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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 20, 1996
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
STYLING TECHNOLOGY CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 2844 76-2665378
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
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One East Camelback Road, Phoenix, Arizona 85012
(Address, including Zip Code, and Telephone Number, including Area Code, of
Registrant's Principal Executive Offices)
SAM L. LEOPOLD, CHAIRMAN OF THE BOARD
ONE EAST CAMELBACK ROAD, SUITE 1100, PHOENIX, ARIZONA 85012
(602) 263-2362
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF REGISTRANT'S AGENT FOR SERVICE)
------------------------
COPIES TO:
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
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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
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TITLE OF EACH CLASS OF SECURITIES PROPOSED MAXIMUM
TO BE REGISTERED AGGREGATE OFFERING PRICE(1) AMOUNT OF REGISTRATION FEE
- -------------------------------------------------------------------------------------------------------------
Common Stock, par value $.0001(2)................ $28,617,600 $ 9,868
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Underwriter's Warrants(3)........................ 1,540 1
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Common Stock(4).................................. 3,960,000 1,366
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Total....................................... $32,579,140 $11,235
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(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457.
(2) Includes 330,000 shares of Common Stock subject to the Underwriter's
Overallotment Option.
(3) To be issued to the Underwriter.
(4) Issuable upon exercise of Underwriter's Warrants.
------------------------
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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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.
PROSPECTUS SUBJECT TO COMPLETION, DATED SEPTEMBER 20, 1996
2,200,000 SHARES
STYLING TECHNOLOGY CORPORATION
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."
Application has been made to list the Common Stock on the Nasdaq National Market
under the symbol "STYL."
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.
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PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNTS COMPANY(2)
AND COMMISSIONS(1)
- ------------------------------------------------------------------------------------------------------
Per Share.............................. $ $ $
- ------------------------------------------------------------------------------------------------------
Total(3)............................... $ $ $
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(1) Does not include the Underwriter's 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 154,000 shares of Common Stock issuable to the
Underwriter (the "Underwriter's Warrants"). The Company has agreed to
indemnify the Underwriter against certain liabilities, including
liabilities under the Securities Act of 1933, as amended. See
"Underwriting."
(2) Before deducting expenses, estimated at $2,057,000, including the
Underwriter's non-accountable expense allowance of $363,000, or $2,365,550
if the Underwriter's Overallotment Option (as defined below) is exercised
in full, payable by the Company.
(3) The Company has granted the Underwriter an option (the "Overallotment
Option"), exercisable within 30 days of the date of this Prospectus, to
purchase up to an aggregate of 330,000 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 Underwriter, subject to
prior sale and acceptance by the Underwriter and subject to its 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 in New York, New York
against payment therefor on or about , 1996.
PRIME CHARTER LTD.
The date of this Prospectus is , 1996
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[PHOTOS AND CAPTIONS TO COME]
IN CONNECTION WITH THE OFFERING, THE UNDERWRITER 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 acquisition 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 Underwriter's 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 September 19, 1996. 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 $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
combined basis, total revenue of the Company exceeded $25 million in 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(R) product line is one of the leaders in the professional skin care and
tanning products market; its Gena(R) Warm-O-Lotion(R) 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(R) 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. The
Company's Chief Executive Officer and President have more than 10 and 20 years,
respectively, of experience in the professional salon industry.
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; (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.
3
<PAGE> 5
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
negotiated 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 million, of which $22.65 million is
payable in cash ($2 million of which is 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. For a further description of
the Acquisitions, see "Description of the Acquisitions." The Company has
financed some of the costs associated with the Acquisitions through the private
issuance of a $400,000 promissory note (the "Bridge Note"). In connection with
the issuance of the Bridge Note, the Company agreed to issue 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"). See "Use of
Proceeds" and "Description of Capital Stock -- Bridge Warrants."
The Company is a Delaware corporation. The Company maintains its principal
executive office at One East Camelback Road, Phoenix, Arizona, and its telephone
number is (602) 263-2362. This Prospectus refers to certain trademarks and
service marks, including registered marks, of the Acquired Businesses and of
companies other than the Company.
THE OFFERING
Common Stock offered by the
Company.................. 2,200,000 shares
Common Stock to be
outstanding after the
Offering................. 4,000,000 shares(1)(2)
Use of Proceeds............ To pay the cash portion of the purchase price for
the Acquired Businesses, to repay the Company's
Bridge Notes, and to provide funds for working
capital and other general corporate purposes. See
"Use of Proceeds."
Proposed 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 Underwriter's Warrants or shares contingently
issuable in connection with the Body Drench Acquisition.
(2) 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
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SUMMARY HISTORICAL AND PRO FORMA FINANCIAL DATA(1)
(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, 1994, 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 Consolidated 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.
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YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
------------------- -------------------
1994 1995 1996 1995
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STATEMENT OF OPERATIONS DATA-COMPANY PRO FORMA(2):
Net sales......................................... $24,239 $25,181 $14,590 $13,339
Gross profit...................................... 13,079 13,664 7,506 7,049
Selling, general, and administrative expenses..... 8,363 8,804 4,685 4,121
Income from operations............................ 4,716 4,860 2,821 2,928
Net income........................................ 2,617 2,660 1,653 1,649
Adjusted pro forma earnings per share............. .65 .67 .41 .41
Adjusted pro forma shares outstanding............. 3,999 3,999 3,999 3,999
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THREE MONTHS
YEAR ENDED FEBRUARY 28, ENDED MAY 31,
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1994 1995 1996 1995 1996
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STATEMENT OF OPERATIONS DATA-GENA:
Net sales................................... $6,426 $7,524 $8,384 $2,178 $2,304
Gross profit................................ 3,146 3,360 3,565 1,008 1,007
Selling, general, and administrative
expenses................................. 2,744 2,964 3,033 777 747
Income from operations...................... 402 396 532 231 260
Net income.................................. 278 232 317 145 160
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SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
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1993 1994 1995 1995 1996
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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
Excess of net sales over direct
expenses............................... 559 720 561 715 719
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NINE MONTHS ENDED
YEAR ENDED SEPTEMBER 30, JUNE 30,
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1993 1994 1995 1995 1996
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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) (27) 12 (4)
Net income (loss)......................... (29) (16) 9 23 (3)
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SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
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1993 1994 1995 1995 1996
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STATEMENT OF OPERATIONS DATA-KII:
Net sales................................. $ 102 $ 1,999 $ 1,558 $ 777 $ 736
Gross profit.............................. 60 1,046 785 389 400
Selling, general, and administrative
expenses............................... 87 1,040 891 476 329
Income (loss) from operations............. (27) 6 (106) (87) 71
Net income (loss)......................... (32) (72) (195) (133) 32
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STYLING GENA BODY DRENCH JDS KII
AS OF AS OF AS OF AS OF AS OF
JUNE 30, 1996 MAY 31, 1996 JUNE 30, 1996(4) JUNE 30, 1996 JUNE 30, 1996
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BALANCE SHEET DATA:
Working capital............... $(300) $2,009 $ 329 $ 333 $ 345
Total assets.................. 300 3,707 4,221 728 622
Long-term debt, less current
portion.................... -- 310 -- 432 610
Total stockholders' equity.... 1 2,759 582 27 (200)
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COMBINED HISTORICAL PRO FORMA ADJUSTED PRO FORMA
AS OF JUNE 30, 1996 AS OF JUNE 30, 1996(5) AS OF JUNE 30, 1996(6)
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BALANCE SHEET DATA:
Working capital.................... $ 2,716 $(17,153) $ 4,097
Total assets....................... 9,578 7,000 28,250
Long-term debt, less current
portion......................... 1,352 2,292 2,292
Total stockholders' equity......... 3,169 50 21,300
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(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
consolidated statement of operations data for the years ended December 31,
1994 and 1995 and the six months ended June 30, 1995 and 1996 assumes that
Styling had completed the Acquisitions on January 1, 1994. The pro forma
consolidated 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 consolidated 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
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(3) Body Drench has historically operated as a division of DBN. Statement of
operations data is derived from the Statement of Net Sales and Direct
Expenses and includes only net sales and direct operating expenses of the
division, excluding parent company interest expense.
(4) Body Drench has historically operated as a division of DBN. Balance sheet
information is derived from the Statement of Assets and Liabilities to be
Acquired and includes assets and liabilities to be acquired, as well as
certain liabilities which are considered regenerative in nature. Total
stockholders' equity data represents the net equity in the assets and
liabilities to be acquired by Styling.
(5) Reflects adjustments for the Acquisitions. See the Pro Forma Consolidated
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 consolidated balance sheet data as of June 30, 1996
gives effect to the Acquisitions and the Offering, and the use of proceeds
therefrom, as if such transactions had occurred on June 30, 1996.
7
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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.
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 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 Require-
8
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ments." 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, and to repay the Bridge Notes.
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 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.
9
<PAGE> 11
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.
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 all
in-house manufacturing equipment.
10
<PAGE> 12
The Company also believes that there are several readily available external
sources to repair or replace any of this equipment should that be necessary. See
"Business -- Production."
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 will maintain key person life insurance on each of Messrs. Leopold and
Clifford in the amount of $1 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
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 materials hazardous 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."
11
<PAGE> 13
CONTROL BY MANAGEMENT
Upon the sale of the shares of Common Stock offered hereby, Sam L. Leopold
and Kenneth S. Bernstein, founders of the Company, will own a total of
approximately 40.4% of the outstanding shares of Common Stock, and Thomas M.
Clifford, President of the Company, will have an option to purchase 161,571
shares. See "Principal Stockholders." Consequently, Messrs. Leopold and
Bernstein will effectively be able to control the election of all of the
directors of the Company and thereby control the business, affairs, and
management of the Company. In addition, these individuals, will effectively be
able to approve 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.
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 application has been made for listing of the Common
Stock 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 Underwriter 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 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 3,838,429
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), approximately 2,200,000 shares will be eligible for
resale in the public market without any restrictions. In June 1997 and November
1998, 1,615,702 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 founders, directors, and executive officers of the Company have agreed not
to sell or otherwise dispose of a total of 1,615,702 shares of Common Stock for
a period of 270 days after the consummation of the Offering without the prior
written consent of the Underwriter.
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
12
<PAGE> 14
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, 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 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.
LACK OF 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."
13
<PAGE> 15
IMMEDIATE AND SUBSTANTIAL DILUTION
Purchasers of Common Stock in the Offering will experience immediate and
substantial dilution in the net tangible book value of $10.19 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, and the impact of current and future laws and
governmental regulations affecting the professional salon products industry and
the Company's operations.
14
<PAGE> 16
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 Beauty Company ("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
Corporation, 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 $8.38 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(R)
Ultra Tanning Formula, and New Basics. Body Drench tanning products, which
include the Carboplex(TM) Tan-FX 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 $11.87 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.(R)(Professionals Only), Triumph(R) 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 $3.37 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 $1.56 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") 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
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.
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 2,200,000 shares of
Common Stock offered hereby are estimated to be $21.25 million ($24.57 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 million
deferred portion), approximately $400,000 to repay the Bridge Note, and the
remainder for general corporate purposes, including working capital. 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.
16
<PAGE> 18
CAPITALIZATION
The following table sets forth the pro forma combined capitalization of the
Company as of June 30, 1996 (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>
JUNE 30, 1996
-------------------------------
PRO FORMA(1) AS ADJUSTED(2)
------------ --------------
<S> <C> <C>
Cash payable to sellers to complete Acquisitions and current
portion of long-term debt...................................... $(19,680) $ --
======== ========
Long-term debt, excluding current portion(1)..................... $ 2,292 $ 2,292
Stockholders' equity:
Preferred Stock, $.0001 par value, 1,000,000 shares authorized;
none outstanding............................................ -- --
Common Stock, $.0001 par value, 10,000,000 shares authorized;
1,620,247 shares issued and outstanding before the Offering;
3,838,429 shares issued and outstanding as adjusted......... 1 2
Additional paid-in capital..................................... 49 21,248
Retained earnings.............................................. -- --
-------- --------
Total stockholders' equity..................................... 50 21,250
-------- --------
Total capitalization............................................. $ 2,342 $ 23,542
======== ========
</TABLE>
- ---------------
(1) Reflects pro forma adjustments to effect the Acquisitions, excluding the
Bridge Financing and the Offering.
(2) Reflects pro forma adjustments giving effect to the Acquisitions, the Bridge
Financing, and the Offering, and the use of proceeds related thereto. See
"Use of Proceeds."
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<PAGE> 19
DILUTION
The pro forma combined net tangible book value of the Company at June 30,
1996 was ($18.0 million) or $(10.11) 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 divided by the number of shares of Common
Stock outstanding without giving effect to the Bridge Financing or the sale of
shares of Common Stock sold in connection with the Offering. After giving effect
to the Bridge Financing and 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 $3.2 million or $.81 per share, representing an immediate increase in net
tangible book value of $10.92 per share to existing stockholders and an
immediate dilution of $10.19 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 Financing............... $(10.11)
Increase per share attributable to shares sold to New
Investors................................................... 10.92
Net tangible book value per share after the Offering............. .81
-------
Dilution in net tangible book value per share to New Investors... $ 10.19
=======
</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 PURCHASED TOTAL CONSIDERATION AVERAGE
--------------------- ----------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders(1).............. 1,615,702 42.3% $ 200 0.0% $ 0.00
New Investors......................... 2,200,000 57.7% 24,200,000 100.0% $ 11.00
--------- ----- ----------- -----
Total....................... 3,815,702 100.0% $24,200,200 100.0%
========= ===== =========== =====
</TABLE>
- ---------------
(1) Does not include 234,278 shares of Common Stock issuable upon the exercise
of outstanding options, 18,182 shares issuable to the holders of the Bridge
Note, 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
issued in connection with the acquisition of KII.
(2) Assumes the sale of 2,200,000 shares of Common Stock at the Offering Price.
18
<PAGE> 20
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 Gena, Body Drench,
and JDS as of and for the three- and six-month periods ended May 31, 1996, June
30, 1996, and June 30, 1996, respectively, and for the three- and six-month
periods ended May 31, 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 KII, and earlier
periods for Gena, Body Drench and JDS not specifically referenced above, was
derived from each Acquisition's unaudited financial statements not included in
this Prospectus. The pro forma statement of operations data set forth on the
following page assumes that Styling had completed the Acquisitions on January 1,
1994, 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 financial statements
appearing elsewhere in this Prospectus. The pro forma consolidated financial
information for the six months ended June 30, 1995 and for the year ended
December 31, 1994 does not appear elsewhere in this Prospectus. The pro forma
consolidated 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 consolidated 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 consolidated 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.
19
<PAGE> 21
SELECTED HISTORICAL AND PRO FORMA FINANCIAL DATA(1)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER SIX MONTHS ENDED
31, JUNE 30,
------------------- -------------------
1994 1995 1995 1996
------- ------- ------- -------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA -- COMPANY PRO
FORMA(2):
Net sales......................................... $24,239 $25,181 $14,590 $13,339
Gross profit...................................... 13,079 13,664 7,506 7,049
Selling, general, and administrative expenses..... 8,363 8,804 4,685 4,121
Income from operations............................ 4,716 4,860 2,821 2,928
Net income........................................ 2,617 2,660 1,653 1,649
Adjusted pro forma earnings per share............. .65 .67 .41 .41
Adjusted pro forma shares outstanding............. 3,999 3,999 3,999 3,999
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED FEBRUARY 28, ENDED MAY 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 $2,178 $2,304
Gross profit............. 2,642 2,868 3,146 3,360 3,565 1,008 1,007
Selling, general, and
administrative
expenses.............. 2,416 2,570 2,744 2,964 3,033 777 747
Income from operations... 226 298 402 396 532 231 260
Net income............... 180 204 278 232 317 145 160
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR 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
Excess of net sales
over direct
expenses............ 740 382 559 720 561 715 719
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR 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) (27) 12 (4)
Net income (loss)........ 16 (20) (29) (16) 9 23 (3)
</TABLE>
20
<PAGE> 22
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
YEAR 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 1,046 785 389 400
Selling, general, and
administrative expenses..... -- -- 87 1,040 891 476 329
Income (loss) from
operations.................. -- -- (27) 6 (106) (87) 71
Net income (loss).............. -- -- (32) (72) (195) (133) 32
</TABLE>
<TABLE>
<CAPTION>
STYLING GENA BODY DRENCH JDS KII
AS OF AS OF AS OF AS OF AS OF
JUNE 30, 1996 MAY 31, 1996 JUNE 30, 1996(4) JUNE 30, 1996 JUNE 30, 1996
------------- ------------ ---------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital............... $(300) $2,009 $ 329 $ 333 $ 345
Total assets.................. 300 3,707 4,221 728 622
Long-term debt, less current
portion.................... -- 310 -- 432 610
Total stockholders' equity.... 1 2,759 582 27 (200)
</TABLE>
<TABLE>
<CAPTION>
COMBINED HISTORICAL PRO FORMA ADJUSTED PRO FORMA
AS OF JUNE 30, 1996 AS OF JUNE 30, 1996(5) AS OF JUNE 30, 1996(6)
------------------- ---------------------- ----------------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Working capital.................... $ 2,716 $(17,153) $ 4,097
Total assets....................... 9,578 7,000 28,250
Long-term debt, less current
portion......................... 1,352 2,291 2,291
Total stockholders' equity......... 3,169 50 21,300
</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
consolidated statement of operations data for the years ended December 31,
1994 and 1995 and the six months ended June 30, 1995 and 1996 assumes that
Styling had completed the Acquisitions on January 1, 1994. The pro forma
consolidated 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 consolidated statement of operations data contain adjustments
which are directly attributable to the transaction. See the Pro Forma
Consolidated Financial Statements, including the notes thereto, appearing
elsewhere in this Prospectus.
(3) Body Drench has historically operated as a division of DBN. Statement of
operations data is derived from the Statement of Net Sales and Direct
Expenses and includes only net sales and direct operating expenses of the
division, excluding interest expense of the parent company.
(4) Body Drench has historically operated as a division of DBN. Balance sheet
information is derived from the Statement of Assets and Liabilities to be
Acquired and includes assets and liabilities to be acquired, as well as
certain liabilities which are considered regenerative in nature. Total
stockholders' equity data represents the net equity in the assets and
liabilities 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 consolidated 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.
21
<PAGE> 23
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 consolidated 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.
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 consolidated statement of operations data contain adjustments, which
are directly attributable to the transaction. See "Selected Historical and Pro
Forma Financial Data" and Pro Forma Consolidated Financial Statements, including
the Notes thereto, appearing elsewhere in this Prospectus.
PRO FORMA RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
--------------------------- ---------------------------
1994 1995 1995 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales............................. $24,238,578 $25,180,571 $14,590,376 $13,338,900
Cost of sales......................... 11,159,969 11,516,288 7,084,736 6,289,526
Gross profit.......................... 13,078,609 13,664,283 7,505,640 7,049,374
Selling general and administrative
expenses............................ 8,363,482 8,804,588 4,685,053 4,121,372
</TABLE>
SIX MONTHS ENDED JUNE 30, 1996 COMPARED TO SIX MONTHS ENDED JUNE 30, 1995
NET SALES. Pro forma net sales decreased 8.6% to $13,338,900 in the six
months ended June 30, 1996 from $14,590,376 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 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 47.2% in the six months ended June 30, 1996 as compared with 48.6%
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
22
<PAGE> 24
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 6.1% to $7,049,374 in the six months ended June 30, 1996 from
$7,505,640 in the six months ended June 30, 1995.
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES. Pro forma selling, general,
and administrative expenses decreased 12.0% to $4,121,372 in the six months
ended June 30, 1996 from $4,685,063 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 3.1% to $1,081,930 in the
six months ended June 30, 1996 from $1,049,166 in the six months ended June 30,
1995. The pro forma tax rates of 39.6% 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 decreased 0.2% to $1,649,390 in the six
months ended June 30, 1996 from $1,652,789 in the six months ended June 30,
1995.
TWELVE MONTHS ENDED DECEMBER 31, 1995 COMPARED TO TWELVE MONTHS ENDED DECEMBER
31, 1994
NET SALES. Pro forma net sales increased 3.9% to $25,180,571 in the 12
months ended December 31, 1995 from $24,238,578 in the 12 months ended December
31, 1994 primarily as a result of 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. The increase in net sales was also 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, the increase in pro forma
net sales was partly attributable to the growth in net sales of 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,
decreased to 45.7% in the 12 months ended December 31, 1995 as compared with
46.0% in the 12 months ended December 31, 1994. The decrease related primarily
to 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. The decrease in cost of sales, as a percentage of net
sales, was partially offset by an increase in costs to produce the paraffin spa
and MRX products which have a higher costs of sales, as a percentage of net
sales, than its other products.
GROSS PROFIT. As a result of the foregoing, pro forma gross profit
increased 4.5% to $13,664,283 in the 12 months ended December 31, 1995 from
$13,078,609 in the 12 months ended December 31, 1994.
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES. Pro forma selling, general,
and administrative expenses increased 5.3% to $8,804,588 in the 12 months ended
December 31, 1995 from $8,363,482 in the 12 months ended December 31, 1994
related primarily to the 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 increased 3.6% to $1,869,176 in the
12 months ended December 31, 1995 from $1,804,019 in the 12 months ended
December 31, 1994. The pro forma effective tax rates of 41.3% and 40.8% for the
periods ended December 31, 1995 and 1994 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.
23
<PAGE> 25
NET INCOME. Pro forma net income for the Company increased 1.6% to
$2,659,686 in the 12 months ended December 31, 1995 from $2,616,660 in the 12
months ended December 31, 1994.
RESULTS OF OPERATIONS -- GENA
THREE MONTHS ENDED MAY 31, 1996 COMPARED TO THREE MONTHS ENDED MAY 31, 1995
NET SALES. Net sales increased 5.8% to $2,303,787 in the three months
ended May 31, 1996 from $2,177,896 in the three months ended May 31, 1995. The
increase in net sales was attributable to an increase in sales volume 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
56.3% in the three months ended May 31, 1996 as compared with 53.7% in the three
months ended May 31, 1995. The increase was primarily attributable to increased
costs for certain raw materials associated with production of the paraffin spa
equipment.
GROSS PROFIT. As a result of the foregoing, gross profit decreased
marginally to $1,007,304 in the three months ended May 31, 1996 from $1,008,148
in the three months ended May 31, 1995.
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES. Selling, general, and
administrative expenses decreased 3.8% to $747,092 in the three months ended May
31, 1996 from $776,771 in the three months ended May 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 three months
ended May 31, 1996.
NET INCOME. Net income increased 10.3% to $160,138 in the three months
ended May 31, 1996 from $145,419 in the three months ended May 31, 1995.
TWELVE MONTHS ENDED FEBRUARY 29, 1996 COMPARED TO TWELVE MONTHS ENDED FEBRUARY
28, 1995
NET SALES. Net sales increased 11.4% to $8,384,092 in the 12 months ended
February 29, 1996 from $7,523,751 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
$3,565,306 in the 12 months ended February 29, 1996 from $3,360,356 in the 12
months ended February 28, 1995.
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES. Selling, general, and
administrative expenses increased 2.3% to $3,033,409 in the 12 months ended
February 29, 1996 from $2,963,926 in the 12 months ended February 28, 1995. The
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 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 36.8% to $316,627 in the 12 months ended
February 29, 1996 from $231,542 in the 12 months ended February 28, 1995.
24
<PAGE> 26
TWELVE MONTHS ENDED FEBRUARY 28, 1995 COMPARED TO TWELVE MONTHS ENDED FEBRUARY
28, 1994
NET SALES. Net sales increased 17.1% to $7,523,751 in the 12 months ended
February 28, 1995 from $6,426,416 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 Classics 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 Classics and MRX product lines were
approximately $1,000,000 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 Classics 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
$3,360,356 in the 12 months ended February 28, 1995 from $3,146,370 in the 12
months ended February 28, 1994.
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES. Selling, general, and
administrative expenses increased 8.0% to $2,963,926 in the year ended February
28, 1995 from $2,744,363 in the year ended February 28, 1994 as a result of the
increase in selling and promotional costs related to the introduction and
promotion of the paraffin product line. In addition, Gena incurred an increase
in costs related to the acquisition of Design Classics, which includes
amortization of intangible assets, and increased personnel costs required to
support the new product.
NET INCOME. Net income decreased 16.9% to $231,542 in the 12 months ended
February 28, 1995 from $278,486 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 $6,586,455 compared to $8,249,771 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 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.
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 $3,121,196 in the six months ended June 30, 1996 from $3,685,511 in the six
months ended June 30, 1995.
SELLING, GENERAL, AND ADMINISTRATIVE. Selling, general, and administrative
expenses decreased 19.2% to $2,402,064 for the six months ended June 30, 1996
compared to $2,971,173 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.
25
<PAGE> 27
EXCESS OF NET SALES OVER DIRECT EXPENSES. Excess of net sales over direct
expenses increased 0.7% to $719,132 in the six months ended June 30, 1996
compared to $714,338 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 1995 increased 6.6% to $11,871,171 compared to
$11,138,369 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 57.0% 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 $5,444,396 in the 12 months ended December 31, 1995 from $4,795,599 in the 12
months ended December 31, 1994.
SELLING, GENERAL, AND ADMINISTRATIVE. Selling, general, and administrative
expenses increased 19.8% to $4,883,265 in 1995 compared to $4,075,756 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 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% 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.
EXCESS OF NET SALES OVER DIRECT EXPENSES. Excess of net sales over direct
expenses decreased 22.1% to $561,131 in 1995 compared to $719,843 in 1994.
TWELVE MONTHS ENDED DECEMBER 31, 1994 COMPARED TO TWELVE MONTHS ENDED DECEMBER
31, 1993
NET SALES. Net sales increased 67.4% to $11,138,369 in the 12 months ended
December 31, 1994 compared to $6,653,488 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
57.0% 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 $4,795,599 in the 12 months ended December 31, 1994 from $2,613,645 in the 12
months ended December 31, 1993.
SELLING, GENERAL, AND ADMINISTRATIVE. Selling, general, and administrative
expenses increased 98.3% to $4,075,756 in 1994 compared to $2,054,919 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.
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<PAGE> 28
EXCESS OF NET SALES OVER DIRECT EXPENSES. Excess of net sales over direct
expenses increased 28.9% to $719,843 in 1994 compared to $558,726 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 9.7% to $2,339,344 for the nine months ended
June 30, 1996 compared to $2,591,653 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 of JDS.
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 11.1%
to $1,389,353 in the nine months ended June 30, 1996 from $1,561,418 in the nine
months ended June 30, 1995.
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES. Selling, general, and
administrative expenses decreased 10.1% to $1,393,109 in the nine months ended
June 30, 1996 from $1,549,000 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 ($3,756) in the nine months ended June 30,
1996 compared to net income of $23,000 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 $3,367,599 for the 12 months ended
September 30, 1995 compared to $3,577,779 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.
COST OF SALES. Cost of sales, as a percentage of net sales, decreased to
40.0% 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
$2,019,304 in the 12 months ended September 30, 1995 from $2,114,157 in the 12
months ended September 30, 1994.
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES. Selling, general, and
administrative expenses decreased 5.7% to $2,045,731 for the 12 months ended
September 30, 1995 compared to $2,170,271 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 $9,000 in the 12 months ended September
30, 1995 compared to a net loss of ($16,000) in the 12 months ended September
30, 1994 an increase of 156.3%.
TWELVE MONTHS ENDED SEPTEMBER 30, 1994 COMPARED TO TWELVE MONTHS ENDED
SEPTEMBER 30, 1993
NET SALES. Net sales decreased 5.8% to $3,577,779 for the 12 months ended
September 30, 1994 compared to $3,799,178 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.
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<PAGE> 29
GROSS PROFIT. As a result of the foregoing, gross profit increased 2.9% to
$2,114,157 in the 12 months ended September 30, 1994 from $2,054,088 in the 12
months ended September 30, 1993.
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES. Selling, general, and
administrative expenses increased 3.8% to $2,170,271 in the 12 months ended
September 30, 1994 compared to $2,091,895 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 increased to 44.8% to $16,000 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 5.4% to $735,538 in the six months ended
June 30, 1996 compared to $777,460 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
45.7% in the six months ended June 30, 1996 as compared with 50.0% 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. As a result of the foregoing, gross profit increased 2.7% to
$399,524 in the six months ended June 30, 1996 from $389,009 in the six months
ended June 30, 1995.
SELLING, GENERAL, AND ADMINISTRATIVE. Selling, general, and administrative
expenses decreased 31.0% to $328,925 in the six months ended June 30, 1996
compared to $476,481 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.
NET INCOME (LOSS). Net income was $32,000 in the six months ended June 30,
1996 compared to a net loss of ($133,000) 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 $1,557,709 compared to $1,998,679 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.
COSTS OF SALES. Cost of sales, as a percentage of net sales, increased to
49.6% in the 12 months ended December 31, 1995 as compared with 47.7% 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 24.9%
to $785,265 in the 12 months ended December 31, 1995 from $1,046,119 in the 12
months ended December 31, 1994.
SELLING, GENERAL, AND ADMINISTRATIVE. Selling, general, and administrative
expenses decreased 14.3% to $891,146 in the 12 months ended December 31, 1995
compared to $1,039,566 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 was ($195,000) in the 12 months ended December 31, 1995
compared to $72,000 in the 12 months ended December 31, 1994.
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LIQUIDITY AND CAPITAL RESOURCES
The pro forma working capital as of June 30, 1996 after giving 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. This debt has rates of approximately 10% due in
approximately two years (includes the $2 million deferred cash payment described
under "Description of The Acquisitions -- Gena Acquisition").
In September 1996 the Company used the net proceeds of a $400,000 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 holders
of the Bridge Notes 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 currently plans to consolidate the operations of Body Drench,
JDS Manufacturing and KII into Gena's facilities in Duncanville, Texas. The
Company's executive offices will be located in Phoenix, Arizona. 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. Additional
costs will be incurred 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
expenditures and operating requirements through the end of 1996 and 1997 will be
funded by operations and other sources of financing. The Company will also seek
to establish bank financing which, when combined with the Company's cash
resources, will be used for anticipated future acquisitions of beauty 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.
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<PAGE> 31
BUSINESS
INTRODUCTION
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 combined basis, total revenue of the
Company exceeded $25 million in 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.
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 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
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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. The Company is not aware of any other company
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, greater purchasing
power, 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 as a result of a decentralized management
policy; 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, which has allowed them to become personally acquainted with
principals of professional salon product businesses across the country. The
Company believes that the 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
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<PAGE> 33
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 labor costs
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.
- 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 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.
- 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.
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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 and,
with respect to certain products, physically more therapeutic than 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
Mediceuticals 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(R) 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(R) 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(TM) salonwear line
features an extensive array of salonwear for the stylist and the stylist's
clientele.
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.
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<TABLE>
<CAPTION>
PRODUCT PRODUCT BRAND SALON RETAIL SALES
CATEGORY DESCRIPTION NAMES USE BY SALONS
- ----------------- -------------------------------- ----------------- ----- ------------
<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
manicure and pedicure solutions
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; Maiko 100% 0%
and Sundries salonwear (capes and aprons)
<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, including the semiannual Barber and Beauty Supply
Institute selling show, 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 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.
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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 accounts for a
significant portion of the purchases of the Company's professional sale
products. During 1995, Sally accounted for approximately 10% of the Company's
net sales.
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 sixmonth 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 at the Duncanville
facility. 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 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 Company 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 commence construction of such addition.
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
35
<PAGE> 37
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. Substantially
all of the Company's salon appliance products currently are manufactured on a
contract basis by a single independent foreign manufacturer. 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.
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
Windemere -- Durable Holdings, Inc.), 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 will
seek to register significant trademarks and trade names in other foreign
countries as it enters these markets.
A number of the Company's products incorporate patented or patent-pending
formulations pursuant to nonexclusive licenses from third parties. While the
Company considers these patents and the protection provided by them to be
important, 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."
36
<PAGE> 38
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 six months with an option to renew for an additional six months.
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. There can be no assurance that the
Company's insurance coverage will be adequate to cover all liabilities occurring
out of such claims or that any such claims that are not covered by insurance
will not have an adverse effect on the Company's business.
37
<PAGE> 39
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth information concerning each of the
directors, proposed director, and executive officers 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
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. 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. 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, AII acquired 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 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.
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<PAGE> 40
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 1994. F&C filed
for protection under Chapter 11 of the United States Bankruptcy Code ("Chapter
11") in 1994. 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.
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 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 was elected 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 September 1995.
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 the Underwriter of the
39
<PAGE> 41
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."
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 $180,000 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
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 entered 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 threeyear 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 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 during the term of the
employment agreement after the expiration or termination of such employment
agreement.
40
<PAGE> 42
In connection with the acquisition of KII, the Company entered 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 complete during 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 $60,000 for the first five months of the term of the
employment agreement and $30,000 over the remaining seven months. In addition,
Mr. Black will receive a $10,000 bonus upon the completion of the combinations
of the Acquired Businesses and the integration of the production of Body Drench
products in the Duncanville facility.
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." Officers of
the Company receive no additional compensation for serving on the Board of
Directors.
1996 STOCK OPTION PLAN
In August 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 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
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<PAGE> 43
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.
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.
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<PAGE> 44
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 OFFERING AFTER OFFERING(1)
--------------------- ---------------------
NAME OF BENEFICIAL OWNER NUMBER PERCENT NUMBER PERCENT
- --------------------------------------------------- --------- ------- --------- -------
<S> <C> <C> <C> <C>
Sam L. Leopold..................................... 807,851 43.2% 807,851 19.8%
Kenneth S. Bernstein(2)............................ 807,851 43.2% 807,851 19.8%
Thomas M. Clifford(3).............................. 161,571 8.7% 161,571 4.0%
David E. Ziegler(4)................................ 72,707 3.9% 72,707 1.8%
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 officers as a group (five
persons)......................................... 1,849,980 99.0% 1,849,980 45.4%
</TABLE>
- ---------------
(1) Assumes that the Overallotment Option is not exercised.
(2) Mr. Bernstein, a founder of the Company, entered into consent agreements
with the SEC, the National Association of Securities Dealers, Inc. and the
Colorado state securities commissions with respect to allegations that Mr.
Bernstein and others failed to supervise adequately the activities of
employees of a broker-dealer. Mr. Bernstein served as General Security
Principal, Director of Corporate Finance, and Director of Compliance for the
broker-dealer at the time these employees were alleged to have engaged in
practices that resulted in delaying customer orders and excessive mark-ups.
Mr. Bernstein agreed to $100,000 in fines, censure, and a suspension for
associating with a broker-dealer for a two-year period. Since 1994, Mr.
Bernstein has had no affiliations with any broker-dealers.
(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 accelerate such options if
the Company's earnings per share equal or exceed $1.86 on a combined basis
for fiscal years 1997 and 1998.
(4) On October 14, 1996, Mr. Ziegler will receive 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 will each
receive options to purchase 2,500 shares of Common Stock following each
annual meeting of stockholders for so long as he remains a member of the
Board. See "Management -- 1996 Stock Option Plan."
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 three of the Acquired Companies and is negotiating a definitive agreement
with KII as described below. The agreements provide for an aggregate purchase
price for the four Acquired Businesses of approximately $23.23 million, subject
to certain adjustments, of which (i) approximately $22.65 million is payable in
cash (including $2 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
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<PAGE> 45
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 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 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 has entered 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."
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
$4,100,000 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 of life insurance policies owned by
JDS on the lives of each of the JDS 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
44
<PAGE> 46
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 a proposed Asset Purchase Agreement among KII and John Hammer,
Wallace Jones, and Gerald L. Kotch (collectively, the "KII Stockholders") and
Styling, the Company will purchase substantially all of the 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 trade accounts payable and open purchase orders. The Asset Purchase
Agreement contains provisions respecting confidentiality for the five-year
period following the closing. In connection with the acquisition, Styling has
entered into an employment agreement with Mr. Kotch. See
"Management -- Employment Agreements."
DESCRIPTION OF CAPITAL STOCK
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
September 20, 1996, there were issued and outstanding 1,615,702 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.
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<PAGE> 47
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 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
Notes 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.
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<PAGE> 48
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 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.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, the Company will have outstanding
4,000,000 shares of Common Stock (including options with an exercise price less
than the Offering Price). All of the 2,200,000 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 1,615,702 shares owned by the
Company's founders, 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 founders, directors, and executive officers of the Company have agreed,
at the request of the Underwriter, 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 Underwriter.
See "Underwriting." 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, 1,615,702, 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 383,843 shares immediately after the
Offering) or (ii) the average weekly trading volume in Common Stock during the
four calendar weeks preceding such sale. Sales
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<PAGE> 49
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 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 Shares and the Bridge Warrant Shares may exercise
one-time demand registration rights and require the Company to register the
Bridge 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 Shares and the Bridge Warrant Shares also have "piggyback"
registration rights with respect to such shares as well. See "Description of
Capital Stock -- Bridge Warrants."
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is Corporate Stock
Transfer, Inc., Denver, Colorado.
LISTING
Application has been made to list the Common Stock on the Nasdaq National
Market under the symbol "STYL."
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<PAGE> 50
UNDERWRITING
The Underwriter has agreed, subject to the terms and conditions of the
Underwriting Agreement, to purchase from the Company the number of shares of
Common Stock set forth on the cover hereof.
The Underwriter proposes 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 Underwriter may allow a concession to selected dealers
who are members of the National Associated of Securities Dealers, Inc. ("NASD")
not in excess of $ per share, and the Underwriter 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 Underwriter.
The Company has agreed to pay to the Underwriter a non-accountable expense
allowance equal to the greater of 1 1/2% of the gross proceeds of the Offering
or $350,000, $75,000 of which has been paid, to cover some of the underwriting
costs and due diligence expenses related to the Offering.
The Company has granted an option to the Underwriter, exercisable within 30
days after the date of this Prospectus to purchase up to an additional 330,000
shares of Common Stock at the Offering Price, less underwriting discounts and
the non-accountable expense allowance. The Underwriter may exercise the option
solely to cover overallotments, if any, made on the sale of the Common Stock
offered hereby.
The Company, its founders, 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 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 Underwriter.
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 Underwriter. 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 Company's 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, and 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 Underwriter against certain
liabilities, including liabilities under the Securities Act.
The Company has agreed to sell to the Underwriter or its designees, for
nominal consideration, the Underwriter's Warrants to purchase an aggregate of
154,000 shares of Common Stock. The shares of Common Stock subject to the
Underwriter's Warrants will be in all respects identical to the shares of Common
Stock offered to the public hereby. The Underwriter's 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 Underwriter's 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 Underwriter's 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 Underwriter's 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 Underwriter's
Warrants may be exercised by
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<PAGE> 51
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 Underwriter will the right to send a representative to
observe each meeting of the Company's Board of Directors, or in lieu of such
observer, the Underwriter may elect to require the Company to use its best
efforts to elect Sylvan Schefler, Vice Chairman of the Underwriter, 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 Underwriter by
Brownstein Hyatt Farber & Strickland, P.C., Denver, Colorado.
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.
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.
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<PAGE> 52
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
Statements of Assets and Liabilities to be Acquired................................. F-9
Statements of Net Sales and Direct Expenses......................................... F-10
Notes to Financial Statements....................................................... F-11
GENA LABORATORIES, INC.
Report of Independent Public Accountants............................................ F-14
Balance Sheets...................................................................... F-15
Statements of Operations............................................................ F-16
Statements of Stockholders' Equity.................................................. F-17
Statements of Cash Flows............................................................ F-18
Notes to Financial Statements....................................................... F-19
JDS MANUFACTURING CO., INC.
Report of Independent Public Accountants............................................ F-25
Balance Sheets...................................................................... F-26
Statements of Operations............................................................ F-27
Statements of Stockholders' Equity.................................................. F-28
Statements of Cash Flows............................................................ F-29
Notes to Financial Statements....................................................... F-30
STYLING TECHNOLOGY CORPORATION
Report of Independent Public Accountants............................................ F-33
Balance Sheets...................................................................... F-34
Notes to Balance Sheets............................................................. F-35
</TABLE>
F-1
<PAGE> 53
STYLING TECHNOLOGY CORPORATION AND ACQUIRED BUSINESSES
INTRODUCTION TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
The following pro forma financial statements include the pro forma combined
balance sheet of the Company as of June 30, 1996, and the pro forma consolidated
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 Pending 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, (iii) approximately $300,000 to
be paid by the assumption of existing debt of the related Acquired Businesses,
and (iv) approximately $50,000 in aggregate market value of Common Stock, based
on the initial public offering price. 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 consolidated 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
Laboratories for the year ended February 29, 1996 and JDS Manufacturing 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 Laboratories which is as of and for the six months ended May 31, 1996.
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 consolidated statement of operations data contain adjustments which are
directly attributable to the transaction.
F-2
<PAGE> 54
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......................... $ 200 $ 447,141 $ -- $ 66,368 $ 177,321 $ 691,030
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............................. 300,218 2,619,019 3,968,567 602,619 556,492 8,046,915
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..................................... $300,218 $3,707,135 $4,221,333 $728,124 $ 621,784 $9,578,594
======== ========== ========== ======== ========= ==========
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...................................... 200 10,000 -- 10,000 50,000 70,200
Additional paid in capital........................ -- 88,303 -- -- -- 88,303
Retained earnings (deficit)....................... -- 2,661,113 582,095 17,453 (250,071) 3,010,590
-------- ---------- ---------- -------- --------- ----------
Total liabilities and
stockholders' equity........................... $300,218 $3,707,135 $4,221,333 $728,124 $ 621,784 $9,578,594
======== ========== ========== ======== ========= ==========
<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) $(19,680,303) $21,250,000(C) $ 1,569,697
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) (12,494,418) 21,250,000 8,755,582
PP&E, net......................................... -- 1,166,983 -- 1,166,983
Goodwill.......................................... 18,060,092(A) 18,060,092 -- 18,060,092
Other............................................. (97,000)(A) 267,696 -- 267,696
------------ ------------ ----------- -----------
Total assets..................................... $ (2,578,241) $ 7,000,353 $21,250,000 $28,250,353
============ ============ =========== ===========
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.................................... (1,051,619)(A) 299,568 -- 299,568
1,991,509(A) 1,991,509 -- 1,991,509
-- --
-- --
Other............................................. -- -- --
STOCKHOLDER'S EQUITY:
Common Stock...................................... (70,000)(B) 200 2,125 2,325
Additional paid in capital........................ (88,303)(B) -- 21,247,875(C) 21,250,000
Retained earnings (deficit)....................... (3,010,590)(B) -- -- --
-- -- --
-- -- --
50,000(A) 50,000 -- 50,000
------------ ------------ ----------- -----------
Total liabilities and
stockholders' equity........................... $ (2,578,241) $ 7,000,353 $21,250,000 $28,250,353
============ ============ =========== ===========
</TABLE>
F-3
<PAGE> 55
STYLING TECHNOLOGY CORPORATION AND ACQUIRED BUSINESSES
NOTES TO UNAUDITED PRO FORMA COMBINED BALANCE SHEET
1. PRO FORMA BALANCE SHEET ADJUSTMENTS
The accompanying pro forma consolidated 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........... 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 on non-interest bearing note to
sellers of Gena, secured by 18,182 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.
(B) Reflects the elimination of the equity of the companies to be acquired.
(C) Reflects the net proceeds from the offering of 2,200,000 shares of $.0001
par value Common Stock at the Offering Price.
F-4
<PAGE> 56
STYLING TECHNOLOGY CORPORATION AND ACQUIRED BUSINESSES
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1996
<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....................... $4,351,975 $6,586,455 $1,664,932 $735,538 $13,338,900 $13,338,900
Cost of sales................... 2,738,126 3,465,259 675,132 336,014 7,214,531 (925,006 )(DD) 6,289,525
---------- ---------- ---------- -------- ----------- ----------- -----------
Gross Profit................ 1,613,849 3,121,196 989,800 399,524 6,124,369 925,006 7,049,375
(AA
Selling, general and admin...... 1,468,856 2,402,064 928,214 328,925 5,128,059 (1,006,687 )BB, CC) 4,121,372
---------- ---------- ---------- -------- ----------- ----------- -----------
Income from operations........ 144,993 719,132 61,586 70,599 996,310 1,931,693 2,928,003
Interest expense................ 19,943 19,961 38,675 78,579 108,579 (FF) 187,158
Other income (expense), net..... (10,296) -- 932 (160) (9,524) -- (9,524)
---------- ---------- ---------- -------- ----------- ----------- -----------
Income before income taxes...... 114,754 719,132 42,557 31,764 908,207 1,823,114 2,731,321
Provision for income taxes...... 27,690 -- 16,600 -- 44,290 1,037,639 (EE) 1,081,930
---------- ---------- ---------- -------- ----------- ----------- -----------
Net income.................... $ 87,064 $ 719,132 $ 25,957 $ 31,764 $ 863,917 $ 785,475 $ 1,649,391
========== ========== ========== ======== =========== =========== ===========
Pro forma earnings per share.... $ 0.41
===========
Weighted average common and
common equivalent shares
outstanding................... $ 3,998,531(GG)
===========
</TABLE>
F-5
<PAGE> 57
STYLING TECHNOLOGY CORPORATION AND ACQUIRED BUSINESSES
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE TWELVE MONTHS 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 1,348,295 772,444 13,366,300 (1,850,011 )(DD) 11,516,289
---------- ----------- ---------- ---------- ----------- ----------- -----------
Gross Profit............. 3,565,306 5,444,396 2,019,304 785,265 11,814,271 1,850,011 13,664,282
(AA,
Selling, general and
admin. .................... 3,033,409 4,883,265 2,010,142 891,146 10,817,962 (2,013,374 )BB, CC) 8,804,588
---------- ----------- ---------- ---------- ----------- ----------- -----------
Income from operations..... 531,897 561,131 9,162 (105,881) 996,309 3,863,385 4,859,694
Interest expense............. 43,289 35,589 89,557 168,435 217,158 (FF) 385,593
Other income (expense),
net........................ 12,809 -- 41,951 -- 54,760 -- 54,760
---------- ----------- ---------- ---------- ----------- ----------- -----------
Income (loss) before income
taxes...................... 501,417 561,131 15,524 (195,438) 882,634 3,646,227 4,528,861
Provision for income taxes... 184,790 -- 6,950 -- 191,740 1,677,436 (EE) 1,869,176
---------- ----------- ---------- ---------- ----------- ----------- -----------
Net income (loss)........ $ 316,627 $ 561,131 $ 8,574 ($ 195,438) $ 690,894 $1,968,792 $ 2,659,685
========== =========== ========== ========== =========== =========== ===========
Pro forma earnings per
share...................... $ 0.67
===========
Weighted average common and
common equivalent shares
outstanding................ 3,998,531(GG)
===========
</TABLE>
F-6
<PAGE> 58
STYLING TECHNOLOGY CORPORATION
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
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 Manufacturing and the consolidation of
operations at Gena Laboratories.
(CC) To record the amortization of goodwill over 25 years.
(DD) Adjustment to reflect the reduction of material and direct labor costs
as a result of internalizing 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 companies on a combined basis.
(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.
(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 holders of the Bridge Note, for each period.
