the "Beneficial
Owner," directly or indirectly, of securities of the Company representing at
least 30 percent of the combined voting power of the Company's then outstanding
securities. For purposes of this definition, the term "Beneficial Owner" shall
have the same meaning as given to that term in Rule 13d-3 promulgated under the
1934 Act, provided that any pledgee of voting securities shall not be deemed to
be the Beneficial Owner thereof prior to its acquisition of voting rights with
respect to such securities.
(iv) Any consolidation or merger of the Company with or into
an Unrelated Person, unless immediately after the consolidation or merger the
holders of the common stock of the Company immediately prior to the
consolidation or merger are the Beneficial Owners of securities of the surviving
corporation representing at least 50 percent of the combined voting power of the
surviving corporation's then outstanding securities.
(v) During any period of two years, individuals who, at the
beginning of such period, constituted the Board of Directors of the Company
cease, for any reason, to constitute at least a majority thereof, unless the
election or nomination for election of each new director was approved by the
vote of at least two-thirds of the directors then still in office who were
directors at the beginning of such period.
(vi) A change in control of the Company of a nature that would
be required to be reported in response to Item 6(e) of Schedule 14A of
Regulation 14A promulgated under the 1934 Act, or any successor regulation of
similar import, regardless of whether the Company is subject to such reporting
requirement.
Notwithstanding any provision hereof to the contrary, the filing of a
proceeding for the reorganization of the Company under Chapter 11 of the General
Bankruptcy Code or any successor or other statute of similar import shall not be
deemed to be a Change of Control for purposes of this Plan.
"CODE" shall mean the Internal Revenue Code of 1986, as amended.
"COMPANY" shall mean Leopold Styling Products, Inc., a Delaware
corporation.
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"CORPORATE TRANSACTION" shall mean (a) a merger or consolidation in
which the Company is not the surviving entity, except for a transaction the
principal purposes of which is to change the state in which the Company is
incorporated; (b) the sale, transfer of or other disposition of all or
substantially all of the assets of the Company and complete liquidation or
dissolution of the Company, or (c) any reverse merger in which the Company is
the surviving entity but in which the securities possessing more than 50 percent
of the total combined voting power of the Company's outstanding securities are
transferred to a person or persons different from those who held such securities
immediately prior to such merger.
"DISCRETIONARY GRANT PROGRAM" shall mean the program described in
Article II of this Plan pursuant to which certain Eligible Persons are granted
Options or Awards in the discretion of the Plan Administrator.
"DISCRETIONARY OPTIONS" shall mean options granted under the
Discretionary Grant Program.
"EFFECTIVE DATE" shall mean the date that the Plan has been approved by
the stockholders as required by Section 1.3(a) hereof.
"ELIGIBLE DIRECTOR" shall mean, with respect to the Automatic Grant
Program, those Board members who are not employed by the Company, whether or not
such members are Non-Employee Directors as defined herein.
"ELIGIBLE PERSONS" shall mean (a) with respect to the Discretionary
Grant Program, those persons who, at the time that the Discretionary Option or
Award is granted, are (i) key personnel (including officers and directors) of
the Company or Parent or Subsidiary Corporations or (ii) consultants or
independent contractors who provide valuable services to the Company or Parent
or Subsidiary Corporations, and (b) with respect to the Automatic Grant Program,
the Eligible Directors.
"EMPLOYEE COMMITTEE" shall mean that committee appointed by the Board
to administer the Plan with respect to the Non-Affiliates and comprised of two
or more persons who are members of the Board.
"EXERCISE DATE" shall be the date on which written notice of the
exercise of an Option is delivered to the Company in accordance with the
requirements of the Plan.
"EXPIRATION DATE" shall be the 10-year anniversary of the date on which
an Automatic Option Grant was made.
"GRANTEE" shall mean an Eligible Person or Eligible Director that has
received an Award.
"INCENTIVE STOCK OPTION" shall mean a Discretionary Option that is
intended to qualify as an "incentive stock option" under Code section 422.
"INITIAL GRANT DATE" shall mean the date that an Eligible Director is
first appointed or elected to the Board.