F-7
<PAGE> 59
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Styling Technology Corporation:
We have audited the accompanying statements of assets and liabilities to be
acquired of BODY DRENCH (a Division of Designs by Norvell, Inc., a Tennessee
corporation) as of December 31, 1995 and 1994, and the related statements of
operating revenues and direct expenses for the three years in the period then
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.
The accompanying statements of assets and liabilities to be acquired and
the related statements of net sales and direct expenses of the to be acquired
business pursuant to the acquisition agreement dated April 5, 1996, between
Styling Technology Corporation and Designs by Norvell, Inc. (Note 1) are not
intended to be a complete presentation of an existing entity's financial
position or results of operations. These statements of assets and liabilities to
be acquired and the related statements of operating revenues and direct expenses
are presented for the purposes of complying with the financial statement
requirements of the Securities Exchange Commission for acquired or to be
acquired businesses.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the net assets of Body Drench as of December 31, 1995
and 1994, and the related operating revenues and expenses for the three years
then ended 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 6. 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> 60
BODY DRENCH
STATEMENTS OF ASSETS AND LIABILITIES TO BE ACQUIRED
<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,
$297,196 and $363,611, respectively.................. 167,697 316,443 252,766
---------- ---------- ----------
Total assets................................. $4,621,680 $4,780,778 $4,221,333
========== ========== ==========
LIABILITIES
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)
NET ASSETS............................................. $1,122,527 $1,026,818 $ 582,095
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-9
<PAGE> 61
BODY DRENCH
STATEMENTS OF NET SALES AND DIRECT EXPENSES
<TABLE>
<CAPTION>
DECEMBER 31, 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
---------- ----------- ----------- ---------- ----------
EXCESS OF NET SALES OVER DIRECT
EXPENSES.......................... $ 558,726 $ 719,843 $ 561,131 $ 714,338 $ 719,132
========== =========== =========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-10
<PAGE> 62
BODY DRENCH
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND BASIS OF PRESENTATION
ACQUISITION AGREEMENT AND BASIS OF PRESENTATION
The accompanying financial statements represent the accounts of the
acquired "business," herein referred to as Body Drench (the Division), and
include assets and liabilities to be acquired and certain nonacquired
liabilities which would be considered "regenerative" in nature (accruals and
other liabilities). These statements are presented for the purposes of complying
with the financial statement requirements of the Securities Exchange Commission
for acquired or to be acquired businesses.
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 the Division, 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.
NATURE AND SEASONALITY OF OPERATIONS
The Division is engaged in the manufacture and distribution of skincare,
suncare and bodycare 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.
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 Company'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, results of operations as of and for the period then ended. The
Division's revenues
F-11
<PAGE> 63
BODY DRENCH
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
are seasonal in nature, with the first six months of the year having the
majority of the volume. 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>
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.............................. 243,647 393,726 396,784
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>
4. COMMITMENTS AND CONTINGENCIES
LEASES
The Division leases certain facilities and equipment under operating lease
agreements.
F-12
<PAGE> 64
BODY DRENCH
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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 $52,1636, $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.
5. 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).
6. 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 is 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-13
<PAGE> 65
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.
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-14
<PAGE> 66
GENA LABORATORIES, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
MAY 31,
1996
FEBRUARY 28, FEBRUARY 29, -----------
1995 1996
------------ ------------ (UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents............................ $ 390,325 $ 250,644 $ 447,141
Investments.......................................... 14,999 46,500 --
Accounts receivable, net of allowance for doubtful
accounts of $120,347, $136,093 and $136,093,
repectively....................................... 863,208 965,615 978,297
Inventory............................................ 965,335 1,213,688 1,065,889
Deferred tax asset................................... 99,055 131,790 127,692
---------- ---------- ----------
Total current assets......................... 2,332,922 2,608,237 2,619,019
---------- ---------- ----------
PROPERTY AND EQUIPMENT, net of accumulated depreciation
of $392,026 $471,771, and $484,417, repectively...... 884,638 830,093 826,822
---------- ---------- ----------
DEFERRED TAX ASSET, net of current portion............. -- 19,870 26,759
---------- ---------- ----------
OTHER ASSETS........................................... 346,866 256,770 234,535
---------- ---------- ----------
$ 3,564,426 $ 3,714,970 $ 3,707,135
========== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable..................................... $ 391,381 $ 382,926 $ 293,729
Accrued expenses..................................... 302,808 259,903 214,351
Current portion of note payable to related parties... 32,571 34,929 34,324
Current portion of long-term debt.................... 96,056 95,248 68,016
---------- ---------- ----------
Total current liabilities.................... 822,816 773,006 610,420
---------- ---------- ----------
NOTE PAYABLE TO RELATED PARTIES, less current
portion.............................................. 342,464 307,358 299,458
---------- ---------- ----------
LONG-TERM DEBT, net of current portion................. 124,186 11,518 10,229
---------- ---------- ----------
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 2,688,725
---------- ---------- ----------
TOTAL STOCKHOLDERS' EQUITY................... $ 2,274,960 $ 2,623,088 $ 2,787,028
---------- ---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY... $ 3,564,426 $ 3,714,970 $ 3,707,135
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-15
<PAGE> 67
GENA LABORATORIES, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE-MONTH
FOR THE YEARS ENDED PERIOD ENDED
------------------------------------------ -----------------------
FEBRUARY 28, FEBRUARY 28, FEBRUARY 29, MAY 31, MAY 31,
1994 1995 1996 1995 1996
------------ ------------ ------------ ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
NET SALES..................................... $ 6,426,416 $ 7,523,751 $ 8,384,092 $2,177,896 $2,303,787
COST OF SALES................................. 3,280,046 4,163,395 4,818,786 1,169,748 1,296,483
---------- ---------- ---------- ---------- ----------
GROSS PROFIT.................................. 3,146,370 3,360,356 3,565,306 1,008,148 1,007,304
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES.................................... 2,744,363 2,963,926 3,033,409 776,771 747,092
---------- ---------- ---------- ---------- ----------
INCOME FROM OPERATIONS........................ 402,007 396,430 531,897 231,377 260,212
OTHER INCOME AND (EXPENSE), net............... 35,092 (35,282) (30,480) (78) (5,979)
---------- ---------- ---------- ---------- ----------
INCOME BEFORE PROVISION FOR INCOME TAXES...... 437,099 361,148 501,417 231,299 254,233
PROVISION FOR INCOME TAXES.................... 158,613 129,606 184,790 85,880 94,095
---------- ---------- ---------- ---------- ----------
NET INCOME.................................... $ 278,486 $ 231,542 $ 316,627 $ 145,419 $ 160,138
========== ========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-16
<PAGE> 68
GENA LABORATORIES, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
------------------ PAID-IN RETAINED
SHARES AMOUNT CAPITAL EARNINGS TOTAL
------ ------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
BALANCE AT 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 AT 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 AT 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 AT FEBRUARY 29, 1996................... 2,000 10,000 88,303 2,524,785 2,623,088
Net income for the three-month period
ended May 31, 1996 (unaudited).......... -- -- -- 160,138 160,138
Net change in unrealized holding loss
(unaudited)............................. -- -- -- 3,802 3,802
----- ------- ------- ---------- ----------
BALANCE AT MAY 31, 1996 (unaudited)............ 2,000 $10,000 $ 88,303 $2,688,725 $2,787,028
===== ======= ======= ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-17
<PAGE> 69
GENA LABORATORIES, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE-MONTH PERIOD
FOR THE YEARS ENDED ENDED
---------------------------------------------- -----------------------
FEBRUARY 28, FEBRUARY 28, FEBRUARY 29, MAY 31, MAY 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 $ 145,419 $ 160,138
Adjustments to reconcile net income to
net cash used in operating
activities --
Depreciation and amortization...... 114,021 155,185 168,685 32,334 34,881
Loss on sale of securities on fixed
assets........................... -- 32,513 -- -- 7,684
Decrease (increase) in accounts
receivable....................... 38,647 (157,714) (102,407) (54,397) (12,682)
Decrease (increase) in inventory... (14,638) (118,638) (248,353) (135,824) 147,799
Decrease (increase) in other
assets........................... 80,863 (30,814) (51,449) (75,141) (2,791)
(Decrease) increase in accounts
payable and accrued
liabilities...................... (122,813) 210,426 (51,360) 70,246 (134,749)
--------- --------- --------- --------- ---------
Net cash provided by (used in)
operating activities........ 374,566 322,500 31,743 (17,363) 200,280
--------- --------- --------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures.................. (331,996) (23,648) (25,200) (11,719) (9,375)
Cost incurred to acquire new
businesses......................... (180,213) (140,000) -- -- --
Proceeds from sale of investments..... -- -- -- -- 42,618
--------- --------- --------- --------- ---------
Net cash provided by (used in)
investing activities........ (512,209) (163,648) (25,200) (11,719) 33,243
--------- --------- --------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from (payments of)
long-term debt, net.............. 178,585 (136,668) (146,224) (36,249) (37,026)
--------- --------- --------- --------- ---------
Net cash provided by (used in)
financing activities........ 178,585 (136,668) (146,224) (36,249) (37,026)
--------- --------- --------- --------- ---------
NET INCREASE (DECREASE) IN CASH......... 40,942 22,184 (139,681) (65,331) 196,497
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 $ 324,994 $ 447,141
========= ========= ========= ========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Interest paid...................... $ 8,325 $ 54,401 $ 43,259 $ 11,531 $ 9,141
========= ========= ========= ========= =========
Income taxes paid.................. $ 137,580 $ 127,609 $ 232,417 $ 99,631 $ 86,456
========= ========= ========= ========= =========
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-18
<PAGE> 70
GENA LABORATORIES, INC.
NOTES TO FINANCIAL STATEMENTS
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.
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, MAY 31,
1995 1996 1996
------------ ------------ ----------
<S> <C> <C> <C>
(UNAUDITED)
Raw materials and work-in-process.............. $675,735 $ 849,582 $ 746,122
Finished goods................................. 289,600 364,106 319,767
-------- ---------- ----------
$965,335 $ 1,213,688 $1,065,889
======== ========== ==========
</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-19
<PAGE> 71
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 three-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, $3,400 and
$9,200.
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 three-month
periods ended May 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 three-month period ending May 31, 1996, are not
necessarily indicative of the results that may be expected for the fiscal year
ending February 28, 1997.
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 $456,505 (unaudited) as of February 28,
1995, February 29, 1996 and May 31, 1996, respectively.
F-20
<PAGE> 72
GENA LABORATORIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
4. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
FEBRUARY 28, FEBRUARY 29, MAY 31,
1995 1996 1996
------------ ------------ ------------
<S> <C> <C> <C>
(UNAUDITED)
Land............................................... $ 150,000 $ 150,000 $ 150,000
Factory equipment.................................. 407,427 431,832 441,207
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 1,311,239
Less -- Accumulated depreciation................... (392,026) (471,771) (484,417)
---------- ---------- ----------
$ 884,638 $ 830,093 $ 826,822
========== ========== ==========
</TABLE>
5. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
FEBRUARY 28, FEBRUARY 29, MAY 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 $ 35,294
Various notes payable, bearing interest from
7.5% to 8.0%, maturing through 1998........... 96,713 53,824 42,951
-------- -------- --------
220,242 106,766 78,245
Less: Current maturities........................ (96,056) (95,248) (68,016)
-------- -------- --------
$124,186 $ 11,518 $ 10,229
======== ======== ========
</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 May 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>
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%, 28%, 30% and 27% for the
years ended February 28, 1994, 1995, February 29, 1996, and the three-month
periods ended May 31, 1995 and 1996.
F-21
<PAGE> 73
GENA LABORATORIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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>
FOR THE YEARS ENDED THREE MONTHS ENDED
------------------------------------------ MAY 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 $ 92,686 $85,093
State........................... 18,699 19,329 28,896 12,845 11,793
-------- -------- -------- -------- -------
153,626 158,797 237,395 105,531 96,886
Deferred provision (benefit)...... 4,987 (29,191) (52,605) (19,651) (2,791)
-------- -------- -------- -------- -------
Provision for income taxes...... $158,613 $129,606 $184,790 $ 85,880 $94,095
======== ======== ======== ======== =======
</TABLE>
The components of deferred taxes are as follows:
<TABLE>
<CAPTION>
FEBRUARY 28, FEBRUARY 29, MAY 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 55,800
Capital losses in excess of capital gains..... 1,544 10,362 13,202
Allowance for doubtful accounts............... 44,492 50,314 50,314
Amortization.................................. 15,773 38,586 45,476
-------- -------- --------
Total gross deferred tax assets............ 118,749 170,377 173,168
-------- -------- --------
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 $ 154,451
======== ======== ========
</TABLE>
F-22
<PAGE> 74
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>
FOR THE THREE
FOR THE YEARS ENDED MONTHS ENDED
------------------------------------------ MAY 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 78,641 86,439
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 7,239 7,656
-------- -------- -------- ------- -------
Income tax provision......... $158,613 $129,606 $184,790 $85,880 $94,095
======== ======== ======== ======= =======
</TABLE>
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>
MAY 31,
1996
FEBRUARY 28, FEBRUARY 29, -----------
1995 1996
------------ ------------ (UNAUDITED)
<S> <C> <C> <C>
Total shareholder note payable.................. $375,035 $342,287 $ 333,782
Less: Current maturities...................... (32,571) (34,929) (34,324)
-------- -------- --------
Shareholder note payable, net of current
portion....................................... $342,464 $307,358 $ 299,458
======== ======== ========
</TABLE>
Principal maturities related to this loan are as follows:
<TABLE>
<CAPTION>
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 $143,133, $128,446,
$106,312, $24,361, and $29,977 for the years ended February 28, 1994 and 1995,
February 29, 1996, and the three-month unaudited periods ended May 31, 1995 and
1996, respectively.
F-23
<PAGE> 75
GENA LABORATORIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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.
Principal maturities related primarily to a warehouse space lease are as
follows:
<TABLE>
<CAPTION>
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>
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-24
<PAGE> 76
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-25
<PAGE> 77
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-26
<PAGE> 78
JDS MANUFACTURING CO., INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED FOR THE NINE-MONTH
SEPTEMBER 30, PERIOD 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 operations) 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 19,043 800
-------- -------- -------- --------
NET INCOME (LOSS)......................... $ (16,494) $ 8,574 $ 23,275 $ (3,094)
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-27
<PAGE> 79
JDS MANUFACTURING CO., INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK
------------------ RETAINED
SHARES AMOUNT EARNINGS TOTAL
------ ------- -------- --------
<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-28
<PAGE> 80
JDS MANUFACTURING CO., INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE-MONTH
FOR THE YEARS ENDED PERIOD ENDED
SEPTEMBER 30, 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-29
<PAGE> 81
JDS MANUFACTURING CO., INC.
NOTES TO FINANCIAL STATEMENTS
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.
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-30
<PAGE> 82
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.
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>
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-31
<PAGE> 83
JDS MANUFACTURING CO., INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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.
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.
7. SUBSEQUENT EVENT
The Company entered into an acquisition agreement with STC dated 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-32
<PAGE> 84
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, 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-33
<PAGE> 85
STYLING TECHNOLOGY CORPORATION
BALANCE SHEET
<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-34
<PAGE> 86
STYLING TECHNOLOGY CORPORATION
NOTES TO BALANCE SHEETS
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 Kochammer Investments. The aggregate consideration that will
be paid by the Company to acquire these companies is approximately $23.33
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.
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. 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.
3. SUBSEQUENT EVENTS
Subsequent to June 30, 1996, the Company borrowed approximately $50,000
from the shareholders to fund costs related to the acquisition of one of the
four companies. In addition, the Company obtained bridge loan financing (Bridge
Note) to fund approximately $400,000 of deferred issuance and acquisition costs,
including the amounts borrowed above. 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 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" on Form
S-1 for further discussion of the terms of the anticipated acquisitions.
F-35
<PAGE> 87
STYLING TECHNOLOGY CORPORATION
NOTES TO BALANCE SHEETS -- (CONTINUED)
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.
F-36
<PAGE> 88
======================================================
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 UNDERWRITER. 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
Dividend Policy....................... 16
Use of Proceeds....................... 16
Capitalization........................ 17
Dilution.............................. ...
Selected Consolidated Financial
Data................................ 19
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 22
Business.............................. 30
Management............................ 38
Principal Stockholders................ 43
Description of the Acquisitions....... 43
Description of Capital Stock.......... 45
Underwriting.......................... 49
Legal Opinions........................ 50
Experts............................... 50
Additional Information................ 50
Index to Consolidated 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.
======================================================
======================================================
2,200,000 SHARES
STYLING TECHNOLOGY
CORPORATION
COMMON STOCK
-----------------
PROSPECTUS
-----------------
PRIME CHARTER LTD.
, 1996
======================================================
<PAGE> 89
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...................................................... $ 11,234
NASD filing fee........................................................... 3,758
Blue Sky fees and expenses................................................ 15,000
Nasdaq fees............................................................... 35,257
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........................................................ 25,751
--------
Total........................................................... $893,000
========
</TABLE>
II-1
<PAGE> 90
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 1,000,000 shares of Common Stock to
Messrs. Leopold and Bernstein, respectively, and options to purchase shares of
Common Stock to Mr. Clifford 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
John Hammer, Wallace Jones and Gerald L. Kotch (Stockholders) with respect to
Styling Technology Corporation+
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 Employment Agreement between Registrant and Richard E. Norvell+
10.9 Employment Agreement between Registrant and Gerald L. Kotch+
10.10 Employment Agreement between Registrant and Donald L. Black+
10.11 1996 Stock Option Plan+
</TABLE>
II-2
<PAGE> 91
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
- ------ ------------------------------------------------------------------------------------
<C> <S>
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>
- ---------------
+ 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> 92
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Phoenix, State of
Arizona, on September 19, 1996.
STYLING TECHNOLOGY CORPORATION
By: /s/ SAM 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
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 LEOPOLD Chairman of the Board, Chief September 19, 1996
- ------------------------------------- Executive Officer, and Principal
Sam L. Leopold Financial and Accounting Officer
/s/ THOMAS CLIFFORD President and Director September 19, 1996
- -------------------------------------
Thomas M. Clifford
Director , 1996
- -------------------------------------
James A. Brooks
/s/ DANIEL HOWELL Director September 19, 1996
- -------------------------------------
Daniel Howell
</TABLE>
II-4
<PAGE> 93
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 John Hammer, Wallace Jones and Gerald L. Kotch (Stockholders)
with respect to Styling Technology Corporation+...........................
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 Employment Agreement between Registrant and Richard E. Norvell+...........
10.9 Employment Agreement between Registrant and Gerald L. Kotch+..............
10.10 Employment Agreement between Registrant and Donald L. Black+..............
10.11 1996 Stock Option Plan+...................................................
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>
- ---------------
+ To be filed by amendment
<PAGE> 1
EXHIBIT 1
DRAFT 9/12/96
_________ Shares
STYLING TECHNOLOGY CORPORATION
Common Stock
(Par Value $.0001 Per Share)
UNDERWRITING AGREEMENT
November __, 1996
PRIME CHARTER LTD.
810 Seventh Avenue
New York, New York 10019
Ladies and Gentlemen:
1. Introduction. Styling Technology Corporation, a Delaware
corporation (the "Company"), proposes to issue and sell to Prime Charter Ltd.
and the other Underwriters listed on Schedule A hereto (collectively, the
"Underwriters") an aggregate of _________ shares (the "Primary Shares") of the
Company's common stock, par value $.0001 per share (the "Common Stock"). The
Company also proposes to issue and sell to the Underwriters an aggregate of not
more than _______ additional shares of Common Stock (the "Additional Shares") if
requested by the Representative in accordance with Section 9 hereof. The Primary
Shares and the Additional Shares are collectively referred to herein as the
"Shares." The words "you" and "your" refer to the Underwriters. Prime Charter
Ltd. is acting as representative (in such capacity, the "Representative") of the
several Underwriters.
2. Representations and Warranties. The Company represents, warrants
and agrees with the Underwriters that:
(a) A registration statement on Form S-1 (File No. 333-____)
under the Securities Act of 1933, as amended (the "Act"), with respect to the
Shares, including a form of prospectus subject to completion, has been prepared
by the Company in conformity with the requirements of the Act and the rules and
regulations (the "Rules and Regulations") of the Securities and Exchange
Commission (the "Commission") thereunder. Such registration statement has been
filed with the Commission under the Act, and one or more amendments to such
registration statement may also have been so filed. After the execution of this
Agreement, the Company shall file with the Commission either (i) if such
registration statement, as it may have been amended, has been declared by the
Commission to be effective under the Act, a prospectus in the form most recently
included in an amendment to such registration statement filed with the
Commission (or, if no such amendment shall have been filed, in such registration
statement), with such insertions and changes as are required by Rule 430A under
the Act or permitted by Rule 424(b) under the Act as shall have been provided to
and approved by the
<PAGE> 2
Representative prior to the filing thereof, or (ii) if such registration
statement, as it may have been amended, has not been declared by the Commission
to be effective under the Act, an amendment to such registration statement,
including a form of prospectus, a copy of which amendment has been furnished to
and approved by the Representative prior to the filing thereof. As used in this
Agreement, the term "Registration Statement" means such registration statement,
as amended at the time when it was or is declared effective, including all
financial schedules and exhibits thereto; the Registration Statement shall be
deemed to include any information omitted therefrom pursuant to Rule 430A under
the Act and included in the Prospectus (as hereinafter defined); the term
"Preliminary Prospectus" means each prospectus subject to completion that was
distributed to prospective investors; and the term "Prospectus" means the
prospectus first filed with the Commission pursuant to Rule 424(b) under the Act
or, if no prospectus is required to be filed pursuant to said Rule 424(b), such
term means the prospectus included in the Registration Statement at the time
when it was or is declared effective.
(b) The Commission has not issued any order preventing or
suspending the use of any Preliminary Prospectus and has not instituted or, to
the best knowledge of the Company, threatened to institute any proceedings with
respect to such an order. When any Preliminary Prospectus was filed with the
Commission it (i) contained all statements required to be stated therein in
accordance with, and complied in all material respects with the requirements of,
the Act and the Rules and Regulations, and (ii) did not include any untrue
statement of a material fact or omit to state any material fact necessary in
order to make the statements therein, in the light of the circumstances under
which they were made, not misleading. When the Registration Statement or any
amendment thereto was or is declared effective and at all times subsequent
thereto up to and including the Closing Date (as defined in Section 3 hereof)
and any Additional Closing Date (as defined in Section 9 hereof), it (i)
contained or will contain all statements required to be stated therein in
accordance with, and complied or will comply in all material respects with the
requirements of, the Act and the Rules and Regulations and (ii) did not or will
not include any untrue statement of a material fact or omit to state any
material fact necessary to make the statements therein not misleading. When the
Prospectus and any amendment or supplement thereto is filed with the Commission
pursuant to Rule 424(b) (or, if the Prospectus or such amendment or supplement
is not required to be so filed, when the Registration Statement and any
amendment thereto containing such amendment or supplement to the Prospectus was
or is declared effective) and at all times subsequent thereto up to and
including the Closing Date and any Additional Closing Date, the Prospectus, as
amended or supplemented at any such time (i) contained or will contain all
statements required to be stated therein in accordance with, and complied or
will comply in all material respects with the requirements of, the Act and the
Rules and Regulations, and (ii) did not or will not include any untrue statement
of a material fact or omit to state any material fact necessary in order to make
the statements therein, in light of the circumstances under which they were
made, not misleading. The foregoing provisions of this paragraph (b) shall not
apply to statements or omissions made in any Preliminary Prospectus, the
Registration Statement or the Prospectus or any amendment or supplement thereto
in reliance upon, and in conformity with, information furnished in writing to
the Company by or on behalf of the Underwriters expressly for use therein.
2
<PAGE> 3
(c) Each of the Company, both before and after giving effect
to the acquisition of the Body Drench Division of Designs by Norvell, Inc. (the
"Division"), and Gena Laboratories, Inc., JDS Manufacturing Co., Inc. and
Kotchammer Investments, Inc. (each a "Subsidiary" and, collectively, the
"Subsidiaries"), (i) is a duly incorporated and validly existing corporation in
good standing under the laws of its jurisdiction of incorporation or
organization, with full power and authority (corporate and other) to own or
lease its properties and to conduct its business as described in the
Registration Statement and the Prospectus (or, if the Prospectus is not in
existence, the most recent Preliminary Prospectus); and (ii) is duly qualified
to do business as a foreign corporation and is in good standing in each
jurisdiction in which the conduct of its business requires such qualification or
in which it owns or leases property, in each case except for those jurisdictions
in which the failure to so qualify, individually or in the aggregate, has not
had and is not reasonably likely to have a Material Adverse Effect (as defined
below). As of the Closing Date, the Subsidiaries will constitute the only
subsidiaries of the Company. "Material Adverse Effect" means any development,
change or circumstance that could be materially adverse to the business,
properties, assets, net worth, financial condition, results of operation or
prospects of the Company and the Subsidiaries, taken as a whole.
(d) The Company has the duly authorized and validly outstanding
capitalization set forth under the caption "Capitalization" in the Prospectus
(or, if the Prospectus is not in existence, the most recent Preliminary
Prospectus) and the Company will have the adjusted capitalization set forth
therein on the Closing Date, based on the assumptions set forth therein. The
securities of the Company conform to the descriptions thereof contained in the
Prospectus (or, if the Prospectus is not in existence, the most recent
Preliminary Prospectus). The outstanding shares of Common Stock have been duly
authorized and validly issued by the Company and are fully paid and
non-assessable. Except as created hereby or referred to in the Prospectus (or,
if the Prospectus is not in existence, the most recent Preliminary Prospectus),
there are no outstanding options, warrants, rights or other arrangements
requiring the Company or any Subsidiary at any time to issue any capital stock.
No holders of outstanding shares of capital stock of the Company are entitled as
such to any preemptive or other rights to subscribe for any of the Shares and
neither the filing of the Registration Statement nor the offering or sale of the
Shares as contemplated by this Agreement gives rise to any rights for or
relating to the registration of any securities of the Company. The Shares have
been duly authorized by all necessary corporate action on the part of the
Company, and on the Closing Date or any Additional Closing Date, as the case may
be, after payment therefor in accordance with the terms of this Agreement, (i)
the Shares to be sold by the Company hereunder on such date will be validly
issued, fully paid and nonassessable, and (ii) good and marketable title to the
Shares to be sold by the Company hereunder on such date will pass to the
Underwriters free and clear of any lien, encumbrance, security interest, claim
or other restriction whatsoever. Except for its equity interest in the
Subsidiaries or as set forth in the Prospectus (or, if the Prospectus is not in
existence, the most recent Preliminary Prospectus), the Company does not,
directly or indirectly, own any stock or other equity interest in any
corporation, partnership or other entity. All of the outstanding shares of
capital stock of each Subsidiary have been duly authorized and validly issued,
are fully paid and nonassessable and, as of the Closing Date, will be owned by
the Company free and clear of any lien, encumbrance, security interest, claim or
other
3
<PAGE> 4
restriction whatsoever, except as disclosed in the Registration Statement. The
Company has reserved sufficient shares of Common Stock for issuance upon the
exercise of all outstanding options and warrants (including the Underwriter
Warrants (as defined in Section 3(c) hereof)). The Company has received, subject
to notice of issuance, approval to have the Shares listed on the Nasdaq National
Market, and the Company does not know of any reason or set of facts which is
likely to adversely affect such approval.
(e) The financial statements and the related notes and schedules
thereto included in the Registration Statement and the Prospectus (or, if the
Prospectus is not in existence, the most recent Preliminary Prospectus) fairly
present the consolidated financial condition, results of operations,
stockholders' equity and cash flows of the entities to which they relate at the
dates and for the periods specified therein. Such consolidated financial
statements and the related notes and schedules thereto have been prepared in
accordance with generally accepted accounting principles consistently applied
throughout the periods involved (except as otherwise noted therein). The audited
financial statements for the Subsidiaries and the Division (collectively, the
"Acquired Companies") included in the Registration Statement and the Prospectus
(or, if the Prospectus is not in existence, the most recent Preliminary
Prospectus) have been examined and certified by Arthur Andersen LLP, which are
independent public accountants within the meaning of the Act and the Rules and
Regulations, as indicated in its reports filed therewith. The selected
historical financial information and statistical data set forth under the
captions "Summary Financial Information" and "Selected Financial Information" in
the Prospectus (or, if the Prospectus is not in existence, the most recent
Preliminary Prospectus) have been prepared on a basis consistent with the
financial statements contained in the Registration Statement. The pro forma
financial statements of the Company and the Subsidiaries, and the related notes
thereto, set forth in the Registration Statement and the Prospectus (or, if the
Prospectus is not in existence, the most recent Preliminary Prospectus), have
been prepared in conformity with the requirements of the Act and the Rules and
Regulations and present fairly the pro forma information shown therein; and the
pro forma adjustments on such pro forma financial statements have been properly
applied on the basis described in the related notes thereto. The pro forma
financial data set forth in the Prospectus (or, if the Prospectus is not in
existence, the most recent Preliminary Prospectus) under the captions "Summary
Financial Information," "Selected Financial Information" and "Pro Forma
Consolidated Financial Statements" have been prepared on a basis consistent with
the pro forma consolidated financial statements of the Company and the
Subsidiaries.
(f) The Company and each of the Subsidiaries have filed all
necessary federal, state and local income, franchise and other tax returns,
domestic and/or foreign, and have paid all taxes shown as due thereunder, and
the Company has no knowledge of any tax deficiency which might be assessed
against the Company or any Subsidiary which is reasonably likely to have a
Material Adverse Effect.
(g) The Company and each of the Subsidiaries maintain
insurance (including the "key man" life insurance described in the Prospectus
or, if the Prospectus is not in existence, the Preliminary Prospectus) of the
types and in amounts which they reasonably believe to be
4
<PAGE> 5
adequate for their business, in such amounts and with such deductibles as is
customary for companies in the same or similar business, all of which insurance
is in full force and effect. The Company has no reason to believe that the
Company or the Subsidiaries will not be able to renew their existing insurance
coverage as and when such coverage expires or to obtain similar coverage from
similar insurers as may be necessary to continue their business at a cost that
would not have a Material Adverse Effect, except as described in or contemplated
by the Prospectus (or, if the Prospectus is not in existence, the most recent
Preliminary Prospectus).
(h) There is no action, suit, proceeding or investigation
pending or, to the Company's best knowledge, threatened, before or by any court,
regulatory body or administrative agency or any other governmental agency or
body, domestic or foreign, which (i) questions the validity of the capital stock
of the Company or this Agreement or the Underwriter Warrant Agreement (as
defined in Section 3(c) hereof) or of any action taken or to be taken by the
Company pursuant to or in connection with this Agreement or the Underwriter
Warrant Agreement, (ii) is required to be disclosed in the Registration
Statement which is not so disclosed (and such proceedings, if any, as are
summarized in the Registration Statement are accurately summarized in all
material respects), or (iii) is reasonably likely to have a Material Adverse
Effect.
(i) The Company has full legal right, power and authority to
enter into this Agreement and to consummate the transactions provided for
herein. This Agreement has been duly authorized, executed and delivered by the
Company; and none of the Company's execution or delivery of this Agreement or
the Underwriter Warrant Agreement, its performance hereunder or thereunder, its
consummation of the transactions contemplated herein or therein, its application
of the net proceeds of the offering in the manner set forth under the caption
"Use of Proceeds," or the conduct of its business as described in the Prospectus
(or, if the Prospectus is not in existence, the most recent Preliminary
Prospectus) conflicts or will conflict with or results or will result in any
breach or violation of any of the terms or provisions of, or constitutes or will
constitute a default under, or causes or will cause (or permits or will permit)
the maturation or acceleration of any liability or obligation or the termination
of any right under, or results in the creation or imposition of any lien,
charge, or encumbrance upon, any property or assets of the Company, the Division
or any of the Subsidiaries pursuant to the terms of (i) the certificate or
articles of incorporation or bylaws (or other organizational documents, as
applicable) of the Company or any of the Subsidiaries, (ii) any indenture,
mortgage, deed of trust, voting trust agreement, stockholders' agreement, note
agreement, partnership agreement, joint venture agreement or other agreement or
instrument to which the Company, the Division or any of the Subsidiaries is a
party or by which it is or any of them are or may be bound or to which any of
their respective properties is or may be subject, or (iii) any statute,
judgment, decree, order, rule or regulation applicable to the Company, the
Division or any of the Subsidiaries of any government, arbitrator, court,
regulatory body or administrative agency or other governmental agency or body,
domestic or foreign, having jurisdiction over the Company, the Division or any
of the Subsidiaries or any of their respective activities or properties, except
with respect to matters described in clauses (ii) or (iii) above that are not
individually or in the aggregate reasonably likely to have a Material Adverse
Effect.
5
<PAGE> 6
(j) There is no document or agreement of a character required
to be described in the Prospectus (or, if the Prospectus is not in existence,
the most recent Preliminary Prospectus) or to be filed as an exhibit to the
Registration Statement which is not described or filed as required. All
agreements or copies of agreements filed as exhibits to the Registration
Statement to which the Company, the Division or any of the Subsidiaries is a
party or by which it is or any of them are or may be bound or to which any of
their assets, properties or businesses is or may be subject have been duly and
validly authorized, executed and delivered by the Company, the Division or such
Subsidiary, as the case may be, and constitute the legal, valid and binding
agreements of the Company, the Division or such Subsidiary, as the case may be,
enforceable against it or each of them in accordance with their respective terms
(except as such enforceability may be limited by applicable bankruptcy,
insolvency, reorganization or other similar laws relating to enforcement of
creditors' rights generally, and general equitable principles relating to the
availability of remedies). The descriptions in the Registration Statement of
contracts and other documents are accurate and fairly present the information
required to be shown with respect thereto by the Act and the Rules and
Regulations, and there are no contracts or other documents which are required by
the Act or the Rules and Regulations to be described in the Registration
Statement or filed as exhibits to the Registration Statement which are not so
described or filed as required, and the exhibits which have been filed are
complete and correct copies (excluding schedules and other attachments not
required to be filed under the Act or the Rules and Regulations) of the
documents of which they purport to be copies.
(k) Subsequent to the most recent respective dates as of which
information is given in the Registration Statement and the Prospectus (or, if
the Prospectus is not in existence, the most recent Preliminary Prospectus), and
except as expressly contemplated therein, neither the Company, the Division nor
any of the Subsidiaries has incurred, other than in the ordinary course of its
business, any liabilities or obligations, direct or contingent, purchased any of
its outstanding capital stock, paid or declared any dividends or other
distributions on its capital stock or entered into any material transactions not
in the ordinary course of business, and there has been no change in capital
stock or indebtedness of the Company, the Division or any Subsidiary or any
other event or circumstance that could result in a Material Adverse Effect.
Neither the Company, the Division nor any of the Subsidiaries (or the manner in
which it or any of them conducts its business) is in breach or violation of, or
in default under, any term or provision of (i) its certificate or articles of
incorporation or bylaws (or other organizational documents, as applicable), (ii)
any indenture, mortgage, deed of trust, voting trust agreement, stockholders'
agreement, note agreement, partnership agreement, joint venture agreement or
other agreement or instrument to which it is a party by which it is or may be
bound or to which any of its properties is or may be subject, or any
indebtedness, which breach or default individually or in the aggregate is
reasonably likely to have a Material Adverse Effect, or (iii) any statute,
judgment, decree, order, rule or regulation applicable to it or of any
government, arbitrator, court, regulatory body or administrative agency or other
governmental agency or body, domestic or foreign, having jurisdiction over the
Company, the Division or any of the Subsidiaries or any of their respective
activities or properties, which breach or default individually or in the
aggregate is reasonably likely to have a Material Adverse Effect.
6
<PAGE> 7
(l) The Company has obtained and delivered to the Representative
agreements (the "Lock-Up Agreements") from each of the persons and entities
listed on Schedule B hereto, representing all of the Company's executive
officers and directors and certain holders of outstanding equity securities of
the Company (or securities convertible into or exchangeable or exercisable for
equity securities of the Company), to the effect that such person or entity will
not, commencing on the Closing Date and continuing for a period of 180 days
thereafter, without the Representative's prior written consent (not to be
unreasonably withheld), directly or indirectly, offer, sell, pledge or otherwise
encumber, or grant any option to purchase or otherwise dispose of, any shares of
Common Stock or any securities convertible into or exchangeable or exercisable
for Common Stock.
(m) No labor disturbance by the employees of the Company, the
Division or any of the Subsidiaries exists or is, to the Company's best
knowledge, imminent which is reasonably likely to have a Material Adverse
Effect.
(n) The Company, the Division and the Subsidiaries own, or are
licensed or otherwise possess sufficient rights to use, the proprietary
knowledge, inventions, patents, trademarks, service marks, trade names, logo
marks and copyrights used in or necessary for the conduct of their business
(collectively, "Rights") as described in the Prospectus (or, if the Prospectus
is not in existence, the most recent Preliminary Prospectus). No claims have
been asserted against the Company, the Division or any of the Subsidiaries by
any person with respect to the use of any such Rights or which challenge or
question the validity or effectiveness of any such Rights, except for any of the
foregoing which is not reasonably likely to have a Material Adverse Effect. The
use in connection with the business and operations of the Company, the Division
and the Subsidiaries of such Rights does not infringe in any material respect on
the rights of any person.
(o) No consent, approval, authorization or order of or filing
with any court, regulatory body, administrative agency or any other governmental
agency or body, domestic or foreign, is required for the Company's performance
of this Agreement or the Underwriter Warrant Agreement or the consummation of
the transactions contemplated hereby or thereby, except such as has been or may
be obtained under the Act or may be required under state securities or blue sky
laws in connection with the Underwriters' purchase and distribution of the
Shares.
(p) Except for the Underwriter Warrant Agreement and except as
set forth in the Prospectus (or if the Prospectus is not in existence, the most
recent Preliminary Prospectus), there are no contracts, agreements or
understandings between the Company and any person granting such person the right
to require the Company to file a registration statement under the Act with
respect to any securities of the Company owned or to be owned by such person, or
to require the Company to include such securities under the Registration
Statement.
(q) None of the Company or any of its officers, directors or
affiliates (within the meaning of the Rules and Regulations) has taken, directly
or indirectly, any action designed
7
<PAGE> 8
to stabilize or manipulate the price of any security of the Company, or which
has constituted or which might in the future reasonably be expected to cause or
result in stabilization or manipulation of the price of any security of the
Company, to facilitate the sale or resale of the Shares or otherwise.
(r) Neither the Company, the Division nor any of the Subsidiaries
(A) has made any material investment in any related entity, except as may be
described in the Prospectus (or, if the Prospectus is not yet in existence, the
most recent Preliminary Prospectus); (B) has any commitments to make any
material investments in any related entity after the date hereof; or (C) has any
material liability or obligation (absolute, accrued, contingent or otherwise),
whether due or to become due, which arises out of or relates to the operations
or assets of any related entity.
(s) Each of the Company, the Division and the Subsidiaries has
good and marketable title to, or valid and enforceable leasehold interests in,
all properties and assets owned or leased by it, free and clear of all liens,
encumbrances, security interests, claims, restrictions, equities and defects,
except (i) such as are described in the Registration Statement or the Prospectus
(or, if the Prospectus is not in existence, the most recent Preliminary
Prospectus) or such as do not materially adversely affect the value of any such
properties or assets taken as a whole and do not interfere with the use made or
proposed to be made of any of such properties and assets in a manner that is
reasonably likely to have a Material Adverse Effect, and (ii) liens for taxes
not yet due and payable as to which appropriate reserves have been established
and reflected in the financial statements included in the Registration
Statement. The Company, the Division and the Subsidiaries own or lease all such
properties as are necessary to their operations as now conducted or as proposed
to be conducted, as set forth in the Registration Statement or the Prospectus
(or, if the Prospectus is not in existence, the most recent Preliminary
Prospectus); and the properties and business of the Company, the Division and
the Subsidiaries conform in all material respects to the descriptions thereof
contained in the Registration Statement or the Prospectus (or, if the Prospectus
is not in existence, the most recent Preliminary Prospectus). All the leases and
subleases under which the Company, the Division or any Subsidiary holds
properties or assets as lessee or sublessee, constitute valid leasehold
interests of the Company, the Division or such Subsidiary, free and clear of any
lien, encumbrance, security interest, claim, restriction, equity or defect, are
in full force and effect, and neither the Company, the Division nor any
Subsidiary is in default in respect of any of the terms or provisions of any
such leases or subleases or has notice of any claim which has been asserted by
anyone adverse to the Company's, the Division's or any of the Subsidiaries'
rights as lessee or sublessee under any such leases or subleases, or affecting
or questioning the Company's, the Division's or any of the Subsidiaries' right
to the continued possession of the leased or subleased premises under any such
lease or sublease, except in each case which are not reasonably likely to have a
Material Adverse Effect.
(t) Neither the Company, the Division nor any Subsidiary has
violated any law, including without limitation any environmental, safety, health
or similar law applicable to its business, nor any federal or state law relating
to discrimination in the hiring, promotion, or
8
<PAGE> 9
pay of employees, nor any applicable federal or state wages and hours law, nor
any provisions of ERISA or the rules and regulations promulgated thereunder, the
consequences of which violation are reasonably likely to have a Material Adverse
Effect; and no legal or governmental proceedings (whether civil, criminal or
administrative) are pending to which the Company, the Division or any Subsidiary
is a party or to which the property of the Company, the Division or any
Subsidiary is subject, and to the Company's knowledge, no such proceedings have
been threatened against the Company, the Division or any Subsidiary or with
respect to any of their respective properties, nor does the Company contemplate
that any such action will be instituted or threatened in the future which in any
of the foregoing cases is reasonably likely to have a Material Adverse Effect;
and neither the Company, the Division nor any Subsidiary is subject to any writ,
decree, order, judgment or similar proclamation or adjudication which would
prohibit the Company, the Division or any Subsidiary from conducting its
business in all material respects as described in the Prospectus (or, if the
Prospectus is not in existence, the most recent Preliminary Prospectus).
(u) The Underwriter Warrants will conform to the description
thereof in the Registration Statement and in the Prospectus (or, if the
Prospectus is not in existence, the most recent Preliminary Prospectus) and,
when sold to and paid for by the Representative (or its designee(s)) in
accordance with the Underwriter Warrant Agreement, will have been duly
authorized and validly issued and will constitute valid and binding obligations
of the Company and the holders thereof will be entitled to the benefits of the
Underwriter Warrant Agreement. The Warrant Shares (as defined in Section 3(c)
hereof) have been duly authorized and reserved for issuance upon exercise of the
Underwriter Warrants by all necessary corporate action on the part of the
Company and, when issued upon such exercise in accordance with the terms of the
Underwriter Warrant Agreement at the price therein provided, will be validly
issued, fully paid, nonassessable and free of preemptive rights and will conform
to the description thereof in the Prospectus (or, if the Prospectus is not in
existence, the most recent Preliminary Prospectus).
(v) Each of the Company, the Division and the Subsidiaries holds
all franchises, licenses, permits, approvals, certificates and other
authorizations from federal, state and other governmental or regulatory
authorities necessary for the ownership, leasing and operation of its properties
or required for the present and proposed conduct of its business, and such
franchises, licenses, permits, approvals, certificates and other governmental
authorizations are in full force and effect and the Company, the Division and
the Subsidiaries are in compliance therewith, except where the failure so to
obtain, maintain or comply with is not reasonably likely to have a Material
Adverse Effect.
(w) No Subsidiary will be prohibited or restricted as of the
Closing Date, directly or indirectly, from paying any dividends to the Company,
from making any other distribution on its capital stock, from repaying to the
Company any loans or advances to it from the Company or from transferring any of
its property or assets to the Company or any other Subsidiary, except as
described in or contemplated by the Prospectus (or, if the Prospectus is not in
existence, the most recent Preliminary Prospectus).
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<PAGE> 10
(x) None of the Company or any of the Subsidiaries is subject to
registration as an "investment company" under the Investment Company Act of 1940
or will be subject to such registration following issuance of the Shares. None
of the Company, the Division or any Subsidiary or, to the Company's knowledge,
any director, officer, agent, employee, or other person associated with, or
acting on behalf of, the Company, the Division or any Subsidiary has, directly
or indirectly, used any corporate funds for unlawful contributions, gifts,
entertainment or other unlawful expenses relating to political activity; made
any unlawful payment to foreign or domestic government officials or employees or
to foreign or domestic political parties or campaigns from corporate funds;
violated any provision of the Foreign Corrupt Practices Act of 1977, as amended
(the "FCPA"); or made any bribe, rebate, payoff, influence payment, kickback, or
other unlawful payment. The Company's internal accounting controls and
procedures are sufficient to cause the Company to comply in all material
respects with the FCPA.
(y) Except as described in the Prospectus (or, if the Prospectus
is not in existence, the most recent Preliminary Prospectus), the Company has
not incurred any liability for a fee, commission, or other compensation on
account of the employment of a broker or finder in connection with the
transactions contemplated by this Agreement. Except as previously disclosed to
the Representative in writing, no officer, director or stockholder of the
Company has any affiliation or association with the NASD or any member thereof.
(z) All issuances of securities by the Company described in Item
15 of Part II of the Registration Statement were exempt from registration under
the Act and were exempt from or complied in all respects with the provisions of
all applicable state securities laws, and the materials distributed or otherwise
used in connection with any such issuance taken as a whole (including any
confidential offering memoranda, business plans, other summaries of the
Company's business or any material filed with any federal or state securities
authority) did not contain an untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary in order to
make the statements therein, in light of the circumstances in which they were
made, not misleading.
3. Purchase, Sale and Delivery of the Shares and Underwriter
Warrants.
(a) On the basis of the representations, warranties, covenants
and agreements herein contained, but subject to the terms and conditions herein
set forth, the Company agrees to sell to each Underwriter, and each Underwriter
severally and not jointly agrees to purchase from the Company, the number of
Primary Shares set forth opposite its name on Schedule A hereto, in each case at
a purchase price of $________ per Share.
(b) Delivery of certificates, and payment of the purchase price,
for the Primary Shares shall be made at the offices of the Representative at 810
Seventh Avenue, New York, New York 10019, or such other location as shall be
agreed upon by the Company and the Representative. Such delivery and payment
shall be made at 10:00 a.m., New York City time, on November __, 1996 or at such
other time and date thereafter as shall be agreed upon by the
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<PAGE> 11
Company and the Representative. The time and date of such delivery and payment
are herein called the "Closing Date." Delivery of the certificates for the
Primary Shares shall be made to the Representative for the respective accounts
of the Underwriters against payment of the purchase price therefor by certified
or official bank check in New York Clearing House (next day) funds drawn to the
order of the Company. The certificates for the Primary Shares to be so delivered
will be in definitive, fully registered form, will bear no restrictive legends
and will be in such denominations and registered in such names as the
Representative shall request not less than two full business days prior to the
Closing Date. The certificates for the Primary Shares will be made available to
the Representative at such office or such other place as the Representative may
designate for inspection, checking and packaging not later than 9:30 a.m., New
York City time on the business day prior to the Closing Date.
(c) On the Closing Date, the Company will further issue and sell
to the Representative, or at the direction of the Representative to its
designees including the Underwriters, other NASD members participating in the
offering and their respective bona fide officers or partners, for a purchase
price of $.01 per warrant, warrants (the "Underwriter Warrants") entitling the
holders thereof initially to purchase an aggregate of _______ shares of Common
Stock, subject to adjustment as provided in the Underwriter Warrants, for a
period of five years commencing on the effective date of the Registration
Statement. The Underwriter Warrants shall be exercisable at a price equal to
120% of the public offering price per Share and shall contain terms and
provisions as set forth more particularly in the warrant agreement relating
thereto executed by the Company on the date hereof in substantially the form of
Exhibit A hereto (the "Underwriter Warrant Agreement") including, but not
limited to, provisions protecting the holders against dilution. The shares of
Common Stock issuable upon exercise of the Underwriter Warrants are referred to
herein as the "Warrant Shares."
4. Public Offering of the Shares. It is understood that the
Underwriters propose to make a public offering of the Shares at the price and
upon the other terms set forth in the Prospectus.
5. Covenants of the Company. The Company covenants and agrees with
the Underwriters that:
(a) The Company will use its best efforts to cause the
Registration Statement and any amendments thereto to become effective as
promptly as practicable. If required, the Company will file the Prospectus and
any amendment or supplement thereto with the Commission in the manner and within
the time period required by Rule 424(b) under the Act. During any time when a
Prospectus relating to the Shares is required to be delivered under the Act, the
Company (i) will comply with all requirements imposed upon it by the Act and the
Rules and Regulations to the extent necessary to permit the continuance of sales
of or dealings in the Shares in accordance with the provisions hereof and of the
Prospectus, as then amended or supplemented, and (ii) will not file with the
Commission the Prospectus or the amendment referred to in the third sentence of
Section 2(a) hereof, any amendment or supplement to such Prospectus or any
amendment to the Registration Statement of which the Representative shall
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<PAGE> 12
not previously have been advised and furnished with a copy a reasonable period
of time prior to the proposed filing or as to which filing the Representative
shall reasonably object, unless (with respect to any time after the Closing
Date) the Company has received the written advice of its counsel that such
amendment or supplement is required by law, rule or regulation. If, at the time
that the Registration Statement becomes effective, any information shall have
been omitted therefrom in reliance upon Rule 430A promulgated under the Act,
then promptly following the execution of this Agreement, the Company will
prepare, and file or transmit for filing with the Commission in accordance with
said Rule 430A, copies of the Prospectus including the information omitted in
reliance on Rule 430A.
(b) The Company shall cause each Subsidiary to comply with the
covenants and agreements set forth herein that are applicable to it.
(c) As soon as the Company is advised or obtains knowledge
thereof, the Company will advise the Representative (i) when the Registration
Statement, as amended, has become effective and if the provisions of Rule 430A
promulgated under the Act will be relied upon, when the Prospectus has been
filed in accordance with said Rule 430A and when any post-effective amendment to
the Registration Statement has been filed and becomes effective; (ii) of any
request made by the Commission for amending the Registration Statement, for
supplementing any Preliminary Prospectus or the Prospectus or for additional
information; (iii) of any suspension of the qualification of the Shares for
offering or sale in any jurisdiction; or (iv) of the issuance by the Commission
of any stop order suspending the effectiveness of the Registration Statement or
any post-effective amendment thereto or any order preventing or suspending the
use of any Preliminary Prospectus or the Prospectus or any amendment or
supplement thereto or the institution or threat of any investigation or
proceeding for that purpose, and the Company will use its best efforts to
prevent the issuance of any such stop order and, if issued, to obtain the
lifting thereof as soon as possible.
(d) The Company will (i) use its best efforts to arrange for the
qualification of the Shares for offer and sale under the state securities or
blue sky laws of such jurisdictions as the Underwriters may designate, (ii)
continue such qualifications in effect for as long as may be necessary to
complete the distribution of the Shares, and (iii) make such applications, file
such documents and furnish such information as may be required for the purposes
set forth in clauses (i) and (ii) of this subsection (d); provided, however,
that the Company shall not be required to qualify as a foreign corporation or
file a general or unlimited consent to service of process in any such
jurisdiction or take any action that would subject the Company to taxation in
such jurisdiction if it is not already so subject.
(e) The Company consents to the use of the Prospectus and any
amendment or supplement thereto by the Underwriters and all dealers to whom the
Shares may be sold in connection with the offering or sale of the Shares and for
such period of time thereafter as the Prospectus is required by law to be
delivered in connection therewith. If, at any time when a prospectus relating to
the Shares is required to be delivered under the Act, any event occurs as a
result of which the Prospectus, as then amended or supplemented, would include
any untrue
12
<PAGE> 13
statement of a material fact or omit to state a material fact necessary to make
the statements therein not misleading, or if it becomes necessary at any time to
amend or supplement the Prospectus to comply with the Act or the Rules and
Regulations, the Company promptly will so notify the Representative and, subject
to Section 5(a)(ii) hereof, will promptly prepare and file with the Commission
an amendment to the Registration Statement or an amendment or supplement to the
Prospectus that will correct such statement or omission or effect such
compliance, each such amendment or supplement to be reasonably satisfactory to
counsel to the Underwriters.
(f) As soon as practicable, but in any event not later than 45
days after the end of the 12-month period beginning on the day after the end of
the fiscal quarter of the Company during which the effective date of the
Registration Statement occurs (90 days in the event that the end of such fiscal
quarter is the end of the Company's fiscal year), the Company will make
generally available to its security holders, in the manner specified in Rule
158(b) of the Rules and Regulations, and to the Underwriters, an earnings
statement which will be in the detail required by, and will otherwise comply
with, the provisions of Section 11(a) of the Act and Rule 158(a) of the Rules
and Regulations.
(g) The Company will furnish to its stockholders, as soon as
practicable, annual reports (including financial statements audited by
independent public accountants) and unaudited quarterly reports of earnings, and
during the period of three years after the date hereof will deliver to the
Underwriters:
(i) concurrently with furnishing such annual reports to its
stockholders, a balance sheet of the Company as at the end of the
preceding fiscal year, together with statements of operations,
stockholders' equity, and cash flows of the Company for such fiscal
year, accompanied by a copy of the report thereon of independent public
accountants;
(ii) concurrently with furnishing such quarterly reports to
its stockholders, statements of income for the Company for each quarter
in the form furnished to the Company's stockholders;
(iii) as soon as they are available, copies of all
information (financial or other) mailed to stockholders;
(iv) as soon as they are available, copies of all publicly
available reports and financial statements furnished to or filed with
the Commission, the NASD or the Nasdaq National Market;
(v) every press release and every material news item or
article of interest to the financial community in respect of the
Company or its affairs which was released or prepared by the Company;
and
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<PAGE> 14
(vi) any additional information of a public nature concerning
the Company or its business which the Underwriters may reasonably
request.
The foregoing financial statements will be on a consolidated basis to
the extent that the accounts of the Company and its subsidiaries are
consolidated, and will be accompanied by similar financial statements for any
subsidiary which is not so consolidated.
(h) The Company will appoint a transfer agent and, if necessary
under the jurisdiction of incorporation of the Company, a registrar (which may
be the same entity as the transfer agent) for its Common Stock approved by the
Representative; and the Company will not change or terminate such appointment
for a period of two years after the Closing Date without first obtaining the
Representative's consent.
(i) The Company will furnish, without charge, to each Underwriter
or on such Underwriter's order, at such place as such Underwriter may designate,
copies of each Preliminary Prospectus, the Registration Statement, and any
pre-effective or post-effective amendments thereto (two of which copies will
manually be signed and will include all financial statements and exhibits) and
the Prospectus and all amendments and supplements thereto, in each case as soon
as available and in such quantities as such Underwriter may reasonably request.
The Company will provide the Representative copies of its report on Form SR
required by Rule 463 under the Act and any amendments thereto, including all
exhibits, concurrently with the filing thereof with the Commission.
(j) The Company will not, directly or indirectly, without the
prior written consent of the Representative, issue, offer, sell, pledge or
otherwise encumber, or grant any option to purchase or otherwise dispose of, any
shares of Common Stock or any securities convertible into or exchangeable or
exercisable for Common Stock for a period of 180 days after the Closing Date
except pursuant to this Agreement or the Underwriter Warrant Agreement or except
for (i) issuances of Common Stock pursuant to the exercise of stock options
outstanding on or granted subsequent to the date hereof pursuant to a stock
option or other employee benefit plan described in the Prospectus (or, if the
Prospectus is not in existence, the Preliminary Prospectus) and in existence on
the date of this Agreement, or (ii) issuances of Common Stock pursuant to the
exercise of warrants outstanding on the date hereof and disclosed in the
Prospectus (or, if the Prospectus is not in existence, the most recent
Preliminary Prospectus); provided, however, that the Representative shall not
unreasonably withhold such consent in connection with the issuance, offer or
sale of shares of Common Stock (or securities convertible into or exchangeable
or exercisable for Common Stock) by the Company to an unaffiliated third party
in connection with an acquisition in which the Company uses such shares as part
or all of the consideration paid by it.
(k) The Company will cause the Shares to be duly listed on the
Nasdaq National Market prior to the Closing Date, subject to official notice of
issuance.
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<PAGE> 15
(l) None of the Company, any of its officers or directors or any
of their affiliates (within the meaning of the Rules and Regulations) will take,
directly or indirectly, any action designed to, or which might in the future
reasonably be expected to cause or result in, stabilization or manipulation of
the price of any securities of the Company.
(m) The Company will apply the net proceeds of the offering
received by it in substantially the manner set forth under the caption "Use of
Proceeds" in the Prospectus. Prior to the application of such net proceeds, the
Company will invest or reinvest such proceeds only in Eligible Investments,
which shall mean the following investments so long as they have maturities of
one year or less: (i) obligations issued or guaranteed by the United States or
by any person controlled or supervised by or acting as an instrumentality of the
United States pursuant to authority granted by Congress; (ii) obligations issued
or guaranteed by any state or political subdivision thereof rated either Aa or
higher or MIG 1 or higher, by Moody's Investors Service, Inc. or AA or higher,
or an equivalent, by Standard & Poor's Corporation; (iii) commercial paper which
is rated either Prime-1 or higher or an equivalent by Moody's Investors Service,
Inc. or A-1 or higher or an equivalent by Standard & Poor's Corporation; and
(iv) fully insured certificates of deposit or time deposits of banks or trusts
companies organized under the laws of the United States having a minimum equity
of $50,000,000.
(n) The Company will timely file all such reports, forms or other
documents as may be required from time to time under the Act, the Rules and
Regulations and the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), and the rules and regulations thereunder; and all such reports, forms and
documents filed will comply as to form and substance with the applicable
requirements under the Act, the Rules and Regulations and the Exchange Act and
the rules and regulations thereunder.
(o) The Company will not take any action to facilitate the sale of
any shares of Common Stock pursuant to Rule 144 under the Act if any such sale
would violate any of the terms of the Lock-Up Agreements.
(p) During a period of three years after the date hereof, the
Company will retain Arthur Andersen LLP as its independent auditors; provided,
however, that, upon written notice to the Representative during such period, the
Company may retain another "Big Six" firm of independent certified public
accountants.
(q) The Company will supply the Representative, within 30 days
prior to the end of each of the fiscal years ending December 31, 1996, 1997 and
1998, with a quarterly budget for the succeeding fiscal year. For each period
covered by a budget to be supplied to the Representative, the Company also will
supply financial statements prepared in detail substantially similar to the
financial statements previously delivered to the Representative so as to allow
comparison to the budgets.
(r) During a period of three years after the Closing Date, the
Company will permit an agent of the Representative to attend all meetings of the
Company's Board of Directors
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<PAGE> 16
(the "Board") as a non-voting observer, will give such agent notice of all
meetings of the Board at the same time and in the same manner that directors are
notified, will reimburse such agent for all expenses incurred in attending Board
meetings (including but not limited to food, transportation and lodging) and
shall compensate such agent in the same manner as an independent director is
compensated for each meeting attended. During such three-year period, the
Company will hold no less than four formal meetings of the Board each year. In
lieu of the foregoing, at the request of the Representative, the Company shall
nominate Sylvan Schefler or another mutually acceptable agent of the
Representative to serve as a director of the Company and shall exercise best
efforts (including the solicitation of proxies from shareholders of the Company)
to cause such person to be elected to the Board.
(s) During a period of three years after the date hereof, the
Company shall provide at its sole expense to the Representative (i) copies of
its daily transfer sheets and (ii) copies of the Nasdaq National Market monthly
summaries of trading activity of the Company.
(t) During such period as the Company is subject to the periodic
reporting requirements of the Exchange Act, the Company shall supply to the
appropriate parties such information as may be necessary or desirable, and shall
otherwise use its best efforts so that during such period the Company will be
listed in one or more of the securities manuals published by Standard & Poor's
Corporation and Moody's Investors Service, Inc. or another comparable publisher
and that, at all times during such period, such listing will, at a minimum,
contain the names of the Company's officers and directors, a balance sheet as of
a date not more than 15 months prior to such time and a statement of operations
for either the fiscal year preceding such date or the most recent fiscal year of
operations.
6. Expenses.
(a) Regardless of whether the transactions contemplated by this
Agreement are consummated, and regardless of whether for any reason this
Agreement is terminated, the Company will pay, and hereby agrees to indemnify
the Underwriters against, all fees and expenses incident to the performance of
the obligations of the Company, including, but not limited to, (i) fees and
expenses of accountants and counsel for the Company, (ii) all costs and expenses
incurred in connection with the preparation, duplication, printing, filing,
delivery and shipping of copies of the Registration Statement and any
pre-effective or post-effective amendments thereto, any Preliminary Prospectus
and the Prospectus and any amendments or supplements thereto (including postage
costs related to the delivery by the Underwriters of any Preliminary Prospectus
or Prospectus or any amendment or supplement thereto), this Agreement, the
Underwriter Warrant Agreement and all other documents in connection with the
transactions contemplated herein, (iii) fees and expenses relating to the
qualification of the Shares under state securities or blue sky laws, including
the costs of preparing and mailing the preliminary and final blue sky memoranda
and filing fees and disbursements and fees of counsel and other related
expenses, if any, in connection therewith, (iv) filing fees of the Commission
and the NASD relating to the Shares, (v) any fees and expenses in connection
with the listing of the Shares on the Nasdaq National Market, (vi) costs and
expenses incident to the preparation, issuance and
16
<PAGE> 17
delivery to the Underwriters of any certificates evidencing the Shares,
including transfer agent's and registrar's fees and any applicable transfer
taxes incurred in connection with the delivery to the Underwriters of the Shares
to be sold by the Company pursuant to this Agreement, and (vii) costs and
expenses of the Company incident to any meetings with prospective investors in
the Shares. In addition to the foregoing, the Company shall provide the
Representative on behalf of the Underwriters with a non-accountable expense
allowance in an amount equal to the greater of $350,000 or 1.5% of the gross
offering proceeds to be received by the Company, $75,000 of which has previously
been paid by the Company to the Representative. The balance of the expense
allowance shall be deducted from the funds to be paid by the Underwriters in
payment for the Primary Shares pursuant to Section 3 of this Agreement on the
Closing Date. To the extent any Additional Shares are sold, any remaining
expense allowance based on the gross proceeds from the sale of the Additional
Shares shall be deducted from the funds to be paid by the Underwriters in
payment for the Additional Shares, pursuant to Section 9 of this Agreement, on
any Additional Closing Date. The Company represents, warrants and agrees that
all such payments and reimbursements will be promptly and fully made; if the
Company shall fail to pay any portion of the expense allowance set forth herein
within ten days of receipt of a written request therefor, the Company shall be
liable to the Underwriters for reasonable counsel fees and costs incurred in the
collection of such amount.
(b) If the purchase of the Shares as herein contemplated is not
consummated for any reason other than by reason of the Representative's election
pursuant to Section 11(a) or in the case of an individual Underwriter other than
such Underwriter's default under this Agreement, then the Company shall
reimburse each non-defaulting Underwriter for its out-of-pocket expenses
(including counsel fees and disbursements and including blue sky fees and
expenses referred to in subsection (a) above) in connection with any
investigation and preparation made by it in respect of marketing of the Shares
or in contemplation of the performance by it of its obligations hereunder, and
the Representative may retain any portion of the expense allowance referred to
in subsection (a) above that was previously paid to it.
7. Conditions of the Underwriters' Obligations. The obligation of the
Underwriters to purchase and pay for the Shares is subject to the continuing
accuracy in all material respects of the representations and warranties of the
Company herein as of the date hereof and as of the Closing Date as if they had
been made on and as of the Closing Date; the accuracy in all material respects
on and as of the Closing Date of the statements of officers of the Company made
pursuant to subsection (f) below; the performance in all material respects by
the Company on and as of the Closing Date of its covenants and agreements
hereunder; and the following additional conditions:
(a) If the Company has elected to rely on Rule 430A under the
Act, the Registration Statement shall have been declared effective, and the
Prospectus containing the information omitted pursuant to Rule 430A shall have
been filed with the Commission not later than the Commission's close of business
on the second business day following the date hereof or such later time and date
to which the Representative shall have consented; if the Company does not elect
to rely on Rule 430A, the Registration Statement shall have been declared
17
<PAGE> 18
effective not later than 11:00 a.m., New York City time, on the date hereof or
such later time and date to which the Representative shall have consented; if
required, in the case of any changes in or amendments or supplements to the
Prospectus in addition to those contemplated above, the Company shall have filed
such Prospectus as amended or supplemented with the Commission in the manner and
within the time period required by Rule 424(b) under the Act; no stop order
suspending the effectiveness of the Registration Statement or any amendment
thereto shall have been issued, and no proceedings for that purpose shall have
been instituted or, to the knowledge of the Company or the Representative, shall
be threatened or contemplated by the Commission; and the Company shall have
complied with any request of the Commission for additional information to be
included in the Registration Statement or the Prospectus or otherwise.
(b) The Representative shall not have in good faith advised the
Company that the Registration Statement or any amendment thereto contains an
untrue statement of fact which, in the Representative's opinion, is material and
is required to be stated therein or is necessary to make the statements therein,
in the light of the circumstances under which they were made, not misleading.
(c) On or prior to the Closing Date, the Representative shall
have received the favorable opinion of Brownstein Hyatt Farber & Strickland,
P.C., counsel to the Underwriters, with respect to the issuance and sale of the
Shares, the Registration Statement, the Prospectus and such other related
matters as the Representative reasonably may request, and such counsel may rely,
as to all matters governed by the laws of jurisdictions other than the law of
the State of New York, the general corporate law of the State of Delaware and
the federal law of the United States, upon the opinions of counsel satisfactory
to the Representative (which may include counsel to the Company) and such
counsel shall have received such documents and other information as they request
to enable them to pass upon such matters.
(d) On the Closing Date, the Representative shall have received
the opinion of O'Connor, Cavanagh, Anderson, Killingsworth & Beshears, P.A.,
counsel to the Company, addressing the matters set forth below:
(i) Each of the Company and the Subsidiaries (A) is a duly
incorporated and validly existing corporation in good standing under
the laws of its jurisdiction of incorporation, with the corporate power
and authority to own or lease its properties and to conduct its
business as described in the Registration Statement or the Prospectus,
and (B) is duly qualified to do business as a foreign corporation and
is in good standing in each jurisdiction (x) in which the conduct of
its business requires such qualification or (y) in which it owns or
leases property, in each case except for those jurisdictions in which
the failure to so qualify has not had and is not reasonably likely to
have a Material Adverse Effect.
(ii) The Company has the authorized capital stock as set
forth in the Prospectus; the securities of the Company conform as to
legal matters in all material
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<PAGE> 19
respects to the descriptions thereof contained in the Prospectus; the
outstanding shares of Common Stock have been duly authorized and
validly issued by the Company, are fully paid and nonassessable, and
are free of any preemptive or other rights to subscribe for any of the
Shares; the Company has duly authorized the issuance and sale of the
Shares to be sold by it hereunder; such Shares, when issued by the
Company and paid for in accordance with the terms hereof, will be
validly issued, fully paid and nonassessable and will conform as to
legal matters in all material respects to the description thereof
contained in the Prospectus and will not be subject to any preemptive,
subscription or other similar rights; the Shares have been approved for
listing on the Nasdaq National Market; and, to the best of such
counsel's knowledge, there are no outstanding warrants, options or
other rights granted by the Company to purchase shares of its Common
Stock or other securities other than as described in the Prospectus;
(iii) The Registration Statement is effective under the Act;
any required filing of the Prospectus pursuant to Rule 424(b) has been
made in the manner and within the time period required by Rule 424(b);
and no stop order suspending the effectiveness of the Registration
Statement or any amendment thereto has been issued, and no proceedings
for that purpose have been instituted or are pending or, to the best
knowledge of such counsel, are threatened or contemplated under the
Act; the Registration Statement originally filed with respect to the
Shares and each amendment thereto and the Prospectus and, if any, each
amendment and supplement thereto (except for the financial statements,
schedules and other financial, market and statistical data included
therein and information provided by the Underwriters for inclusion
therein (which for the purposes hereof shall be limited to the
information set forth under the heading "Underwriting" in the
Prospectus), as to all of which such counsel need not express any
opinion), complied as to form in all material respects with the
requirements of the Act and the Rules and Regulations; the descriptions
contained and summarized in the Registration Statement or the
Prospectus of contracts and other documents as they pertain to legal
matters are accurate and fairly represent in all material respects the
information required to be shown by the Act and the Rules and
Regulations; to the best knowledge of such counsel, there are no
contracts or documents which are required by the Act to be described in
the Registration Statement or the Prospectus or to be filed as exhibits
to the Registration Statement which are not so described or filed as
required by the Act and the Rules and Regulations; to the best
knowledge of such counsel, there is not pending or threatened against
the Company, the Division or any Subsidiary any action, suit,
proceeding or investigation before or by any court, regulatory body, or
administrative agency or any other governmental agency or body,
domestic or foreign, of a character required to be disclosed in the
Registration Statement or the Prospectus which is not so disclosed
therein; and the statements set forth under the headings "Business,"
"Management," "Principal Shareholders," "Description of the
Acquisitions," "Certain Transactions," "Description of Capital Stock"
and "Shares Eligible for Future Sale" in the Prospectus, insofar as
such statements constitute a summary of the legal matters, documents or
proceedings referred to therein, provide an accurate summary of such
legal matters, documents and proceedings;
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<PAGE> 20
(iv) The Company has the full legal right, power, and
authority to enter into this Agreement and to consummate the
transactions provided for herein; this Agreement has been duly
authorized, executed and delivered by the Company; and this Agreement,
assuming due authorization, execution and delivery by each other party
hereto, is a valid and binding agreement of the Company. None of the
Company's execution or delivery of this Agreement, its performance
hereof, its consummation of the transactions contemplated herein or its
application of the net proceeds of the offering in the manner set forth
under the caption "Use of Proceeds" conflicts or will conflict with or
results or will result in any breach or violation of any of the terms
or provisions of, or constitutes a default under, or results in the
creation or imposition of any lien, charge or encumbrance upon, any
property or assets of the Company, the Division or any of the
Subsidiaries pursuant to the terms of (A) the certificate or articles
of incorporation or bylaws of the Company or any of the Subsidiaries,
(B) any indenture, mortgage, deed of trust, voting trust agreement,
stockholders' agreement, note agreement, partnership agreement, joint
venture agreement or other agreement or instrument (together
"Contracts") identified to such counsel by the Company as the only
material Contracts to which the Company, the Division or any of the
Subsidiaries is a party or by which it or any of them is or may be
bound or to which any of their respective properties may be subject, or
(C) any statute, rule or regulation of any regulatory body or
administrative agency or other regulatory body or administrative agency
or other governmental agency or body, domestic or foreign, having
jurisdiction over the Company, the Division or any of the Subsidiaries
or any of their respective activities or properties, or any judgment,
decree or order (together "Orders") identified to such counsel by the
Company as the only material Orders of any government, arbitrator,
court, regulatory body or administrative agency or other governmental
agency or body, domestic or foreign, having such jurisdiction, except
with respect to clauses (B) or (C) above that is not reasonably likely
to have a Material Adverse Effect; and, to the knowledge of such
counsel, no consent, approval, authorization or order of any court,
governmental agency or body, domestic or foreign, has been or is
required for the Company's performance of this Agreement or the
consummation of the transactions contemplated hereby, except such as
have been obtained under the Act or may be required under state
securities or blue sky laws in connection with the purchase and
distribution by the Underwriters of the Shares;
(v) To the best of such counsel's knowledge, no claims have
been asserted against the Company to the effect that the conduct of the
business of the Company, the Division and the Subsidiaries is in
violation of any federal, state or local statute, administrative
regulation or other law, domestic or foreign, or that the Company, the
Division and the Subsidiaries have failed to obtain all licenses,
permits, franchises, certificates and other authorizations from state,
federal and other regulatory authorities as are necessary or required
for the ownership, leasing and operation of their properties and the
conduct of their business as presently conducted and as contemplated in
the Prospectus;
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(vi) The issued shares of capital stock of each of the
Subsidiaries have been duly authorized and validly issued, are fully
paid and nonassessable and, except and as otherwise set forth in the
Prospectus, are owned directly or indirectly by the Company, free and
clear of any perfected security interests or, to the best knowledge of
such counsel, any other liens, encumbrances, claims or security
interests; to the best knowledge of such counsel no Subsidiary is
currently prohibited, directly or indirectly, from paying any dividends
to the Company, from making any other distribution on its capital
stock, from repaying to the Company any loans or advances to it from
the Company or from transferring any of its property or assets to the
Company or any Subsidiary, except as described herein or as described
in or contemplated by the Prospectus;
(vii) The Company has full legal right, power, and
authority to enter into the Underwriter Warrant Agreement and to
consummate the transactions provided for therein; and the Underwriter
Warrant Agreement has been duly authorized, executed and delivered by
the Company, and is a valid, legal and binding agreement of the
Company, enforceable against the Company in accordance with its terms
(except as enforceability may be limited by bankruptcy, insolvency,
reorganization, fraudulent conveyance, moratorium and other similar
laws affecting creditors' rights generally and to general principles of
equity, regardless of whether enforcement is considered in a proceeding
in equity or at law).
(viii) The Underwriter Warrants conform as to legal matters
to the description thereof in the Registration Statement and in the
Prospectus and are duly authorized and validly issued and constitute
valid, legal and binding obligations of the Company enforceable in
accordance with the terms thereof; the Warrant Shares have been duly
and validly authorized and reserved for issuance upon exercise of the
Underwriter Warrants and, when issued upon exercise in accordance with
the terms of and for the consideration set forth in the Underwriter
Warrant Agreement, will be duly and validly issued, fully paid and
nonassessable and free of preemptive rights.
(ix) The Company is not an "investment company" as defined
in Section 3(a) of the Investment Company Act and, if the Company
conducts its business as set forth in the Registration Statement and
the Prospectus, will not become an "investment company" and will not be
required to register under the Investment Company Act.
(x) Such counsel has read all contracts referred to in
the Registration Statement and the Prospectus, and such contracts are
fairly summarized or described therein, conform in all material
respects to the descriptions thereof contained therein, and are filed
as exhibits thereto, as required, and such counsel does not know of any
contracts or documents required to be so summarized, disclosed or filed
which have not been so summarized, disclosed or filed, and such counsel
does not know of any statutes or regulations or pending or threatened
legal or governmental proceedings required to be disclosed in the
Prospectus which have not been described as required.
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(xi) The issuances of securities by the Company referred to
in Item 15 of Part II of the Registration Statement were exempt from
registration under the Act and complied with the provisions of all
applicable state securities laws.
In addition, such counsel shall state that in the course of the
preparation of the Registration Statement and the Prospectus, it has
participated in conferences with officers and representatives of the Company,
representatives of the Company's independent public accountants and with your
representatives and your counsel, at which the contents of the Registration
Statement and the Prospectus and related matters were discussed, and (without
taking any further action to verify independently the statements made in the
Registration Statement and the Prospectus and, except as stated in the foregoing
opinion, without assuming responsibility for the accuracy, completeness or
fairness of such statements) nothing has come to such counsel's attention that
causes it to believe that either the Registration Statement as of the date it is
declared effective and as of the Closing Date contained or contains any untrue
statement of a material fact or omitted or omits to state a material fact
required to be stated therein or necessary to make the statements therein not
misleading or that the Prospectus as of the date thereof and as of the Closing
Date contained or contains any untrue statement of a material fact or omitted or
omits to state a material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under which they were
made, not misleading (it being understood that such counsel need not express any
opinion with respect to the financial statements, schedules and other financial
or statistical data included in or excluded from the Registration Statement or
the Prospectus or any information provided by the Underwriters expressly for
inclusion therein (which for the purposes hereof shall be limited to the
information set forth under the heading "Underwriting" in the Prospectus)).
In rendering any such opinion, such counsel may rely, as to matters of
fact, to the extent such counsel deems proper, on certificates of responsible
officers of the Company and public officials and, as to matters involving the
application of laws of any jurisdiction other than the law of the States of New
York and Arizona, the general corporate law of the State of Delaware and the
federal law of the United States, such counsel may rely upon or substitute the
opinion of other counsel reasonably satisfactory to the Representative. The
foregoing opinion shall also state that the Representative is justified in
relying upon such opinion of other counsel, and copies of such opinion shall be
delivered to the Representative and counsel to the Underwriters. Such counsel
may also state that it has not represented the Division or the Subsidiaries
prior to the consummation of the Acquisitions, and its opinions set forth in
paragraphs (iii), (iv), (v) and (vi), insofar as they relate to the Division or
the Subsidiaries, are rendered solely in such counsel's capacity as counsel to
the Company.
References to the Registration Statement and the Prospectus in this
paragraph (d) shall include any amendment or supplement thereto at the date of
such opinion.
(e) At the time that this Agreement is executed by the Company, the
Representative shall have received from Arthur Andersen LLP a letter as of the
date this Agreement is executed by the Company in form and substance
satisfactory to it (the "Comfort Letter"), and on the
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<PAGE> 23
Closing Date the Representative shall have received from Arthur Andersen LLP a
letter dated the Closing Date stating that, as of a specified date not earlier
than five days prior to the Closing Date, nothing has come to the attention of
such firm to suggest that the statements made in the Comfort Letter are not true
and correct.
(f) On the Closing Date, the Representative shall have received a
certificate, dated the Closing Date, of the principal executive officer and the
principal financial and accounting officer of the Company to the effect that
each of such persons has carefully examined the Registration Statement and the
Prospectus and any amendments or supplements thereto and this Agreement and the
Underwriter Warrant Agreement, and that to the best of their knowledge:
(i) The representations and warranties of the Company in
this Agreement and the Underwriter Warrant Agreement are true and
correct in all material respects, as if made on and as of the Closing
Date, and the Company has complied in all material respects with all
agreements and covenants and satisfied in all material respects all
conditions contained in this Agreement and the Underwriter Warrant
Agreement on its part to be performed or satisfied at or prior to the
Closing Date;
(ii) No stop order suspending the effectiveness of the
Registration Statement has been issued, and no proceedings for that
purpose have been instituted or are pending or, to the best knowledge
of each of such persons, are contemplated or threatened under the Act,
and any and all filings required by Rule 424 and Rule 430A have been
timely made;
(iii) The Registration Statement and Prospectus and each
amendment and each supplement thereto, if any, contain all statements
and information required to be included therein under the Act and the
Rules and Regulations, and neither the Registration Statement nor any
amendment thereto includes any untrue statement of a material fact or
omits to state any material fact required to be stated therein or
necessary to make the statements therein not misleading and neither the
Prospectus (or any supplement thereto) nor any Preliminary Prospectus
includes or included any untrue statement of a material fact or omits
or omitted to state any material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances
under which they were made, not misleading;
(iv) Subsequent to the respective dates as of which
information is given in the Registration Statement and the Prospectus,
up to and including the Closing Date, neither the Company, the Division
nor any of the Subsidiaries has incurred, other than in the ordinary
course of its business, any material liabilities or obligations, direct
or contingent; neither the Company nor any of the Subsidiaries has
purchased any of its outstanding capital stock or paid or declared any
dividends or other distributions on its capital stock; neither the
Company, the Division nor any of the Subsidiaries has entered into any
material transactions not in the ordinary course of business; and there
has not been any change in the capital stock or consolidated long-term
debt or any increase in
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<PAGE> 24
the consolidated short-term borrowings (other than any increase in
short-term borrowings in the ordinary course of business) of the
Company or any Material Adverse Effect; neither the Company, the
Division nor any of the Subsidiaries has sustained any material loss or
damage to its property or assets, whether or not insured; there is no
litigation which is pending or, to the Company's knowledge, threatened
against the Company, the Division or any of the Subsidiaries which is
required under the Act or the Rules and Regulations to be set forth in
an amended or supplemented Prospectus which has not been set forth; and
there has not occurred any event required to be set forth in an amended
or supplemented Prospectus which has not been set forth.
References to the Registration Statement and the Prospectus in this
paragraph (f) are to such documents as amended and supplemented at the date of
the certificate.
(g) Subsequent to the respective dates as of which information is
given in the Registration Statement and the Prospectus, up to and including the
Closing Date, there has not been (i) any change in the capital stock or debt of
the Company or decrease in the net current assets or stockholders equity of the
Company from the amounts specified in the Comfort Letter, or (ii) any change, or
any development involving a prospective change, in the business or properties of
the Company, the Division and the Subsidiaries, taken as a whole, which change
or decrease in the case of clause (i) or change or development in the case of
clause (ii) makes it impractical or inadvisable in the Representative's judgment
to proceed with the public offering or the delivery of the Shares as
contemplated by the Prospectus.
(h) The Representative shall have received a Lock-Up Agreement
from each person who is or will be after the Closing a director or executive
officer of the Company or who is listed on Schedule B as contemplated by Section
2(a)(xii) hereof.
(i) The Shares shall have been duly approved for trading on the
Nasdaq National Market subject only to official notice of issuance.
(j) All conditions to the closing of the acquisitions of the
Acquired Companies shall have been satisfied or waived in a manner satisfactory
to the Representative and counsel to the Underwriters, and each such acquisition
shall have been closed in escrow subject only to delivery of the applicable
purchase price by the Company.
(k) The Company shall have furnished the Representative with such
further opinion letters, certificates or documents as the Representative or
counsel to the Underwriters may reasonably request. All opinions, certificates,
letters and documents to be furnished by the Company will comply with the
provisions hereof only if they are reasonably satisfactory in all material
respects to the Representative and to counsel to the Underwriters. The Company
shall furnish the Representative with conformed copies of such opinions,
certificates, letters and documents in such quantities as you reasonably
request. The certificates delivered hereunder shall constitute representations,
warranties and agreements of the Company as to all matters set forth therein as
fully and effectively as if such matters had been set forth in this Agreement.
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(l) The Common Stock shall be qualified in such states as the
Representative may request pursuant to Section 5(d), and each such qualification
shall be in effect and not subject to any stop order or other proceeding on the
Closing Date.
(m) The Company shall have executed and delivered to the
Representative the Underwriter Warrant Agreement in a form deemed acceptable by
the Representative and a certificate or certificates evidencing the Underwriter
Warrants.
8. Indemnification.
(a) The Company agrees to indemnify and hold harmless each
Underwriter and each person, if any, who controls such Underwriter within the
meaning of Section 15 of the Act or Section 20 of the Exchange Act against any
and all losses, claims, damages or liabilities, joint or several (and actions in
respect thereof) to which such Underwriter or such controlling person may become
subject under the Act or other federal or state statutory law or regulation, at
common law or otherwise, insofar as such losses, claims, damages, liabilities or
actions arise out of or are based upon any untrue statement or alleged untrue
statement of any material fact contained in the Registration Statement or the
Prospectus or any Preliminary Prospectus, or any amendment or supplement
thereto, or any blue sky application or other document executed by the Company
specifically for the purpose of qualifying, or based upon written information
furnished by the Company filed in any state or other jurisdiction in order to
qualify, any or all of the Shares under the securities or blue sky laws thereof
(any such application, document or information being hereinafter called a "Blue
Sky Application"), or arise out of or are based upon the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading and will reimburse, as
incurred, such Underwriter or such controlling persons for any reasonable legal
or other expenses incurred by such Underwriter or such controlling persons in
connection with investigating, defending or appearing as a third party witness
in connection with any such loss, claim, damage, liability or action; provided,
however, that the Company will not be liable in any such case to the extent that
any such loss, claim, damage, liability or action arises out of or is based upon
any untrue statement or alleged untrue statement or omission or alleged omission
made in any of such documents in reliance upon and in conformity with
information furnished in writing to the Company on behalf of such Underwriter
expressly for use therein; provided, further, that such indemnity with respect
to any Preliminary Prospectus shall not inure to the benefit of any Underwriter
(or to the benefit of any person controlling such Underwriter) from whom the
person asserting any such loss, claim, damage, liability or action purchased
Shares which are the subject thereof to the extent that any such loss, claim,
damage, liability or action (i) results from the fact that such Underwriter
failed to send or give a copy of the Prospectus (as amended or supplemented) to
such person at or prior to the confirmation of the sale of such Shares to such
person in any case where such delivery is required by the Act and (ii) arises
out of or is based upon an untrue statement or omission of a material fact
contained in such Preliminary Prospectus that was corrected in the Prospectus
(as amended and supplemented), unless such failure resulted from noncompliance
by the Company with Section 5(i) hereof. The Company acknowledges that the
statements with respect to the public offering of the Shares set forth under
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<PAGE> 26
the heading "Underwriting" in the Prospectus have been furnished by the
Underwriters to the Company expressly for use therein and constitute the only
information furnished in writing by or on behalf of the Underwriters for
inclusion in the Prospectus. The indemnity agreement contained in this
subsection (a) shall be in addition to any liability which the Company may have
at common law or otherwise.
(b) Each Underwriter severally and not jointly agrees to indemnify
and hold harmless the Company, each of its directors, each of its officers who
has signed the Registration Statement and each person, if any, who controls the
Company within the meaning of Section 15 of the Act or Section 20 of the
Exchange Act against any and all losses, claims, damages or liabilities (and
actions in respect thereto to which the Company or any such director, officer,
or controlling person may become subject, under the Act or other federal or
state statutory law or regulation, at common law or otherwise, insofar as such
losses, claims, damages, liabilities or actions arise out of or are based upon
any untrue statement or alleged untrue statement of any material fact contained
in the Registration Statement or the Prospectus or any Preliminary Prospectus,
or any amendment or supplement thereto or in any Blue Sky Application, or arise
out of or are based upon the omission or the alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
not misleading, in each case to the extent, but only to the extent, that such
untrue statement or alleged untrue statement or omission or alleged omission was
made in reliance upon and in conformity with information furnished in writing by
such Underwriter to the Company expressly for use therein; and will reimburse,
as incurred, all reasonable legal or other expenses reasonably incurred by the
Company or any such director, officer or controlling person in connection with
investigating or defending any such loss, claim, damage, liability or action.
The Company acknowledges that the statements with respect to the public offering
of the Shares set forth under the heading "Underwriting" in the Prospectus have
been furnished by the Underwriters to the Company expressly for use therein and
constitute the only information furnished in writing by or on behalf of the
Underwriters for inclusion in the Prospectus. The indemnity agreement contained
in this subsection (b) shall be in addition to any liability which any
Underwriter may have at common law or otherwise.
(c) Promptly after receipt by an indemnified party under this
Section 8 of notice of the commencement of any action, such indemnified party
will, if a claim in respect thereof is to be made against one or more
indemnifying parties under this Section 8, notify such indemnifying party or
parties of the commencement thereof; but the omission so to notify the
indemnifying party shall not relieve it from any liability which it may have to
any indemnified party otherwise than under this Section 8 or to the extent that
the indemnifying party was not adversely affected by such omission. In case any
such action is brought against an indemnified party and it notifies an
indemnifying party or parties of the commencement thereof, the indemnifying
party or parties against which a claim is to be made will be entitled to
participate therein and, to the extent that it or they may wish, to assume the
defense thereof, with counsel reasonably satisfactory to such indemnified party;
provided, however, that if the defendants in any such action include both the
indemnified party and the indemnifying party and the indemnified party has
reasonably concluded that there may be legal defenses available to it
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<PAGE> 27
and/or other indemnified parties which are different from or additional to those
available to the indemnifying party, the indemnified party or parties shall have
the right to select separate counsel to assume such legal defenses and otherwise
to participate in the defense of such action on behalf of such indemnified party
or parties. Upon receipt of notice from the indemnifying party to such
indemnified party of its election so to assume the defense of such action and
approval by the indemnified party of counsel, the indemnifying party will not be
liable to such indemnified party under this Section 8 for any legal or other
expenses (other than the reasonable costs of investigation) subsequently
incurred by such indemnified party in connection with the defense thereof unless
(i) the indemnified party has employed such counsel in connection with the
assumption of such different or additional legal defenses in accordance with the
proviso to the immediately preceding sentence, (ii) the indemnifying party has
not employed counsel reasonably satisfactory to the indemnified party to
represent the indemnified party within a reasonable time after notice of
commencement of the action, or (iii) the indemnifying party has authorized in
writing the employment of counsel to the indemnified party at the expense of the
indemnifying party. In addition to the foregoing, no indemnifying party shall,
without the prior written consent (not to be unreasonably withheld) of an
indemnified party, settle or compromise or consent to the entry of any judgment
in any pending or threatened claim, action, suit or proceeding in respect of
which indemnification may be sought hereunder (whether or not any Underwriter or
any such indemnified party or any person who controls any Underwriter or any
such indemnified party within the meaning of Section 15 of the Act or Section 20
of the Exchange Act is a party to such claim, action, suit or proceeding),
unless such settlement, compromise or consent includes an unconditional release
of the Underwriters and any such indemnified party and each such controlling
person from all liability arising out of such claim, action, suit or proceeding.
(d) If the indemnification provided for in this Section 8 is
unavailable to hold harmless an indemnified party under this Section 8 in
respect of any losses, claims, damages or liabilities (or actions in respect
thereto referred to therein, then each indemnifying party shall contribute to
the amount paid or payable by such indemnified party as a result of such losses,
claims, damages or liabilities (or actions in respect thereof) (i) in such
proportion as is appropriate to reflect the relative benefits received by each
of the contributing parties, on the one hand, and the party to be indemnified,
on the other hand, from the offering of the Shares or (ii) if the allocation
provided by clause (i) above is not permitted by applicable law, in such
proportion as is appropriate to reflect not only the relative benefits referred
to in clause (i) above but also the relative fault of each of the contributing
parties, on the one hand, and the party to be indemnified, on the other hand, in
connection with the statements or omissions that resulted in such losses,
claims, damages or liabilities, as well as any other relevant equitable
considerations. In any case where the Company is a contributing party and any
Underwriter is the indemnified party, the relative benefits received by the
Company on the one hand and such Underwriter on the other hand shall be deemed
to be in the same proportion as the total net proceeds from the offering of the
Shares (before deducting expenses) bear to the total underwriting discounts
received by such Underwriter hereunder, in each case as set forth in the table
on the cover page of the Prospectus. Relative fault shall be determined by
reference to, among other things, whether the untrue or alleged untrue statement
of a material fact or the
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omission or alleged omission to state a material fact relates to information
supplied by the Company or by such Underwriter and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
untrue statement or omission. The amount paid or payable by an indemnified party
as a result of the losses, claims, damages or liabilities (or actions in respect
thereof) referred to above in this subsection (d) shall be deemed to include any
legal or other expenses reasonably incurred by such indemnified party in
connection with investigating or defending any such action or claim.
Notwithstanding the provisions of this subsection (d), no Underwriter shall be
required to contribute any amount in excess of the underwriting discount
applicable to the Shares purchased by such Underwriter hereunder. No person
guilty of fraudulent misrepresentation (within the meaning of Section 11 (f) of
the Act) shall be entitled to contribution from any person who was not guilty of
such fraudulent misrepresentation. For purposes of this subsection (d), (i) each
person, if any, who controls an Underwriter within the meaning of Section 15 of
the Act or Section 20 of the Exchange Act shall have the same rights to
contribution as such Underwriter and (ii) each director of the Company, each
officer of the Company who has signed the Registration Statement, and each
person, if any, who controls the Company within the meaning of Section 15 of the
Act or Section 20 of the Exchange Act shall have the same rights to contribution
as the Company, subject in each case to this subsection (d). Any party entitled
to contribution will, promptly after receipt of notice of commencement of any
action, suit or proceeding against such party in respect to which a claim for
contribution may be made against another party or parties under this subsection
(d), notify such party or parties from whom contribution may be sought, but the
omission so to notify such party or parties shall not relieve the party or
parties from whom contribution may be sought from any other obligation (x) it or
they may have hereunder or otherwise than under this subsection (d), or (y) to
the extent that such party or parties were not adversely affected by such
omission. The contribution agreement contained in this subsection (d) shall be
in addition to any liabilities which any indemnifying party may have at common
law or otherwise.
9. Right to Increase Offering. At any time during a period of 30 days
after the date of the Prospectus, the Representative, by no less than two
business days' prior notice to the Company, may designate a closing(s) (which
may be concurrent with, and part of, the closing on the Closing Date or may be
an additional closing or closings held on a date subsequent to the Closing Date;
in either case any such date shall be referred to herein as an "Additional
Closing Date") at which the Underwriters may purchase all or less than all of
the Additional Shares in accordance with the provisions of this Section 9 at the
purchase price per share to be paid for the Primary Shares; provided, however,
that a maximum of three Additional Closing Dates shall be allowed pursuant to
this Section 9. In no event shall any Additional Closing Date be later than 10
business days after written notice of election to purchase Additional Shares is
given.
The Company agrees to sell to each Underwriter on each Additional
Closing Date such Underwriter's pro rata portion (equal to the percentage
determined by dividing the number of Primary Shares to be purchased by such
Underwriter by the total number of Primary Shares to be purchased by all
Underwriters) of the number of Additional Shares specified in such notice, and
each Underwriter agrees to purchase such Additional Shares from the Company on
such
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Additional Closing Date. Such Additional Shares may be purchased by the
Underwriters solely for the purpose of covering over-allotments made in
connection with the sale of the Primary Shares.
No Additional Shares shall be sold or delivered unless the Primary
Shares previously have been, or simultaneously are, sold and delivered. The
right to purchase the Additional Shares or any portion thereof may be
surrendered and terminated at any time upon notice by the Representative to the
Company.
Except to the extent modified by this Section 9, all provisions of this
Agreement relating to the transactions contemplated to occur on the Closing Date
for the sale of the Primary Shares shall apply, mutatis mutandis, to any
Additional Closing Date for the sale of Additional Shares.
10. Representations, Etc. to Survive Delivery. The respective
representations, warranties, agreements, covenants, indemnities and statements
of, and on behalf of, the Company and the Underwriters, respectively, set forth
in or made pursuant to this Agreement will remain in full force and effect,
regardless of any investigation made by or on behalf of the Underwriters, and
will survive delivery of and payment for the Shares. Any successor or successors
to any Underwriter shall be entitled to the indemnity, contribution and
reimbursement agreements contained in this Agreement.