"NON-AFFILIATES" shall mean all persons who are not Affiliates.
18
<PAGE> 19
"NON-EMPLOYEE DIRECTORS" shall mean those Directors who satisfy the
definition of "Non-Employee Director" under Rule 16b-3(b)(3)(i) promulgated
under the 1934 Act.
"$100,000 LIMITATION" shall mean the limitation pursuant to which the
aggregate fair market value (determined as of the respective date or dates of
grant) of the Stock for which one or more Options granted to any person under
this Plan (or any other option plan of the Company or any Parent or Subsidiary
Corporation) may for the first time be exercisable as Incentive Stock Options
during any one calendar year shall not exceed the sum of $100,000.
"OPTIONHOLDER" shall mean an Eligible Person or Eligible Director to
whom Options have been granted.
"OPTIONED SHARES" shall be those shares of Stock to be optioned from
time to time to any Eligible Person or Eligible Director.
"OPTION PRICE" shall mean (i) with respect to Discretionary Options,
the exercise price per share as specified by the Plan Administrator pursuant to
Section 2.2(b) hereof, and (ii) with respect to Automatic Options, the exercise
price per share specified by Section 3.2(b) hereof.
"OPTIONS" shall mean options to acquire Stock granted under the Plan to
acquire Stock.
"PARENT CORPORATION" shall mean any corporation in the unbroken chain
of corporations ending with the employer corporation, where, at each link of the
chain, the corporation and the link above owns at least 50 percent of the
combined total voting power of all classes of the stock in the corporation in
the link below.
"PLAN" shall mean this stock option plan for Leopold Styling Products,
Inc.
"PLAN ADMINISTRATOR" shall mean (a) either the Board, the Senior
Committee, or any other committee, whichever is applicable, with respect to the
administration of the Discretionary Grant Program as it relates to Affiliates
and (b) either the Board, the Employee Committee, or any other committee,
whichever is applicable, with respect to the administration of the Discretionary
Grant Program as it relates to Non-Affiliates and with respect to the Automatic
Grant Program.
"REGISTRATION DATE" shall have the meaning set forth in Section 1.3(b)
hereof.
"SAR" shall mean stock appreciation rights granted pursuant to Section
2.4 hereof.
"SENIOR COMMITTEE" shall mean that committee appointed by the Board to
administer the Discretionary Grant Program with respect to the Affiliates and
comprised of two or more Non-Employee Directors.
"SERVICE" shall have the meaning set forth in Section 2.2(n) hereof.
"STOCK" shall mean shares of the Company's common stock, $.0001 par
value per share, which may be unissued or treasury shares, as the Board may from
time to time determine.
19
<PAGE> 20
"STOCK AWARDS" shall mean Stock directly granted under the
Discretionary Grant Program.
"SUBSIDIARY CORPORATION" shall mean any corporation in the unbroken
chain of corporations starting with the employer corporation, where, at each
link of the chain, the corporation and the link above owns at least 50 percent
of the combined voting power of all classes of stock in the corporation below.
EXECUTED as of the _____ day of ______________, 1996.
LEOPOLD STYLING PRODUCTS, INC.
By: __________________________________
Name: __________________________________
Its: __________________________________
ATTESTED BY:
___________________________________
Secretary
20
<PAGE> 1
THIS OFFERING IS BEING MADE PURSUANT TO SECTION 4(2) OF THE SECURITIES ACT OF
1933. THE SECURITIES OFFERED HEREBY HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933 OR UNDER ANY STATE ACTS AND MAY NOT BE SOLD, TRANSFERRED,
PLEDGED, OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT
UNDER SUCH ACTS OR AN OPINION OF COUNSEL ACCEPTABLE TO THE COMPANY TO THE EFFECT
THAT REGISTRATION IS NOT REQUIRED.