11. Effective Date and Termination.
(a) This Agreement shall become effective at 11:00 a.m., New York
City time, on the first business day following the date hereof, or at such
earlier time after the Registration Statement becomes effective as the
Representative in its sole discretion shall release the Shares for sale to the
public unless prior to such time the Representative shall have received written
notice from the Company that it elects that this Agreement shall not become
effective, or the Representative shall have given written notice to the Company
that the Representative on behalf of the Underwriters elects that this Agreement
shall not become effective; provided, however, that the provisions of Sections 6
and 8 hereof and this Section 11 shall at all times be effective. For purposes
of this subsection (a), the Shares to be purchased hereunder shall be deemed to
have been so released upon the earlier of notification by the Representative to
securities dealers releasing such Shares for offering or the release by the
Representative for publication of the first newspaper advertisement which is
subsequently published relating to the Shares.
(b) This Agreement (except for the provisions of Sections 6 and 8
hereof) may be terminated by the Representative on behalf of the Underwriters by
notice to the Company in the event that the Company has failed to comply in any
material respect with any of the provisions of this Agreement required to be
performed at or prior to the Closing Date or any Additional Closing Date, or if
any of the representations or warranties of the Company are not accurate in any
material respect, or if the covenants, agreements or conditions of or applicable
to the Company herein contained have not been complied with in any material
respect or
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materially satisfied within the time specified on the Closing Date or any
Additional Closing Date, respectively, or if prior to the Closing Date or any
Additional Closing Date:
(i) the Company, the Division or any of the Subsidiaries
shall have sustained a loss (regardless of whether or not such loss was
insured) by explosion, strike, fire, flood, accident or other calamity
of such a character as to interfere materially with the conduct of the
business and operations of the Company, the Division and the
Subsidiaries, taken as a whole;
(ii) trading in the Common Stock shall have been suspended
by the Commission or the Nasdaq National Market or trading in
securities generally on the New York Stock Exchange or the Nasdaq
National Market shall have been suspended or a material limitation on
such trading shall have been imposed or minimum or maximum prices shall
have been established on any such exchange or market system;
(iii) a banking moratorium shall have been declared by New
York or United States authorities;
(iv) there shall have been an outbreak or escalation of
hostilities between the United States and any foreign power or an
outbreak or escalation of any other insurrection or armed conflict
involving the United States; or
(v) there shall have been a material adverse change in (A)
general economic, political or financial conditions or (B) the present
or prospective business, financial condition or results of operations
of the Company, the Division and the Subsidiaries, taken as a whole
that, in each case, in the Representative's judgment makes it
impracticable or inadvisable to make or consummate the public offering
or the sale or delivery of the Shares on the terms and in the manner
contemplated in the Prospectus and the Registration Statement.
(c) Termination of this Agreement under this Section 11 after the
Primary Shares have been purchased by the Underwriters hereunder shall be
applicable only to the Additional Shares. Termination of this Agreement shall be
without liability of any party to any other party other than as provided in
Sections 6 and 8 hereof.
12. Default by One of More of the Underwriters. If one or more of the
Underwriters shall fail to purchase the Primary Shares to be purchased by it on
the Closing Date (the "Defaulted Shares"), the Representative shall have the
right, within 24 hours thereafter, to make arrangements for one or more of the
non-defaulting Underwriters, or any other underwriters, to purchase all but not
less than all of the Defaulted Shares in such amounts as may be agreed upon and
upon the terms set forth herein. If, however, the Representative shall not have
completed such arrangements within such 24-hour period, then:
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<PAGE> 31
(a) if the number of Defaulted Shares does not exceed 10% of the
Primary Shares, the non-defaulting Underwriters shall be obligated to purchase
the full amount thereof in the proportions that their respective underwriting
obligations hereunder bear to the underwriting obligations of all non-defaulting
Underwriters, or
(b) if the number of Defaulted Shares exceeds 10% of the Primary
Shares, this Agreement shall terminate without liability on the part of any
non-defaulting Underwriter.
No action pursuant to this Section 12 shall relieve any defaulting Underwriter
from liability in respect of its default. In the event of any such default which
does not result in a termination of this Agreement, the Representative and the
Company shall each have the right to postpone the Closing Date for a period not
exceeding seven days in order to effect any required changes in the Registration
Statement or the Prospectus or in any other documents or arrangements.
13. Notices. All communications hereunder shall be in writing and (i)
if sent to the Representative, shall be mailed or delivered or telecopied and
confirmed by letter to Prime Charter Ltd. at 810 Seventh Avenue, New York, New
York 10019, Attention: Mary Celeste Anthes, and (ii) if sent to the Company,
shall be mailed or delivered or telecopied and confirmed to the Company at One
East Camelback Road, Phoenix, Arizona 85012, Attention: Sam L. Leopold.
14. Successors. This Agreement shall inure to the benefit of and be
binding upon the Company and the Underwriters and their respective successors
and legal representatives, and nothing expressed or mentioned in this Agreement
is intended or shall be construed to give any other person any legal or
equitable right, remedy or claim under or in respect of this Agreement, or any
provisions herein contained, this Agreement and all conditions and provisions
hereof being intended to be and being for the sole and exclusive benefit of such
persons and for the benefit of no other person, except that the representations,
warranties, indemnities and contribution agreements of the Company contained in
this Agreement shall also be for the benefit of any person or persons, if any,
who control any Underwriter within the meaning of Section 15 of the Act or
Section 20 of the Exchange Act, and except that the Underwriters' indemnity and
contribution agreements shall also be for the benefit of the directors of the
Company, the officers of the Company who have signed the Registration Statement,
and any person or persons, if any, who control the Company within the meaning of
Section 15 of the Act or Section 20 of the Exchange Act. No purchaser of Shares
from any Underwriter will be deemed a successor because of such purchase.
15. Applicable Law, Jurisdiction. This Agreement shall be governed by
and construed in accordance with the laws of the State of New York, without
giving effect to the choice of law or conflict of law principles thereof. Each
party hereto consents to the jurisdiction of each court in which any action is
commenced seeking indemnity or contribution pursuant to Section 8 hereof and
agrees to accept, either directly or through an agent, service of process of
each such court.
31
<PAGE> 32
16. Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an original, and all of which
together shall be deemed to be one and the same instrument.
If the foregoing correctly sets forth our understanding, please
indicate the Underwriters' acceptance thereof in the space provided below for
that purpose, whereupon this letter shall constitute a binding agreement between
us.
Very truly yours,
STYLING TECHNOLOGY CORPORATION
By:______________________________________
Sam L. Leopold
Chairman of the Board
Accepted as of the date first written:
PRIME CHARTER, LTD., Individually
and as Representative of the
several Underwriters
By:_______________________________
Sylvan Schefler
Vice Chairman
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<PAGE> 33
SCHEDULE A
Underwriters
Underwriter Primary Shares
33
<PAGE> 34
SCHEDULE B
Parties to Lock-Up Agreements
Directors
Executive Officers
Stockholders
<PAGE> 35
EXHIBIT A
Draft 9/12/96
WARRANT AGREEMENT
BETWEEN
STYLING TECHNOLOGY CORPORATION
AND
PRIME CHARTER LTD.
DATED AS OF NOVEMBER __, 1996
<PAGE> 36
WARRANT AGREEMENT dated as of November __, 1996 (the "Effective Date"),
between STYLING TECHNOLOGY CORPORATION, a Delaware corporation (the
"Company"), and PRIME CHARTER LTD. ("Prime Charter").
The Company proposes to sell to Prime Charter or its designee(s)
warrants (the "Warrants") to purchase an aggregate of ________ shares (the
"Warrant Shares") of the Company's common stock, par value $.0001 per share (the
"Common Stock"), in connection with a public offering by the Company of ________
shares of Common Stock (the "Offering") pursuant to a registration statement
(the "Registration Statement") on Form S-1 (File No. 333- ____) filed by the
Company with the Securities and Exchange Commission.
THEREFORE, in consideration of the mutual undertakings contained
herein, the Company and Prime Charter hereby agree as follows:
1. Issuance of Warrants. Concurrently with the initial closing (the
"Closing") under the Underwriting Agreement of even date herewith between the
Company and Prime Charter as representative of the several underwriters named
therein (the "Underwriting Agreement") relating to the Offering, the Company
shall issue, sell and deliver the Warrants to Prime Charter or, at Prime
Charter's direction, to one or more underwriters or other members of the
National Association of Securities Dealers, Inc. that participate in the
Offering and/or the bona fide officers or partners of Prime Charter or such
other participants (each a "Permitted Designee"), for a purchase price of $.01
per Warrant. The Warrants shall be substantially in the form of Exhibit A
attached hereto.
2. Registration. The Company shall maintain a Warrant register at its
principal executive office for the registration of the issuance and transfer of
the Warrants. The Company shall be entitled to treat the registered holder of
any Warrant (the "Holder") as the owner in fact thereof for all purposes and
shall not be bound to recognize any equitable or other claim to or interest in
such Warrants on the part of any other person. The Warrants shall be registered
initially in the name of Prime Charter and/or one or more Permitted Designees in
such denominations as Prime Charter may request not less than two business days
prior to the Closing Date. Issuances of Warrants to persons other than Prime
Charter may be made only if such issuances would not violate applicable rules
and guidelines of the National Association of Securities Dealers, Inc. relating
to corporate financing arrangements.
3. Transfer and Exchange of Warrants. The Warrants shall be
transferable only upon surrender thereof at the Company's principal executive
office duly endorsed by the Holder or by the Holder's duly authorized attorney
or representative, or accompanied by proper evidence of succession, assignment
or authority to transfer. Upon any registration of transfer, the Company shall
deliver a new Warrant or Warrants to the persons entitled thereto. In addition,
the Warrants may be exchanged, at the option of the Holder thereof, for another
Warrant or Warrants of different denominations, of like tenor and representing
in the aggregate the right to
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<PAGE> 37
purchase a like number of Warrant Shares upon surrender at the Company's
principal executive office. Notwithstanding the foregoing, the Warrants and
Warrant Shares may not be sold, assigned, transferred, pledged or hypothecated
for a period of 12 months after the Effective Date, except to a Permitted
Designee, by operation of law or by reason of a reorganization of the Company.
Thereafter, the Warrants and Warrant Shares shall be freely transferable subject
only to compliance with applicable securities laws.
4. Exercise of Warrants.
4.1. Exercise Price and Term. Each Warrant shall entitle the Holder
thereof to purchase from the Company one Warrant Share at a purchase price of
$[120% of IPO price], as such purchase price may be adjusted from time to time
pursuant to the provisions of Section 8 hereof (the "Exercise Price"), payable
in full at the time of exercise of the Warrant. The Warrants may be exercised,
in whole or in part, at any time or from time to time during the five-year
period commencing on the Effective Date and ending at 5:00 p.m., New York City
time, on the fifth anniversary of the Effective Date (the "Expiration Date").
The Company shall give each Holder of Warrants not less that 30 days' nor more
than 60 days' prior written notice of the Expiration Date. After the Expiration
Date, any unexercised Warrants shall be void and all rights of Holders with
respect thereto shall cease.
4.2. Payment of Exercise Price. At the election of the Holder, the
Exercise Price may be paid: (a) in cash in the amount of the aggregate Exercise
Price then in effect for the number of Warrants being exercised, (b) by
surrender to the Company of shares of Common Stock having a Fair Market Value
(as defined below) on the date of exercise equal to the aggregate Exercise Price
then in effect for the number of Warrants being exercised, (c) by a surrender of
Warrants covering a number of Warrant Shares having a Fair Market Value, net of
the applicable Exercise Price therefor, equal to the aggregate Exercise Price
then in effect for the number of Warrants being exercised, or (d) by a
combination of the aforementioned methods of payment. For purposes of this
Agreement, the "Fair Market Value" per share of Common Stock on a given date
shall be: (i) if the Common Stock is listed on a national securities exchange or
included on the Nasdaq National Market, the closing price per share of Common
Stock on such date (or, if there was no trading on such date, on the next
preceding day on which there was trading); (ii) if the Common Stock is not
listed on a national securities exchange or included on the Nasdaq National
Market, the average of the closing bid and asked quotations per share of Common
Stock as reported by Nasdaq (or the National Quotation Bureau Incorporated or
any similar organization) on such date (or, if there was no trading in the
Common Stock on such date, on the next preceding day on which there was trading)
as provided by such organization; and (iii) if the Common Stock is not traded on
a national securities exchange and the bid and asked quotations are not provided
by Nasdaq (or the National Quotation Bureau Incorporated or any similar
organization), as determined by the agreement of the parties in good faith or,
in the absence of such agreement, as determined pursuant to arbitration under
the auspices of the American Arbitration Association.
2
<PAGE> 38
4.3. Exercise Procedure. Warrants may be exercised by their surrender
at the Company's principal executive office, with the Election to Purchase form
attached thereto duly completed and executed, accompanied by payment of the
Exercise Price for the Warrant Shares to be purchased upon such exercise.
Payment for the Warrant Shares shall be made (a) if payment is to be made in
cash, by a certified or bank cashier's check payable to the order of the Company
or by wire transfer to an account designated by the Company, (b) if payment is
to be made through a surrender of shares of Common Stock, by surrender of
certificates duly endorsed for transfer (with all transfer taxes paid or
provided for), and (c) if payment is to be made by a surrender of Warrants, by
surrender of certificates representing such Warrants. Promptly after the
exercise of any Warrants, the Company shall issue a certificate or certificates
for the number of full Warrant Shares to which the Holder is entitled,
registered in accordance with the instructions set forth in the Election to
Purchase, together with cash as provided in Section 10 of this Warrant Agreement
payable in respect of fractional shares and (if applicable) a new Warrant
certificate or certificates representing all remaining unexercised Warrants. All
Warrant Shares shall be duly authorized and validly issued, fully paid,
nonassessable and free of preemptive rights, and free from all taxes, liens and
charges other than those created by the Holder. Certificates representing such
Warrant Shares and remaining unexercised Warrants shall be issued by the Company
in such names and denominations, and shall be delivered to such persons, as are
specified by written instructions of the Holder.
4.4. Record Holder. Each person in whose name any such certificate for
Warrant Shares is issued shall for all purposes be deemed to have become the
holder of record of the Warrant Shares represented thereby on the date upon
which such Warrants were surrendered for exercise, accompanied by payment of the
Exercise Price as aforesaid, irrespective of the date of issuance or delivery of
such certificate for Warrant Shares; provided, however, that if, at the date of
the surrender of such Warrants and payment of the Exercise Price, the transfer
books for the Warrant Shares or other class of stock purchasable upon the
exercise of such Warrants shall be closed, the certificates for the Warrant
Shares or for shares of such other class of stock in respect of which such
Warrants are then exercised shall be issuable as of the date on which such books
shall next be opened (whether before or after the Expiration Date) and, until
such date, the Company shall be under no duty to deliver any certificate for
such Warrant Shares or for shares of such other class of stock; provided,
further, that the transfer books of record, unless otherwise required by law,
shall not be closed at any one time for a period longer than 20 days.
5. Payment of Taxes. The Company shall promptly pay all documentary
stamp taxes attributable to the issuance of Warrants or the issuance of Warrant
Shares upon the exercise of any Warrants, except that any transfer taxes payable
in connection with the issuance of Warrants or Warrant Shares in any name other
than that of the Holder of the Warrant surrendered shall be paid by such Holder
and, if any such tax would otherwise be payable by the Company, no such issuance
or delivery shall be made unless and until the person requesting such issuance
has paid to the Company the amount of any such tax, or it is established to the
reasonable satisfaction of the Company that any such tax has been paid.
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<PAGE> 39
6. Replacement Warrants. In case any of the Warrants shall be
mutilated, lost, stolen or destroyed, the Company shall issue and deliver in
exchange and substitution for and upon cancellation of the mutilated Warrant, or
in lieu of and substitution for the lost, stolen or destroyed Warrant, a new
Warrant of like tenor and representing an equivalent right or interest, but only
upon receipt of evidence reasonably satisfactory to the Company of such loss,
theft or destruction of such Warrant, together with an appropriate agreement
regarding indemnification of the Company relating to the issuance of a
replacement Warrant.
7. Reservation of Warrant Shares. The Company shall at all times
reserve and keep available for issuance upon the exercise of the Warrants a
number of its authorized but unissued shares of Common Stock that will be
sufficient to permit the exercise in full of all outstanding Warrants. Each
transfer agent for the Common Stock or other shares of the Company's capital
stock issuable upon the exercise of Warrants shall be irrevocably authorized and
directed at all times to reserve such number of authorized and unissued shares
as shall be sufficient for such purpose. The Company will keep a copy of this
Warrant Agreement on file with each such transfer agent and will supply such
transfer agent with duly executed stock certificates for such purpose and will
provide or otherwise make available any cash that may be payable as provided in
Section 10 hereof. All Warrants surrendered upon the exercise thereof shall be
canceled. After the Expiration Date, no shares shall be subject to reservation
in respect of any unexercised Warrants.
8. Adjustments.
8.1. Adjustment of Exercise Price.
8.1.1. Initial Exercise Price. The Exercise Price shall be adjusted and
readjusted from time to time as provided in this Section 8.1 and, as so adjusted
or readjusted, shall remain in effect until a further adjustment or readjustment
thereof is required by this Section 8.1.
8.1.2. Issuance of Additional Shares of Common Stock. In case the
Company, at any time or from time to time after the Effective Date, shall issue
additional shares of Common Stock for no consideration in connection with a
dividend, stock split or other distribution on Common Stock (including, without
limitation, any distribution of Common Stock or securities that are convertible
into or exchangeable or exercisable for Common Stock by way of spin-off,
reclassification or corporate rearrangement), then, and in each such case, the
Exercise Price shall be reduced concurrently with such issuance to a price
(calculated to the nearest cent) determined by multiplying such Exercise Price
by a fraction of which:
(a) the numerator shall be the number of shares of Common
Stock outstanding immediately prior to such issuance, and
(b) the denominator shall be the number of shares of Common
Stock outstanding immediately after such issuance.
4
<PAGE> 40
8.1.3. Dividends and Distributions. In case the Company shall at any
time after the Effective Date declare, order, pay or make a dividend or other
distribution on the Common Stock (including without limitation any distribution
of stock or other securities, property or options by way of dividend, spin-off,
reclassification, or corporate rearrangement) then, and in each such case, the
Exercise Price in effect immediately prior to the close of business on the
record date fixed for the determination of holders of any class of securities
entitled to receive such dividend or other distribution shall be reduced,
effective as of the close of business on such record date, to a price
(calculated to the nearest cent) determined by multiplying such Exercise Price
by a fraction of which:
(a) the numerator shall be the Exercise Price in effect
immediately prior to the close of business on such record date minus
the value of such dividends or other distributions (as determined in
good faith by the Board of Directors of the Company) applicable to one
share of Common Stock, and
(b) the denominator shall be such Exercise Price in effect
immediately prior to the close of business on such record date.
provided, however, that no such reduction shall be made pursuant to this Section
8.1.3 for a dividend payable in additional shares of Common Stock, or a dividend
payable in cash or other property and declared out of the earned surplus (i.e.,
retained earnings) of the Company (excluding any portion thereof resulting from
a revaluation of property). For purposes of the foregoing, a dividend payable
other than in cash shall be considered payable out of earned surplus only to the
extent that such earned surplus is charged an amount equal to the fair value of
such dividend at the time of declaration as determined in good faith by the
Board of Directors of the Company.
8.1.4. Adjustments for Combinations, etc. In case the outstanding
shares of Common Stock shall be combined or consolidated, by reclassification or
otherwise, into a lesser number of shares of Common Stock, the Exercise Price in
effect immediately prior to such combination or consolidation shall be
proportionately increased concurrently with the effectiveness of such
combination or consolidation.
8.1.5. Minimum Adjustment of Exercise Price. If the amount of any
adjustment of the Exercise Price required pursuant to this Section 8.1 would be
less than $.01, such amount shall be carried forward, and an adjustment with
respect thereto shall be made at the time of and together with any subsequent
adjustment that, together with such amount and any other amount or amounts so
carried forward, shall aggregate at least $.01.
8.2. Adjustment of Number of Warrant Shares. Upon each adjustment of
the Exercise Price pursuant to the provisions of Section 8.1, the number of
Warrant Shares that the Holder of a Warrant shall be entitled to receive upon
exercise thereof shall be adjusted to equal that number of Warrant Shares
determined by multiplying the number of Warrant Shares issuable
5
<PAGE> 41
upon exercise of such Warrant immediately prior to such adjustment of the
Exercise Price by a fraction of which:
(a) the numerator shall be the Exercise Price in effect
immediately prior to such adjustment of the Exercise Price, and
(b) the denominator shall be the Exercise Price in effect
immediately following such adjustment of the Exercise Price.
9. Consolidation, Merger, Sale of Assets, Reorganization, etc.
9.1. General Provisions. In case the Company at any time after the
Effective Date (a) shall consolidate with or merge into any other person and
shall not be the continuing or surviving person of such consolidation or merger,
or (b) shall permit any other person to consolidate with or merge into the
Company and the Company shall be the continuing or surviving person but, in
connection with such consolidation or merger, the Common Stock or other
securities issuable upon exercise of the Warrants shall be changed into or
exchanged for cash, stock or other securities or property, or (c) shall
transfer, directly or indirectly, all or substantially all its properties and
assets to any other person, or (d) shall effect a capital reorganization or
reclassification of the Common Stock or other securities issuable upon exercise
of the Warrants (other than a capital reorganization or reclassification
resulting in the issue of additional shares of Common Stock for which adjustment
of the Exercise Price is provided in Section 8.1), then, and in the case of each
such transaction, the Company shall make proper provision such that, upon the
terms and in the manner provided in Section 8, the Holder of each Warrant, upon
the exercise thereof at any time after the consummation of such transaction,
shall be entitled to receive, at the Exercise Price in effect immediately prior
to such transaction, in lieu of the Common Stock or other securities issuable
upon such exercise immediately prior to such transaction, the amount of cash,
securities or other property to which such Holder would have been entitled if
such Warrant had been exercised in full immediately prior to such transaction,
subject to adjustments subsequent to such transaction as nearly equivalent as
possible to the adjustments provided for in Section 8 and this Section 9.
9.2. Assumption of Obligation. Notwithstanding anything contained in
this Warrant Agreement to the contrary, the Company shall not effect any of the
transactions described in subdivisions (a) through (d) of Section 9.1 unless,
prior to the consummation thereof, each person (other than the Company) that may
be required to deliver any cash, stock or other securities or other property
upon the exercise of this Warrant as provided herein shall assume, by written
instrument delivered to the Holders of the Warrants, (a) the obligations of the
Company under this Warrant Agreement and the Warrants (and if the Company shall
survive the consummation of any such transaction, such assumption shall be in
addition to, and shall not release the Company from, any continuing obligations
of the Company under this Warrant Agreement and the Warrants) and (b) the
obligation to deliver to such Holder such cash, stock or other securities or
other property as such Holder may be entitled to receive in accordance
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<PAGE> 42
with the provisions of this Section 9. Such person shall have similarly
delivered to the Company an opinion of counsel to the effect that this Warrant
Agreement and the Warrants shall continue in full force and effect after any
such transaction and that the terms hereof (including, without limitation, all
of the provisions of Section 8 and this Section 9.2) and thereof shall be
applicable to the cash, stock or other securities or other property that such
Person may be required to deliver upon any exercise of the Warrants or the
exercise of any rights pursuant hereto or thereto.
9.3. Other Dilutive Events. The Board of Directors of the Company shall
have an ongoing obligation to determine in good faith whether any event has
occurred as to which the provisions of Section 9 shall not be strictly
applicable, but with respect to which the failure to make any adjustment to the
Exercise Price would not fairly protect the purchase rights represented by this
Warrant in accordance with the intent and principles of that Section . In each
case in which such determination shall be made, the Company shall appoint a firm
of independent public accountants reasonably acceptable to Prime Charter or the
holders of a majority-in-interest of the Warrants, which shall give its opinion
upon the adjustments, if any, consistent with the intent and principles
established in Sections 8 and 9, necessary to preserve without dilution the
purchase rights represented by this Warrant Agreement and the Warrants. Upon
receipt of such opinion, the Company will promptly mail a copy thereof to the
Holders and shall make the adjustments described therein.
9.4. No Dilution or Impairment. The Company shall not, by amendment of
its certificate of incorporation or by-laws or through any consolidation,
merger, reorganization, transfer of assets, dissolution, issue, sale, grant or
assumption of securities or any other voluntary action, avoid or seek to avoid
the observance or performance of any of the terms of this Warrant Agreement or
the Warrants, but will at all times, whether or not requested to do so, in good
faith assist in the carrying out of all such terms and in the taking of all such
action as may be necessary or appropriate in order to protect the rights of the
Holders against dilution or other impairment. Without limiting the generality of
the foregoing, the Company agrees that it shall take all such reasonable action
as may be necessary or appropriate in order that the Company may validly and
legally issue fully paid and nonassessable shares of stock upon the exercise of
all Warrants from time to time outstanding.
9.5. Notice, Evidence of Adjustments. Whenever the Exercise Price is
adjusted as herein provided, the Company shall promptly cause a notice setting
forth the adjusted Exercise Price and adjusted number of Warrant Shares issuable
upon exercise of each Warrant to be mailed to the Holders, at their last address
appearing in the Warrant register, and shall cause a certified copy thereof to
be mailed to each transfer agent for the Warrant Shares. The Company shall
retain a firm of independent public accountants of recognized standing selected
by the Board of Directors (who may be the regular accountants employed by the
Company) to make any computation required by Section 8, and a certificate signed
by such firm shall accompany said notice and shall be conclusive evidence of the
correctness of such adjustment.
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<PAGE> 43
10. Fractional Interests. The Company shall not be required to issue
fractions of shares of Common Stock on the exercise of Warrants. If more than
one Warrant shall be presented for exercise in full at the same time by the same
Holder, the number of Warrant Shares that shall be issuable upon the exercise
thereof shall be computed on the basis of the aggregate number of Warrant Shares
purchasable on exercise of the Warrants so presented. If any fraction of a share
of Common Stock would, except for the provisions of this Section 10, be issuable
on the exercise of any Warrant (or specified portions thereof), the Company
shall purchase such fraction for an amount in cash equal to the same fraction of
the Fair Market Value of one share of Common Stock on the date of exercise.
11. Restrictions on Dispositions. Prime Charter acknowledges that the
Warrants and the Warrant Shares may not be transferred except pursuant to (i) an
effective registration statement under the Act, or (ii) any available exemption
from registration under the Act permitting such disposition of securities and an
opinion of counsel, reasonably satisfactory to counsel for the Company, that an
exemption from such registration is available. Prime Charter agrees that the
certificates representing the Warrants and Warrant Shares shall bear an
appropriate restrictive legend to such effect.
12. Registration Rights.
12.1. Demand Registration. Upon written request of the Holder(s) of at
least a majority of the then-outstanding Warrants and Warrant Shares made at any
time within the period commencing one year and ending five years after the
Effective Date, the Company shall file within a reasonable period of time and,
in any event, within 90 days after receipt of such written request, at its sole
expense, on no more than one occasion a registration statement under the Act
registering the Warrant Shares for sale to the public. Within 15 days after
receiving any such notice, the Company shall give notice to the other Holders of
the Warrants and the Warrant Shares advising that the Company is proceeding with
such registration statement, and offering to include therein the Warrant Shares
of such other Holders. The Company shall not be obligated to include the Warrant
Shares of any such other Holder in such registration unless such other Holder
shall accept such offer by notice in writing to the Company within 15 days after
receipt of such notice from the Company. The Holders of Warrants and Warrant
Shares shall have priority over all other securities to be included in such
registration, and no other securities shall be entitled to participate in such
registration if the inclusion of such securities would have a material adverse
effect on the marketing of the Warrant Shares. The Company shall use its best
efforts, through its officers, directors, auditors and counsel in all matters
necessary or advisable, to file and cause such registration statement to become
effective as promptly as practicable and to remain effective for a period of 90
days thereafter, to reflect in the registration statement financial statements
that are prepared in accordance with Section 10(a)(3) of the Act, and to amend
or supplement such registration statement to reflect any facts or events arising
that, individually or in the aggregate, represent a material change in the
information set forth in the registration statement to enable any Holders of
Warrants to exercise Warrants and/or sell the underlying Warrant Shares during
such 90-day period. If any registration pursuant to
8
<PAGE> 44
this Section 13.1 is an underwritten offering, the Holders of a majority of the
Warrant Shares to be included in such registration will select an underwriter
(or managing underwriter if such offering should be syndicated) approved by the
Company, such approval not to be unreasonably withheld. Notwithstanding anything
in this Warrant Agreement to the contrary, the Company shall be entitled to
postpone for a reasonable period of time (not exceeding 90 days) the filing or
effectiveness of any registration statement otherwise required to be prepared
and filed by it pursuant to this Section 12.1 if the Company's Board of
Directors determines, in its reasonable discretion, that such registration and
offering would adversely affect any financing, acquisition, corporate
reorganization or other material transaction involving the Company and the
Company promptly gives the Holders written notice of such determination
specifying the grounds therefor and an estimate of the anticipated delay. If the
Company shall so postpone the filing of a registration statement, a
majority-in-interest of the requesting Holders shall have the right to withdraw
the request for demand registration by giving written notice to the Company
within 30 days after receipt of the notice of postponement. No registration
shall be counted as the demand registration to which the Holders are entitled
pursuant to this Section 12.1 unless the Holders are able to register and sell
at least 90% of the Warrant Shares requested to be included therein.
12.2. Piggyback Registration. If, at any time within the period
commencing one year and ending seven years after the Effective Date, the Company
proposes to register any securities under the Act in a primary registration on
behalf of the Company and/or in a secondary registration on behalf of holders of
such securities, and the registration form to be used may be used for
registration of the Warrant Shares, the Company shall give prompt written notice
(which, in the case of a registration pursuant to the exercise of demand
registration rights other than those provided in Section 12.1 above, shall be
within 10 business days after the Company's receipt of notice of such exercise
and, in any event, shall be at least 30 days prior to the date of such filing)
to the Holders of Warrants and/or Warrant Shares (regardless of whether some of
the Holders shall have theretofore availed themselves of the demand right
provided in Section 12.1 hereof) at the address(es) appearing on the records of
the Company of its intention to effect registration and shall offer to include
in such registration such number of Warrant Shares with respect to which the
Company has received written requests for inclusion therein within 10 business
days after receipt of such notice from the Company. This Section 12.2 is not
applicable to any registration statement to be filed by the Company on Forms S-4
or S-8 or any successor forms. The Company shall not be obligated to cause to be
effective any registration statement as to which it has given notice to the
Holders of Warrants and/or Warrant Shares and shall have discretion to withdraw
any such registration without liability to Holders of Warrants and/or Warrant
Shares.
Notwithstanding the foregoing, if the managing underwriter of the
offering shall determine in good faith and advise the Company in writing that
the inclusion of the Warrant Shares in such registration would materially
adversely affect the marketability of the offering, then the Company and the
managing underwriter may reduce the number of Warrant Shares to be registered on
a pro rata basis proportionate to the reduction of all other holders of
securities
9
<PAGE> 45
participating in such registration pursuant to the exercise of piggyback
registration rights. In such event, the Company may reduce the number of Warrant
Shares to be registered to zero as long as long as no other securities are
registered in such registration statement pursuant to an exercise of piggyback
registration rights.
12.3. Action to be Taken by the Company. In connection with the
registration of Warrant Shares in accordance with this Section 12, the Company
shall:
(a) Bear the expenses of any registration under Sections 12.1
or 12.2, including but not limited to legal, accounting and printing
fees, including the fees and disbursements of one legal counsel
retained by the Holders of Warrant Shares; provided, however, that in
no event shall the Company be obligated to pay any underwriters'
discount or commission payable in respect of such Warrant Shares,
payment of which shall be the sole responsibility of the Holders of the
Warrant Shares;
(b) Use its best efforts to register or qualify the Warrant
Shares for offer or sale under state securities or blue sky laws of
such jurisdictions in which the participating Holders propose to offer
Warrant Shares, and to do any and all other acts and things that may be
necessary or advisable to enable the Holders to consummate the proposed
sale, transfer or other disposition of such securities in any
jurisdiction, provided, however, that the Company shall not be required
to qualify as a foreign corporation in connection with such
qualification if not otherwise required to do so; and
(c) Indemnify each Holder of Warrant Shares for any liability,
cost or expense arising out of any untrue statement of material fact
contained in such registration statement or any omission of material
fact required in order to make the statements contained in such
registration statement not misleading (other than misstatements or
omissions contained in materials supplied by the Holders in writing for
inclusion in the registration statement) and enter into an underwriting
agreement, in customary form, with the underwriter(s) for any
underwritten offering of Warrant Shares.
12.4. Securities Law Compliance. The Company covenants that it will
timely file all reports required to be filed by it under the Act and the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). So long as the
Company is subject to the periodic reporting requirements of the Exchange Act,
the Company covenants to make publicly available such information as may be
necessary to permit the sale of Warrant Shares without registration under the
Act pursuant to the exemption provided by Rule 144 under the Act, as such rule
may be amended from time to time, or any similar rule or regulation hereafter
adopted by the Securities and Exchange Commission. Upon the request of any
Holder of Warrants or Warrant Shares at any time, the Company will deliver to
such Holder or such Holder's prospective transferee such information as may be
necessary to permit the sale of Warrants or Warrant Shares pursuant to Rule 144A
under the Act, as such rule may be amended from time to time. Upon request of
10
<PAGE> 46
any Holder of Warrants or Warrant Shares, the Company will deliver to such
Holder a written statement as to whether it has complied with such information
requirements.
13. Notices to Holders.
13.1. Nothing contained in this Warrant Agreement or in any of the
Warrants shall be construed as conferring upon the Holders thereof the right to
vote or to receive dividends or to consent or to receive notice as stockholders
in respect of the meetings of stockholders or the election of directors of the
Company or any other matter, or any rights whatsoever as stockholders of the
Company.
13.2. In the event the Company intends to:
(a) make any distribution on or with respect to its Common
Stock (or other securities that may be purchasable in lieu thereof upon
the exercise of Warrants), including without limitation any dividend or
distribution from earned surplus, any dividend or distribution of
stock, assets or evidences of indebtedness, or any similar
distribution,
(b) issue subscription rights or warrants to holders of its
Common Stock,
(c) consolidate or merge with or into another entity, or
(d) liquidate, dissolve or sell or otherwise dispose of
substantially all its assets,
then the Company shall cause a notice of its intention to take such action to be
sent by first-class mail, postage prepaid, at least 20 days prior to the date
fixed as a record date or the date of closing the transfer books for the
determination of the stockholders entitled to such distribution or issuance, or
to vote upon such proposed consolidation, merger, liquidation, sale or
conveyance, to each registered Holder at its address appearing on the Warrant
register, but failure to mail or to receive such notice or any defect therein or
in the mailing thereof shall not affect the validity of any action taken in
connection with such distribution, issuance, or proposed consolidation, merger,
sale or conveyance.
14. Notices. Any notice or demand required by this Warrant Agreement to
be given or made by the Holder to or on the Company shall be sufficiently given
or made if sent by first-class or registered mail, postage prepaid, or by
facsimile transmission addressed as follows:
Styling Technology Corporation
One East Camelback Road
Phoenix, Arizona 85012
Telephone: (___) __________
Facsimile: (___) __________
11
<PAGE> 47
Attention: Chief Executive Officer
Any notice or demand required by this Warrant Agreement to be given or made by
the Company to or on the Holder of any Warrant shall be sufficiently given or
made, whether or not such Holder receives the notice, if sent by first-class or
registered mail, postage prepaid, addressed to such Holder at his last address
as shown on the books of the Company.
15. Governing Law. The validity, interpretation and performance of this
Warrant Agreement, of each Warrant issued hereunder and of the respective terms
and provisions thereof shall be governed by the law of the State of New York
without giving effect to principles of conflicts of law.
16. Counterparts. This Warrant Agreement may be executed in any number
of counterparts, each of which so executed shall be deemed to be an original;
but such counterparts shall together constitute but one and the same instrument.
IN WITNESS WHEREOF, the parties have executed this Warrant Agreement as
of the date first set forth above.
STYLING TECHNOLOGY CORPORATION
By:____________________________
Name: Sam L. Leopold
Title: Chairman of the Board
PRIME CHARTER LTD.
By:____________________________
Name: Sylvan Schefler
Title: Vice Chairman
12
<PAGE> 48
EXHIBIT B
NEITHER THE WARRANTS NOR THE SECURITIES ISSUABLE UPON EXERCISE HEREOF HAVE BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"). SUCH
SECURITIES MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO (i) AN EFFECTIVE
REGISTRATION STATEMENT UNDER THE ACT, OR (ii) AN AVAILABLE EXEMPTION FROM
REGISTRATION UNDER THE ACT RELATING TO THE DISPOSITION OF SECURITIES AND AN
OPINION OF COUNSEL, REASONABLY SATISFACTORY TO COUNSEL FOR THE COMPANY, THAT AN
EXEMPTION FROM REGISTRATION UNDER THE ACT IS AVAILABLE. IN ADDITION, THE
WARRANTS MAY NOT BE TRANSFERRED EXCEPT IN ACCORDANCE WITH THE PROVISIONS OF THE
WARRANT AGREEMENT DATED AS OF NOVEMBER __, 1996 BETWEEN STYLING TECHNOLOGY
CORPORATION AND PRIME CHARTER LTD.
No. Warrants
----- -----
Void After 5:00 p.m. New York City Time
On November __, 2001
STYLING TECHNOLOGY CORPORATION
Warrant Certificate
THIS CERTIFIES THAT, for value received,__________________________, or
registered assigns, is the registered Holder of the number of Warrants set forth
above, each Warrant entitling the owner thereof to purchase any time prior to
5:00 p.m., New York City time on November __, 2001 (the "Expiration Date"), one
fully paid and nonassessable share of common stock, par value $.0001 per share
("Common Stock"), of Styling Technology Corporation, a Delaware corporation (the
"Company"), at a purchase price per share (the "Exercise Price") initially equal
to $[120% of IPO price], upon presentation and surrender of this Warrant
Certificate with the Form of Election to Purchase (attached hereto) duly
executed. The number of Warrants evidenced by this Warrant Certificate (and the
number of shares that may be purchased upon exercise thereof, any such shares of
Common Stock being referred to as "Warrant Shares") set forth above, and the
Exercise Price per share set forth above, are the number and Exercise Price as
of the date of original issuance of the Warrant, based on the shares of Common
Stock of the Company as constituted at such date. As provided in the Warrant
Agreement referred to below, the Exercise Price and the number or kind of shares
that may be purchased upon the exercise of the Warrants evidenced by this
Warrant Certificate are subject to modification and adjustment upon the
happening of certain events.
This Warrant Certificate is subject to, and entitled to the benefits
of, all of the terms, provisions and conditions of the Warrant Agreement dated
as of November __, 1996 between the Company and Prime Charter Ltd., which
Warrant Agreement is hereby incorporated herein by reference and made a part
hereof and to which reference is hereby made for a full description
<PAGE> 49
of the rights, limitations of rights, duties and immunities hereunder of the
Company and the Holders of the Warrant Certificates. Copies of the Warrant
Agreement are on file at the principal office of the Company.
This Warrant Certificate, with or without other Warrant Certificates,
upon surrender at the principal office of the Company, may be exchanged for
another Warrant Certificate or Warrant Certificates of like tenor and date
evidencing Warrants entitling the Holder to purchase a like aggregate number of
shares of Common Stock as the Warrants evidenced by the Warrant Certificate or
Warrant Certificates surrendered entitled such Holder to purchase. If this
Warrant Certificate shall be exercised in part, the Holder hereof shall be
entitled to receive upon surrender hereof another Warrant Certificate or Warrant
Certificates for the number of whole Warrants not exercised.
The Exercise Price may be paid: (a) in cash in the amount of the
aggregate Exercise Price then in effect for the number of Warrants being
exercised, (b) by surrender to the Company of Warrant Shares or shares of Common
Stock having a Fair Market Value (as defined in the Warrant Agreement) on the
date of exercise equal to the aggregate Exercise Price then in effect for the
number of Warrants being exercised, (c) by surrender of Warrants representing a
number of Warrant Shares with a Fair Market Value (net of the applicable
Exercise Price therefor) equal to the aggregate Exercise Price then in effect
for the number of Warrants being exercised, or (d) by a combination of the
aforementioned methods of payment.
No fractional shares of Common Stock will be issued upon the exercise
of any Warrant or Warrants evidenced hereby, but in lieu thereof a cash payment
will be made, as provided in the Warrant Agreement.
No Holder of this Warrant Certificate shall be entitled to vote or to
receive dividends or to consent or to receive notice as a stockholder at the
meetings of stockholders for the election of directors of the Company or any
other matter, or to any rights whatsoever as stockholder of the Company, except
as may be provided in the Warrant Agreement, until the Warrant or Warrant
evidenced by this Warrant Certificate shall have been exercised and the Warrant
Shares shall have become deliverable as provided in the Warrant Agreement.
If this Warrant Certificate shall be surrendered for exercise within
any period during which the transfer books for the Common Stock or other class
of stock purchasable upon the exercise of this Warrant are closed for any
purpose, the Company shall not be required to make delivery of certificates for
shares purchasable upon such exercise until the date of the reopening of said
transfer books.
IN WITNESS WHEREOF, Styling Technology Corporation has caused the
signature (or facsimile signature) of its Chairman and Secretary to be printed
hereon and its corporate seal (or facsimile) to be printed hereon.
2
<PAGE> 50
Dated: November __, 1996
STYLING TECHNOLOGY CORPORATION
By:
---------------------------
Name:
Title:
(Corporate Seal)
Attest:
- ------------------------------
Secretary
3
<PAGE> 51
FORM OF ASSIGNMENT
(To be executed by the registered Holder if such Holder desires to transfer the
Warrant Certificates).
TO STYLING TECHNOLOGY CORPORATION
FOR VALUE RECEIVED, __________________________ hereby sells assigns and
transfers unto _______________________ this Warrant Certificate, together with
all right, title and interest therein, and does hereby irrevocably constitute
and appoint ______________________________, to transfer the within Warrant
Certificate on the books of the within-named Company, with full power of
substitution.
DATED: ________________, 19__
Signature____________________________________
Signature Guaranteed:
NOTICE:
The Signature of the foregoing assignment must correspond to the name
as written upon the face of this Warrant Certificate in every particular,
without alteration or enlargement or any change whatsoever.
<PAGE> 52
FORM OF ELECTION TO PURCHASE
(To be executed if Holder desires to exercise the Warrants evidenced by the
within Warrant Certificate).
TO STYLING TECHNOLOGY CORPORATION:
The undersigned hereby (1) irrevocably elects to exercise _________________
Warrants represented by this Warrant Certificate to purchase ____ shares of
Common Stock issuable upon the exercise of such Warrants, (2) makes payment in
full of the aggregate Exercise Price for such Warrants by enclosure of a bank
cashier's check or money order therefor or by surrendering Warrants, Warrant
Shares or shares of Common Stock for application to the aggregate Exercise
Price, upon condition that new Warrants be issued to the undersigned for the
balance of the Warrants remaining, and (3) requests that certificates for shares
be issued in the name of:
(Please insert social security or other
identifying number)
-------------
- -----------------------------------
(Please print name and address)
If such number of Warrants shall not be all the Warrants evidenced by this
Warrant Certificate, a new Warrant Certificate for the balance remaining of such
Warrants shall be registered in the name of and delivered to:
Please insert social security or other
identifying number
------------
- -----------------------------------
(Please print name and address)
Dated: , 19
-------------- --
-------------------------------
Signature
Signature Guaranteed:
<PAGE> 1
EXHIBIT 3.1
CERTIFICATE OF INCORPORATION
LEOPOLD STYLING PRODUCTS, INC.
FIRST: The name of the Corporation is LEOPOLD STYLING
PRODUCTS, INC.
SECOND: The registered office of the Corporation in the State
of Delaware is 1209 Orange Street, City of Wilmington, County of New Castle,
Delaware 19801. The name of the Corporation's registered agent is The
Corporation Trust Company.
THIRD: The purpose of the Corporation is to engage in any
lawful act or activity for which corporations may be organized under the General
Corporation Law of the State of Delaware, as the same exists or may hereafter be
amended (the "GCL").
FOURTH: The Corporation shall be authorized to issue two
classes of shares of capital stock, to be designated, respectively, "Common
Stock" and "Preferred Stock." The total number of shares of Common Stock and
Preferred Stock which the Corporation shall have authority to issue is eleven
million (11,000,000) of which ten million (10,000,000) shares shall be Common
Stock and one million (1,000,000) shall be Preferred Stock. The par value of the
shares of Common Stock is one hundredth of one cent per share. The par value of
the shares of Preferred Stock is one hundredth of one cent per share.
The shares of Preferred Stock may be issued from time to time
in one or more series. The Board of Directors is hereby authorized, by filing a
certificate pursuant to the applicable law of the State of Delaware, to
establish from time to time the number of shares to be included in each series,
and to fix the designation, powers, preferences and rights of the shares of each
such series and the qualifications, limitations, or restrictions thereof,
including, but not limited to, the fixing or alteration of the dividend rights,
dividend rate, conversion rights, voting rights, rights and terms of redemption
(including sinking fund provisions), the redemption price or prices, and the
liquidation preferences of any wholly unissued series of shares of Preferred
Stock, or any of them; and to increase or decrease the number of shares of any
series subsequent to the issue of the shares of that series, but not below the
number of shares of that series then outstanding. In case the number of shares
of any series shall be so decreased, the shares constituting such decrease shall
resume the status which they had prior to the adoption of the resolution
originally fixing the number of shares of that series.
FIFTH: The name and mailing address of the incorporator are M.
C. Kinnamon , 1209 Orange Street, City of Wilmington, County of New Castle,
Delaware 19801.
SIXTH: The number of directors which shall comprise the
initial Board of Directors of the Corporation shall be two (2). The size of the
Board of Directors may be
<PAGE> 2
increased or decreased in the manner provided in the Bylaws of the Corporation.
All corporate powers of the Corporation shall be exercised by
or under the direction of the Board of Directors except as otherwise provided
herein or by law.
In furtherance and not in limitation of the powers conferred
by law, the Board of Directors is expressly authorized:
(i) to fix, abolish, determine, and vary from time
to time the amount or amounts to be set apart as reserves;
(ii) to adopt, amend, and repeal Bylaws of the
Corporation;
(iii) to authorize and cause to be executed
mortgages and liens, with or without limit as to amount, upon the real or
personal property of the Corporation;
(iv) from time to time to determine whether and to
what extent, at what time and place, and under what conditions and regulations
the accounts and books of the Corporation, or any of them, shall be open to the
inspection of any stockholder; and no stockholder shall have any right to
inspect any account or book or document of the Corporation except as conferred
by statute or bylaw or as authorized by resolution of the stockholders or Board
of Directors;
(v) to authorize the payment of compensation to the
directors for services to the Corporation, including fees for attendance at
meetings of the Board of Directors or of any committee thereof and/or salaries
for serving as such directors or committee members, and to determine the amount
of such compensation;
(vi) from time to time to formulate, establish,
promote, and carry out, and to amend, alter, change, revise, recall, repeal, or
abolish, a plan or plans for the participation by all or any of the employees,
including directors and officers, of the Corporation, or of any corporation,
company, association, trust, or organization in which or in the welfare of which
the Corporation has any interest, and those actively engaged in the conduct of
the Corporation's business, in the profits, gains, or business of the
Corporation or of any branch or division thereof, as part of the Corporation's
legitimate expenses, and/or for the furnishing to such employees, directors,
officers, or persons, or any of them, at the Corporation's expense, of medical
services, insurance against accident, sickness, or death, pensions during old
age, disability or unemployment, education, housing, social services,
recreation, or other similar aids for their relief or general welfare, in such
manner and upon such terms and conditions as the Board of Directors shall
determine; and
2
<PAGE> 3
(vii) to authorize the guaranty by the Corporation
of securities, evidences of indebtedness, and obligations of other persons,
firms, associations, and corporations.
SEVENTH: Unless and except to the extent that the Bylaws of
the Corporation shall so require, the election of directors of the Corporation
need not be by written ballot.
EIGHTH: Every person who was or is a party or is threatened to
be made a party to or is involved in any threatened, pending or completed
action, suit, or proceeding, whether civil, criminal, administrative or
investigative ("Proceeding"), by reason of the fact that he or she or a person
of whom he or she is the legal representative, is or was a director or officer
of the Corporation or is or was serving at the request of the Corporation as a
director or officer of another corporation, or as its representative in a
partnership, joint venture, trust, employee benefit plan, or other enterprise,
shall be indemnified and held harmless by the Corporation, and the Corporation
shall advance expenses to such person, to the fullest extent legally permissible
under the GCL, against all expenses, liabilities and losses (including
attorneys' fees, judgments, fines and amounts paid in settlement) reasonably
incurred or suffered by him or her in connection therewith. Nothing contained
herein shall affect any rights to indemnification to which employees other than
directors and officers may be entitled by law. No amendment or repeal of this
Article EIGHTH shall apply to or have any effect on any right to indemnification
provided hereunder with respect to any acts or omissions occurring prior to such
amendment or repeal. The right of indemnification shall be a contract right that
may be enforced in any manner desired by such person. The right of
indemnification shall not be exclusive of any other right that such directors,
officers or representatives may have or hereafter acquire and, without limiting
the generality of such statement, they shall be entitled to their respective
rights of indemnification under any bylaws, agreement, vote of stockholders,
provision of law or otherwise, as well as their rights under this Article.
Notwithstanding any other provision of this Article EIGHTH, no person shall be
entitled to indemnification or advancement of expenses under this Article with
respect to any Proceeding, or any claim therein, brought or made by him or her
against the Corporation, unless such Proceeding or claim is approved by the
Board of Directors of the Corporation.
The Board of Directors may adopt bylaws from time to time with
respect to indemnification to provide at all time the fullest indemnification
permitted by the GCL, and may cause the Corporation to purchase and maintain
insurance, at the Corporation's expense, on behalf of any person who is or was a
director, officer, employee or agent of the Corporation, or is or was serving at
the request of the Corporation as a director or officer of another corporation,
or as its representative in a partnership, joint venture, trust or other
enterprise against any liability asserted against such person and incurred in
any such capacity or arising out of such status, whether or not the Corporation
would have the power to indemnify such person against such liability. The
Corporation may also create a trust fund, grant a security interest and/or use
other means (including, but not limited to, letters of credit, surety bonds
and/or other similar arrangements), as well as enter into contracts providing
indemnification to the full extent authorized or permitted by law and including
as part thereof provisions with respect to any or all of the foregoing, to
ensure the payment of such amounts as may become necessary to effect
3
<PAGE> 4
indemnification as provided therein, or elsewhere.
NINTH: Any director or the entire Board of Directors may be
removed, with or without cause, at any time by the holders of a majority of the
shares then entitled to vote at an election of directors, and the vacancy in the
Board of Directors caused by such removal may be filled by the stockholders at
the time of such removal.
TENTH: A director of the Corporation shall not be liable to
the Corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director, except to the extent such exemption from liability or
limitation thereof is not permitted under the GCL. Any repeal or modification of
this Article shall not adversely affect any right or protection of a director of
the Corporation existing hereunder with respect to any act or omission occurring
prior to such repeal or modification.
ELEVENTH: Subject to the power of the stockholders of the
Corporation to alter or repeal any Bylaw made by the Board of Directors, the
Board of Directors is expressly authorized and empowered to make, alter and
repeal the Bylaws of the Corporation.
TWELFTH: The Corporation reserves the right at any time, and
from time to time, to amend, alter, change or repeal any provision contained in
this Certificate of Incorporation, and other provisions authorized by the laws
of the State of Delaware at the time in force may be added or inserted, in the
manner now or hereafter prescribed by law; and all rights, preferences and
privileges of whatsoever nature conferred upon stockholders, directors or any
other persons whomsoever by and pursuant to this Certificate of Incorporation in
its present form or as hereafter amended are granted subject to the rights
reserved in this Article.
IN WITNESS WHEREOF, I, the undersigned, being the Incorporator
hereinabove stated, set my hand this 29th day of June , 1995.
M.C. Kinnamon
--------------------------
M. C. Kinnamon
4
<PAGE> 1
EXHIBIT 3.2
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
OF
LEOPOLD STYLING PRODUCTS, INC.
1. The name of the Corporation (which is hereinafter referred to
as the "Corporation") is Leopold Styling Products, Inc.
2. The Corporation filed its original Certificate of Incorporation
with the Secretary of State of the State of Delaware on June 29, 1995 under the
name Leopold Styling Products, Inc.
3. This Certificate of Amendment of Certificate of Incorporation
(i) has been duly proposed by resolutions adopted and declared advisable by the
Board of Directors of the Corporation; (ii) has been duly adopted by written
consent of the stockholders of the Corporation in accordance with the provision
of Section 228 of the General Corporation Law of the State of Delaware (the
"General Corporation Law"); (iii) has been duly executed and acknowledged by
the officers of the Corporation in accordance with the provisions of Sections
103 and 242 of the General Corporation Law; (iv) amends Article FIRST of the
Certificate as follows:
"FIRST: The name of the Corporation is Styling Technology
Corporation";
and (v) amends Article FOURTH to provide for a reverse stock split by
adding the following language:
"FOURTH: Effective as of the filing date of this Amendment of
the Certificate of Incorporation, all issued and outstanding shares of
common stock shall be converted into and become issued, outstanding,
fully paid and nonassessable shares of common stock at the rate of
0.807851 shares of common stock for each share of common stock so
converted, so that the 2,000,000 shares of the common stock that are
issued and outstanding as of the date hereof shall be converted into
and shall become 1,615,702 issued, outstanding, fully paid and
nonassessable shares of common stock, and each outstanding right,
option and warrant issued by the Corporation to purchase shares of
common stock shall be converted into a right, option or warrant to
purchase 0.807851 shares of common stock for each share of common
stock that could have been acquired pursuant to the exercise of that
right, option, or warrant immediately prior to the conversion, with
the exercise price being adjusted accordingly.
Effective as of the filing date of this Amendment of the
Certificate of Incorporation, each outstanding certificate
representing shares of common stock shall thenceforth represent the
appropriate number of shares of common stock after conversion and the
holder of each certificate shall be entitled to all rights
<PAGE> 2
attributable to shares of common stock under the Certificate of
Incorporation of the Corporation, as amended, and upon the surrender
to the Corporation of any certificate representing shares of common
stock, the holder of such certificate shall be entitled to receive in
exchange therefor a certificate or certificates representing the
appropriate number of shares of common stock."
IN WITNESS WHEREOF, the undersigned officers, for and on behalf of the
Corporation, have executed this Certificate of Amendment of Certificate of
Incorporation this 19th day of September, 1996, and hereby acknowledge, under
penalties of perjury, that this Certificate of Amendment of the Certificate of
Incorporation is the act and deed of the Corporation and that the facts stated
in the Certificate of Amendment of the Certificate of Incorporation are true.
By: /s/ Sam Leopold
-----------------------------------
Sam Leopold
Chairman of the Board, Chief Executive
Officer, Vice President, Secretary and
Treasurer
ATTEST:
/s/ Tom Clifford
- ------------------------------
Tom Clifford
President
<PAGE> 1
EXHIBIT 3.3
BYLAWS
OF
LEOPOLD STYLING PRODUCTS, INC.
ARTICLE I
STOCKHOLDERS
SECTION 1.1 PLACE OF MEETINGS. Meetings of stockholders shall
be held at the place, either within or without the State of Delaware, as may be
designated by resolution of the Board of Directors from time to time.
SECTION 1.2 ANNUAL MEETINGS. Annual meetings of stockholders
shall, unless otherwise provided by the Board of Directors, be held on the
second Tuesday in January of each calendar year, commencing in 1996, if not a
legal holiday, and if a legal holiday, then on the next full business day
following, at 9:00 a.m., at which time they shall elect a board of directors and
transact any other business as may properly be brought before the meeting.
SECTION 1.3 SPECIAL MEETINGS. Special meetings of stockholders
for any purpose or purposes may be called at any time by the Board of Directors,
or by a committee of the Board of Directors which has been duly designated by
the Board of Directors and whose powers and authority, as expressly provided in
a resolution of the Board of Directors, include the power to call such meetings,
but such special meetings may not be called by any other person or persons.
SECTION 1.4 NOTICE OF MEETINGS. Whenever stockholders are
required or permitted to take any action at a meeting, a written notice of the
meeting shall be given which shall state the place, date and hour of the
meeting, and, in the case of a special meeting, the purpose or purposes for
which the meeting is called. Unless otherwise provided by law, the Certificate
of Incorporation of these Bylaws, the written notice of any meeting shall be
given no less than ten (10) nor more than sixty (60) days before the date of the
meeting to each stockholder entitled to vote at such meeting. If mailed, such
notice shall be deemed to be given when deposited in the mail, postage prepaid,
directed to the stockholder at his address as it appears on the records of the
corporation.
SECTION 1.5 ADJOURNMENTS. Any meeting of stockholders, annual
or special, may adjourn from time to time to reconvene at the same or some other
place, and notice need not be given of any such adjourned meeting if the time
and place thereof are announced at the meeting at which the adjournment is
taken. At the adjourned meeting the corporation may transact any business which
might have been transacted at the original meeting. If the
<PAGE> 2
adjournment is for more than thirty (30) days, or if after the adjournment a new
record date is fixed for the adjourned meeting, a notice of the adjourned
meeting shall be given to each stockholder of record entitled to vote at the
meeting.
SECTION 1.6 QUORUM. Except as otherwise provided by law, the
Certificate of Incorporation or these Bylaws, at each meeting of stockholders
the presence in person or by proxy of the holders of shares of stock having a
majority of the votes which could be cast by the holders of all outstanding
shares of stock entitled to vote at the meeting shall be necessary and
sufficient to constitute a quorum. In the absence of a quorum, the stockholders
so present may, by majority vote, adjourn the meeting from time to time in the
manner provided in Section 1.5 of these Bylaws until a quorum shall attend.
Shares of its own stock belonging to the corporation or to another corporation,
if a majority of the shares entitled to vote in the election of directors of
such other corporation is held, directly or indirectly, by the corporation,
shall neither be entitled to vote nor be counted for quorum purposes; provided,
however, that the foregoing shall not limit the right of the corporation to vote
stock, including but not limited to its own stock, held by it in a fiduciary
capacity.
SECTION 1.7 ORGANIZATION. Meetings of stockholders shall be
presided over by the Chairman of the Board, if any, or in his absence by the
Vice Chairman of the Board, if any, or in his absence by the President, or in
his absence by a Vice President, or in the absence of the foregoing persons by a
chairman designated by the Board of Directors, or in the absence of such
designation by a chairman chosen at the meeting. The Secretary shall act as
secretary of the meeting, but in his absence the chairman of the meeting may
appoint any person to act as secretary of the meeting.
SECTION 1.8 VOTING; PROXIES. Except as otherwise provided by
the Certificate of Incorporation, each stockholder entitled to vote at any
meeting of stockholders shall be entitled to one vote for each share of stock
held by him which has voting power upon the matter in question. Each stockholder
entitled to vote at a meeting of stockholders may authorize another person or
persons to act for him by proxy, but no such proxy shall be voted or acted upon
after three (3) years from its date, unless the proxy provides for a longer
period. A duly executed proxy shall be irrevocable if it states that it is
irrevocable and if, and only as long as, it is coupled with an interest
sufficient in law to support an irrevocable power. A stockholder may revoke any
proxy which is not irrevocable by attending the meeting and voting in person or
by filing an instrument in writing revoking the proxy or another duly executed
proxy bearing a later date with the Secretary of the corporation. Voting at
meetings of stockholders need not be by written ballot and need not be conducted
by inspectors of election unless so determined by the holders of shares of stock
having a majority of the votes which could be cast by the holders of all
outstanding shares of stock entitled to vote thereon which are present in person
or by proxy at such meeting. At all meetings of stockholders for the election of
directors a plurality of the votes cast shall be sufficient to elect. All other
elections and questions shall, unless otherwise provided by law, the Certificate
of Incorporation or these Bylaws, be decided by the vote of the holders of
shares of stock having a majority of the votes which could be cast
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by the holders of all shares of stock entitled to vote thereon which are present
in person or represented by proxy at the meeting.
SECTION 1.9 FIXING DATE FOR DETERMINATION OF STOCKHOLDERS OF
RECORD. In order that the corporation may determine the stockholders entitled to
notice of or to vote at any meeting of stockholders or any adjournment thereof,
or to express consent to corporate action in writing without a meeting, or
entitled to receive payment of any dividend or other distribution or allotment
of any rights, or entitled to exercise any rights in respect of any change,
conversion or exchange of stock or for the purpose of any other lawful action,
the Board of Directors may fix a record date, which record date shall not
precede the date upon which the resolution fixing the record date is adopted by
the Board of Directors and which record date: (1) in the case of determination
of stockholders entitled to vote at any meeting of stockholders or adjournment
thereof, shall, unless otherwise required by law, not be more than sixty (60)
nor less than ten (10) days before the date of such meeting; (2) in the case of
determination of stockholders entitled to express consent to corporate action in
writing without a meeting, shall not be more than ten (10) days from the date
upon which the resolution fixing the record date is adopted by the Board of
Directors; and (3) in the case of any other action, shall not be more than sixty
(60) days prior to such other action. If no record date is fixed: (1) the record
date for determining stockholders entitled to notice of or to vote at a meeting
of stockholders shall be at the close of business on the day next preceding the
day on which notice is given, or, if notice is waived, at the close of business
on the day next preceding the day on which the meeting is held; (2) the record
date for determining stockholders entitled to express consent to corporate
action in writing without a meeting when no prior action of the Board of
Directors is required by law, shall be the first date on which a signed written
consent setting forth the action taken or proposed to be taken is delivered to
the corporation in accordance with applicable law, or, if prior action by the
Board of Directors is required by law, shall be at the close of business on the
day on which the Board of Directors adopts the resolution taking such prior
action; and (3) the record date for determining stockholders for any other
purpose shall be at the close of business on the day on which the Board of
Directors adopts the resolution relating thereto. A determination of
stockholders of record entitled to notice of or to vote at a meeting of
stockholders shall apply to any adjournment of the meeting; provided, however,
that the Board of Directors may fix a new record date for the adjourned meeting.
SECTION 1.10 LIST OF STOCKHOLDERS ENTITLED TO VOTE. The
Secretary shall prepare and make, at least ten (10) days before every meeting of
stockholders, a complete list of the stockholders entitled to vote at the
meeting, arranged in alphabetical order, and showing the address of each
stockholder and the number of shares registered in the name of each stockholder.
Such list shall be open to the examination of any stockholder, for any purpose
germane to the meeting, during ordinary business hours, for a period of at least
ten (10) days prior to the meeting, either at a place within the city where the
meeting is to be held, which place shall be specified in the notice of the
meeting, or, if not so specified, at the place where the meeting is to be held.
The list shall also be produced and kept at the time and place of the meeting
during the whole time thereof and may be inspected by any stockholder who is
present. Upon the willful neglect or refusal of the directors to produce such a
list at any meeting for the election
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of directors, they shall be ineligible for election to any office at such
meeting. The stock ledger shall be the only evidence as to who are the
stockholders entitled to examine the stock ledger, the list of stockholders or
the books of the corporation, or to vote in person or by proxy at any meeting of
stockholders.
SECTION 1.11 ACTION BY CONSENT OF STOCKHOLDERS. Unless
otherwise restricted by the Certificate of Incorporation, any action required or
permitted to be taken at any annual or special meeting of the stockholders may
be taken without a meeting, without prior notice and without a vote, if a
consent in writing, setting forth the action so taken, shall be signed by the
holders of outstanding stock having not less than the minimum number of votes
that would be necessary to authorize or take such action at a meeting at which
all shares entitled to vote thereon were present and voted. Prompt notice of the
taking of the corporate action without a meeting by less than unanimous written
consent shall be given to those stockholders who have not consented in writing.
ARTICLE II
BOARD OF DIRECTORS
SECTION 2.1 NUMBER; QUALIFICATIONS. The Board of Directors
shall consist of one or more members, the number thereof to be determined from
time to time by resolution of the Board of Directors. Directors need not be
stockholders.
SECTION 2.2 ELECTION; RESIGNATION; REMOVAL; VACANCIES. The
Board of Directors shall initially consist of the persons named as directors in
the Certificate of Incorporation, and each director so elected shall hold office
until the first annual meeting of stockholders or until his successor is elected
and qualified. At the first annual meeting of stockholders and at each annual
meeting thereafter, the stockholders shall elect directors each of whom shall
hold office for a term of one (1) year or until his successor is elected and
qualified. Any director may resign at any time upon written notice to the
corporation. Any newly created directorship or any vacancy occurring in the
Board of Directors for any cause may be filled by a majority of the remaining
members of the Board of Directors, although such majority is less than a quorum,
or by a plurality of the votes cast at a meeting of stockholders, and each
director so elected shall hold office until the expiration of the term of office
of the director whom he has replaced or until his successor is elected and
qualified.
SECTION 2.3 REGULAR MEETINGS. Regular meetings of the Board of
Directors may be held at such places within or without the State of Delaware and
at such times as the Board of Directors may from time to time determine, and if
so determined, notices thereof need not be given.
SECTION 2.4 SPECIAL MEETINGS. Special meetings of the Board of
Directors may be held at any time or place within or without the State of
Delaware whenever called by the
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President, any Vice President, the Secretary, or by any member of the Board of
Directors. Notice of a special meeting of the Board of Directors shall be given
by the person or persons calling the meeting at least twenty-four (24) hours
before the special meeting.
SECTION 2.5 TELEPHONIC MEETINGS PERMITTED. Members of the
Board of Directors, or any committee designated by the Board of Directors, may
participate in a meeting thereof by means of conference telephone or similar
communications equipment by means of which all persons participating in the
meeting can hear each other, and participation in a meeting pursuant to this
bylaw shall constitute presence in person at such meeting.
SECTION 2.6 QUORUM; VOTE REQUIRED FOR ACTION. At all meetings
of the Board of Directors a majority of the whole Board of Directors shall
constitute a quorum for the transaction of business. Except in cases in which
the Certificate of Incorporation or these Bylaws otherwise provide, the vote of
a majority of the directors present at a meeting at which a quorum is present
shall be the act of the Board of Directors.
SECTION 2.7 ORGANIZATION. Meetings of the Board of Directors
shall be presided over by the Chairman of the Board, if any, or in his absence
by the Vice Chairman of the Board, if any, or in his absence by the President,
or in their absence by a chairman chosen at the meeting. The Secretary shall act
as secretary of the meeting, but in his absence the chairman of the meeting may
appoint any person to act as secretary of the meeting.
SECTION 2.8 INFORMAL ACTION BY DIRECTORS. Unless otherwise
restricted by the Certificate of Incorporation or these Bylaws, any action
required or permitted to be taken at any meeting of the Board of Directors, or
of any committee thereof, may be taken without a meeting if all members of the
Board of Directors or such committee, as the case may be, consent thereto in
writing, and the writing or writings are filed with the minutes of proceedings
of the Board of Directors or such committee.
ARTICLE III
COMMITTEES
SECTION 3.1 COMMITTEES. The Board of Directors may, by
resolution passed by a majority of the whole Board of Directors, designate one
or more committees, each committee to consist of one or more of the directors of
the corporation. The Board of Directors may designate one or more directors as
alternate members of any committee, who may replace any absent or disqualified
member at any meeting of the committee. In the absence or disqualification of a
member of the committee, the member or members thereof present at any meeting
and not disqualified from voting, whether or not he or they constitute a quorum,
may unanimously appoint another member of the Board of Directors to act at the
meeting in place of any such absent or disqualified member. Any such committee,
to the extent permitted by law and to the extent provided in the resolution of
the Board of Directors, shall have and may
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exercise all the powers and authority of the Board of Directors in the
management of the business and affairs of the corporation, and may authorize the
seal of the corporation to be affixed to all pages which may require it.
SECTION 3.2 COMMITTEE RULES. Unless the Board of Directors
otherwise provides, each committee designated by the Board of Directors may
make, alter and repeal rules for the conduct of its business. In the absence of
such rules each committee shall conduct its business in the same manner as the
Board of Directors conducts its business pursuant to Article II of these Bylaws.
ARTICLE IV
OFFICERS
SECTION 4.1 EXECUTIVE OFFICERS; ELECTION; QUALIFICATIONS; TERM
OF OFFICE; RESIGNATION; REMOVAL; VACANCIES. The Board of Directors shall elect a
President and Secretary, and it may, if it so determines, choose a Chairman of
the Board and a Vice Chairman of the Board from among its members. The Board of
Directors may also choose one or more Vice Presidents, one or more Assistant
Secretaries, a Treasurer and one or more Assistant Treasurers. Each such officer
shall hold office until the first meeting of the Board of Directors after the
annual meeting of stockholders next succeeding his election, and until his
successor is elected and qualified or until his earlier resignation or removal.
Any officer may resign at any time upon written notice to the corporation. The
Board of Directors may remove any officer with or without cause at any time, but
such removal shall be without prejudice to the contractual rights of such
officer, if any, with the corporation. Any number of offices may be held by the
same person. Any vacancy occurring in any office of the corporation by death,
resignation, removal or otherwise may be filled for the unexpired portion of the
term by the Board of Directors at any regular or special meeting.
SECTION 4.2 POWERS AND DUTIES OF EXECUTIVE OFFICERS. The
officers of the corporation shall have such powers and duties in the management
of the corporation as may be prescribed by the Board of Directors and, to the
extent not so provided, as generally pertain to their respective officers,
subject to the control of the Board of Directors. The Board of Directors may
require any officer, agent or employee to give security for the faithful
performance of his duties.
ARTICLE V
STOCK
SECTION 5.1 CERTIFICATES. Every holder of stock shall be
entitled to have a certificate signed by or in the name of the corporation by
the Chairman or Vice Chairman of the Board of Directors, if any, or the
President or a Vice President, and by the Treasurer or an Assistant Treasurer,
or the Secretary or an Assistant Secretary, of the corporation, certifying the
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number of shares owned by him in the corporation. Any of or all the signatures
on the certificate may be a facsimile. In case any officer, transfer agent, or
registrar who has signed or whose facsimile signature has been placed upon a
certificate shall have ceased to be such officer, transfer agent, or registrar
before such certificate is issued, it may be issued by the corporation with the
same effect as if he were such officer, transfer agent, or registrar at the date
of issue.
SECTION 5.2 LOST, STOLEN OR DESTROYED STOCK CERTIFICATES;
ISSUANCE OF NEW CERTIFICATES. The corporation may issue a new certificate of
stock in the place of any certificate theretofore issued by it, alleged to have
been lost, stolen or destroyed, and the corporation may require the owner of the
lost, stolen or destroyed certificate, or his legal representative, to give the
corporation a bond sufficient to indemnify it against any claim that may be made
against it on account of the alleged loss, theft or destruction of any such
certificate or the issuance of such new certificate.
ARTICLE VI
INDEMNIFICATION
SECTION 6.1 RIGHT TO INDEMNIFICATION. The corporation shall
indemnify and hold harmless, to the fullest extent permitted by applicable law
as it presently exists or may hereafter be amended, any person who was or is
made or is threatened to be made a party or is otherwise involved in any action,
suit or proceeding, whether civil, criminal, administrative or investigative (a
"proceeding"), by reason of the fact that he or she or a person for whom he or
she is the legal representative, is or was a director or officer of the
corporation or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation or of a partnership,
joint venture, trust, enterprise or nonprofit entity, including service with
respect to employee benefit plans (an "indemnitee"), against all liability and
loss suffered and expenses (including attorneys' fees) reasonably incurred by
such indemnitee. The corporation shall be required to indemnify an indemnitee in
connection with a proceeding (or part thereof) initiated by such indemnitee only
if the initiation of such proceeding (or part thereof) by the indemnitee was
authorized by the Board of Directors of the corporation.
SECTION 6.2 PREPAYMENT OF EXPENSES. The corporation shall pay
the expenses (including attorneys' fees) incurred by an indemnitee in defending
any proceeding in advance of its final disposition, provided, however, that the
payment of expenses incurred by a director or officer in advance of the final
disposition of the proceeding shall be made only upon receipt of an undertaking
by the director or officer to repay all amounts advanced if it should be
ultimately determined that the director or officer is not entitled to be
indemnified under this Article or otherwise.
SECTION 6.3 CLAIMS. If a claim for indemnification or payment
of expenses under this Article is not paid in full within sixty (60) days after
a written claim therefor by the
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indemnitee has been received by the corporation, the indemnitee may file suit to
recover the unpaid amount of such claim and, if successful in whole or in part,
shall be entitled to be paid the expenses of prosecuting such claim. In any such
action the corporation shall have the burden of proving that the indemnitee was
not entitled to the requested indemnification or payment of expenses under
applicable law.
SECTION 6.4 NONEXCLUSIVITY OF RIGHTS. The rights conferred on
any person by this Article VI shall not be exclusive of any other rights which
such person may have or hereafter acquire under any statute, provision of the
Certificate of Incorporation, these By-laws, agreement, vote of stockholders or
disinterested directors or otherwise.
SECTION 6.5 OTHER INDEMNIFICATION. The corporation's
obligation, if any, to indemnify any person who was or is serving at its request
as a director, officer, employee or agent of another corporation, partnership,
joint venture, trust, enterprise, or nonprofit entity shall be reduced by any
amount such person may collect as indemnification from such other corporation,
partnership, joint venture, trust, enterprise or nonprofit enterprise.
SECTION 6.6 AMENDMENT OR REPEAL. Any repeal or modification of
the foregoing provisions of this Article VI shall not adversely affect any right
or protection hereunder of any person in respect of any act or omission
occurring prior to the time of such repeal or modification.
ARTICLE VII
MISCELLANEOUS
SECTION 7.1 FISCAL YEAR. The fiscal year of the corporation
shall be determined by resolution of the Board of Directors.
SECTION 7.2 SEAL. The corporate seal shall have the name of
the corporation inscribed thereon and shall be in such form as may be approved
from time to time by the Board of Directors.
SECTION 7.3 WAIVER OF NOTICE OF MEETINGS OF STOCKHOLDERS,
DIRECTORS AND COMMITTEES. Any written waiver of notice, signed by the person
entitled to notice, whether before or after the time stated therein, shall be
deemed equivalent to notice. Attendance of a person at a meeting shall
constitute a waiver of notice of such meeting, except when the person attends a
meeting for the express purpose of objecting, at the beginning of the meeting,
to the transaction of any business because the meeting is not lawfully called or
convened. Neither the business to be transacted at, nor the purpose of any
regular or special meeting of the stockholders, directors, or members of a
committee of directors need be specified in any written waiver of notice.
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SECTION 7.4 INTERESTED DIRECTORS; QUORUM. No contract or
transaction between the corporation and one or more of its directors or
officers, or between the corporation and any other corporation, partnership,
association, or other organization in which one or more of its directors or
officers are directors or officers, or have a financial interest, shall be void
or voidable solely for this reason, or solely because the director or officer is
present at or participates in the meeting of the Board of Directors or committee
thereof which authorizes the contract or transaction, or solely because his or
their votes are counted for such purpose, if: (1) the material facts as to his
relationship or interest and as to the contract or transaction are disclosed or
are known to the Board of Directors or the committee, and the Board of Directors
or committee in good faith authorizes the contract or transaction by the
affirmative votes of a majority of the disinterested directors, even though the
disinterested directors be less than a quorum; or (2) the material facts as to
his relationship or interest and as to the contract or transaction are disclosed
or are known to the stockholders entitled to vote thereon, and the contract or
transaction is specifically approved in good faith by vote of the stockholders;
or (3) the contract or transaction is fair as to the corporation as of the time
it is authorized, approved or ratified by the Board of Directors, a committee
thereof, or the stockholders. Common or interested directors may be counted in
determining the presence of a quorum at a meeting of the Board of Directors or
of a committee which authorizes the contract or transaction.
SECTION 7.5 FORM OF RECORDS. Any records maintained by the
corporation in the regular course of its business, including its stock ledger,
books of account, and minute books, may be kept on, or be in the form of, punch
cards, magnetic tape, photographs, microphotographs, or any other information
storage device, provided that the records so kept can be converted into clearly
legible form within a reasonable time. The corporation shall so convert any
records so kept upon the request of any person entitled to inspect the same.
SECTION 7.6 AMENDMENT OF BYLAWS. These Bylaws may be altered
or repealed, and new Bylaws made by the Board of Directors, but the stockholders
may make additional bylaws and may alter and repeal any bylaws whether adopted
by them or otherwise.
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EXHIBIT 4.2
NEITHER THIS WARRANT, NOR THE SHARES OF COMMON STOCK ISSUABLE UPON EXERCISE
HEREOF, HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
"SECURITIES ACT"), OR ANY APPLICABLE STATE SECURITIES LAW. SUCH SECURITIES MAY
NOT BE SOLD OR OTHERWISE TRANSFERRED UNLESS (I) A REGISTRATION STATEMENT UNDER
THE SECURITIES ACT AND SUCH APPLICABLE STATE SECURITIES LAWS SHALL HAVE BECOME
EFFECTIVE WITH REGARD THERETO OR (II) IN THE OPINION OF COUNSEL REASONABLY
ACCEPTABLE TO THE COMPANY, REGISTRATION UNDER THE SECURITIES ACT AND SUCH
APPLICABLE STATE SECURITIES LAWS IS NOT REQUIRED IN CONNECTION WITH A PROPOSED
SALE OR TRANSFER.
REDEEMABLE COMMON STOCK PURCHASE WARRANT
FOR THE PURCHASE OF SHARES
OF
COMMON STOCK OF LEOPOLD STYLING PRODUCTS, INC.
(PAR VALUE $.0001 PER SHARE)
(INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE)
VOID AFTER 5:00 P.M. EST ON _____________ , 1998
Date of Original Issuance: _____________ , 1996
This is to certify that, for value received, , or assigns (the
"Warrantholder"), is entitled, subject to the terms and conditions hereinafter
set forth, at any time after the date hereof and on or before 5:00 P.M., Eastern
Standard Time, on , 1998, but not thereafter, to purchase
____________________ shares of common stock, par value $.0001 per share (the
"Common Stock"), of LEOPOLD STYLING PRODUCTS, INC. (the "Company") for the
Warrant Price (as defined below), and to receive a certificate or certificates
for the shares of Common Stock so purchased.
1. TERMS AND EXERCISE OF WARRANTS.
(a) Exercise Period. Subject to the terms of this Warrant, the
Warrantholder shall have the right, at any time during the period (the "Exercise
Period") commencing on the date hereof and ending at 5:00 P.M., Eastern Standard
Time, on , 1998 (the "Termination Date"), or if such date is a day on
which banking institutions are authorized by law to close, then on the next
succeeding day which shall not be such a day, to purchase from the Company up
to the number of fully paid and nonassessable shares of Common Stock which the
Warrantholder may at the time be entitled to purchase pursuant to this Warrant;
provided, however, the Company may redeem this Warrant prior to the
Termination Date in accordance with Section 2 hereof. Shares of Common Stock
purchasable pursuant to this Warrant and any other securities that the Company
may be required by the operation of Section 4 to issue upon the exercise hereof
are referred to hereinafter as the "Warrant Shares."
(b) Method of Exercise. This Warrant shall be exercised by
surrender of this Warrant to the Company at its principal office, Leopold
Styling Products, Inc., 1146 South Cedar Ridge, Duncanville, Texas, Attn:
President, or at such other address as the Company may designate by notice in
writing to the Warrantholder at the address of the Warrantholder appearing on
the books of the Company or such other address as the Warrantholder may
designate in writing, together with the Exercise
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Form included as Exhibit "A" hereto, duly completed and signed, and upon payment
to the Company of the Warrant Price (as defined in Section 3) multiplied by the
number of Warrant Shares being purchased upon such exercise (the "Aggregate
Warrant Price"), together with all taxes applicable upon such exercise. Payment
of the Aggregate Warrant Price shall be made in cash or by certified check or
cashier's check, payable to the order of the Company. If, at the time of
exercise thereof, the Common Stock is listed on a national securities exchange
or quoted on an interdealer quotation system of a national securities
association, any portion of the Warrant Price may be paid by surrender to the
Company of one or more shares of Common Stock, which shall be valued for
purposes of exercise at the Daily Market Price as set forth in Section 2(e)
hereof.
(c) Partial Exercise. This Warrant shall be exercisable, at
the election of the Warrantholder, either in full or from time to time in part,
during the Exercise Period.
(d) Share Issuance Upon Exercise. Upon the exercise and
surrender of this Warrant certificate and payment of such Warrant Price, the
Company shall issue and cause to be delivered with all reasonable dispatch to
the Warrantholder, in such name or names as the Warrantholder may designate in
writing, a certificate or certificates for the number of full Warrant Shares so
purchased upon the exercise of the Warrant, together with cash, as provided in
Section 7 hereof, with respect to any fractional Warrant Shares otherwise
issuable upon such surrender and, if applicable, the Company shall issue and
deliver a new Warrant to the Warrantholder for the number of shares not so
exercised. Such certificate or certificates shall be deemed to have been issued
and any person so designated to be named therein shall be deemed to have become
a Warrantholder of such Shares as of the close of business on the date of the
surrender of the Warrant and payment of the Warrant Price, notwithstanding that
the certificates representing such Warrant Shares shall not actually have been
delivered or that the stock transfer books of the Company shall then be closed.
2. REDEMPTION.
(a) This Warrant may be redeemed, at the option of the
Company, at a price of $5.00 upon 30 days notice after the closing bid price of
the Common Stock has equalled or exceeded two hundred fifty percent (250%) of
the Common Stock's initial public offering price per share, and prior to
expiration of the Warrant. The Daily Market Price of the Common Stock shall be
determined by the Company in the manner set forth in Section 2(e) as of the end
of each trading day (or, if no trading in the Common Stock occurred on such day,
as of the end of the immediately preceding trading day in which trading
occurred). The Warrant must be redeemed and any right to exercise the Warrant
shall terminate at 5:00 p.m. (Eastern Standard Time) on the business day
immediately preceding the date fixed for redemption. A trading day shall mean a
day in which trading of securities occurred on the New York Stock Exchange.
(b) If the Company exercises its right to redeem, it shall
give notice to the Warrantholder pursuant to Section 2(a), by mailing to the
Warrantholder a notice of redemption, first class, postage prepaid, at the
Warrantholder's address as it shall appear on the records of the Company. Any
notice mailed in the manner provided herein shall be conclusively presumed to
have been duly given whether or not the Warrantholder actually receives such
notice.
(c) The notice of redemption shall specify the redemption
price, the date fixed for redemption (which shall be the thirtieth day after
such notice is mailed), the place where the Warrant certificate shall be
delivered and the redemption price shall be paid, and that the right to exercise
the
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Warrant shall terminate at 5:00 P.M. (Eastern Standard Time) on the business day
immediately preceding the date fixed for redemption.
(d) Appropriate adjustment shall be made to the redemption
price and to the minimum Daily Market Price prerequisite to redemption set forth
in Section 2(a) hereof, in each case on the same basis as provided in Section 4
hereof with respect to adjustment of the Warrant Price.
(e) For purposes of this Agreement, the term "Daily Market
Price" shall mean (i) if the Common Stock is traded in the over-the-counter
market or the Nasdaq SmallCap Market and not in the Nasdaq National Market
System nor on any national securities exchange, the closing bid price per share
of the Common Stock on the trading day in question, as reported by Nasdaq or an
equivalent generally accepted reporting service, or (ii) if the Common Stock is
traded in the Nasdaq National Market System or on a national securities
exchange, the daily per share closing price per share of the Common Stock in the
Nasdaq National Market System or on the principal stock exchange on which it is
listed on the trading day in question, as the case may be. For purposes of
clause (i) above, if trading in the Common Stock is not reported by Nasdaq, the
bid price referred to in said clause shall be the lowest bid price as reported
in the "pink sheets" published by National Quotation Bureau, Incorporated. The
closing price referred to in clause (ii) above shall be the last reported sale
price or, in case no such reported sale takes place on such day, the average of
the reported closing bid and asked prices, in either case in the Nasdaq National
Market System or on the national securities exchange on which the Common Stock
is then listed.
3. WARRANT PRICE. The price per share at which Warrant Shares shall be
purchasable on the exercise of this Warrant shall be one hundred twenty-five
percent (125%) of the Common Stock's initial public offering price per share,
subject to adjustment pursuant to Section 4 hereof (originally and as adjusted,
the "Warrant Price").
4. ADJUSTMENT OF WARRANT PRICE AND NUMBER OF SHARES.
The Company agrees to reserve and shall keep reserved for issuance the
number of shares of Common Stock issuable upon exercise of this Warrant. The
number and kind of securities purchasable upon the exercise of this Warrant and
the Warrant Price shall be subject to adjustment from time to time upon the
happening of certain events, as follows:
(a) In case the Company shall (1) pay a dividend or make a
distribution in shares of its Common Stock, (2) subdivide its outstanding Common
Stock into a greater number of shares, (3) combine its outstanding Common Stock
into a smaller number of shares, or (4) issue by reclassification of its Common
Stock any shares of capital stock of the Company (other than a change in par
value, or from par value to no par value, or from no par value to par value),
the Warrant Price and the number of shares of Common Stock or other securities
issuable upon exercise of this Warrant in effect immediately prior thereto shall
be adjusted so that the Warrantholder, by operation of Section 3(d) hereof,
shall be entitled to receive the number of shares which it would have owned or
have been entitled to receive immediately following the happening of any of the
events described above, had this Warrant been exercised immediately prior to the
record or effective date thereof.
An adjustment made pursuant to Sections 4(a)(1)-(4) above
shall become effective immediately after the record date in the case of a
dividend or distribution (provided, however, that such adjustments shall be
reversed if such dividends or distributions are not actually paid) and shall
become
3
<PAGE> 4
effective immediately after the effective date in the case of a subdivision,
combination or reclassification. If, as a result of an adjustment made pursuant
to this paragraph, the Warrantholder shall become entitled to receive shares of
two or more classes of capital stock of the Company, the Board of Directors
(whose determination shall be conclusive and shall be evidenced by a resolution)
shall determine the allocation of the adjusted Warrant Price between or among
the shares of such classes of capital stock.
(b) In case of any reclassification of the outstanding Common
Stock (other than a change in par value, or from par value to no par value, or
from no par value to par value, or as a result of a subdivision, combination or
stock dividend), or in case of any consolidation of the Company with, or merger
of the Company into, another corporation wherein the Company is not the
surviving entity, or in case of any sale of all, or substantially all, of the
property, assets, business and goodwill of the Company, the Company, or such
successor or purchasing corporation, as the case may be, shall provide, by a
written instrument delivered to the Warrantholder, that the Warrantholder shall
thereafter be entitled, upon exercise of this Warrant, to the kind and amount of
shares of stock or other equity securities, or other property or assets which
would have been receivable by such Warrantholder upon such reclassification,
consolidation, merger or sale, if this Warrant had been exercised immediately
prior thereto. Such corporation, which thereafter shall be deemed to be the
"Company" for purposes of this Warrant, shall provide in such written instrument
for adjustments to the Warrant Price which shall be as nearly equivalent as may
be practicable to the adjustments provided for in this Section 4.
(c) No adjustment in the number of securities purchasable
hereunder shall be required unless such adjustment would require an increase or
decrease of at least five percent (5%) in the number of securities (calculated
to the nearest full share or unit thereof) then purchasable upon the exercise of
this Warrant; provided, however, that any adjustment which by reason of this
Section 4(c) is not required to be made immediately shall be carried forward and
taken into account in any subsequent adjustment.
(d) Whenever the Warrant Price is adjusted as provided in this
Section 4, the number of shares of Common Stock or other securities issuable
upon exercise of this Warrant shall be adjusted simultaneously, by multiplying
the number of shares previously issuable by a fraction, of which the numerator
shall be the Warrant Price in effect immediately prior to such adjustment, and
of which the denominator shall be the Warrant Price as so adjusted.
(e) For the purpose of this Section 4, the term "Common Stock"
shall mean (i) the class of stock designated as Common Stock of the Company at
______________, 1996, or (ii) any other class of stock resulting from successive
changes or reclassifications of such Common Stock consisting solely of changes
in par value, or from par value to no par value, or from no par value to par
value. In the event that at any time, as a result of an adjustment made pursuant
to this Section 4, the Warrantholder shall become entitled to purchase any
shares of the Company's capital stock other than Common Stock, thereafter the
number of such other shares so purchasable upon the exercise of this Warrant and
the Warrant Price of such shares shall be subject to adjustment from time to
time in a manner and on terms as nearly equivalent as practicable to the
provisions with respect to the shares contained in this Section 4.
(f) Whenever the number of shares of Common Stock and/or other
securities purchasable upon the exercise of this Warrant or the Warrant Price is
adjusted as herein provided, the Company shall cause to be promptly mailed to
the Warrantholder by first class mail, postage prepaid, notice of such
adjustment and a certificate of the Company's chief financial officer setting
forth the number of shares of Common Stock and/or other securities purchasable
upon the exercise of this Warrant,
4
<PAGE> 5
the Warrant Price after such adjustment, a brief statement of the facts
requiring such adjustment, and the computation by which such adjustment was
made.
(g) Irrespective of any adjustments in the Warrant Price or
the number or kind of securities purchasable upon the exercise of this Warrant,
the Warrant certificate or certificates theretofore or thereafter issued may
continue to express the same price or number or kind of securities stated in
this Warrant initially issuable hereunder.
5. TRANSFER OF WARRANT.
(a) The Warrantholder may not sell, assign, pledge,
hypothecate or otherwise transfer any right under this Warrant without the
written consent of the Company.
(b) This Warrant and the shares of Common Stock or any other
security issued or issuable upon exercise of this Warrant may not be offered or
sold except in compliance with the Securities Act of 1933, as amended. The
Holder represents that it has acquired the Warrant and the shares of Common
Stock on exercise thereof for its own account.
(c) The Company may cause a legend in substantially the form
set forth on the first page of this Warrant on each Warrant and certificate
representing shares of Common Stock or any other security issued or issuable
upon exercise of this Warrant not theretofore distributed to the public or sold
to underwriters for distribution to the public, unless counsel for the Company
is of the opinion as to any such certificate that such legend is unnecessary.
6. REGISTRATION RIGHTS. For purposes of this Section 6:
(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 upon the exercise of this Warrant; and
(iii) The term "Holder" means Payee.
(B) DEMAND REGISTRATION.
(i) At any time during the six-month period
commencing 120 days after the Company has completed an IPO of its Common Stock,
the holders of fifty percent (50%) or more of the Registrable Securities may
demand that the Company prepare and file a registration statement covering all
of the Registrable Securities. In such event, the Company shall promptly give
each Holder notice of the Company's intent to prepare and file such a
registration statement. Notwithstanding the foregoing, the Company 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 6(c) below
of the Company's proposal to register securities and is undertaking in good
faith to cause such registration to become
5
<PAGE> 6
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 6(c). The Holders shall be
entitled to only one demand registration pursuant to this Section 6(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 6(b).
(c) PIGGYBACK REGISTRATION. Commencing after the Company has
completed an IPO of its Common Stock, if the Company proposes to register
(including for this purpose a registration effected by the Company 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), the
Company 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 the Company in accordance with Section
12 hereof, the Company shall cause to be registered under the Securities Act all
of the Registrable Securities that Holder has requested to be registered,
subject to Sections 6(d) and 6(f) below.
(d) INFORMATION CONCERNING HOLDER. It shall be a condition
precedent of the obligations of the Company to take any action pursuant to this
Section 6 that Holder shall furnish to the Company 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 6 (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 the
Company, shall be borne by the Company.
(f) ACCEPTANCE OF UNDERWRITING AGREEMENT. The Company shall
not be required under this Section 6 to include any of the Registrable
Securities in an underwriting of securities being issued by the Company unless
Holder accepts the terms of the underwriting agreement as agreed upon between
the Company and the underwriter selected by the Company, 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 the Company.
6
<PAGE> 7
(g) EXPIRATION OF PIGGYBACK REGISTRATION RIGHTS. Any
obligation of the Company to register the Registrable Securities pursuant to
Section 6(c) shall expire on the second anniversary of the receipt by Holder of
the Shares.
7. FRACTIONAL INTEREST. No fractional shares or scrip representing
fractional shares shall be issuable upon the exercise of this Warrant, but on
exercise of this Warrant, the Warrantholder hereof may purchase only a whole
number of shares of Common Stock. The Company shall make a payment in cash in
respect of any fractional shares which might otherwise be issuable upon exercise
of this Warrant, calculated by multiplying the fractional shares amount by the
market price of the Company's Common Stock on the date of exercise as reported
by the national securities exchange or quoted on the interdealer quotation
system on which the Company's Common Stock is traded.
8. RESERVATION OF SHARES. The Company shall at all times reserve for
issuance such number of authorized and unissued shares of Common Stock (or other
securities substituted therefor as hereinabove provided) as shall be sufficient
for exercise of this Warrant. The Company covenants and agrees that upon
exercise of this Warrant, all shares of Common Stock issuable upon such exercise
shall be duly and validly issued, fully paid, nonassessable and not subject to
preemptive rights, rights of first refusal or similar rights of any person or
entity.
9. BENEFITS OF THIS WARRANT. Nothing in this Warrant shall be construed
to confer upon any person other than the Company and the Warrantholder any legal
or equitable right, remedy or claim under this Warrant and this Warrant shall be
for the sole and exclusive benefit of the Company and the Warrantholder.
10. LOSS OF WARRANT. Upon receipt by the Company of evidence of the
loss, theft, destruction or mutilation of this Warrant, and (in the case of
loss, theft or destruction) of indemnity or security reasonably satisfactory to
the Company, and upon surrender the cancellation of this Warrant, if mutilated,
the Company shall execute and deliver a new Warrant of like tenor and date.
11. NOTICES. Any notice given pursuant to this Warrant by the Company
or by the Warrantholder shall be in writing and shall be deemed to have been
duly given upon (a) transmitter's confirmation of the receipt of a facsimile
transmission, (b) confirmed delivery by a standard overnight carrier, or (c) the
expiration of three business days after the day when mailed by United States
Postal Service by certified or registered mail, return receipt requested,
postage prepaid at the following addresses:
If to the Company:
Leopold Styling Products, Inc.