SEPTEMBER 9, 1996 $400,000.00
----------
NON-NEGOTIABLE UNSECURED PROMISSORY NOTE
FOR VALUE RECEIVED, LEOPOLD STYLING PRODUCTS, INC., a Delaware
corporation ("Maker"), hereby promises to pay to HOLDEN HOLDINGS LIMITED, a
company organized under the Republic of Ireland ("Payee"), the principal sum of
Four Hundred Thousand and 00/100 Dollars ($400,000.00) in lawful money of the
United States, together with simple interest thereon at the Interest Rate (as
hereinafter defined).
1. INTEREST. The principal balance hereof shall bear interest at a rate
of 10% per annum (the "Interest Rate") computed on a 360-day year and 30-day
month basis.
2. PAYMENTS. The principal sum of this Note together with the interest
due hereunder shall be due and payable in full on the date (the "Due Date") that
is the first to occur of (a) January 31, 1997 or (b) ten (10) business days
following the successful consummation of the acquisitions by Maker of Gena
Laboratories, Inc., the Body Drench division of Designs by Norvell, Inc., JDS
Manufacturing, Inc., and Styling Research, Inc. (collectively, the
"Acquisitions").
All amounts due hereunder shall be payable to the order of
______________________________________________________________, or at such other
place as Payee may from time to time designate in writing to Maker. Maker shall
not be deemed in default of this Note unless Maker has failed to make any
payment due hereunder and has failed to cure such nonpayment within seven (7)
days following the date Maker receives notice in writing from Payee (the
"Default Notice") demanding payment of such unpaid installment.
3. COMMON STOCK. In addition to the payments due hereunder, upon the
consummation of an initial public offering ("IPO") of Maker's common stock
pursuant to a registration statement filed by Maker under the Securities Act of
1933 (the "Act") or a private placement for cash of Maker's Common Stork, Maker
shall deliver to Payee (i) the number of shares of Maker's common stock (the
"Shares") determined by dividing one-half (1/2) of the principal sum of this
Note by the initial public offering price per share and (ii) warrants to
<PAGE> 2
purchase a like number of shares of Common Stock at an exercise price equal to
125% of such public or private offering price per share during the two-year
period commencing with the issuance of the warrants (the "Warrants").
4. REGISTRATION RIGHTS. For purposes of this Section 4:
(A) DEFINITIONS.
(i) The terms "register", "registered", and
"registration" refer to a registration effected by preparing and filing a
registration statement on Form S-1 or Form SB-2 or similar document in
compliance with the Act, and the declaration or ordering of effectiveness of
such registration statement or document;
(ii) The term "Registrable Securities" means the
shares of Common Stock issuable in accordance with Section 3 above and the
shares of Common Stock issuable pursuant to the exercise of the Warrants
issuable in accordance with Section 3 above; and
(iii) The term "Holder" means Payee.
(B) DEMAND REGISTRATION.
(i) At any time during the six-month period
commencing 120 days after Maker has completed an IPO of its Common Stock, the
holders of fifty percent (50%) or more of the Registrable Securities may demand
that Maker prepare and file a registration statement covering all of the
Registrable Securities. In such event, Maker shall promptly give each Holder
notice of Maker's intent to prepare and file such a registration statement.
Notwithstanding the foregoing, Maker shall have no obligation to prepare and
file a registration statement under this Section 4(b) at any time the Company
has given Holders notice pursuant to Section 4(c) below of the Company's
proposal to register securities and is undertaking in good faith to cause such
registration to become effective, or for a period of 180 days following the
effective date of any such registration. During any such period, the Holders
shall be entitled to exercise the registration rights granted to them under
Section 4(c). The Holders shall be entitled to only one demand registration
pursuant to this Section 4(b).
(ii) If any Holders intend to distribute Registrable
Securities by means of an underwriting, they shall so notify the Company not
later than the date twenty (20) days after the date of the Company's mailing of
its notice of intent to prepare and file a registration statement. All Holders
proposing to distribute their Registrable Securities through such underwriting
shall be responsible for underwriting commissions and fees applicable to the
sale of such Holder's securities and shall enter into an underwriting agreement
in customary form with the underwriter or underwriters selected for such
underwriting by the Company.
(iii) The Company is obligated to effect only one
demand registration pursuant to this Section 4(b).