1146 South Cedar Ridge
Duncanville, Texas 75137
Attention: Sam Leopold
If to the Warrantholder:
To the address of the Warrantholder in the Company's
books and records.
7
<PAGE> 8
Each party hereto may, from time to time, change the address
to which notices to it are to be transmitted, delivered or mailed hereunder by
notice in accordance herewith to the other party.
12. GENERAL PROVISIONS.
(a) Successors. All covenants and provisions of this Warrant
shall bind and inure to the benefit of the respective executors, administrators,
successors and assigns of the parties hereto.
(b) Choice Of Law. This Warrant and the rights of the parties
hereunder shall be governed by and construed in accordance with the laws of the
State of Arizona, including all matters of construction, validity, performance,
and enforcement, and without giving effect to the principles of conflict of
laws.
(c) Entire Agreement. Except as provided herein, this Warrant,
including exhibits, contains the entire agreement of the parties, and supersedes
all existing negotiations, representations or agreements and all other oral,
written, or other communications between them concerning the subject matter of
this Warrant.
(d) Severability. If any provision of this Warrant is
unenforceable, invalid, or violates applicable law, such provision shall be
deemed stricken and shall not affect the enforceability of any other provisions
of this Warrant.
(e) Captions. The captions in this Warrant are inserted only
as a matter of convenience and for reference and shall not be deemed to define,
limit, enlarge, or describe the scope of this Warrant or the relationship of the
parties, and shall not affect this Warrant or the construction of any provisions
herein.
(f) Amendments. This Warrant may be amended only by the
written agreement of the Company and the Warrantholder.
IN WITNESS WHEREOF, the Company caused this Warrant to be duly executed
as of the date first above written.
LEOPOLD STYLING PRODUCTS, INC., a Delaware
corporation
By:
---------------------------------------
Name:
-------------------------------------
Its:
-------------------------------------
8
<PAGE> 9
Exhibit A
EXERCISE FORM
TO: LEOPOLD STYLING PRODUCTS, INC.
The undersigned hereby irrevocably exercises the right to purchase
shares of the Common Stock of Leopold Styling Products, Inc., a
Delaware corporation, evidenced by the attached Warrant, and herewith makes
payment of the Exercise Price with respect to such shares in full, all in
accordance with the conditions and provisions of said Warrant.
The undersigned agrees not to offer, sell, transfer, or otherwise
dispose of any of such Common Stock and consents that the following legend, and
any other legends required by applicable securities laws the Company deems to be
reasonable and appropriate, may be affixed to the certificates for the Common
Stock hereby subscribed for, if such legend is applicable:
"The securities represented by this certificate have not been
registered under the Securities Act of 1933, as amended (the
"Securities Act"), or any state securities law, and may not be sold,
transferred, pledged, hypothecated or otherwise disposed of unless
either (i) a registration statement under the Securities Act and
applicable state securities laws shall have become effective with
regard thereto, or (ii) an exemption from registration under the
Securities Act or any applicable state securities laws is available in
connection with such offer, sale or transfer."
The undersigned requests that certificates for such shares be issued,
and a warrant representing any unexercised portion thereof be issued, pursuant
to the Warrant in the name of the registered Warrantholder and delivered to the
undersigned at the address set forth below:
- -------------------------------------------------------------------------------
Signature of Registered Warrantholder
- -------------------------------------------------------------------------------
Printed Name of Registered Warrantholder
- -------------------------------------------------------------------------------
Address
The attached Warrant and the securities issuable on exercise thereof have not
been registered under the Securities Act of 1933, as amended, and my not be
sold, transferred, pledged, hypothecated or otherwise disposed of in the absence
of registration or the availability of an exemption from registration under said
Act.
<PAGE> 1
EXHIBIT 10.1
STOCK PURCHASE AGREEMENT
by and among
LEOPOLD STYLING PRODUCTS, INC.
a Delaware corporation
("Purchaser")
DON BLACK, HOWARD BLACK,
BARBARA BLACK, ROBERT BLACK,
DON COTTAM, JIM COTTAM,
AND
THE COTTAM FAMILY PARTNERSHIP, L.P.
A TEXAS LIMITED PARTNERSHIP
("Shareholders")
with respect to the stock of
GENA LABORATORIES, INC.,
a Texas corporation
Dated: May 8, 1996
<PAGE> 2
ARTICLE I
SALE OF THE STOCK
1.1 Sale of the Stock.................................................. 1
ARTICLE II
PURCHASE PRICE AND MANNER OF PAYMENT
2.1 Purchase Price..................................................... 2
2.2 Payment of Purchase Price.......................................... 2
(a) Cash...................................................... 2
(b) Common Stock.............................................. 2
(c) Adjustment to Purchase Price.............................. 2
ARTICLE III
REPRESENTATIONS AND WARRANTIES
3.1 General Statement.................................................. 3
3.2 Representations and Warranties of Purchaser........................ 3
(a) Organization.............................................. 3
(b) Power and Authority....................................... 3
(c) Enforceability............................................ 3
(d) Conflicts; Consents....................................... 3
(e) Accuracy of Documents, Representations and
Warranties................................................ 4
3.3 Representations and Warranties of Shareholders..................... 4
(a) Ownership of Stock........................................ 4
(b) Power and Authority....................................... 4
(c) Enforceability............................................ 4
(d) Conflicts; Consents....................................... 4
(e) Capital Stock............................................. 5
(f) Subsidiaries and Affiliates............................... 5
(g) Organization.............................................. 5
(h) Qualification............................................. 5
(i) Assets.................................................... 6
(j) Bank Accounts............................................. 6
(k) Ability to Conduct Business............................... 6
(l) Real Property; Leases..................................... 6
(m) Contracts................................................. 6
(n) Insurance................................................. 7
(o) Intellectual Property..................................... 7
(p) Licenses.................................................. 8
(q) Taxes..................................................... 8
(r) Labor Disputes; Unfair Labor Practices.................... 8
(s) Financial Statements...................................... 8
(t) Books and Records......................................... 9
(u) Liabilities............................................... 9
(v) Subsequent Events......................................... 9
<PAGE> 3
(w) No Material Changes.............................. 10
(x) ERISA............................................ 11
(y) Employees and Consultants........................ 11
(z) Litigation....................................... 12
(aa) Unasserted Claims................................ 12
(ab) Absence of Product or Service Warranties......... 12
(ac) Absence of Judicial Orders....................... 12
(ad) Compliance with Law.............................. 12
(ae) Hazardous Materials.............................. 13
(af) Accuracy of Documents, Representations and
Warranties....................................... 13
3.4 Further Representations and Warranties of
Shareholders.............................................. 13
(a) Ability to Bear Risk; Business and Financial
Knowledge and Experience......................... 13
(b) Knowledge Respecting Purchaser................... 13
(c) Absence of Representations and Warranties........ 13
(d) No Distribution.................................. 14
(e) Stock to be Restricted........................... 14
(f) No Registration.................................. 14
(g) No Obligation to Register........................ 14
(h) Legend on Certificate............................ 14
(i) Stop Orders...................................... 14
(j) Reliance Upon Information........................ 15
ARTICLE IV
CONDUCT PRIOR TO THE CLOSING
4.1 General................................................... 15
4.2 Conduct by Shareholders................................... 15
(a) Access to Records................................ 15
(b) Business in Ordinary Course...................... 15
(c) Certain Transactions..............................16
(d) Employees........................................ 16
(e) Dividends........................................ 17
(f) Confidentiality.................................. 17
(g) Exclusivity...................................... 17
(h) Equitable Relief................................. 17
(i) Severability..................................... 17
(j) Consents......................................... 17
4.3 Joint Obligations of Shareholders and Purchaser........... 18
(a) Notice........................................... 18
(b) Performance...................................... 18
(c) Shareholder's Access to Records.................. 18
(d) Confidentiality.................................. 18
<PAGE> 4
ARTICLE V
CONDITIONS PRECEDENT TO CLOSING
5.1 Conditions Precedent to Shareholders' Obligations.......... 18
(a) Truth of Representations and Warranties........... 18
(b) Purchaser's Obligations Performed................. 18
(c) Purchaser's Closing Certificate................... 18
5.2 Conditions Precedent to Purchaser's Obligations............ 19
(a) Representations and Warranties.................... 19
(b) Current Assets and Inventory...................... 19
(c) Shareholders' Obligations Performed............... 19
(d) Consents.......................................... 19
(e) No Suit, Proceeding or Investigation.............. 19
(f) Closing Certificate of Shareholders............... 19
(g) Releases.......................................... 20
(h) State of Texas Licenses, Permits and
Certificates of Necessity......................... 20
(i) Disclosure Schedules.............................. 20
(j) Receipt of Satisfactory Audit Report.............. 20
(k) Purchaser's Due Diligence......................... 20
(l) Receipt of Opinion of Counsel for the
Company and Shareholders.......................... 20
(m) Disclosure Schedules.............................. 21
(n) Consents and Approvals............................ 21
(o) Repayment of Indebtedness......................... 21
(p) Financing......................................... 22
ARTICLE VI
CLOSING
6.1 Time and Place of Closing.................................. 22
6.2 Form of Documents.......................................... 22
6.3 Purchaser's Deliveries..................................... 22
(a) Funds............................................. 22
(b) Purchaser Stock................................... 22
(c) Closing Certificate............................... 22
(d) Corporate Resolutions............................. 22
(e) Stock Escrow and Buy-Back Agreement............... 22
(f) Other Documents................................... 22
(g) Opinion Letter.................................... 22
6.4 Shareholders' Deliveries................................... 22
(a) Good Standing Certificates........................ 22
(b) Closing Certificate............................... 23
(c) Delivery of Corporate Documents................... 23
(d) Releases.......................................... 23
(e) Consents and Estoppel Letters..................... 23
(f) State of Texas and County Consents................ 23
(g) Tax Good Standing Certificate..................... 23
(h) Other Documents................................... 23
<PAGE> 5
(i) Opinion Letter.................................... 23
(j) Stock Escrow and Buy-Back Agreement............... 23
ARTICLE VII
POST CLOSING OBLIGATIONS
7.1 Obligations of Shareholders................................ 24
(a) Covenant Not to Compete........................... 24
(b) Nonsolicitation................................... 24
(c) Trade Secrets and Other Information............... 24
(d) Confidentiality................................... 24
(e) Equitable Relief.................................. 25
(f) Severability...................................... 25
(g) Consents.......................................... 25
7.2 Obligations of Both Shareholders and Purchaser;
Further Assurances......................................... 25
ARTICLE VIII
INDEMNIFICATION
8.1 Indemnification by Shareholder............................. 25
(a) General........................................... 25
(b) Environmental..................................... 26
(c) Right of Offset................................... 27
8.2 Limitation of Indemnity Rights............................. 27
8.3 Obligations of Shareholders, Separate and Several.......... 27
8.4 Indemnification by Purchaser............................... 27
8.5 Limitation on Indemnity.................................... 28
8.6 Notice and Right to Defend Third-Party Claims.............. 28
ARTICLE IX
TERMINATION
9.1 Right to Terminate......................................... 29
9.2 Remedies................................................... 29
(a) Proceed to Close.................................. 29
(b) Decline to Close.................................. 29
9.3 Events on Termination...................................... 29
9.4 Right to Damages........................................... 29
<PAGE> 6
ARTICLE X
MISCELLANEOUS
10.1 Disclosure Schedules....................................... 30
10.2 Assignability.............................................. 30
10.3 Brokers and Finders........................................ 31
10.4 Costs and Expenses......................................... 31
10.5 Earnest Money Deposit...................................... 31
10.6 Notices.................................................... 31
10.7 Entire Agreement........................................... 33
10.8 Waivers.................................................... 33
10.9 Counterparts............................................... 33
10.10 Severability...................................... 33
10.11 Applicable Law, Jurisdiction and Venue............ 33
10.12 Construction...................................... 33
10.13 Excluded Assets................................... 34
10.14 Limitation on Purchasers Due Diligence............ 34
10.15 Shareholder Representative........................ 34
<PAGE> 7
STOCK PURCHASE AGREEMENT
THIS STOCK PURCHASE AGREEMENT (this "Agreement") is made and
entered into as of the 8th day of May, 1996, by and among LEOPOLD STYLING
PRODUCTS, INC., a Delaware corporation or its assigns ("Purchaser"), and DON
BLACK, HOWARD BLACK, BARBARA BLACK, ROBERT BLACK, DON COTTAM, JIM COTTAM, AND
THE COTTAM FAMILY PARTNERSHIP, a Texas Limited partnership (hereinafter referred
to as "Shareholders").
RECITALS
AA. Shareholders collectively own all of the issued and
outstanding shares of capital stock of Gena Laboratories, Inc., a Texas
corporation (the "Company").
B. The Company is engaged in the manufacture, distribution and
sale of health and beauty products, including nail, hair and skin products and
accessories, in the United States and worldwide (the "Company's Business" or the
"Business").
C. Shareholders desire to sell to Purchaser, and Purchaser
desires to purchase from Shareholders, all of the issued and outstanding shares
of the capital stock of the Company (the "Stock"), free and clear of all liens,
claims, rights, charges, encumbrances and security interests of whatsoever
nature, subject to and in accordance with the terms and conditions set forth
herein.
D. Shareholders acknowledge that Purchaser is relying on the
representations, warranties and covenants made herein by Shareholders in
pursuing financing for the transaction contemplated herein.
AGREEMENT
NOW, THEREFORE, in consideration of the foregoing recitals and
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
SALE OF THE STOCK
1.1 SALE OF THE STOCK. At the closing of the transactions
contemplated by this Agreement in accordance with Section 6.1 hereof (the
"Closing"), Shareholders shall sell, transfer, convey, assign and deliver to
Purchaser, and Purchaser shall purchase from Shareholders, all of the Stock,
free and clear of all liens, claims, rights, charges, encumbrances and security
interests of whatsoever nature or type.
<PAGE> 8
ARTICLE II
PURCHASE PRICE AND MANNER OF PAYMENT
2.1 PURCHASE PRICE. The total purchase price for the Stock
(the "Purchase Price") shall be Ten Million Dollars ($10,000,000), subject to
adjustment as contemplated by Section 2.2(c) hereof.
2.2 PAYMENT OF PURCHASE PRICE. At the Closing, Shareholders
shall be entitled to receive an amount equal to the Purchase Price payable as
follows:
(a) CASH. At the Closing, Purchaser shall pay to
Shareholders , by wire transfer, the sum of Eight Million Dollars ($8,000,000)
(the "Cash Component").
(b) COMMON STOCK. On or prior to the Closing, Purchaser
shall deposit with such escrow agent shares of Common Stock of Purchaser (the
"Purchaser Stock") equal in value on the Closing Date to Two Million Dollars
($2,000,000), based on the initial public offering price per share of
Purchaser's Common Stock or, in the event that the Purchaser's Common Stock
shall not have been the subject of an initial public offering at the time of the
Closing, based on the fair market value per share of the Purchaser's Stock as
determined by an independent securities dealer acceptable to Shareholders and
Purchaser. To the extent reasonably required by Purchaser, each Shareholder
shall, prior to the delivery of the Stock, execute a Subscription Agreement with
respect to the issuance of the Purchaser Stock. The Purchaser's Stock will be
subject to the terms of a separate Stock Escrow and Buy-Back Agreement (Exhibit
"A") containing a repurchase guarantee as provided in said Stock Escrow and
Buy-Back Agreement. Said repurchase guarantee will be secured by an irrevocable
letter of credit in favor of Shareholders and issued on a bank acceptable to
Shareholders. Said letter of credit must be in form and substance acceptable to
Shareholders and their counsel.
(c) ADJUSTMENT TO PURCHASE PRICE.
(i) The inventory, as of the Closing Date, is
identified in Schedule 2.2(c) will include, without limitation, finished goods,
and supplies, including all supplies which have been expended by Seller) (the
"Inventory"). For purposes of the calculation of the value of the Inventory in
this Section 2.2(c), the value of the Inventory shall not include any Inventory
that Arthur Anderson does not consider salable. The parties will attempt to
resolve among themselves any dispute regarding the salability of inventory. In
the event the Shareholders do not agree with Arthur Andersen's decision, they
will be entitled to obtain, at their expense, a certified public accounting firm
to review the matter and present their arguments to Arthur Andersen regarding
any salability issue.
(ii) If the value of the Company's total current
assets, as defined by generally accepted accounting principles (the "Total
Current Assets"), as of the Closing Date (as determined by Arthur Andersen,
shall be less than Two Million Three Hundred Thousand Dollars including
Inventory ($2,300,000) (the "Minimum Asset Level"), then the Purchase Price
pursuant to this Section 2.2 and the Common Stock Component thereof pursuant to
Section 2.2(b ) shall be reduced 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 Minimum Asset level, all accounts receivable will
be considered good and collectible if current within 180 days.
8
<PAGE> 9
ARTICLE III
REPRESENTATIONS AND WARRANTIES
3.1 GENERAL STATEMENT. The parties make the representations
and warranties to each other that are set forth in this Article III.
Shareholders shall cooperate with Purchaser in the conduct by Purchaser of its
due diligence review of the Company. Notwithstanding the foregoing, all such
representations and warranties and all representations and warranties that are
set forth elsewhere in this Agreement and in any financial statement, exhibit,
schedule or document delivered by or on behalf of a party hereto or their
representative to the other party pursuant to this Agreement shall survive the
Closing for a period of eighteen (18) months from Closing Date (and none shall
merge into any instrument of conveyance). No specific representation or warranty
shall limit the generality or applicability of a more general representation or
warranty. Representations and warranties of the parties are initially made as of
the date hereof and are to be true and correct as of the Closing Date; thus, any
modifications thereof prior to the Closing Date shall be the subject of notice
designated as a "Supplemental Disclosure," communicated as set forth in Article
5 hereof and delivered on or before the Closing.
3.2 REPRESENTATIONS AND WARRANTIES OF PURCHASER. To induce
Shareholders to enter into this Agreement and to perform their obligations
hereunder, and with full knowledge that Shareholders will rely thereon,
Purchaser represents and warrants the truth, accuracy and completeness of the
following:
(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
agreements referenced herein to which Purchaser is a party (the "Other Purchaser
Agreements"), and to consummate the transactions contemplated hereby and
thereby. The execution and delivery by Purchaser of this Agreement and the Other
Purchaser Agreements referenced herein to which Purchaser is a party, and the
consummation of the transactions contemplated hereby and thereby, have been duly
authorized and approved by Purchaser's board of directors, and, if necessary, by
its shareholders, 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.
(c) ENFORCEABILITY. This Agreement and the Other Purchaser
Agreements have been 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 materially
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
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<PAGE> 10
the transactions contemplated hereby or thereby, will require any consent or
approval of, or any filing with, any governmental entity or other person, other
than the filings, registrations or qualifications under the federal and state
securities laws or "blue sky" laws of any state of the United States of America
that may be required to be made or obtained in connection with the issuance of
the Purchaser's Stock or the Common Stock.
(e) ACCURACY OF DOCUMENTS, REPRESENTATIONS AND WARRANTIES.
The copies of all documents furnished to Shareholders and their representatives
by or on behalf of Purchaser and its representatives are true, complete and
correct. No representation or warranty of Purchaser contained in this Agreement
or the Other Purchaser Agreements, 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 the
Other Purchaser Agreements 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.
3.3 REPRESENTATIONS AND WARRANTIES OF SHAREHOLDERS. To induce
Purchaser to enter into this Agreement and to perform Purchaser's obligations
hereunder, and with full knowledge that Purchaser will rely thereon,
Shareholders, jointly and severally, to the extent of their individual ownership
interest in the stock as defined in Section 3.3(a) represent and warrant the
truth and accuracy of the following, subject only to the exceptions expressly
and specifically set forth in the schedules provided for by this Section 3.3
(collectively, the "Disclosure Schedules"):
(a) OWNERSHIP OF STOCK. Each Shareholder represents that
he has good and marketable title to, and rightful possession of the shares of
the Stock, and each of the shares of the Stock are and shall be, upon the
delivery thereof to Purchaser, free and clear of all liens, claims, rights,
charges, encumbrances and security interests of whatsoever nature or type. The
extent of the individual ownership interest of the stock is as follows:
<TABLE>
<S> <C>
Howard Black 17.25%
Don Black 25.25%
Robert Black 3.75%
Barbara Black 3.75%
Don Cottam 2.10%
Jim Cottam 25.25%
Cottam Family Partnership 22.65%
</TABLE>
(b) POWER AND AUTHORITY. Each Shareholder has the full
right, power and authority to execute and deliver this Agreement and the other
agreements referenced herein to which Shareholders are a party and to consummate
the transactions contemplated hereby and thereby.
(c) ENFORCEABILITY. This Agreement and each of the other
agreements referenced herein to which Shareholders are a party have been duly
executed and delivered by Shareholders, and constitute legal, valid and binding
obligations of Shareholders, enforceable against each Shareholder in accordance
with their respective terms.
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<PAGE> 11
(d) CONFLICTS; CONSENTS. Except as disclosed in Schedule
3.3(d), neither the execution and delivery of this Agreement or any of the other
agreements referenced herein to which each Shareholder is a party (the "Other
Shareholder Agreements"), nor the consummation of the transactions contemplated
hereby or thereby, will conflict with, violate or result in a material 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, and any amendment
thereto, of the Company; (ii) any license, instrument, contract or agreement to
which any Shareholder, and/or the Company, is a party or by which any
Shareholder, and/or the Company, or any one of them, is bound; or (iii) any law,
order, rule, regulation, writ, injunction or decree that is applicable to any
Shareholder, and/or the Company, or any one of them. Except as disclosed in
Schedule 3.3(d), neither the execution and delivery by Shareholders of this
Agreement or any of the Other Shareholder Agreements, nor the consummation by
Shareholders of the transactions contemplated hereby or thereby, will result in
the creation of any lien, claim, right, charge, encumbrance or security interest
of any nature or type whatsoever with respect to any of the Stock or any of the
assets of the Company. Except as disclosed in Schedule 3.3(d), neither the
execution and delivery by Shareholders of this Agreement, nor the Other
Shareholder Agreements, nor the consummation by Shareholders of the transactions
contemplated hereby or thereby, will require any consent, permit, license or
approval of, or any filing with, any governmental or private entity, body, or
other person, firm or other entity.
(e) CAPITAL STOCK. The Company has authorized capital
stock consisting of Two Hundred Thousand (200,000) shares of Class A voting
common stock, $.10 par value per share, of which One Hundred Fifty (150) shares
are presently issued and outstanding and are held of record as set forth
hereinafter; and One Hundred Thousand (100,000) shares of Class B non-voting
common stock, $.10 par value per share, of which One Thousand Eight Hundred
Fifty (1,850) shares are presently issued and outstanding and are held of record
as set forth hereinafter. Each and all of the issued and outstanding shares of
the Stock have been validly authorized and issued, are fully paid and
nonassessable, and are free of preemptive rights. Except for the Stock, there
are no other authorized or issued or outstanding securities of the Company, of
any class, kind or character. There are no outstanding subscriptions, options,
warrants or other rights, agreements or commitments obligating the Company to
issue any additional shares of capital stock, or any options or rights with
respect thereto, or any securities convertible into or exchangeable for any
shares of capital stock. There are no outstanding obligations of the Company,
contractual or otherwise, to repurchase, redeem or otherwise acquire any
outstanding shares of the Company's capital stock.
(f) SUBSIDIARIES AND AFFILIATES. Except as disclosed in
Schedule 3.3(f) hereto, the Company has no subsidiaries or any other equity
investment in any entity. Except as disclosed in Schedule 3.3(f) hereto,
Shareholder has no equity investment in any "Affiliates." For purposes of this
Agreement, the term "Affiliates" shall mean all entities in which a Shareholder
is an officer or director, or in which a Shareholder directly or indirectly,
owns or controls ten percent (10%) or more of the equity securities of the
entity.
(g) ORGANIZATION. The Company is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Texas. Copies of the Articles of Incorporation and Bylaws of the Company and all
amendments thereto are attached to Schedule 3.3(g) hereto, and are true,
complete and correct copies of such documents, as presently in effect. The
minutes of, or the unanimous consents in lieu of, the meetings of the
shareholders and/or boards of directors of the Company have been delivered to
Purchaser and are true, complete and correct copies
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<PAGE> 12
of such minutes and unanimous consents, and accurately reflect the events that
took place at or in lieu of such meetings.
(h) QUALIFICATION. Except where the failure to qualify
would not have a material adverse affect on business, the Company has qualified
as a foreign corporation, and is in good standing, under the laws of all
jurisdictions where the nature of its business or the nature or location of its
assets require such qualification (all of such jurisdictions are referred to
herein collectively as the "Foreign Jurisdictions") or if not so qualified, the
failure to be so qualified will not materially or adversely affect its financial
condition, business, operations or prospects. Schedule 3.3(h) hereto, contains a
list of the Foreign Jurisdictions and a list of all addresses at which the
Company conducts business or owns or holds assets.
(i) ASSETS.
(i) The Company has good and marketable title to and
rightful possession of all its real and personal assets and properties, tangible
and intangible, including those reflected in the Balance Sheet (as hereinafter
defined) delivered to Purchaser as set forth in Section 3.3(s) hereof, and to
all of the assets acquired by it since the date of the Balance Sheet (other than
those assets disposed of after the date of the Balance Sheet only in the
ordinary course of business and not in violation of this Agreement), free and
clear of any and all mortgages, liens, pledges, privileges, claims, rights,
charges, encumbrances and security interests of whatsoever kind or nature,
except: (A) liens for current taxes not yet delinquent; and (B) liens or
liabilities disclosed in Schedule 3.3(i) hereto.
(ii) The inventories of the Company reflected in the
Balance Sheet are stated at actual cost. The inventories of the Company are in
good and merchantable condition. Since the date of the Balance Sheet, there have
been no material write-downs in the value of the Company's inventories or
material write-offs with respect to such inventories.
(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 the Company at the Closing are good and collectible within one hundred
eighty (180) days thereafter, net of reserves for collectability thereof, and
none of such accounts receivable are subject to the return of the merchandise or
other property, other than in the ordinary course of business, the selling price
of which is represented thereby, or to offsets or counterclaims, the extent of
which is in excess of any reserves for collectability thereof reflected therein.
(iv) The furniture, fixtures and equipment of the
Company reflected in the Balance Sheet and such items of furniture, fixtures and
equipment acquired since the date of the Balance Sheet to the Closing are in
working condition and repair sufficient to allow the Company to conduct its
usual business in a manner consistent with past practices.
(j) BANK ACCOUNTS. Schedule 3.3(j) hereto sets forth the
name and location of each bank in which the Company has an account, lock box or
safe deposit box, the number of each such account or box, the names of all
signatories thereto and the persons authorized to draw thereon or have access
thereto. No power of attorney exists from the Company.
(k) ABILITY TO CONDUCT BUSINESS. The assets reflected in
the Balance Sheet, any fully depreciated assets, and those acquired since the
date hereof to the Closing except any
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<PAGE> 13
Excluded Assets as defined hereinafter , constitute all of the assets and
properties of the Company, and constitute all of the assets and properties that
are necessary to permit Purchaser to continue to conduct the business of the
Company, after the Closing in the same manner in which such business is
presently being conducted.
(l) REAL PROPERTY; LEASES. A true, complete and correct
list of all real property of every kind, and all interests in real property,
which is owned, leased, occupied or used by the Company, is disclosed in
Schedule 3.3(l) hereto. The leases identified on Schedule 3.3(l) hereto, are in
full force and effect and have not been breached or terminated, modified,
amended or superseded by any agreement, contract or commitment not identified
therein.
(m) CONTRACTS. Schedule 3.3(m) hereto sets forth a true,
complete and correct list of every (written): (i) union, collective bargaining
or similar agreement, together with all amendments thereto or interpretations
thereof, such as arbitration decisions and the like, to which the Company is a
party or is bound; (ii) profit sharing, deferred compensation, bonus, stock
option, stock purchase, pension, retainer, consulting, retirement, welfare
(including, without limitation, retiree welfare benefit) or incentive plan or
agreement maintained or sponsored by the Company, or to which the Company
contributes; (iii) plan of the Company providing for "fringe benefits" to its
employees or former employees, including, but not limited to, vacation, sick
leave, severance pay, medical, hospitalization, life insurance and other plans,
or related benefits; (iv) employment agreement that is not terminable at will
and without penalty on thirty (30) days or less prior written notice or that
provides for payments upon or after termination; (v) agency, sales agency,
brokerage, wholesaling, franchise, distributorship or similar agreement or
contract; (vi) loan agreement or letter of credit; (vii) lease for personal
and/or real property; (viii) security or pledge agreement; (ix) mortgage or deed
of trust; (x) purchase commitment to, or contract or agreement with, any
supplier; (xi) contract or agreement relating to research and development; (xii)
license, authority or permit granted by the Company to any person or entity;
(xiii) contract or agreement to which the Company is a party or by which the
Company, or any of its assets is bound, which reasonably may be expected to
involve future obligations or benefits in excess of $5,000 in any one calendar
year; and (xiv) contract or agreement to which the Company is a party or by
which the Company or any of its assets is bound, which is either individually or
collectively material to the condition (financial or otherwise), assets,
business or prospects of the Company. (All of the foregoing plans, 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 (x) 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 the Company, Shareholders or any
of them, or any other party thereto under any of the Contracts; (y) no party to
any of the Contracts has given any notice of default or termination, nor do
Shareholders or the Company have any reason to believe that such notice shall be
given; and (z) the Company has not waived any material right under or with
respect to any of the Contracts. The Company is not bound by any agreement or
arrangement to sell or provide goods or services at prices below the prevailing
market prices therefor, or to purchase goods or services at prices above the
prevailing market prices therefor. The Company has no reason to believe that
there is a likelihood that any of the customers of or suppliers to the Company
will terminate its or their business relationship with the Company for any
reason whatsoever. Schedule 3.3(m) hereto, accurately describes all transactions
that have occurred on or after December 31, 1994, between the Company and any
Shareholder, or any of them, and/or any of the Affiliates. There are no oral
Contracts to which the Company is a party or by which the Company is bound that
would materially affect the business or financial condition of the Company.
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<PAGE> 14
(n) INSURANCE. Schedule 3.3(n) hereto contains a
description (identifying insurer, coverage, premiums, named insured, deductibles
and expiration date) of all policies of fire, liability and other forms of
insurance that currently are, or at any time within the past five (5) years have
been, maintained in force by or for the account of the Company with respect to
its business and assets (such policies are hereinafter referred to as the
"Policies"). The Company has been continuously, and is presently, insured by
insurers unaffiliated with Shareholders or the Company. The insurance coverage
provided by the Policies presently in force will not in any material respect be
affected by, and will not terminate or lapse by reason of, the transactions
contemplated hereby. At no time subsequent to January 1, 1992, has the Company
been denied insurance coverage or indemnity bond coverage. At no time subsequent
to January 1, 1992, has any insurance carrier cancelled or reduced any insurance
coverage for the Company or given any notice or other indication of its
intention to cancel or reduce any such coverage.
(o) INTELLECTUAL PROPERTY. Schedule 3.3(o) hereto sets
forth a true, complete and correct list of all trademarks, trade names,
fictitious names, service marks, trade secrets, patents, copyrights and all
registrations or applications with respect thereto, and all licenses or rights
under or related to the same that are presently or have been, during the past
two years, owned or used by the Company (collectively, the "Intellectual
Property"). To the best of the Shareholders knowledge and belief none of the
matters covered by the Intellectual Property, nor any of the products or
services sold or provided by the Company, nor any of the processes used or the
business practices followed by the Company, infringes or has infringed upon any
trademark, trade name, fictitious name, service mark, trade secrets, patent or
copyright owned by any person or entity (or any application with respect
thereto), or constitutes unfair competition. The Company is not obligated to pay
any royalty or other payment with respect to any Intellectual Property, except
as disclosed in Schedule 3.3(o). Except as disclosed in Schedule 3.3(o) hereto,
to the best of the Shareholders knowledge and belief, no person or entity is
producing, providing, selling or using products or services which would
constitute an infringement of any of the Intellectual Property.
(p) LICENSES. Schedule 3.3(p) hereto contains a true,
correct and complete list of all licenses, permits, franchises, certificates,
consents, approvals and authorizations (collectively "Licenses") applied for,
issued to, or owned or held by the Company. The Company has all Licenses
necessary for the conduct of its Business and the ownership and use of its
assets, properties and the premises occupied by it and the conduct of its
business plan as presently contemplated.
(q) TAXES. All federal, state, county and local taxes,
including without limitation, income, information, excise, payroll, sales, use,
unemployment, social security, occupation, franchise, property, and other taxes,
duties, interest, penalties and charges (collectively, "Taxes") levied, assessed
or imposed upon the Company and its business, assets or properties, have been
duly and fully paid or have been adequately provided for on the Financial
Statements (as hereinafter defined). In addition, all returns, estimated and
extension payments and reports with respect to Taxes required by law or
regulation to be filed by the Company, on or prior to the date hereof shall have
been duly and timely filed. There are no agreements, waivers or other
arrangements (oral or written) providing for extensions of time with respect to
the assessment or collection of unpaid Taxes nor are there any actions, suits,
proceedings, inquiries, investigations or claims of any nature or kind
whatsoever now pending or, to the best knowledge and belief of Shareholders,
after due inquiry, threatened, against the Company with respect to any such
returns or reports, or any such Taxes, or any matters under discussion with any
federal, state, county or local authority relating to Taxes.
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<PAGE> 15
(r) LABOR DISPUTES; UNFAIR LABOR PRACTICES. Except as
disclosed in Schedule 3.3(r) hereto, there is neither pending nor, to the best
knowledge and belief of Shareholders after due inquiry, threatened any labor
dispute, grievance, strike or work stoppage involving any of the employees of
the Company that affects or may affect the financial condition, business,
operations, assets or prospects of the Company. There is neither pending nor, to
the best knowledge and belief of Shareholders after due inquiry, threatened any
charge or complaint against or involving the Company or any of its officers or
employees, by the National Labor Relations Board, the Occupational Health and
Safety Administration, the Department of Labor, or any similar federal, state or
local board or agency, or any representative thereof. There are no unfair
employment or labor practice charges presently pending or, to the best knowledge
and belief of Shareholders after due inquiry, threatened by or on behalf of any
employee of the Company.
(s) FINANCIAL STATEMENTS.
(i) Shareholders have previously furnished Purchaser
with true, complete and correct copies of the unaudited financial statements of
the Company as of and for the twelve (12) month period ended January 31, 1996
(the "Financial Statements"). The Financial Statements contain (a) a balance
sheet of the Company as of January 31, 1996 (the "Balance Sheet"), (b) a
statement of income and claimed earnings for the Company for the twelve (12)
month period ended January 31, 1996, (the "P&L"), and (c) any notes related
thereto. The Financial Statements have been consistently prepared on an accrual
basis from the books and records of the Company, and in accordance with
Generally Accepted Accounting Principles. The Shareholders shall not be deemed
to have made this representation with respect to Generally Accepted Accounting
Principles unless Arthur Andersen so certifies. The Balance Sheet fairly
presents the financial position of the Company as of the date thereof. The P&L
fairly presents the results of the operations of the Company for the twelve (12)
month period ended January 31, 1996.
(ii) The Company has no material liabilities or
obligations, fixed or contingent, accrued or unaccrued, that are not reflected,
adequately reserved against or otherwise disclosed on the Balance Sheet,
excepting only those liabilities and obligations incurred by the Company in the
ordinary course of its business between the date of the Balance Sheet and the
Closing Date, none of which liabilities is individually or collectively
material, incurred in violation of this Agreement, or would require accrual
and/or disclosure under generally accepted accounting principles.
(t) BOOKS AND RECORDS. The books and records of the
Company with respect to its assets, business, operations, properties and
prospects have been maintained in the usual, regular and ordinary manner, and
all entries with respect thereto have been made and all transactions have been
properly accounted for. All applicable corporate and other laws relating to the
maintenance of such books and records have been complied with by Shareholders,
or any of them, and the Company.
(u) LIABILITIES. Except as either fully disclosed in
Schedule 3.3(u) hereto, or fully and properly reflected on or reserved for in
the Balance Sheet or incurred by the Company after the date of the Balance Sheet
only in the ordinary course of business, none of which are either individually
or collectively material and none of which would require accrual or disclosure
under generally accepted accounting principles, the Company has no (i) material
debts, liabilities or obligations of a nature required to be reflected or
disclosed in financial statements prepared in accordance with generally accepted
accounting principles; or (ii) other material debts, liabilities or
15
<PAGE> 16
obligations, whether accrued, absolute, contingent or otherwise, whether due or
to become due, relating to or arising out of any act, transaction, circumstance
or state of facts which occurred or existed on or before January 31, 1996. Since
January 31, 1996, the Company has not incurred any debts, liabilities or
obligations, whether accrued, absolute, contingent or otherwise, whether due or
to become due, other than debts, liabilities and obligations incurred in the
ordinary course of business of the Company, none of which are either
individually or collectively material or incurred in violation of this Agreement
and none of which would require accrual or disclosure under generally accepted
accounting principles. Schedule 3.3(u) hereto contains a true, complete and
correct list of all contracts and agreements pursuant to which the Company has
guaranteed or indemnified any debt, liability or obligation of any other person
or entity, including, without limitation, any of Shareholders or any Affiliate
(including, without limitation, the execution of any document obligating the
Company with respect to any performance or other bond), or pursuant to which the
Company has pledged or otherwise encumbered any of its or their assets. Except
as disclosed in Schedule 3.3(u) hereto, the Company is not indebted to any
Shareholder or any of the Affiliates, nor are Shareholders, or any of them, or
any of the Affiliates, indebted to the Company in any amount for any purpose.
(v) SUBSEQUENT EVENTS. Since January 31, 1996, the Company
has not:
(i) created or suffered to exist any material liens or
encumbrances with respect to any of its assets which have not been discharged,
other than liens for nondelinquent taxes;
(ii) other than in the ordinary course of business,
sold or transferred any of its assets or property (including sales and transfers
to Affiliates);
(iii) suffered any material loss, or material
interruption in use, of any of its assets or properties (whether or not covered
by insurance), on account of fire, flood, riot, strike or other hazard or Act of
God;
(iv) suffered any material change in its business,
business activities, business prospects, or condition;
(v) written off any equipment as unusable or obsolete
or for any reason other than in the ordinary course of business;
(vi) waived any material rights;
(vii) paid any Affiliate or been charged by any
Affiliate for goods sold or services rendered, or paid any Affiliate or been
charged by any Affiliate for corporate overhead expenses, management fees, legal
or accounting fees, capital charges, or similar charges or expenses other than
as disclosed on Schedule 3.3(w) hereto;
(viii) paid, declared or set aside any dividends or
other distributions on its securities of any class, or purchased, exchanged or
redeemed any of its securities of any class;
(ix) incurred or committed to incur any individual
capital expenditures in excess of $5,000 or in the aggregate in excess of
$25,000;
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<PAGE> 17
(x) incurred any indebtedness for borrowed money other
than draws on their line of credit;
(xi) increased the compensation payable to any
employee except in the ordinary course of business;
(xii) paid or incurred any management or consulting
fees;
(xiii) hired any employee who shall have an annual
salary in excess of $25,000; and
(xiv) without limitation by the enumeration of any of
the foregoing, entered into any material transaction other than in the usual and
ordinary course of business (the foregoing representation and warranty shall not
be deemed to be breached by virtue of the entry by Shareholders into this
Agreement or their consummation of the transactions contemplated hereby).
(w) NO MATERIAL CHANGES. The Company has not suffered or
been threatened with any material adverse change in its business or financial
condition, business activities, or business prospects, including, without
limiting the generality of the foregoing, the existence or threat of any labor
dispute, or any material adverse change in, or loss of, any material
relationship between the Company and any of its customers, suppliers or key
employees.
(x) ERISA.
(i) Except as disclosed in Schedule 3.3(x) hereto, the
Company does not maintain, administer or contribute to, and did not at any time
during the past three (3) years, maintain, administer or contribute to, any (A)
employee pension benefit plan (as defined in Section 3(2) of the Employee
Retirement Income Security Act of 1974, as amended ("ERISA"), whether or not
excluded from coverage under specific Titles or Subtitles of ERISA) (the
employee pension benefit plans disclosed in Schedule 3.3(x) hereto are
hereinafter referred to as the "Pension Plans"); (B) employee welfare benefit
plan (as defined in Section 3(1) of ERISA, whether or not excluded from coverage
under specific Titles or Subtitles of ERISA) (the employee welfare benefit plans
disclosed in Schedule 3.3(x) hereto are hereinafter referred to as the "Welfare
Plans"); or (C) bonus, deferred compensation, stock purchase, stock option,
severance plan, insurance or similar arrangement (the plans, insurance or
similar arrangements so disclosed in Schedule 3.3(x) hereto are hereinafter
referred to as the "Employee Benefit Plans").
(ii) All Pension Plans, Welfare Plans and Employee
Benefit Plans and any related trust agreements or annuity contracts (or any
related trust instruments) comply with and are and have been operated in
accordance with ERISA, the Internal Revenue Code of 1986, as amended (the
"Code"), other federal statutes, state law and the regulations and rules
promulgated pursuant thereto. All necessary governmental approvals for the
Pension Plans, the Welfare Plans and the Employee Benefit Plans have been
obtained, and/or a favorable determination as to the qualification under the
Code of each of the Pension Plans and each amendment thereto has been made by
the Internal Revenue Service, and all of the Pension Plans remain qualified
under the Code.
(iii) No Pension Plan, no Welfare Plan, no
"disqualified person" (as such term is used in Section 4975(c)(1) of the Code)
has engaged, and Shareholders have not engaged,
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in any transaction in violation of Section 406 of ERISA or any "prohibited
transaction" (as defined in Section 4975(c)(1) of the Code) other than any such
transaction which is exempt under Section 408 of ERISA or Section 4975(d) of the
Code.
(iv) The Company has not incurred any liability to the
Pension Benefit Guaranty Corporation ("PBGC") as a result of the voluntary or
involuntary termination of any Pension Plan subject to Title IV of ERISA; there
is currently no active filing by the Company with the PBGC (and no proceeding
has been commenced by the PBGC) to terminate any Pension Plan subject to Title
IV of ERISA maintained or funded, in whole or in part, by the Company, and the
Company has not made a complete or partial withdrawal from a multi-employer
plan, as such term is defined in Section 3(37) of ERISA, resulting in
"withdrawal liability," as such term is defined in Section 4201 of ERISA
(without regard to subsequent reduction or waiver of such liability under either
Section 4207 or 4208 of ERISA).
(y) EMPLOYEES AND CONSULTANTS. Schedule 3.3(y) hereto
contains a true and complete list of all of the employees of the Company, and
such list fully and accurately reflects their salaries, wages, other
compensation (other than benefits under Employee Benefit Plans), dates of
employment, job descriptions and birth dates. Except as disclosed in Schedule
3.3(y) hereto, there are no oral or written agreements or other arrangements
with respect to employees or consultants to which the Company is a party, or by
which the Company is bound, and the employment of each employee of each of the
Company is terminable at will, without cost to the Company. Except as disclosed
in Schedule 3.3(y) hereto, the Company does not owe any past or present employee
any sum other than for accrued wages or salaries for the current payroll period,
reimbursable expenses, accrued vacation and holiday pay, sick leave rights and
amounts payable under Employee Benefit Plans, and all of such sums that accrue
from the date hereof until the Closing shall be paid by the Company on or prior
to the Closing Date.
(z) LITIGATION. Except as disclosed in Schedule 3.3 (z)
hereto, there is no litigation or proceeding, investigation or inquiry (in law
or in equity) pending and, to the best of the Shareholders knowledge and belief,
there are no proceedings or investigations or inquiries threatened, against the
Company with respect to or affecting the business or financial condition of the
Company, or the consummation of the transactions herein contemplated, or with
respect to or affecting the Pension Plans, Welfare Plans or Employee Benefit
Plans of the Company or the use of the assets of the Company.
(aa) UNASSERTED CLAIMS. There are no facts known to
Shareholders which, if known by a potential claimant or governmental authority,
could give rise to a claim or proceeding which, if asserted or conducted with
results unfavorable to the Company would have a material adverse effect on the
business or financial condition of the Company or the consummation of the
transactions herein contemplated, or the use of the assets or properties of the
Company after the Closing.
(ab) ABSENCE OF PRODUCT OR SERVICE WARRANTIES. Except as
disclosed in Schedule 3.3(ab) hereto, or included in Schedule 3.3(m) hereto,
neither the Company, nor the Shareholders, in their capacity of officer,
director, employee or agent of the Company, has made any written warranties with
respect to the quality or absence of defects of the products or services of the
Company that the Company has sold or performed, and that are in force as of the
date hereof. There are no material claims pending or, to the best knowledge and
belief of the Shareholders, threatened against the Company with respect to the
quality of or absence of defects in such products or services.
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Except as disclosed in Schedule 3.3(ab,) the Company 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 during the five (5) year period
preceding the date hereof.
(ac) ABSENCE OF JUDICIAL ORDERS. Neither the Company
nor any of the Shareholders is a party to any outstanding, material 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 its properties, assets, personnel or business activities.
(ad) COMPLIANCE WITH LAW. Except as set forth in
Schedule 3.3(ad), and except where the failure to comply would not have a
material adverse affect on the business, the Company, the conduct of the
Business, the use by the Company of the Company's properties, assets and
personnel, the provision of the Company's services, and the business activities
of the Company are in compliance with all applicable laws, and the Company 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 Business, including, without limitation, laws
and regulations and the common law relating to occupational health and safety;
equal employment opportunities, fair employment practices, and sex, race,
religion and age discrimination; medicare, medicaid or other healthcare
activities; and the environment (including, without limitation, laws,
regulations and the common law relating to: toxic or hazardous substances or
solid or hazardous waste treatment, storage, disposal, generation and
transportation; air, water and noise pollution; groundwater contamination, the
handling, transportation, storage, or release into the environment of hazardous
materials or hazardous substances; storage tanks, vessels and related equipment;
the protection of wildlife, marine sanctuaries or wetlands; reporting or
notification for hazardous and extremely hazardous substances (collectively
referred to as "Environmental Laws")). Except as set forth in Schedule 3.3(ad)
hereto, the Company has not received notice of any violation of a type referred
to in any portion of this Section 3.3(ad) within the last three (3) years.
(ae) HAZARDOUS MATERIALS. There has been no storage,
treatment, generation, discharge, transportation or disposal of industrial,
toxic or hazardous substances or solid or hazardous waste by, or on behalf of,
the Company, in violation of any Federal, state or local law, statute, rule or
regulation or the common law or any decree, order, arbitration award or
agreement with or any license or permit from any Federal, state or local
governmental authority. There has been no spill, discharge, leak, emission,
injection, escape, dumping, or release of any kind by, or on behalf of, the
Company into the environment (including, without limitation, into air, water or
ground water) of any materials including, without limitation, industrial, toxic
or hazardous substance or solid, medical or hazardous waste, as defined under
any Federal, state or local law, statute, rule or regulation other than those
releases permissible under such law, statute, rule or regulation or allowable
under applicable permits. Schedule 3.3(ae) hereto sets forth a complete list of
all aboveground and underground storage tanks, vessels, and related equipment
and containers that are subject to Federal, state or local laws, statutes, rules
or regulations, and sets forth their present contents, what the contents have
been at any time in the past, and what program of remediation, if any, is
contemplated with respect thereto.