2
<PAGE> 3
(C) PIGGYBACK REGISTRATION. Commencing after Maker has
completed an IPO of its Common Stock, if Maker proposes to register (including
for this purpose a registration effected by Maker for stockholders other than
Holder) any of its shares of Common Stock under the Act in connection with the
public offering of such securities solely for cash (other than a registration of
securities to be offered to employees pursuant to an employee benefit plan on
Form S-8, a registration in connection with an exchange offer or any
acquisition, or a registration on any form which does not include substantially
the same information as would be required to be included in a registration
statement covering the sale of the Registrable Securities), Maker shall give
Holder written notice of such proposed registration at least thirty (30) days
prior to filing the registration statement respecting such proposed
registration. Upon the written request of Holder given within twenty (20) days
after mailing of such notice by Maker in accordance with Section 11 hereof,
Maker shall cause to be registered under the Securities Act all of the
Registrable Securities that Holder has requested to be registered, subject to
Sections 4(d) and 4(f) below.
(D) INFORMATION CONCERNING HOLDER. It shall be a condition
precedent of the obligations of Maker to take any action pursuant to this
Section 4 that Holder shall furnish to Maker such information regarding itself,
the Registrable Securities held by Holder, and the intended method of
disposition of such securities as shall be required to effect the registration
of the Registrable Securities.
(E) EXPENSES. All expenses incurred in connection with the
registration pursuant to this Section 4 (other than underwriter's commissions
and fees or any fees of others employed by Holder, including attorneys' fees),
including without limitation all registration, filing and qualification fees,
printer's and accounting fees, and fees and disbursements of counsel for Maker,
shall be borne by Maker.
(F) ACCEPTANCE OF UNDERWRITING AGREEMENT. Maker shall not be
required under this Section 4 to include any of the Registrable Securities in an
underwriting of securities being issued by Maker unless Holder accepts the terms
of the underwriting agreement as agreed upon between Maker and the underwriter
selected by Maker, and then only in such quantity, if any, as will not, in the
opinion of the managing underwriter, jeopardize or in any way reduce the success
of the offering by Maker.
(G) EXPIRATION OF PIGGYBACK REGISTRATION RIGHTS. Any
obligation of Maker to register the Registrable Securities pursuant to Section
4(c) shall expire on the second anniversary of the receipt by Holder of the
Shares.
5. PREPAYMENT. Notwithstanding anything to the contrary
contained in this Note, Maker shall have the right and privilege to prepay all
or any part of the unpaid principal balance of this Note and any interest
accrued thereon at any time or times without premium or penalty.
3
<PAGE> 4
6. WAIVERS. Acceptance by Payee of any payment which is less than the
full amount then due and owing hereunder shall not constitute a waiver of
Payee's right to receive payment in full at such time or at any prior or
subsequent time. No delay or omission on the part of Payee in exercising any
right hereunder shall operate as a waiver of such right or any other right under
this Note. A waiver on any one occasion shall not be construed as a bar to or
waiver of any such right or remedy on any future occasion.
7. COSTS OF COLLECTION. Maker shall be liable for any and all costs and
expenses of collection paid by Payee, including reasonable attorneys' fees,
arising by virtue of default of this Note.
8. ACCELERATION. If Maker is in default of this Note and such default
(unless waived in writing by Payee) is not cured within fifteen (15) days of the
applicable Default Notice, then and in each and every case, unless the entire
then unpaid principal amount of this Note shall have already become due and
payable, Payee may, by a notice in writing to Maker (the "Acceleration Notice"),
declare the principal of and the accrued interest on this Note to be due and
payable within seven (7) days following the date Maker receives the Acceleration
Notice.
9. DEFAULT INTEREST. Maker shall pay interest at the rate of four
percent (4%) per annum plus the interest rate borne by this Note on the amount
of any principal with respect to which Maker is in default hereunder or which
has been declared due but remains unpaid as a result of the application of
Section 7 above and, to the extent that payment of such interest is enforceable
under applicable law, upon overdue installments of interest at the same rates to
the date of payment.