(af) ACCURACY OF DOCUMENTS, REPRESENTATIONS AND
WARRANTIES. The copies of all documents furnished to Purchaser, or any of its
representatives by or on behalf of the Company or Shareholders, or any of them,
or its or their representatives, are true, complete and correct.
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No representation or warranty of any Shareholder contained in this Agreement and
no statement contained in the exhibits, the schedules or the other documents
delivered by or on behalf of Shareholders or their representatives pursuant to
or in connection with this Agreement or the Other Shareholder Agreements 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.
3.4 FURTHER REPRESENTATIONS AND WARRANTIES OF SHAREHOLDERS.
To induce Purchaser to enter into this Agreement and for the
benefit of Purchaser, each Shareholder further represent and warrant as follows:
(a) ABILITY TO BEAR RISK; BUSINESS AND FINANCIAL
KNOWLEDGE AND EXPERIENCE. Each Shareholder (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. Each Shareholder
(i) knows or has had the opportunity to acquire all information concerning the
business, affairs, financial condition, plans and prospects of Purchaser which
such Shareholder 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 such Shareholder'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. Each
Shareholder 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 any Shareholder
relied on any representations, warranties, agreements or statements in the
belief that they were made on behalf of any of the foregoing nor has any
Shareholder relied on the absence of any such representations, warranties,
agreements or statements in reaching its decision to acquire the Purchaser
Stock.
(d) NO DISTRIBUTION. Each Shareholder is acquiring
the Purchaser Stock for such Shareholder's own account without a view to public
distribution or resale, and no Shareholder has a 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.
(e) STOCK TO BE RESTRICTED. Each Shareholder
understands that the Purchaser Stock will 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 otherwise provided in
the Stockholders Agreement, each Shareholder understands that the Purchaser
Stock will not be registered under the
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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
subsequently registered under the 1933 Act and the securities laws of any
applicable states or, in the opinion of counsel for each Shareholder,
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. Each Shareholder
understands that (i) except as provided in the Stock Escrow and Buy-Back
Agreement, 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) each
Shareholder therefore 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. Each Shareholder
understands and agrees that there shall be endorsed on the certificates
evidencing the Purchaser Stock a legend substantially 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.
THE SECURITIES EVIDENCED BY THIS CERTIFICATE ARE SUBJECT TO A STOCK
ESCROW AND BUY-BACK AGREEMENT DATED AS OF THE _____ DAY OF
_____________, 1996, AS IT MAY BE AMENDED FROM TIME TO TIME, A COPY OF
WHICH IS ON FILE AT THE PRINCIPAL EXECUTIVE OFFICES OF THE ISSUER. NO
REGISTRATION OR TRANSFER OF SUCH SECURITIES WILL BE MADE ON THE BOOKS
OF THE ISSUER UNLESS SUCH AGREEMENT SHALL HAVE BEEN COMPLIED WITH."
(i) STOP ORDERS. Each Shareholder 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 any Shareholder or their
respective successors or assigns otherwise than as contemplated hereby.
Notwithstanding the provisions of this Section 3.4, Shareholders shall have the
right to transfer, sell or dispose of their Purchaser's Stock at any time,
subject to applicable federal and state securities law and the Stock Escrow and
Buy-Back Agreement.
(j) RELIANCE UPON INFORMATION. Each Shareholder
understands that the Purchaser Stock are being issued in reliance on specific
exemptions from the registration requirements of federal and state securities
laws and that Purchaser is relying upon the truth and accuracy of the
representations, warranties, agreements, acknowledgements and understandings set
forth therein in order to determine the suitability of each Shareholder to
acquire the Purchaser Stock.
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ARTICLE IV
CONDUCT PRIOR TO THE CLOSING
4.1 GENERAL. Between the date hereof and the Closing Date,
Shareholders and Purchaser shall have the rights and obligations that are set
forth in this Article IV.
4.2 CONDUCT BY SHAREHOLDERS. The following are the obligations
of Shareholders:
(a) ACCESS TO RECORDS. Shareholders shall, and shall
cause the Company and its employees, officers, agents, representatives and
accountants to, fully cooperate with Purchaser to allow the officers, employees,
attorneys, consultants and accountants of Purchaser access during normal
business hours to all of the properties, books, contracts, documents and records
of the Company and furnish to Purchaser such information as Purchaser may at any
time and from time to time reasonably request. Shareholders understand and agree
that prior to the Closing, Purchaser's certified public accountants shall
perform an audit at Purchaser's expense with respect to the Company, and
Shareholders agree to cooperate fully with Purchaser's accountants.
(b) BUSINESS IN ORDINARY COURSE. Shareholders shall
cause the Company to carry on its business and affairs as heretofore carried on,
and Shareholders and the Company will not order, sell, purchase or lease any
products, inventory, equipment, leased personalty, or other items, or dispose of
any of their assets or leased property, or issue any quotations, or prepay any
of its or their material obligations, incur any liabilities or obligations, hire
or discharge any employee or officer or, without limitation by specific
enumeration of the foregoing, enter into any other transaction, except in the
usual and ordinary course of its business in accordance with the past practices
of the Company. Without limiting the generality of the foregoing, Shareholders
will not permit the Company (i) except as otherwise authorized in this Section,
grant any increase in the compensation payable or to become payable by the
Company to any of its directors, officers, employees, or agents, other than
normal merit and cost-of-living increases to employees in accordance with the
Company's general prevailing practices existing prior to the date of this
Agreement, (ii) acquire, or enter into any agreement or understanding (oral or
written) to acquire, the stock, assets or business or goodwill of any other
person, firm or other entity; (iii) enter into or amend any bonus, incentive
compensation, deferred compensation, profit sharing, retirement, pension, group
insurance, death benefit or other fringe benefit plan, trust agreement or
arrangement, or any employment, compensation or consulting agreement involving
or affecting any group of employees or consultants or any single employee or
consultant earning total annual compensation in excess of $25,000; (iv) incur
any indebtedness for borrowed money; (v) declare or pay dividends or make any
other distributions with respect to its capital; (vi) make any payments (other
than normal payments of salaries as an employee of the Company, made in the
ordinary course) to any Shareholder or any of their Affiliates except for
payments to Cedar Ridge; or (vii) permit any receivables due from any
Shareholder or Affiliate to increase or decrease from the level reflected on the
Balance Sheet.
(c) CERTAIN TRANSACTIONS. Shareholders shall not
permit the Company, without the prior written consent of Purchaser, to:
(i) create or suffer to exist any liens or
encumbrances with respect to any of the assets or properties of the Company,
that shall not be discharged at or prior to the Closing Date, other than liens
for nondelinquent taxes and existing liens presently reflected on the books and
records of the corporation;
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(ii) incur any additional indebtedness for
borrowed money;
(iii) sell or transfer any material assets
or properties except in ordinary course of business consistent with past
practices;
(iv) acquire or enter into any agreement or
understanding (oral or written) to acquire the stock or assets of any other
person, firm, corporation or other entity;
(v) make any material change in the conduct
or nature of any aspect of their business, whether in the ordinary course of
business or not, or whether or not the change has or will have a material
adverse affect on the business activities, financial condition, or business
prospects of the Company;
(vi) waive any material rights;
(vii) pay any Affiliate, or be charged by
any Affiliate, for goods sold or services rendered or be charged by any
Affiliate for corporate overhead expenses, management fees, legal or accounting
fees, capital charges, or similar charges or expenses except for Cedar Ridge;
(viii) incur or commit to incur any
individual capital expenditures in excess of $5,000, or in the aggregate in
excess of $25,000;
(ix) amend employment contracts or the
terms and conditions of employment of any officer, director or employee earning
total annual compensation in excess of $25,000, other than normal merit and cost
of living increases to employees in accordance with the general prevailing
practices of the Company, existing prior to the date of this Agreement;
(x) pay or incur any management or
consulting fees;
(xi) incur any indebtedness for borrowed
money outside the existing line of credit for the Company;
(xii) hire any employee who shall have an
annual salary in excess of $25,000; or
(XIII) enter into any transaction other
than in the usual and ordinary course of business.
(d) EMPLOYEES. Shareholders shall use their best
efforts to retain, and shall cause the Company to retain, the Business intact,
including keeping available the services of each of its present employees,
representatives and agents.
(e) DIVIDENDS. Shareholders shall cause the Company
to refrain from declaring, making or paying any dividend or other distribution
with respect to its capital stock or otherwise, or purchasing, redeeming or
otherwise acquiring any shares of its capital stock.
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(f) CONFIDENTIALITY. Until the Closing, and at all
times thereafter as provided in Section 7.1(d) hereof, Shareholders will
maintain as confidential the discussions with Purchaser, and the terms and
conditions of this Agreement, and the other agreements to be executed in
connection herewith, and except as required by law will not make any trade press
or other announcement or disclosure in relation to such discussions whether
before or after Closing without the prior written consent of Purchaser.
(g) EXCLUSIVITY. Shareholders will negotiate the sale
of the stock, assets and properties of the Company, or any portion thereof, only
with Purchaser and Shareholders will not permit the Company to, directly or
indirectly, enter into any discussion with, or disclose any information in
relation to the stock or the assets of the Company to, any other person, firm or
other entity, other than Purchaser, prior to the earlier of the Closing Date or
September 16, 1996, with a view to the sale of the assets of the Company, or the
Stock or any portion thereof.
(h) EQUITABLE RELIEF. Shareholders acknowledge that
the covenants contained in each of paragraphs (f) and (g) of this Section 4.2
are a material inducement for Purchaser to execute and deliver this Agreement
and to consummate the transactions contemplated hereby. Accordingly,
Shareholders acknowledge that the restrictions contained in each of paragraphs
(f) and (g) of this Section 4.2 are reasonable and necessary for the protection
of the business of Purchaser, the Company, and Purchaser's investment in the
Company, 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 Shareholders of any of the provisions of any of paragraphs
(f) or (g) of this Section 4.2, Purchaser shall be entitled to obtain, without
the necessity of posting bond therefor, an injunction (preliminary or permanent,
or a temporary restraining order) restraining Shareholders from the activity or
threatened activity constituting, or which would constitute, a breach.
(i) SEVERABILITY. Each and every provision set forth
in each of paragraphs (f) and (g) of this Section 4.2 is independent and
severable from the others, and no provision 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. The parties hereto agree that if any
provision of each of paragraphs (f) and (g) of this Section 4.2 shall be
declared by a court of competent jurisdiction to be unenforceable for any reason
whatsoever, the court may appropriately limit or modify such provision, and such
provision shall be given effect to the maximum extent permitted by applicable
law.
(j) CONSENTS. Shareholders shall use their best
efforts and make every good faith attempt to obtain any and all consent and
estoppel letters reasonably requested by Purchaser to or in connection with the
assignment of, or alternate arrangements satisfactory to Purchaser with respect
to, any contract, lease, license, permit, agreement or other instrument, that is
to be an asset of the Company, or that may be necessary, appropriate or required
in order to permit the conduct of the business and operations of the Company
after the Closing to be in all respects the same as the conduct of the business
and operations of the Company prior to the Closing.
4.3 JOINT OBLIGATIONS OF SHAREHOLDERS AND PURCHASER. The
following shall apply with equal force to Shareholders and Purchaser:
(a) NOTICE. Each party shall promptly give the other
parties written notice of the existence or occurrence of any condition which
would make any representation or warranty of
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the notifying party untrue or which might reasonably be expected to prevent the
consummation of the transactions herein contemplated.
(b) PERFORMANCE. No party shall intentionally perform
or omit to perform any act that, if performed or omitted, would prevent or
excuse the performance of this Agreement by any party hereto or that would
result in any representation or warranty contained herein 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.
(c) SHAREHOLDER'S ACCESS TO RECORDS. Purchaser shall
cause Leopold, its employees, officers, agents, representatives, and accountants
to fully cooperate with Shareholders to allow the officers, employees,
attorneys, consultants, and accountants of Shareholders, access during normal
business hours to all of the properties, books, contracts, documents, records,
and Securities and Exchange Commission filings of Purchaser, and will furnish to
Shareholders such information as Shareholders or their attorneys may at any
time, and from time to time, reasonably request. Any such due diligence on the
part of the Shareholders will be at the expense of the Shareholders.
(d) CONFIDENTIALITY. 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, and
except where disclosure will not adversely affect the business, until the
Closing, Purchaser will maintain as confidential the discussions with
Shareholders and the terms and conditions of this Agreement and other related
agreements, and Purchaser will not make any trade press announcements without
the written consent of Shareholders.
ARTICLE V
CONDITIONS PRECEDENT TO CLOSING
5.1 CONDITIONS PRECEDENT TO SHAREHOLDERS' OBLIGATIONS. The
obligation of Shareholders to consummate the transactions contemplated hereby is
subject to fulfillment by Purchaser, or written waiver by Shareholders, 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
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) PURCHASER'S OBLIGATIONS PERFORMED. All
obligations of Purchaser to be performed hereunder through and including 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.
(c) PURCHASER'S CLOSING CERTIFICATE. Purchaser shall
have executed a closing certificate, dated as of the Closing Date, in form and
content reasonably acceptable to Shareholders ("Purchaser's Closing
Certificate") pursuant to which (i) Purchaser shall represent and warrant to
Shareholders that Purchaser's representations and warranties to Shareholders are
true and correct as of the Closing Date as if then originally made (or, if any
such representation or warranty is untrue in any respect, specifying the respect
in which the same is untrue), (ii) that all covenants
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<PAGE> 26
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.
5.2 CONDITIONS PRECEDENT TO PURCHASER'S OBLIGATIONS. The
obligations of Purchaser to consummate the transactions contemplated hereby are
subject to the fulfillment by Shareholders, 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 Shareholders 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) CURRENT ASSETS AND INVENTORY. The value of the
Inventory and the Total Current Assets of the Company as of the Closing Date
shall be no less than the Minimum Inventory Level and Minimum Asset Level as
calculated in accordance with Section 2.2(d) hereof.
(c) SHAREHOLDERS' OBLIGATIONS PERFORMED. All
obligations of Shareholders to be performed hereunder through and including the
Closing Date (including, without limitation, all obligations that Shareholders
would be required to perform at the Closing if the transaction contemplated
hereby was consummated) shall have been performed in all material respects.
(d) CONSENTS. All of the consents, approvals and
estoppel letters referred to in Section 4.2(i) shall have been obtained and, to
the extent licenses, authorities or permits held by the Company are not
assignable or transferrable, Purchaser has either obtained licenses, authorities
and permits for the Company on substantially the same terms as such licenses,
authorities and permits were originally issued to the Company or has obtained
binding commitments from the applicable authorities to issue such licenses,
authorities and permits to the Company following the Closing.
(e) NO SUIT, PROCEEDING OR INVESTIGATION. No suit,
proceeding, inquiry 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 damages on account of, the consummation of the
transactions herein contemplated.
(f) CLOSING CERTIFICATE OF SHAREHOLDERS. Each of the
Shareholders shall have executed a closing certificate, dated the Closing Date,
in form and content reasonably acceptable to Purchaser ("Shareholders' Closing
Certificates"), pursuant to which Shareholders jointly and severally 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: (aa)
there shall have been no material adverse change in the assets, business
operations or condition, financial or otherwise, of the Company; (bb) the
Company shall not have incurred any liabilities or obligations not reflected on
the Balance Sheet except only in the ordinary course of business, not in
violation of this Agreement, none of which are either individually or in the
aggregate material and adverse; (cc) there shall have been no property damage,
destruction or loss (whether or not covered by insurance) which materially
adversely affects the business or assets of the Company; (dd) no suit, action or
proceeding shall have been instituted or, to the best of such Shareholder's
knowledge and belief after due inquiry, threatened against the Company (or
against such Stockholder with respect to the Company) an adverse determination
of which could reasonably be expected to have a material adverse effect on the
business
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or financial condition of the Company; and (ee) no strike, work stoppage or
labor slow-down shall have been instituted or, to the best of such Shareholder's
knowledge and belief after due inquiry, threatened by any group of employees of
the Company, and (ii) that (aa) such Shareholder's representations and
warranties to Purchaser are true and correct as of the Closing Date as if then
originally made (or if any such representation or warranty is untrue in any
respect, specifying the respect in which the same is untrue); (bb) all covenants
and obligations required by the terms hereof to be performed by such Shareholder
on or before the Closing Date have been fully performed, or waived by Purchaser;
(cc) all documents to be executed and delivered by such Shareholder at or prior
to the Closing have been executed by such Shareholder; and (dd) Company's
Business as conducted prior to Closing is lawful and proper in all material
respects and does not violate any applicable federal, state, county or township
laws, rules, regulations or requirements, the non-compliance with which would
have a material and adverse effect on the Company's Business as conducted or the
conduct of the Company's Business after the Closing, and that after the Closing
such Shareholder does not know or have any reason to believe that the conduct of
the Company's health and beauty care business in the same manner and to the same
extent as the Company conducted its Business before Closing, would violate any
applicable federal, state, county or township laws, rules, regulations or
requirements of a material nature. Such certificate, if and when delivered,
shall for all purposes of this Agreement constitute additional joint and several
representations and warranties of the Shareholders to the same extent as if made
in this Agreement.
(g) RELEASES. Each Shareholder and each director and
officer of the Company and each Affiliate of any of them shall generally release
the Company from any and all claims, whether known or unknown.
(h) STATE OF TEXAS LICENSES, PERMITS AND CERTIFICATES
OF NECESSITY. Purchaser shall have received from the State of Texas, and the
County of Dallas, any and all licenses, permits, authorities and certificates of
necessity permitting the ownership of the Stock by Purchaser and the ability of
the Company to fully conduct and operate its business after the Closing in the
same manner as conducted and operated prior to the Closing, including, without
limitation, receipt by Purchaser from the Texas State Department of Taxation and
Finance to the effect that the Company has filed, or is on extension to file,
all franchise tax returns and has paid all franchise taxes, penalties and
interest, if any, due with respect thereto (the "Tax Clearance Certificates").
(i) DISCLOSURE SCHEDULES. Purchaser shall have
received from Shareholders the Disclosure Schedules referred to in Section 3.3
hereof and all amendments and modifications thereto delivered pursuant to
Section 10.1, and Purchaser shall be reasonably satisfied with the nature and
extent of the disclosures made therein and the representations and warranties of
Shareholders, and any of them, as modified by the disclosures contained in the
Disclosure Schedules.
(j) 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, as part of
Purchaser's due diligence.
(k) PURCHASER'S DUE DILIGENCE. Purchaser shall have
completed its due diligence investigation of the Company and the results of such
due diligence shall have been satisfactory to Purchaser, in its sole discretion.
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(l) RECEIPT OF OPINION OF COUNSEL FOR THE COMPANY AND
SHAREHOLDERS. Purchaser shall have received a favorable opinion of LOE, WARREN,
ROSENFIELD, KAITCER & HIBBS, P.C., counsel for the Company and Shareholders, in
form and substance satisfactory to Purchaser's counsel, dated the Closing Date,
and confirming the following:
(i) The Company is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Texas and has the corporate power to own its assets and properties and to carry
on its business as it is now being conducted.
(ii) The Company was incorporated under the
laws of the State of __________ on _______________ and has an authorized capital
consisting of ____________ (______) shares of Common Stock, par value $_____ per
share, of which ____________ (_____) shares are validly issued and outstanding,
fully paid and non-assessable.
(iii) The execution and delivery of this
Agreement, the consummation of the transactions contemplated hereby, and the
fulfillment of the terms hereof, will not violate any provision of Company'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 to which the Company or any Shareholder is a party
or by which any of them is bound, or any judgment, decree, order or award of any
court, governmental body, or arbitrator, or any applicable law, rule or
regulation.
(iv) Shareholders have full power and
authority to execute, deliver and perform this Agreement, and this Agreement is
the legal and binding obligation of Shareholders and is enforceable against each
of them in accordance with its terms.
(v) Except for matters disclosed in this
Agreement, counsel has no knowledge of any suits, actions, claims, arbitrations,
administrative or other proceedings or governmental investigations pending or
threatened against or affecting the Company, its business or its assets and
properties, or of any litigation affecting the right of any Shareholder 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 the
Company's business or its assets and properties.
(vi) Shareholders have, and at the Closing
shall have effectively conveyed, transferred and assigned to Purchaser, good and
marketable title to the Stock, free and clear of all liens, pledges, claims and
encumbrances.
(m) DISCLOSURE SCHEDULES. Purchaser shall have
received from Shareholders any Supplemental Disclosure Schedules referred to in
Section 4.1 hereof not less than ten (10) days prior to the Closing Date and
Purchaser shall, in the exercise of its sole discretion, be entirely satisfied
with the nature and extent of the disclosure made therein and the
representations and warranties of Shareholders as modified by the disclosures
contained in the Disclosure Schedules and any Supplemental Disclosure Schedules.
(n) CONSENTS AND APPROVALS. Purchaser shall have
received all necessary consents and approvals with respect to the issuance of
Purchaser Stock pursuant to this Agreement.
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(o) REPAYMENT OF INDEBTEDNESS. The Company shall have
paid in full all long term indebtedness, except for the promissory note in the
amount of up to $350,000 payable to Cedar Ridge Associates, a Texas General
partnership.
(p) FINANCING. Purchaser shall have received proceeds
of its financing in an amount and on terms acceptable to Purchaser (in its
reasonable business discretion.)
ARTICLE VI
CLOSING
6.1 TIME AND PLACE OF CLOSING. The Closing shall take place
September 16, 1996, (the "Initial Closing Date"), at the offices of O'Connor,
Cavanagh, Anderson, Killingsworth & Beshears, P.A., One East Camelback Road,
Phoenix, Arizona 85012.
6.2 FORM OF DOCUMENTS. At the Closing, the parties shall
deliver the documents, and shall perform the other acts, that are set forth in
this Article VI. All documents which Shareholders shall deliver shall be in form
and content reasonably satisfactory to Purchaser. All documents that Purchaser
shall deliver shall be in form and content satisfactory to Shareholders.
6.3 PURCHASER'S DELIVERIES. Subject to the fulfillment or
written waiver of the conditions precedent set forth in Section 5.2 hereof,
Purchaser shall execute and/or deliver to Shareholders at the Closing all of the
following:
(a) FUNDS. The portion of the Cash Component of the
Purchase Price payable at Closing by wire transfer to a "Purchase Price Bank
Account" to be designated by Shareholders.
(b) PURCHASER STOCK. The Purchaser Stock shall be
delivered to the Escrow Agent.
(c) CLOSING CERTIFICATE. Purchaser's Closing
Certificate executed by Purchaser.
(d) CORPORATE RESOLUTIONS. A certified copy of
resolutions of Purchaser's board of directors authorizing the execution,
delivery and performance of this Agreement, the other agreements referenced
herein to be executed by Purchaser, and the transactions contemplated hereby and
thereby.
(e) STOCK ESCROW AND BUY-BACK AGREEMENT. The Stock
Escrow and Buy-Back Agreement.
(f) OTHER DOCUMENTS. Without limitation by specific
enumeration of the foregoing, all other documents reasonably required to
consummate the transaction herein contemplated.
(g) OPINION LETTER. Opinion letter from Purchaser's
counsel in form and substance acceptable to Shareholder's counsel in
substantially the form set forth in Exhibit "B".
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6.4 SHAREHOLDERS' DELIVERIES. Subject to the fulfillment or
waiver of the conditions set forth in Section 5.1 hereof, Shareholders shall
deliver to Purchaser at the Closing, and shall execute and/or deliver to
Purchaser all of the following:
(a) GOOD STANDING CERTIFICATES. Certificates of good
standing for the Company by the Secretary of State of Texas, such certificates
of good standing to be issued at a date not earlier than seven (7) days prior to
the Closing Date.
(b) CLOSING CERTIFICATE. Shareholders' Closing
Certificate executed by Shareholders.
(c) DELIVERY OF CORPORATE DOCUMENTS. All of the
following items shall have been delivered to Purchaser:
(i) Stock certificates representing the
stock, duly endorsed in blank or accompanied by duly executed in-blank stock
transfer powers; and
(ii) The stock books, stock ledgers, minute
books and corporate seals for the Company.
(d) RELEASES. The releases described in Section
5.2(g) hereof.
(e) CONSENTS AND ESTOPPEL LETTERS. If necessary, or
required by the applicable document, all consents, approvals and estoppel
letters for the assignment of contracts, leases, purchase orders, sales orders,
installation contracts, license agreements, permits and licenses that are to be
assigned to Purchaser or acceptable alternate arrangements with respect thereto.
(f) STATE OF TEXAS AND COUNTY CONSENTS. All consents,
approvals and authorizations to be obtained from the State of Texas and the
County of Dallas.
(g) TAX GOOD STANDING CERTIFICATE. A receipt from the
taxing authority of the State of Texas evidencing the filing of all tax reports
and the payment in full by the Company of all sales and use taxes imposed.
(h) 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 in order to
assure himself that he receives good title to the Stock free and clear of all
liens, claims, charges, liabilities, encumbrances and security interests of
whatsoever kind and nature, and that the business, conducted by the Company
prior to the Closing may continue to be conducted by the Company, with no
adverse effect on such business, or the financial condition of the Company, or
the business and financial prospects of the Company.
(i) OPINION LETTER. Opinion letter from Shareholders
counsel in form and substance acceptable to Purchaser's counsel.
(j) STOCK ESCROW AND BUY-BACK AGREEMENT. The Stock
Escrow and Buy-Back Agreement.
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ARTICLE VII
POST CLOSING OBLIGATIONS
7.1 OBLIGATIONS OF SHAREHOLDERS.
(a) COVENANT NOT TO COMPETE. In consideration of the
execution and delivery of this Agreement by Purchaser, and in consideration of
the Purchase Price, and as additional consideration therefor, each Shareholder
unconditionally agrees that during the Restricted Period (as defined below) each
Shareholder will not, directly or indirectly (including, without limitation, as
a partner, shareholder, director, officer or employee of, or lender or
consultant to, any other person or entity), or in any other capacity within,
into or from the Restricted Territory (as defined below) engage in the Business,
or any aspect thereof, unless first authorized in writing by Purchaser, which
authorization may be withheld in the sole and absolute discretion of Purchaser.
For purposes of this Agreement, the term "Restricted Period" shall mean the
period ending five (5) years from the date of the Closing. For purposes of this
Agreement, the term "Restricted Territory" shall mean worldwide, including the
United States. If any Shareholder violates his obligations under this Section
7.1(a) (the "Violating Shareholder"), then the Restricted Period for the
Violating Shareholder(s) shall be extended by the period of time equal to that
period beginning when the activities constituting such violation commenced and
ending when the activities constituting such violation terminated.
(b) NONSOLICITATION. In consideration of the
execution and delivery of this Agreement by Purchaser, and in consideration of
the payments by Purchaser of the Purchase Price, each Shareholder agrees that
for a period of five (5) years following the Closing he will not, directly or
indirectly, solicit or cause others to solicit (i) in respect of the Business,
any person or other entity that is, or was within the twelve (12) month period
immediately prior to the Closing, a customer or supplier of the Company, or (ii)
any person who, on the date hereof, is an employee of the Company, for
employment or as an independent contractor with any person or entity, unless
first authorized in writing by Purchaser, which authorization may be withheld in
the sole and absolute discretion of Purchaser. If any Shareholder violates his
obligations under this Section 7.1(b), then the time periods hereunder with
respect to the breaching Shareholder only, shall be extended by the period of
time equal to that period beginning when the activities constituting such
violation commenced and ending when the activities constituting such violation
terminated.
(c) TRADE SECRETS AND OTHER INFORMATION. After the
Closing, no Shareholder will communicate or divulge to, or use for the benefit
of, any person, firm or corporation, other than Purchaser or the Company, 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 the Company, 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 Shareholders in violation of this Agreement,
or (ii) is required to be disclosed by law. Shareholders will 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.
(d) CONFIDENTIALITY. At all times after the Closing,
Purchaser and each Shareholder will maintain as confidential the discussions
among Shareholders and Purchaser, and the terms and conditions of this
Agreement, and the other agreements to be executed in connection
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herewith, and except as required by law will not make any trade press or other
announcement or disclosure in relation to such discussions whether before or
after Closing without the prior written consent of Purchaser.
(e) EQUITABLE RELIEF. Each Shareholder acknowledges
that the covenants contained in each of paragraphs (a), (b), (c) and (d) of this
Section 7.1 are a material inducement for Purchaser to execute and deliver this
Agreement and to consummate the transactions contemplated hereby. Accordingly,
each Shareholder acknowledges that the restrictions contained in each of
paragraphs (a), (b), (c) and (d) of this Section 7.1 (including, without
limitation, the Restricted Period and the Restricted Territory) are reasonable
and necessary for the protection of the business of the Company, and Purchaser's
investment in the Company, 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 Shareholder of any of the provisions of any
of paragraphs (a), (b), (c) or (d) of this Section 7.1, 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 Shareholder 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.
(f) SEVERABILITY. Each and every provision set forth
in each of paragraphs (a), (b), (c) and (d) of this Section 7.1 is independent
and severable from the others, and no provision 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. The parties hereto agree that if any
provision of any of paragraphs (a), (b), (c) or (d) of this Section 7.1 shall be
declared by a court of competent jurisdiction to be unenforceable for any reason
whatsoever, the court may appropriately limit or modify such provision, and such
provision shall be given effect to the maximum extent permitted by applicable
law.
(g) CONSENTS. Each Shareholder shall use his best
efforts and make every good faith attempt to obtain any and all consent and
estoppel letters reasonably requested by Purchaser to or in connection with the
assignment of, or alternate arrangements satisfactory to Purchaser with respect
to, any contract, lease, license, permit, agreement or other instrument, that is
to be an asset of the Company, or that may be necessary, appropriate or required
in order to permit the conduct of the business and operations of the Company
after the Closing to be in all respects the same as the conduct of the business
and operations of the Company prior to the Closing.
7.2 OBLIGATIONS OF BOTH SHAREHOLDERS AND PURCHASER; FURTHER
ASSURANCES. The parties shall execute such further documents, and perform such
further acts, as may be necessary to transfer and convey the Stock to Purchaser,
on the terms herein contained, and to otherwise comply with the terms of this
Agreement and consummate the transactions herein provided.
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ARTICLE VIII
INDEMNIFICATION
8.1 INDEMNIFICATION BY SHAREHOLDERS.
(a) GENERAL. Each Shareholder, severally and limited
as provided in 8.2 and 8.3 herein, covenants and agrees to defend, indemnify and
hold Purchaser and the Company 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) with respect to or arising out of any claim,
proceeding, action and/or cause of action which Purchaser or the Company may
suffer or incur by reason of: (a) the inaccuracy of any of the representations
or warranties of Shareholders, contained in this Agreement, or any of the
agreements, certificates, documents, exhibits or schedules delivered in
connection with this Agreement; (b) the failure to comply with, or the breach or
default by a Shareholder of any of the covenants, warranties or agreements made
by a Shareholder contained in this Agreement, or any of the agreements,
certificates, documents, exhibits or schedules delivered in connection with this
Agreement; or (c) any liability or obligation of the Company not reflected,
provided for or adequately reserved against on the Closing Balance Sheets.
Purchaser shall be entitled to offset pro rata against the Purchaser Stock to be
delivered to Shareholders pursuant to this Agreement.
(b) ENVIRONMENTAL. Shareholders, severally and as
provided by 8.2 and 8.3 herein, 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 by reason of the breach of the representations set forth in Section
3.3(ad) or 3.3(ae), including, but not limited to, the investigation, defense or
settlement of any claim covered by this indemnity) with respect to or arising
out of any demands, claims, inquiries, investigations, proceedings, actions or
causes of action, environmental assessments and/or remediation expenses that
Purchaser, may suffer or incur by reason of any breach of the representations
set forth in Section 3.3(ad) or Section 3.3(ae) or:
(i) any generation, transportation,
storage, treatment or disposal of industrial, toxic or hazardous substances or
solid or hazardous wastes by, for the account, or for the benefit of the
Company, occurring on or prior to the Closing Date including, without
limitation, any waste or other disposal activities or discharges which occurred
at a facility on which any portion of the Company's (or its predecessors')
business was conducted, any waste or other disposal activities or discharges
which occurred off of any such facility with regard to wastes and other
substances generated at or on such facility, and any waste or other disposal
activities or discharges which occurred on real estate owned or leased by the
Company (or its predecessor) at any time whether or not the Company (or its
predecessor) owned or leased such real estate at the time such waste or other
disposal activities or discharges were engaged in, and whether or not the
Company performed such waste or other disposal activities or discharges;
(ii) any spills, discharges, leaks,
emissions, injections, escapes, dumping, or any releases or threatened releases
as defined now or in the future under the Comprehensive Environmental Response,
Compensation, and Liability Act of 1980, P.L. 96-510, as amended or reauthorized
from time to time, or any other similar Federal, state or local laws, statutes,
rules or regulations occurring on or prior to the Closing Date, including, but
not limited to, both those
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releases or incidents involving potential or actual environmental contamination
which required notification or reporting to appropriate Federal, state or local
officials or agencies, or clean-up or remedial activities and those releases or
incidents which occurred prior to the Closing Date, of any requirements imposing
such notification or reporting obligations or clean-up or remedial activities,
but which would have been subject to such obligations if they had occurred
subsequent to the effective date of such requirements;
(iii) any discharges to surface waters or
groundwaters occurring on or prior to the Closing Date;
(iv) any air emissions occurring on or
prior to the Closing Date;
(v) the exposure of and resulting
consequences to any persons, including, but not limited to, employees of the
Company, to any mineral, chemical or industrial product, raw material
intermediate, by-product or waste, or substance created, generated, processed,
handled or originating at a facility at which the Company or the Company's
predecessor conducted business on or prior to the Closing Date or otherwise used
by the Company or the Company's predecessor in the conduct of its business or
contained in or constituting a part of merchandise which was sold by the Company
or the Company's predecessor;
(vi) any violations by the Company
occurring on or prior to the Closing Date of Federal, state or local (A)
environmental laws, (B) mine safety and reclamation laws, or (C) occupational or
employee health and safety laws;
(vii) any and all actions, failures to act
and negligence by the Company, or anyone acting for, or on behalf of the Company
in monitoring, maintaining and upkeep of on-site storage, treatment and disposal
facilities on or prior to the Closing Date;
(viii) any use, removal, maintenance or
monitoring of storage tanks by the Company, or anyone acting for, or on behalf
of the Company on or prior to the Closing Date; and
(ix) any violations, fees, obligations or
failures by the Company, or anyone acting for, or on behalf of the Company to
comply with any and all permit requirements on or prior to the Closing Date.
(c) RIGHT OF OFFSET. Subject to the limitations of
Section 8.2 and 8.3 herein, Purchaser shall be entitled to offset any amount
owed to Purchaser by any Shareholder against any stock or stock guarantee to
which Stockholder is to receive under the terms of this Agreement or the Stock
Escrow and Buy-Back Agreement.
8.2 LIMITATION OF INDEMNITY RIGHTS. Anything to the contrary
herein notwithstanding, the Shareholders shall have no obligation to indemnify
any loss sustained by Purchaser under Article III, Article IV, or Article VIII
of this Agreement unless, and only to the extent that all such losses in the
aggregate exceed $250,000.00 Dollars, and in no event shall the aggregate
liabilities of the Shareholders under Article III, Article IV, Article VII, or
Article VIII exceed the sum of $2,000,000.00. The obligations of the
Shareholders under this Article VIII shall expire on the date that their
representations and warranties shall expire which shall be eighteen (18) months
from the Date
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of Closing unless, prior to such date of expiration, Purchaser gives written
notice to each of the Shareholders of its claim for indemnification (setting
forth in reasonable detail the specific facts and circumstances pertaining
thereto). The limitation in this Section 8.2 does not apply to a loss caused by
intentional breach or knowingly withholding or misrepresenting information.
8.3 OBLIGATIONS OF SHAREHOLDERS, SEPARATE AND SEVERAL.
(a) The obligations of the respective Shareholders
under Article VIII, shall be separate and several and any liability hereunder of
any Shareholder shall be limited to two times his pro rata part of any loss.
Each Shareholder's pro rata part of any loss shall be determined by multiplying
such loss by the percentage set forth for each Shareholder in Section 3.3(a) of
this Agreement times two (2).
8.4 INDEMNIFICATION BY PURCHASER. Purchaser covenants and
agrees to defend, indemnify and hold Shareholders 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) with respect to or arising out of any
claim, proceeding, action and/or cause of action which Shareholders may suffer
or incur by reason of: (a) 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; (b) the failure to comply with or 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; and (c) any act of
Purchaser and/or the Company occurring after the Closing relating to or arising
out of this Agreement; provided, however, that Section 8.4 shall not apply to
any claim, proceeding, action or cause of action arising from or relating to the
Purchaser's Stock.
8.5 LIMITATION ON INDEMNITY. Anything to the contrary herein
notwithstanding, neither Purchaser nor the Company shall have any obligation to
indemnify any loss sustained by any Shareholder under Article III, Article IV or
Article VIII of this Agreement (except 8.4(c)) unless, and only to the extent
that all such losses in the aggregate exceed $250,000.00, and in no event shall
the aggregate liabilities of the Purchaser or the Company under Article III,
Article IV or Article VIII of this Agreement (except 8.4(C)) exceed
$2,000,000.00. The obligations of the Purchaser under this Article VIII shall
expire eighteen (18) months from the Date of Closing unless, prior to such date
of expiration, a Shareholder gives written notice to Purchaser of its claim for
indemnification (setting forth in reasonable detail the specific facts and
circumstances pertaining thereto).
8.6 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, if possible, within sufficient time
to respond to such claim or answer or otherwise plead in such action (but in any
event within thirty (30) 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 of Indemnitor's choice shall not be
unreasonably withheld or delayed, provided that the
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Indemnitor confirms to the Indemnitee that it is a claim to which its rights of
indemnification apply. The Indemnitor shall have the right to settle or
compromise monetary claims; 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, 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. Anything to the contrary herein notwithstanding, Shareholders shall
have the right to notice, prior to any offset.
ARTICLE IX
TERMINATION
9.1 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 Shareholders
if the conditions precedent set forth in Section 5.1 are not satisfied or waived
in writing by Shareholders; or (b) by Purchaser if the conditions precedent set
forth in Section 5.2 are not satisfied or waived in writing by Purchaser.
9.2 REMEDIES. No party shall be limited to the termination
right granted in Section 9.1 hereof by reason of the nonfulfillment of any
condition precedent to such party's closing obligations 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, and consummation of the transaction and closing shall be deemed a
waiver of any breach of a representation, warranty or covenant disclosed by the
breaching party electing to close. If Purchaser elects to proceed to Closing
pursuant to this Section 9.2(a) despite Shareholders' violation of any condition
precedent set forth in Section 5.2(b), the Purchase Price and the Stock
Component thereof shall be reduced in accordance with Section 2.2(d). If
Shareholders violate its covenant set forth in Section 4.2(b) and Purchaser
elects to proceed to Closing notwithstanding such violation, the Purchase Price
and the Cash Component thereof shall be reduced or further reduced, as the case
may be, by an amount equal to the damages caused by Seller's violation to
Purchaser (as agreed upon by the certified public accountants selected by
Purchaser and Seller). In the event that the independent certified public
accountants selected by Purchaser and Seller cannot agree upon the damages
caused by Seller's violation under the immediately preceding sentence, the two
accountants selected by Purchaser and Seller shall select a mutually acceptable
third independent certified public accountant who shall determine such damages.
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(b) DECLINE TO CLOSE. Decline to proceed to Closing,
terminate this Agreement as provided in Section 9.1 hereof, and thereafter seek
damages as limited by, and only to the extent permitted in, Section 9.4 hereof.
9.3 EVENTS ON TERMINATION. In the event the transactions
contemplated hereby shall fail to be consummated for any reason whatsoever, the
Shareholders shall return, or cause to be returned, to Purchaser, and Purchaser,
its officers, directors, agents and representatives shall return to the
Shareholders, 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 spreadsheet
data compiled utilizing confidential or financial information pertaining to the
Company and shall return all information obtained from Company or Shareholders
to Shareholders.
9.4 RIGHT TO DAMAGES. If this Agreement is terminated, no
party hereto shall have any liability or obligation to the other except for as
provided in the next paragraph; 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 Section 4.2(f), 4.2(g) or 9.3 hereof, 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, and preparation of this Agreement, and all of the other
documents related to this transaction, the costs and fees for the audit, and
those costs and expenses which are incurred by the other party in pursuing such
rights and remedies (including reasonable attorneys' fees).
If Shareholders fail to proceed with the Closing for
any reason other than in accordance with Section 9.1 hereof, Shareholders shall
be jointly and severally liable, to the extent of their interest, to pay
Purchaser a fee of $100,000 (the "Shareholders Termination Fee"). Shareholders
hereby acknowledge that the agreements contained in this Section 9.4 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 Shareholders fail to promptly pay the Termination Fee,
Shareholders shall also pay Purchaser all its costs and expenses incurred by it
in pursuing payment of such Termination Fee (including reasonable attorneys'
fees).
If Purchasers fail to proceed with the Closing for
any reason after Purchaser has notified Shareholders that Purchaser is satisfied
with the due diligence examination or if Purchaser should fail to close as a
result of not obtaining financing in accordance with Section 5.2(p), then
Purchaser shall pay to Shareholders the sum of $100,000 (the "Purchasers
Termination Fee"). Purchasers here acknowledge that the agreements contained in
this Section 9.4 are an integral part of the transactions contemplated by this
Agreement, and that without these agreements, Shareholders would not enter into
this Agreement. If said fee is not promptly paid, Purchaser shall also pay to
Shareholders, all of Shareholders cost and expense incurred by it in pursuing
payment of such Purchasers Termination Fee, including reasonable attorneys fees.
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ARTICLE X
MISCELLANEOUS
10.1 DISCLOSURE SCHEDULES. The Disclosure Schedules referred
to in Section 3.3 of this Agreement reflect information supplied to Purchaser in
the course of its investigation of the Company. Except with respect to Financial
Statements, Shareholders may supplement or amend any Disclosure Schedule from
time to time prior to or at the Closing, by notice in accordance with the terms
of this Agreement, including by delivering one or more supplements or amendments
to correct any matter which would constitute a breach of any representation or
warranty contained herein. No such supplement or amended Disclosure Schedule
shall be deemed to cure any breach for purposes of Section 5.2; however, any
such supplement or amendment will be effective to cure and correct for all other
purposes any breach of any representation or warranty which would have existed
but for such supplement or amendment, and all references to any Disclosure
Schedule hereto that is supplemented or amended as provided in this Section 10.1
shall, for all purposes, whether or not the Closing occurs, be deemed to be a
reference to such Disclosure Schedule as so supplemented or amended.
10.2 ASSIGNABILITY. Purchaser may assign all or part of its
rights under this Agreement to any entity that 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 and such assignment
shall not release Purchaser of any obligation created herein.
10.3 BROKERS AND FINDERS. Shareholders 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.
10.4 COSTS AND EXPENSES. Shareholders and Purchaser shall each
be responsible (except as provided for in Section 9.4 hereof) 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. Purchaser agrees on Closing to reimburse
Shareholder for Shareholder's attorney's fees up to the sum of Eighteen Thousand
Dollars ($18,000.00). Shareholders to provide Purchaser copies of Shareholder's
attorneys statements.
10.5 EARNEST MONEY DEPOSIT. Upon completion of Purchaser's due
diligence investigation as provided in 5.2(f) and 10.13 herein, Purchaser shall
deposit to Shareholder's Purchase Price Bank Account the sum of $50,000.00 as an
earnest money deposit. This deposit will be non-refundable except in the event
of a breach of this Agreement by a Shareholder, or in the event Purchaser has
the right to terminate pursuant to Section 9.1(b). Said deposit will be applied
against the Purchase Price on Closing.
10.6 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. Any notice will be
deemed to have been given to all Shareholders, if given to Don Black and Don
Cottam.
Shareholders may receive notice prior to or after the
Closing as follows:
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Howard Black
2208 Woodstock
Colleyville, TX 76034
Fax:__________________________________
Don Black
3917 Deepwood
Colleyville, TX 76034
Fax:__________________________________
Robert Black
216 Ironbridge Place
Euless, TX 76040
Fax:__________________________________
Barbara Black
3007 Oak Valley Dr.
Bedford, TX 76021
Fax:__________________________________
Don Cottam
4957 Gwynn Rd.
Memphis, TN 38124
Fax:__________________________________
Jim Cottam
414 Meadowlark
Duncanville, TX 75137
Fax:__________________________________
The Cottam Family Partnership
4957 Gwynn Rd.
Memphis, TN 38124
Fax:__________________________________
With a copy to:
Loe, Warren, Rosenfield,
Kaitcer & Hibbs, PC
4420 W. Vickery Blvd.
Fort Worth, Texas 76107
Attention: William M. Warren
Fax: (817) 377-1120
and
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Krivcher, Magids, Neal, Cottam & Campbell, PC
5100 Poplar Avenue
Clark Tower, Suite 2929
Memphis, Tennessee 38137-2929
Fax: (901) 682-6453
If to Purchaser:
Leopold Styling Products, Inc.
5330 South Grape Lane
Greenwood Village, Colorado 80121
Attention: Kenneth Bernstein
Fax: (303) 741-5569
and
6105 North Palo Cristi Drive
Paradise Valley, Arizona 85253
Attention: Sam Leopold
Fax: (602) 468-3389
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.
10.7 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. This Agreement may not be amended, modified, supplemented
or otherwise altered in any respect except by an agreement in writing signed by
the parties hereto. This Agreement supersedes all prior written or oral
agreements between or among Purchaser and Shareholders.
10.8 WAIVERS. 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 conferred in this Agreement
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
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<PAGE> 41
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.
10.9 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.
10.10 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.
10.11 APPLICABLE LAW, JURISDICTION AND VENUE. 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 Texas applicable to contracts made in that state without regard to the
conflicts of laws principles of such state. Jurisdiction and venue for any
dispute associated with this Agreement will be in the appropriate Federal or
State District Court located within the State of Texas where this Agreement is
entered.
10.12 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.
10.13 EXCLUDED ASSETS. Anything to the contrary herein
notwithstanding, Shareholders will not transfer, and Purchaser will not
purchase, the personal items belonging to Shareholders identified on Schedule
10.12 hereto.
10.14 LIMITATION ON PURCHASERS DUE DILIGENCE. Anything to the
contrary herein notwithstanding, Purchaser's due diligence investigation of the
business and assets of the Shareholders and Company will be limited to a period
of sixty (60) days from the date of execution of this Agreement. Should
Purchaser not be satisfied, Purchaser will notify Shareholders in writing prior
to the expiration of sixty (60) days and Shareholders shall have an additional
twenty (20) days to meet Purchaser's requirements. In the event that
Shareholders do not receive notice of Purchaser's dissatisfaction at the end of
sixty (60) days, then Purchaser shall be deemed to have accepted and be
satisfied with all matters relating to Purchaser's due diligence investigation
and the Earnest Money deposited pursuant to Section 10.5 will be due and
payable.
10.15 SHAREHOLDER REPRESENTATIVE. The Shareholder hereby
designates DON BLACK as the Shareholder Representative.