10. AMENDMENT. This Note may not be changed, modified or terminated,
nor may any provision of this Note be waived except by an agreement in writing
signed by the party to be charged.
11. NOTICES. All notices required or permitted to be given hereunder
shall be in writing and shall be deemed given and received when delivered in
person, or two (2) business days after being placed in the hands of a courier
service (e.g., DHL or Federal Express) prepaid, or faxed provided that a
confirming copy is delivered forthwith as otherwise herein provided, addressed
as follows:
If to Payee:
___________________________
___________________________
___________________________
FAX: ______________________
4
<PAGE> 5
With a copy to:
___________________________
___________________________
___________________________
FAX: ______________________
If to Maker:
Leopold Styling Products, Inc.
One East Camelback Road, Suite 1100
Phoenix, Arizona 85012
FAX: (602) 263-2900
With a copy to:
O'Connor, Cavanagh, Anderson,
Killingsworth & Beshears, P.A.
One East Camelback Road, Suite 1100
Phoenix, Arizona 85012-1656
Attention: Robert S. Kant, Esq.
FAX: (602) 263-2900
and/or to such other respective addresses and/or addressees as may be designated
by notice given in accordance with the provisions of this Section 11.
12. CONSTRUCTION. By acceptance of this Note, Payee acknowledges and
agrees that Maker and Payee have each participated in the drafting of this Note
and that this Note has been reviewed by the respective legal counsel for such
parties and that the normal rule of construction to the effect that any
ambiguities are to be resolved against the drafting party shall not be applied
to the interpretation of this Note. No inference in favor of, or against, any
party shall be drawn from the fact that one party has drafted any portion
hereof.
13. SEVERABILITY. If any provision herein shall be unenforceable, such
unenforceable provision shall not render the remaining provisions hereof
unenforceable or invalid.
14. CONTROLLING LAW. THIS NOTE SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF ARIZONA, NOTWITHSTANDING THE CONFLICT
OF LAW PRINCIPLES OF SUCH STATE.
5
<PAGE> 6
15. ASSIGNMENT. Except as otherwise provided below, this Note inures to the
benefit of, and binds, the respective successors and assigns of Payee and Maker.
Neither Payee nor Maker may assign or transfer this Note or assign or delegate
any of its respective rights or obligations hereunder without the prior written
consent of the other party in each instance; provided, however, Maker may assign
or transfer this Note to any entity that is controlled by Maker, or is under
common control with Maker, and which entity shall assume all of Maker's
obligations hereunder with respect to this Note.
IN WITNESS WHEREOF, the parties have executed this Note as of the date
first set forth above.
MAKER:
LEOPOLD STYLING PRODUCTS, INC.
By: _____________________________________
Name: ___________________________________
Its: ____________________________________
The undersigned hereby accepts and agrees to be bound by the above
terms and conditions.
PAYEE:
By: _____________________________________
Name: ___________________________________
Its: ____________________________________
6
<PAGE> 1
Exhibit 11
COMPUTATION OF PRO FORMA PER SHARE EARNINGS
<TABLE>
<CAPTION>
Six Months Ended
Year Ended December 31, June 30,
----------------------- --------------------
1994 1995 1995 1996
---- ---- ---- ----
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
The computation of per share
earning is as follows:
Pro forma net income............. $1,541,000 $1,599,000 $1,103,000 $1,450,000
========== ========== ========== ==========
Pro forma weighted average number
of shares outstanding.......... 3,630,578 3,630,578 3,630,578 3,630,578
Weighted average number of
equivalent shares outstanding
through exerciseable warrants
and stock options.............. 160,102 160,102 160,102 160,102
---------- ---------- ---------- ----------
Total weighted average number
of shares and common
equivalent shares
outstanding.................... 3,790,680 3,790,680 3,790,680 3,790,680
========== ========== ========== ==========
Net income (loss) per share...... $.41 $.42 $.29 $.38
========== ========== ========== ==========
</TABLE>
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
reports and to all references to our firm included in or made part of this
Registration Statement.
Arthur Andersen LLP
Phoenix, Arizona
November 1, 1996.