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement as of the date first above written.
SHAREHOLDERS:
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/s/ Don Black
--------------------------------------------
DON BLACK
/s/ Howard Black
--------------------------------------------
HOWARD BLACK
/s/ Barbara Black
--------------------------------------------
BARBARA BLACK
/s/ Robert Black
--------------------------------------------
ROBERT BLACK
/s/ Don Cottam
--------------------------------------------
DON COTTAM
/s/ Jim Cottam
--------------------------------------------
JIM COTTAM
THE COTTAM FAMILY PARTNERSHIP, a Texas
Limited Partnership
By: /s/ Don Cottam
----------------------------------------
Its: General Partner
PURCHASER:
Leopold Styling Products Inc., a Delaware
corporation
By: /s/ Sam Leopold
----------------------------------------
Its: CEO
----------------------------------------
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EXHIBIT A
STOCK ESCROW AND BUY-BACK AGREEMENT
THIS ESCROW AGREEMENT (the "Agreement") is made as of
_________________, 1996, by and among LEOPOLD STYLING PRODUCTS, INC., a Delaware
corporation ("Purchaser"), and DON BLACK, HOWARD BLACK, BARBARA BLACK, ROBERT
BLACK, DON COTTAM, JIM COTTAM, AND THE COTTAM FAMILY PARTNERSHIP, a Texas
Limited partnership (the "Shareholders"), and DON BLACK (the "Shareholder
Representative"). Capitalized terms used but not defined herein shall have the
meanings given to them in that certain Stock Purchase Agreement (the "Stock
Purchase Agreement"), dated as of May 8, 1996, among Purchaser and
Shareholders.
RECITALS:
WHEREAS, Purchaser and Shareholders have entered into the Stock
Purchase Agreement to provide for the purchase and sale of all of the issued and
outstanding shares of the capital stock of Gena Laboratories, Inc. (the
"Company") (the "Acquisition); and
WHEREAS, the Closing of the transactions contemplated by the Stock
Purchase Agreement is taking place as of the date hereof; and
WHEREAS, Purchaser has relied upon the representations, warranties and
covenants of Shareholders provided in the Stock Purchase Agreement and in
schedules, certificates and other documents delivered pursuant to the Stock
Purchase Agreement; and
WHEREAS, pursuant to Section 8 of the Stock Purchase Agreement,
Shareholders have agreed to indemnify and hold Purchaser and the Company
harmless for, from and against certain 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 such indemnity)
("Damages") arising out of certain claims, proceedings, actions and/or causes of
action which Purchaser or the Company may incur or suffer (the "Claims") as
provided therein.
NOW, THEREFORE, to induce Purchaser to proceed with the Closing and the
Acquisition, and in consideration of such Closing and Acquisition, and in
further consideration of the mutual covenants and agreements contained herein
and in the Stock Purchase Agreement, and intending to be legally bound, the
parties hereto do hereby agree as follows:
5 APPOINTMENT OF SHAREHOLDER REPRESENTATIVE. Shareholders hereby
appoint the Shareholder Representative, and the Shareholder Representative
agrees to act, as the representative of the persons entitled to receive (subject
to the terms hereof and the Stock Purchase Agreement) the shares of Purchaser's
Common Stock, in accordance with this Escrow Agreement. No bond shall be
required of the Shareholder Representative. The Escrow Agent and Purchaser are
hereby relieved from any liability for any acts done by them, or any of them, in
accordance with any such resolution, action, decision, consent or instruction of
the Shareholder Representative.
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6 APPOINTMENT OF ESCROW AGENT; ESCROW FUND.
(a) Purchaser, Shareholders and the Shareholder Representative
hereby appoint the Escrow Agent, and the Escrow Agent hereby agrees to act, as
the agent of such parties in performing the duties of the Escrow Agent provided
herein. As compensation for Escrow Agent's services hereunder, Escrow Agent
shall receive a compensation of $__________ ($__________ of which shall be
payable upon the execution hereof and $_________ of which shall be payable upon
the termination of this Agreement) and the reimbursement of all other
Administrative Costs (as such term is defined in Section 6(d)).
(b) On the date hereof, Purchaser shall cause to be deposited
with the Escrow Agent shares of Purchaser's Common Stock (the "Escrow Shares")
in the amount set forth in Section 2.2(b) of the Stock Purchase Agreement
(subject to adjustment as provided in Section 2.2(c) of the Stock Purchase
Agreement) to be received by the Shareholders pursuant to the Stock Purchase
Agreement, such deposit, together with any dividends or other distributions paid
thereon, to constitute an escrow fund (the "Escrow Fund") to be governed by the
terms set forth herein. Upon compliance with the terms hereof, and the terms of
the Stock Purchase Agreement, Purchaser shall be entitled to receive payment
from the Escrow Fund for all Claims for which Purchaser is entitled to
indemnification under Section 8 of the Stock Purchase Agreement.
(c) The Escrow Agent shall hold, safeguard and dispose of the
Escrow Fund in accordance with the terms hereof.
(d) For purposes of this Agreement, each Escrow Share shall
have a value equal to $______ (the "Exchange Value") and such valuation shall
apply throughout the duration of the Escrow Period.
7 ESCROW PERIOD. The escrow created hereby shall remain in existence
until earlier of (i) the date the Escrow Shares and other assets in the Escrow
Fund have been distributed in accordance herewith and (ii) the two (2) year
anniversary of the Closing Date (such period being referred to herein as the
"Escrow Period").
8 CLAIM SUBMISSION PERIOD. With respect to each Claim, Purchaser shall
deliver (in accordance with Section 13 below) to the Escrow Agent within the
Escrow Period a certificate signed by an officer of Purchaser ("officer's
Certificate"):
(i) stating that Purchaser or the Company has paid, suffered
or properly accrued, or Purchaser or the Company in good faith
reasonably anticipates that Purchaser or the Company will have to pay,
suffer or accrue, Damages in an aggregate stated amount (including,
without limitation, any anticipated professional and other fees and
costs associated therewith); and further stating that Purchaser is
entitled to indemnification out of the Escrow Fund pursuant to this
Agreement and the Stock Purchase Agreement; and
(ii) specifying (A) the individual items of Damages
included in the amount so stated, (B) the date each
such item was paid or properly accrued or the basis
for such anticipated liability and (C) the nature of
the liability, misrepresentation, breach of warranty
or covenant or other matter to which such items are
related.
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Upon the Escrow Agent's receipt of the Officer's Certificate, such Claim shall
be administered by the Escrow Agent pursuant to Section 6 below.
9 THIRD PARTY CLAIMS; QUARTERLY REPORTS. Third Party claims will be
handled in accordance with Section 8.6 of the Stock Purchase Agreement.
10 ADMINISTRATION OF CLAIMS.
(a) Accepted Claims. At the time of deliver of an Officer's
Certificate to the Escrow Agent pursuant to Section 4, a duplicate copy of such
Officer's Certificate shall be delivered by Purchaser to the Shareholder
Representative ("Claim Notice"). The Shareholder Representative shall have a
period of ten (10) business days from its receipt of a Claim Notice ("Rejection
Period") to review the Officer's Certificate and deliver to Purchaser and Escrow
Agent written notice of its rejection of all or a portion of the Claim
referenced therein ("Rejection notice"). If no Rejection Notice is received by
Purchaser and Escrow Agent within the Rejection Period, then such Claim shall
become an "Accepted Claim."
(b) Rejected Claims. For any Claim which is the subject of a
Rejection Notice (a "Rejected Claim"), the Shareholder Representative and
Purchaser shall attempt in good faith to agree upon the rights of the respective
parties with respect to such Claim. If the Shareholder Representative and
Purchaser so agree, a memorandum setting forth such agreement shall be prepared
and signed by Purchaser and the Shareholder Representative and shall be
furnished to the Escrow Agent and such Rejected Claim shall become an "Accepted
Claim".
(c) Resolution of Dispute. If no such agreement between the
Shareholder Representative and Purchaser can be reached with respect to a
Rejected Claim after good faith negotiation within thirty (30) days of
Purchaser's receipt of a Rejection Notice, Purchaser and the Shareholder
Representative shall mutually select an independent third party (the "Designated
Party") whose determination of the Rejected Claim and the amount of Damage (if
any) associated therewith shall be final nonappealable and binding, provided
that, with respect to Claims which are the subject of a Qualifying Offer, the
Designated Party shall only be entitled to determine whether such Claim is
subject to the indemnification obligations of Shareholders under the Stock
Purchase Agreement; and the Designated Party shall have no authority to reduce
or increase the amount of such Claim from the amount of the Qualifying Offer and
Damages associated therewith. The Designated Party shall be a person
knowledgeable regarding the health and beauty business and the value of related
assets, and shall be generally knowledgeable with regard to business and
financial matters. In the event Purchaser and the Shareholder Representative
fail to agree upon the Designated Party within forty (40) days after Purchaser's
receipt of a Rejection Notice, the Designated Party shall be a partner in any
"Big Six" accounting firm located in the Dallas/Fort Worth metropolitan area,
reasonably acceptable to both the Shareholder Representative and the Purchaser.
Upon the determination of the Designated Party in accordance herewith with
respect to a Rejected Claim, the determination of the value of such Claim, if
any, by the Designated Party shall become an "Accepted Claim." All
determinations by a Designated party hereunder shall be made in accordance with
the expedited commercial rules of the American Arbitration Association.
(d) Administrative Costs.
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(i) All costs and expenses of administering this
Agreement (including, without limitation, fees and expenses of
the Escrow Agent and any Designated Party) ("Administrative
Costs") shall be borne equally by [Purchaser] and the Escrow
Fund. Administrative Costs shall be paid by [Purchaser] within
fifteen (15) business days after [Purchaser's] receipt of an
invoice from the Escrow Agent therefor. Within five (5)
business days of either the payment of such costs to the
Escrow Agent or [Purchaser's] delivery to the Escrow Agent of
evidence that such Administrative Cost has been paid,
Purchaser shall be entitled to receive Escrow Shares having an
aggregate Exchange Value equal to the amount to such payment.
Purchaser shall be under no obligation to bear any expenses
pursuant to this Section 6(d) at any time that the Escrow Fund
shall be exhausted or following the termination of this
Agreement.
(ii) The Escrow Agent shall be indemnified and saved
harmless by Purchaser, Shareholders and the Shareholder
Representative from and against any and all liability,
including all expenses reasonably incurred in its defense, to
which the Escrow Agent shall be subjected by reason of any
action taken or omitted or any investment or disbursement of
any part of the Escrow Fund made by the Escrow Agent pursuant
to this Agreement, unless caused by the gross negligence or
willful misconduct of the Escrow Agent. The costs and expenses
of enforcing this right of indemnification shall also be paid
equally by [Purchaser] and the Escrow Fund, and this right of
indemnification shall survive the termination of this
Agreement, and/or the resignation or removal of the Escrow
Agent.
(e) Payment of Claims and Expenses. The Administrative Costs
shall be paid in accordance with Section 6(d) above. Once a Claim has become an
Accepted Claim in accordance with the terms of this Agreement, the Escrow Agent
shall, within five (5) business days of the written request of Purchaser,
deliver to Purchaser Escrow Shares having an aggregate Exchange Value equal to
the amount of the Claim for which Purchaser is entitled to indemnification,
rounded to the nearest whole share (with fractional shares equal to or less than
.50 being rounded down).
11 BUY-BACK OF PURCHASER'S COMMON STOCK. On the business day preceding
the expiration of the Escrow Period, Purchaser shall pay to the Escrow Fund an
amount equal to (i) the remaining Escrow Shares multiplied by the Exchange Value
decreased by (ii) any other assets in the Escrow Fund (the "Buy-back Amount"),
and upon such payment, the Escrow Agent shall release to Purchaser any and all
remaining Escrow Shares to the Purchaser. Purchaser shall secure payment of said
funds by obtaining an irrevocable Letter of Credit in favor of Shareholders in
the sum of $2,000,000.00 issued by a recognized national bank reasonably
acceptable to Shareholders.
12 EXPIRATION OF ESCROW PERIOD.
(a) Upon expiration of the Escrow Period, any Escrow Shares
and any other assets (including dividends) remaining in the Escrow Fund shall be
delivered to the Shareholders on a prorata basis based upon the number of shares
of Purchaser Common Stock sold by each such Shareholders in accordance with the
Stock Purchase Agreement. Such shares and any other amounts shall be distributed
in accordance with the Stock Purchase Agreement. Any fractional shares remaining
in the Escrow Fund shall be repurchased by Purchaser for the aggregate Exchange
Value for such Escrow Shares and the proceeds thereof shall be distributed among
the Shareholders. The Escrow Agent shall
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<PAGE> 47
be authorized to draw funds from such account and to prepare checks in the
amount appropriate for inclusion with the mailing of the certificates evidencing
Purchaser Common Stock upon the termination of this Escrow Agreement. All sums
shall be forwarded by wire transfer.
(b) Following the expiration of the Escrow Period and
distribution in accordance herewith of the Escrow Fund, the Escrow created
hereby and this Agreement other than the provisions of Section 11 and the
indemnification obligations contained in Sections 6(d)(ii) and 6(d)(iii) hereof,
shall terminate.
13 DISTRIBUTIONS; VOTING, TRANSFER RESTRICTIONS.
(a) Any cash dividends, dividends payable in securities or
other distributions of any kind (including, without limitation, any shares
received upon a stock split) made in respect of any securities in the Escrow
Fund shall be added to the Escrow fund and become a part thereof. The Escrow
Agent shall invest any cash held in the Escrow fund in an interest-bearing
account or money market instruments in accordance with written instructions from
Purchaser. Any interest payable on the funds shall be added to the Escrow Fund
and become a part thereof. The parties acknowledge that the Escrow Agent shall
not be liable for any diminution in the Escrow Fund due to losses resulting from
investments made pursuant to this Agreement.
(b) The Escrow Shares shall be issued and held in the name of
the Escrow Agent. The Escrow Agent hereby grants to Sam Leopold and/or Tom
Clifford (the "Grantee) an irrevocable proxy to vote the Escrow Shares;
provided, however, that the Grantee shall vote the Escrow Shares for nominees to
the Board of Directors of the Company and on all other matters to be voted on by
the holders of Purchaser's common stock, in the same proportion as the votes
cast by other holders of Purchaser's common stock. The Grantee shall have voting
rights in accordance with the foregoing sentence with respect to the Escrow
Shares (and on any voting securities added to the Escrow Fund) so long as such
Escrow Shares or other voting securities are held in the Escrow Fund. The Escrow
Agent shall execute and deliver to the Grantee, upon request, all such proxies,
forms for election or other instruments which it receives as may be required
with respect to the Escrow Shares in order to give effect to the foregoing.
(c) Shareholders shall not transfer, and neither the Escrow
Agent nor Purchaser shall be required to register the transfer of, any interest
in the Escrow Shares until the expiration of the Escrow Period and distribution
of the Escrow Shares, if any, to the Shareholders. Any purported transfer in
violation of this Section 8(c) shall be void.
14 SHAREHOLDER REPRESENTATIVE'S RIGHTS AND RESPONSIBILITIES.
(a) The Shareholder Representative is vested with the
authority, duty and responsibility to represent the interests of the
Shareholders in the Escrow Fund as set forth herein, and the Shareholder
Representative agrees to manage and discharge his or her duties and
responsibilities as agent of the Shareholders in accordance with the terms
hereof. The resolution, action, decision, consent or instruction of the
Shareholder Representative shall be final, conclusive and absolutely binding
upon each of the Shareholders, and Purchaser may rely upon any such resolution,
action, decision, consent or instruction of the Shareholder Representative as
being the resolution, action, decision, consent or instruction of each and all
of the Shareholders.
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(b) In discharging his or her duties and responsibilities
hereunder, the Shareholder Representative shall have all rights and powers
necessary and incident to the proper discharge thereof. Without limitation upon
the foregoing, the Shareholder Representative shall have the duty and authority
on behalf of the Shareholders to do any thing required of the Shareholder
Representative under this Agreement, including without limitation:
(i) to interpret and construe the provisions of this
Agreement;
(ii) to determine and resolve any disputes that may
arise under this Agreement using his or her best efforts to
dispose of any such disputes by agreed settlement;
(iii) to perform all other acts as deemed appropriate
by the Shareholder Representative on behalf of the
Shareholders to fully effectuate and carry out the provisions
of this Agreement.
(c) To the extent that any funds or property representing
proceeds received in respect of or relating to any Claim are held or come to be
held by the Shareholder Representative after all of his duties hereunder are
discharged, such funds shall be delivered to the Escrow Agent and held in, and
constitute a part of, the Escrow Fund.
(d) In the event of the death, disability or resignation of
Don Black as Shareholder Representative, the Shareholders shall designate a
member to fill each vacancy so created. Such appointment and designation shall
be immediately effective and shall be binding on all Shareholders.
15 ESCROW AGENT'S RIGHTS AND RESPONSIBILITIES. To induce the Escrow
Agent to act hereunder, it is further agreed that:
(a) The Escrow Agent shall not be under any duty to give the
property held hereunder any greater degree of care than it gives its own similar
property. The Escrow Agent undertakes to perform such duties as are specifically
set forth in this Agreement, and the Escrow Agent shall not be liable except for
the performance of such duties as are specifically set forth in this Agreement,
and no implied covenants or obligations shall be read into this Agreement
against the Escrow Agent.
(b) The Escrow Agent may act upon advice of counsel in
reference to any matter connected herewith and shall not be liable for any acts
or omissions while acting in good faith and exercising reasonably judgment.
(c) The Escrow Agent shall not be liable in any respect on
account of the identity, authority or rights of the parties executing or
delivering or purporting to execute or deliver this Agreement or any documents
or papers deposited or called for hereunder.
(d) The Escrow Agent shall not be liable for the outlawing of
any rights under any statute of limitations with respect to this Agreement or
any documents deposited with the Escrow Agent.
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(e) The Escrow Agent is authorized to rely on the written
instructions of the Shareholder Representative as being the act of all of the
Shareholders and the written instructions of the President or any executive
officer of Purchaser as being the act of Purchaser.
(f) This Agreement sets forth the exclusive duties of the
Escrow Agent with respect to any and all matters pertinent hereto and no implied
duties or obligations of the Escrow Agent shall be read into this Agreement.
(g) The Escrow Agent shall not be called upon to advise any
party as to its rights and obligations hereunder.
(h) The Escrow Agent shall be deemed to have fully complied
with its obligations hereunder to transfer the Escrow Shares by delivery to the
transfer agent of Purchaser (the "Transfer Agent") of the Escrow Shares, in all
form satisfactory to such Transfer Agent, of certificates properly endorsed for
transfer with instructions to the Transfer Agent to issue in the name of and
deliver to the person to whom such transfer is to be made a certificate or
certificates for the required number of shares. Transfer taxes, if any,
applicable to such transfer shall be payable by the person to whom the Escrow
Shares are being transferred.
(i) The Escrow Agent shall be fully protected in acting in
accordance with any written instructions given to it hereunder and believed by
it to have been executed by the proper parties. The Escrow Agent's duties shall
be determined only with reference to this Agreement and applicable laws and is
not charged with any duties or responsibilities in connection with any other
document or agreement.
16 RECORDS; FINAL ACCOUNTING. The Escrow Agent shall maintain a record
of all Claims against the Escrow Fund filed with it pursuant to Sections 4 and
5, a record of all such Claims which shall become payable claims as provided in
Section 5 and a record of all payments or distributions from the Escrow Fund.
Upon the termination or resignation of the Escrow Agent or termination or
expiration of this Agreement, the Escrow Agent shall within ten (10) business
days deliver to Purchaser and the Shareholder Representative a full and final
accounting with regard to the Escrow Fund.
17 RESIGNATION OF ESCROW AGENT. The Escrow Agent, or any successor, may
resign as Escrow Agent hereunder by giving written notice thereof to Purchaser
and the Shareholder Representative. Such resignation shall become effective
following such written notice upon the earlier of the appointment by Purchaser
and the Shareholder Representative of a successor Escrow Agent that accepts the
appointment and agrees to be bound by the provisions of the Agreement or the
expiration of 60 days thereafter. Upon the effectiveness of such resignation,
all duties of the Escrow Agent so resigning shall cease, other than the duty to
account in accordance with Section 11. Purchaser and the Shareholder
Representative shall have the right to terminate the appointment of the Escrow
Agent hereunder by giving written notice thereof to the Escrow Agent, specifying
the date upon which such termination shall take effect. A condition precedent to
such termination shall be the designation of a successor Escrow Agent that has
accepted the appointment and agreed to be bound by the provisions of this
Agreement. In the event of such termination, the Escrow Agent shall turn over
and deliver to such successor Escrow Agent the Escrow Fund, and any other sums
and the records and instruments held by it under this Agreement and render the
accounting required by Section 11.
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18 NOTICES. All notices and other communications pursuant to this
Agreement shall be in writing and shall be deemed given if delivered personally,
sent by nationally recognized, overnight courier, or mailed by registered or
certified mail (return receipt requested), postage prepaid, or sent by facsimile
(followed by a copy sent by courier or registered or certified mail) to the
parties at the following addresses (or at such other address for a party as
shall be specified by notice hereunder):
To Purchaser:
Leopold Styling Products, Inc.
5330 South Grape Lane
Greenwood Village, Colorado 80121
Attention: Kenneth Bernstein
Fax: (303) 741-5569
and
6105 North Palo Cristi Drive
Paradise Valley, Arizona 85253
Attention: Sam Leopold
Fax: (602) 468-3389
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
To the Shareholder Representative:
Don Black
3917 Deepwood
Colleyville, TX 76034
Fax:________________________________
With a copy to:
Loe, Warren, Rosenfield,
Kaitcer & Hibbs, PC
4420 W. Vickery Blvd.
Fort Worth, Texas 76107
Attention: William M. Warren
Fax: (817) 377-1120
and
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<PAGE> 51
Krivcher, Magids, Neal, Cottam & Campbell, PC
5100 Poplar Avenue
Clark Tower, Suite 2929
Memphis, Tennessee 38137-2929
Fax: (901) 682-6453
All such notices and other communications shall be deemed to have been
received (a) in the case of personal delivery, on the date of such delivery, (b)
in the case of delivery by nationally recognized, overnight courier, on the
business day following dispatch, (c) in the case of mailing, on the 5th business
day following such mailing, and (d) in the case of a facsimile, when the party
receiving such facsimile shall have confirmed receipt of the communication (or
when the copy sent by courier or registered or certified mail shall have been
deemed to have been receipt pursuant to clause (a), (b) or (c)).
19 SUCCESSORS AND ASSIGNS. This Agreement shall inure to the benefit of
and be binding upon the successors and assigns of the parties hereto.
20 GOVERNING 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 Texas applicable to contracts made
in that state without regard to the conflicts of laws principles of such state.
Jurisdiction and venue for any dispute associated with this Agreement will be in
the appropriate Federal or State District Court located within the State of
Texas where this Agreement is entered.
21 PREVAILING PARTY. In the event of any dispute which results in a
suit or other legal proceeding to construe or enforce any provision of this
Agreement or because of an alleged breach, default or misrepresentation in
connection with any of the provisions of this Agreement, the parties agree that
the prevailing party or parties (in addition to all other amounts and relief to
which such party or parties may be entitled to recover) may recover from the
nonprevailing party or parties reasonable attorneys' fees and other costs
incurred in any action or proceeding.
22 CONFLICT OF TERMS. In the event of a conflict with the Stock
Purchase Agreement and this Agreement, the terms of the Stock Purchase Agreement
will govern.
23 COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which when so executed shall constitute an original
hereof, but all of which together shall constitute one agreement.
IN WITNESS WHEREOF the undersigned have executed this Agreement as of
the day and year first above written.
LEOPOLD STYLING PRODUCTS INC.,
A DELAWARE CORPORATION
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By:
-----------------------------
Its:
-----------------------------
SHAREHOLDERS:
---------------------------------
Don Black
---------------------------------
Howard Black
---------------------------------
Barbara Black
---------------------------------
Robert Black
---------------------------------
Don Cottam
---------------------------------
Jim Cottam
THE COTTAM FAMILY PARTNERSHIP, a
Texas Limited Partnership
By:
-----------------------------
Its: General Partner
10
<PAGE> 1
EXHIBIT 10.2
STOCK PURCHASE AGREEMENT
by and among
LEOPOLD STYLING PRODUCTS, INC.
a Delaware corporation
("Purchaser")
JACK SPERLING
and
GARY SPERLING
("Shareholders")
with respect to the stock and notes of
JDS MANUFACTURING CO., INC.,
a California corporation
Dated: October 25, 1995
<PAGE> 2
STOCK PURCHASE AGREEMENT
THIS STOCK PURCHASE AGREEMENT (this "Agreement") is
made and entered into as of the 25th day of October, 1995, by and among
LEOPOLD STYLING PRODUCTS, INC., a Delaware corporation or its assigns
("Purchaser"), and JACK SPERLING AND GARY SPERLING (hereinafter referred to as
"Shareholders").
RECITALS
A. Shareholders own all of the issued and
outstanding shares of capital stock of JDS Manufacturing Co., Inc., a California
corporation, doing business as Alpha 9 (the "Company") and each owns a note,
copies of which are attached as Exhibits A-1 and A-2 hereto, evidencing the
indebtedness owed by the Company to each of the Shareholders in an aggregate
amount as of the date hereof equal to Four Hundred Fifteen Thousand Six Hundred
Eighty-Seven Dollars ($415,687) (together, the "JDS Notes") .
B. The Company is engaged in the research and
development, manufacture and distribution of nail and nail care products and
accessories on a wholesale and retail basis in the United States and worldwide
(the "Company's Business" or the "Business").
C. Shareholders desire to sell to Purchaser, and
Purchaser desires to purchase from Shareholders, all of the issued and
outstanding shares of the capital stock of the Company (the "Stock") and the JDS
Notes, free and clear of all liens, claims, rights, charges, encumbrances and
security interests of whatsoever nature, subject to and in accordance with the
terms and conditions set forth herein.
AGREEMENT
NOW, THEREFORE, in consideration of the foregoing
recitals and the mutual covenants contained herein, the parties hereto hereby
agree as follows:
ARTICLE I
SALE OF THE STOCK AND JDS NOTES
1.1 SALE OF THE STOCK AND JDS NOTES. At the closing
of the transactions contemplated by this Agreement in accordance with Section
6.1 hereof (the "Closing"), Shareholders shall sell, transfer, convey, assign
and deliver to Purchaser, and Purchaser shall purchase from Shareholders, all of
the Stock and the JDS Notes, free and clear of all liens, claims, rights,
charges, encumbrances and security interests of whatsoever nature or type.
2
<PAGE> 3
ARTICLE II
PURCHASE PRICE AND MANNER OF PAYMENT
2.1 PURCHASE PRICE. The total purchase price for
the Stock and the JDS Notes (the "Purchase Price") shall be Four Million Five
Hundred Fifteen Thousand Six Hundred Eighty-Seven Dollars ($4,515,687) less any
additional adjustment as contemplated by the last sentence of Section 2.2(b)
hereof.
2.2 PAYMENT OF PURCHASE PRICE. At the Closing,
Shareholders shall be entitled to receive an amount equal to the Purchase Price
less the Earnest Money Deposit described in Section 2.3 hereof payable as
follows:
(a) CASH PAYMENT. Four Million Fifty Thousand
Dollars ($4,050,000) (if the Closing occurs on the Initial Closing Date) or Four
Million Twenty-Five Thousand Dollars ($4,025,000) (if the Closing occurs during
the Extended Closing Period) in cash, bank or certified check, or by wire
transfer (the "Cash Payment").
(b) ASSIGNMENT OF INSURANCE POLICY. On or prior
to the Closing Date, Shareholders shall cause the life insurance policies owned
by the Company on the lives of each of the Shareholders to be assigned to the
Shareholders. Such life insurance policies have a cash surrender value as of
_____________, 1995 of Eighty-Two Thousand Seven Hundred Ninety-Five Dollars
($82,795). In the event that the cash surrender value on the Closing Date
exceeds such amount, the principal amount of the Promissory Note shall be
decreased by the amount of such excess.
(c) PROMISSORY NOTE. Purchaser's promissory
note in the principal amount of Three Hundred Thirty-Two Thousand Eight Hundred
Ninety-Two Dollars ($332,892) less any additional adjustment as contemplated by
the last sentence of Section 2.2(b) hereof in the form of Exhibit A hereto (the
"Promissory Note") which shall bear simple interest at a per annum rate equal to
the prime rate as published in the "Money Rates" or equivalent section of the
Western Edition of the Wall Street Journal with a maximum rate equal to ten
percent (10%) per annum and a minimum rate equal to eight percent (8%) per
annum. Interest shall be due and payable quarterly commencing ninety (90) days
following the Closing Date and continuing on a quarterly basis thereafter until
the principal has been paid in full. The principal shall be due and payable in a
single balloon payment due and payable on the second anniversary of the Closing
Date.
2.3 DEPOSITS. Upon Purchaser's approval of the
results of the audit as set forth in Section 5.2(m) hereof and the results of
its due diligence as set forth in Section 5.2(n) hereof, Purchaser shall deliver
to Shareholders a cashier's check in the amount of Fifty Thousand Dollars
($50,000) on account of the Purchase Price (subject to an increase to Seventy-
Five Thousand Dollars ($75,000) in the event Purchaser exercises its right to
extend the Closing Date as provided in Section 6.1 hereof) (together the
"Earnest Money Deposit"). In the event the Closing does not occur, the Earnest
Money Deposit shall be retained or returned as specified in Section 9.3 hereof.
3
<PAGE> 4
ARTICLE III
REPRESENTATIONS AND WARRANTIES
3.1 GENERAL STATEMENT. The parties make the
representations and warranties to each other which are set forth in this Article
III. Shareholders shall cooperate with Purchaser in the conduct by Purchaser of
its due diligence review of the Company. Notwithstanding the foregoing, all such
representations and warranties and all representations and warranties which are
set forth elsewhere in this Agreement and in any financial statement, exhibit,
schedule or document delivered by or on behalf of a party hereto or their
representative to the other party pursuant to this Agreement shall survive the
Closing (and none shall merge into any instrument of conveyance). No specific
representation or warranty shall limit the generality or applicability of a more
general representation or warranty. Representations and warranties of the
parties are initially made as of the date hereof and are to be true and correct
as of the Closing Date.
3.2 REPRESENTATIONS AND WARRANTIES OF PURCHASER. To
induce Shareholders to enter into this Agreement and to perform their
obligations hereunder, and with full knowledge that Shareholders will rely
thereon, Purchaser represents and warrants the truth, accuracy and completeness
of the following:
(a) ORGANIZATION. Purchaser is a corporation
duly formed, 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 agreements referenced herein to which Purchaser is a party, and to
consummate the transactions contemplated hereby and thereby. The execution and
delivery by Purchaser of this Agreement and the other agreements referenced
herein to which Purchaser is a party, 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 agreements referenced herein to which Purchaser is a party,
or the consummation of the transactions contemplated hereby or thereby.
(c) ENFORCEABILITY. This Agreement and the
other agreements referenced herein to which Purchaser is a party have been 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) ACCURACY OF DOCUMENTS, REPRESENTATIONS AND
WARRANTIES. The copies of all documents furnished to Shareholders and their
representatives by or on behalf of Purchaser and its representatives are true,
complete and correct. No representation or warranty of Purchaser contained in
this Agreement or the other agreements referenced herein to which Purchaser is a
party, 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 contains any
4
<PAGE> 5
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.
3.3 FURTHER REPRESENTATIONS, WARRANTIES AND
AGREEMENTS OF PURCHASER. Purchaser further represents, warrants and agrees as
follows with respect to the shares of Common Stock of the Company (the "Shares")
being acquired hereunder:
(a) ABILITY TO BEAR RISK; BUSINESS AND
FINANCIAL KNOWLEDGE AND EXPERIENCE. Purchaser (i) can bear the economic risk of
the purchase of the Shares, 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 purchase of the
Shares.
(b) KNOWLEDGE RESPECTING THE COMPANY. Purchaser
(i) knows or has had the opportunity to acquire all information concerning the
business, affairs, financial condition, plans and prospects of the Company which
Purchaser deems relevant to make a fully informed decision respecting the
purchase of the Shares; (ii) has been encouraged and has had the opportunity to
rely upon the advice of Purchaser's legal counsel and accountants and other
advisers with respect to the purchase of the Shares; 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 the Company and the terms and conditions of the purchase
of the Shares as Purchaser has requested so as to more fully understand its
investment.
(c) ABSENCE OF REPRESENTATIONS AND WARRANTIES.
Purchaser confirms that neither the Company nor anyone purportedly acting on
behalf of the Company has made any representations, warranties, agreements or
statements other than those contained herein respecting the business, affairs,
financial condition, plans or prospects of the Company nor has Purchaser relied
on any representations, warranties, agreements or statements other than those
contained herein in the belief that they were made on behalf of any of the
foregoing nor has Purchaser relied on the absence of any such representations,
warranties, agreements or statements in reaching its decision to purchase the
Shares and the Notes.
(d) NO DISTRIBUTION. Purchaser is acquiring the
Shares and the Notes for Purchaser's own account without a view to public
distribution or resale, and Purchaser has no contract, undertaking, agreement or
arrangement to transfer, sell or otherwise dispose of any Shares or any interest
therein to any other person.
(e) SHARES TO BE RESTRICTED. Purchaser
understands that the Shares are "restricted securities" within the meaning of
Rule 144 under the Securities Act of 1933, as amended (the "1933 Act").
(f) NO REGISTRATION. Purchaser understands that
the Shares have not been registered under the 1933 Act, the Arizona Securities
Act (the "Arizona Act") or the securities laws of any other jurisdiction and
must be held indefinitely without any transfer, sale or other disposition unless
the Shares are subsequently registered under the 1933 Act, the
5
<PAGE> 6
Arizona Act and the securities laws of any other applicable jurisdictions or, in
the opinion of counsel for the Company registration is not required under such
Acts or laws as the result of an available exemption.
(g) NO OBLIGATION TO REGISTER. Purchaser
understands that (i) the Company is under no obligation to register the Shares
under the 1933 Act, the Arizona Act or the securities laws of any other
jurisdiction or to take any action which would make available any exemption from
such registration, and (ii) Purchaser therefore may be precluded from
transferring, selling or otherwise disposing of any Shares or any interest
therein for an indefinite period of time or at any particular time.
(h) LEGEND OF CERTIFICATES. Purchaser
understands that there shall be endorsed on the certificates evidencing the
Shares a legend substantially to the following effect:
"THE SHARES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND ARE
'RESTRICTED SECURITIES' AS DEFINED BY RULE 144 UNDER THAT ACT.
THE SHARES MAY NOT BE SOLD, TRANSFERRED, PLEDGED OR HYPOTHECATED
IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT REGISTERING
THE SHARES UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR, IN
LIEU THEREOF, AN OPINION OF COUNSEL FOR THIS COMPANY TO THE
EFFECT THAT REGISTRATION IS NOT REQUIRED UNDER THAT ACT. WITHOUT
LIMITING THE FOREGOING, THE SHARES MAY NOT BE TRANSFERRED, SOLD
OR OTHERWISE DISPOSED OF WITHOUT AN OPINION OF COUNSEL FOR THIS
COMPANY THAT SUCH TRANSFER, SALE OR OTHER DISPOSITION DOES NOT
VIOLATE THE ARIZONA SECURITIES ACT OR THE SECURITIES LAWS OF ANY
OTHER APPLICABLE JURISDICTION OR ANY RULES OR REGULATIONS
THEREUNDER."
(i) RESTRICTIONS ON OTHER SECURITIES. Purchaser
understands that, except upon certain limited circumstances, the restrictions on
the sale, transfer and disposition of the Shares will also apply to any and all
shares of capital stock or other securities issued or otherwise acquired with
respect to the Shares including, without limitation, shares and securities
issued or acquired as a result of any stock dividend, stock split or exchange or
any distribution of shares or securities pursuant to any corporate
reorganization, reclassification or similar event.
(j) STOP ORDERS. Purchaser understands that the
Company and its transfer agent, if any, may refuse to effect a transfer, sale or
other disposition of any of the Shares by Purchaser or Purchaser's successors or
assigns otherwise than as contemplated hereby.
(k) NO GOVERNMENTAL APPROVAL. Purchaser
understands that no federal or state agency has approved or disapproved the
Shares, passed upon or endorsed the
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<PAGE> 7
merits of the offering of the Shares, or made any finding or determination as to
the fairness of the Shares for investment.
3.4 REPRESENTATIONS AND WARRANTIES OF SHAREHOLDERS.
To induce Purchaser to enter into this Agreement and to perform Purchaser's
obligations hereunder, and with full knowledge that Purchaser will rely thereon,
Shareholders jointly and severally represent and warrant the truth and accuracy
of the following, subject only to the exceptions expressly and specifically set
forth in the schedules provided for by this Section 3.4 (collectively, the
"Disclosure Schedules"):
(a) OWNERSHIP OF STOCK AND JDS NOTES.
Shareholders have good and marketable title to, and rightful possession of all
of the shares of the Stock and the JDS Notes, and each and all of the shares of
the Stock and each of the JDS Notes are and shall be, upon the delivery thereof
to Purchaser, free and clear of all liens, claims, rights, charges, encumbrances
and security interests of whatsoever nature or type. The JDS Notes are
assignable by Shareholders.
(b) POWER AND AUTHORITY. Shareholders have the
full right, power and authority to execute and deliver this Agreement and the
other agreements referenced herein to which Shareholders are a party and to
consummate the transactions contemplated hereby and thereby.
(c) ENFORCEABILITY. This Agreement and each of
the other agreements referenced herein to which Shareholders are a party have
been duly executed and delivered by Shareholders, and constitute legal, valid
and binding obligations of Shareholders, enforceable against each Shareholder in
accordance with their respective terms.
(d) CONFLICTS; CONSENTS. Neither the execution
and delivery of this Agreement or any of the other agreements referenced herein
to which each Shareholder is a party, 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, and any
amendment thereto, of the Company; (ii) any license, instrument, contract or
agreement to which either Shareholder, and/or the Company, is a party or by
which either Shareholder, and/or the Company, or any one of them, is bound; or
(iii) any law, order, rule, regulation, writ, injunction or decree that is
applicable to either Shareholder, and/or the Company, or any one of them.
Neither the execution and delivery by Shareholders of this Agreement or any of
the other agreements referenced herein to which each Shareholder is a party, nor
the consummation by Shareholders of the transactions contemplated hereby or
thereby, will result in the creation of any lien, claim, right, charge,
encumbrance or security interest of any nature or type whatsoever with respect
to any of the Stock, either of the JDS Notes, or any of the assets of the
Company. Neither the execution and delivery by Shareholders of this Agreement,
nor the other agreements referenced herein to which either Shareholder is a
party, nor the consummation by Shareholders of the transactions contemplated
hereby or thereby, will require any consent, permit, license or approval of, or
any filing with, any governmental or private entity, body, or other person, firm
or other entity.
7
<PAGE> 8
(e) CAPITAL STOCK. The Company has authorized
capital stock consisting of Ten Thousand (10,000) shares of common stock, no par
value per share, of which One Thousand (1,000) shares are presently issued and
outstanding and are held of record by Shareholders. Each and all of the issued
and outstanding shares of the Stock have been validly authorized and issued, are
fully paid and nonassessable, and are free of preemptive rights. Except for the
Stock, there are no other authorized or issued or outstanding securities of the
Company, of any class, kind or character. There are no outstanding
subscriptions, options, warrants or other rights, agreements or commitments
obligating the Company to issue any additional shares of capital stock, or any
options or rights with respect thereto, or any securities convertible into or
exchangeable for any shares of capital stock. There are no outstanding
obligations of the Company, contractual or otherwise, to repurchase, redeem or
otherwise acquire any outstanding shares of the Stock.
(f) SUBSIDIARIES AND AFFILIATES. Except as
disclosed in Schedule 3.4(f) hereto, the Company has no subsidiaries or any
other equity investment in any entity. For purposes of this Agreement, the term
"Affiliates" shall mean all entities in which a Shareholder is an officer or
director, or in which a Shareholder directly or indirectly, owns or controls ten
percent (10%) or more of the equity securities of the entity.
(g) ORGANIZATION. The Company is a corporation
duly organized, validly existing and in good standing under the laws of the
State of California. Copies of the Articles of Incorporation and Bylaws of the
Company and all amendments thereto are attached to Schedule 3.4(g) hereto, and
are true, complete and correct copies of such documents, as presently in effect.
The minutes of, or the unanimous consents in lieu of, the meetings of the
shareholders and/or boards of directors of the Company has been delivered to
Purchaser and are true, complete and correct copies of such minutes and
unanimous consents, and accurately reflect the events that took place at or in
lieu of such meetings.
(h) QUALIFICATION. The Company has not
qualified as a foreign corporation in any states or countries within which it
sells and distributes its products. The Company sells and distributes its
products throughout the United States and the world.
(i) ASSETS.
(i) The Company has good and marketable
title to and rightful possession of all of the assets reflected in the September
Balance Sheet (as hereinafter defined) delivered to Purchaser and to all of the
assets acquired by it since the date of the September Balance Sheet (other than
those assets disposed of after the date of the September Balance Sheet only in
the ordinary course of business), free and clear of any and all mortgages,
liens, pledges, privileges, claims, rights, charges, encumbrances and security
interests of whatsoever kind or nature, except: (A) liens for current taxes not
yet delinquent; and (B) liens or liabilities disclosed in Schedule 3.4(i)
hereto.
(ii) The inventories of the Company are in
good and merchantable condition. Since the date of the September Balance Sheet,
there have been no
8
<PAGE> 9
material write-downs in the value of the Company's inventories or material
write-offs with respect to such inventories.
(iii) The accounts receivable reflected in
the September Balance Sheet and those existing since the date of the September
Balance Sheet or existing on the books of the Company at the Closing are
believed by Shareholders to be good and collectible less any reserves for
collectibility thereof reflected therein.
(iv) The furniture, fixtures and equipment
of the Company reflected in the September Balance Sheet and such items of
furniture, fixtures and equipment acquired since the date of the September
Balance Sheet to the Closing are in good and working condition and repair.
(j) BANK ACCOUNTS. Schedule 3.4(j) hereto sets
forth the name and location of each bank in which the Company has an account,
lock box or safe deposit box, the number of each such account or box, the names
of all signatories thereto and the persons authorized to draw thereon or have
access thereto. No power of attorney exists from the Company.
(k) ABILITY TO CONDUCT BUSINESS. The assets
reflected in the September Balance Sheet and those acquired since the dates
thereof to the Closing, constitute all of the assets and properties of the
Company.
(l) REAL PROPERTY; LEASES. A true, complete and
correct list of all real property of every kind, and all interests in real
property, which is owned, leased, occupied or used by the Company, is disclosed
in Schedule 3.4(l) hereto.
(m) CONTRACTS. Disclosed in Schedule 3.4(m)
hereto is a true, complete and correct list of every written (i) union,
collective bargaining or similar agreement, together with all amendments thereto
or interpretations thereof, such as arbitration decisions and the like, to which
the Company is a party or are bound; (ii) profit sharing, deferred compensation,
bonus, stock option, stock purchase, pension, retainer, consulting, retirement,
welfare (including, without limitation, retiree welfare benefit) or incentive
plan or agreement maintained or sponsored by the Company, or to which the
Company contributes; (iii) plan of the Company providing for "fringe benefits"
to its employees or former employees, including, but not limited to, vacation,
sick leave, severance pay, medical, hospitalization, life insurance and other
plans, or related benefits; (iv) employment agreement that is not terminable at
will and without penalty on thirty (30) days or less prior written notice or
that provides for payments upon or after termination; (v) agency, sales agency,
brokerage, wholesaling, franchise, distributorship or similar agreement or
contract; (vi) loan agreement or letter of credit; (vii) personal property
lease; (viii) security or pledge agreement; (ix) mortgage or deed of trust; (x)
purchase commitment to, or contract or agreement with, any supplier; (xi)
contract or agreement relating to research and development; (xii) license,
authority or permit granted by the Company to any person or entity; (xiii)
contract or agreement to which the Company is a party or by which the Company,
or any of its assets is bound, which reasonably may be expected to involve
future obligations or benefits in excess of $5,000 in any one calendar year; and
(xiv) contract
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or agreement to which the Company is a party or by which the Company or any of
its assets is bound, which is either individually or collectively material to
the condition (financial or otherwise), assets, business or prospects of the
Company. (All of the foregoing plans, 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 (x) 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 the Company, or either of them, or any other
party thereto under any of the Contracts; (y) no party to any of the Contracts
has given any notice of default or termination, nor do Shareholders or the
Company have any reason to believe that such notice shall be given; and (z) the
Company has not waived any material right under or with respect to any of the
Contracts. The Company is not bound by any agreement or arrangement to sell or
provide goods or services at prices below the prevailing market prices therefor,
or to purchase goods or services at prices above the prevailing market prices
therefor. The Company has no reason to believe that there is a likelihood that
any of the material customers of or suppliers to the Company will terminate its
or their business relationship with the Company for any reason whatsoever.
Schedule 3.4(m) hereto, accurately describes all material transactions that have
occurred on or after December 31, 1994, between the Company and either
Shareholder, or either of them, and/or any of the Affiliates. There are no oral
Contracts to which the Company is a party or by which the Company is bound that
would materially affect the business or financial condition of the Company.
(n) INSURANCE. Schedule 3.4(n) hereto contains
a description (identifying insurer, coverage, premiums, named insured,
deductibles and expiration date) of all policies of fire, liability and other
forms of insurance that currently are, or at any time within the past two (2)
years have been, maintained in force by or for the account of the Company with
respect to its business and assets (such policies are hereinafter referred to as
the "Policies"). The Company has been continuously, and is presently, insured by
insurers unaffiliated with Shareholders or the Company, with respect to its or
their property and the conduct of its business. The insurance coverage provided
by the Policies presently in force will not in any material respect be affected
by, and will not terminate or lapse by reason of, the transactions contemplated
hereby. At no time subsequent to January 1, 1992, has the Company been denied
insurance coverage. At no time subsequent to January 1, 1992, has any insurance
carrier cancelled or reduced any insurance coverage for the Company or given any
notice or other indication of its intention to cancel or reduce any such
coverage.
(o) INTELLECTUAL PROPERTY. The Company owns or
holds all of the rights to use all trademarks, trade names, fictitious names and
service marks that are used in the conduct of its business. Schedule 3.4(o)
hereto sets forth a true, complete and correct list of all trademarks, trade
names, fictitious names and service marks and all licenses or rights under the
same which are presently or which have been, during the past two years, owned or
used by the Company (collectively, the "Trademarks"). Except with respect to
communications set forth in Schedule 3.4(o), none of the matters covered by the
Trademarks, nor any of the products or services sold or provided by the Company,
nor any of the processes used or the business practices followed by the Company,
infringes or has infringed upon any trademark, trade name, fictitious name,
service mark, patent or copyright owned by any person or entity. The Company
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is not obligated to pay any royalty or other payment with respect to any
Trademark, except as disclosed in Schedule 3.4(o).
(p) LICENSES AND PERMITS. Schedule 3.4(p)
hereto contains a true, correct and complete list of all licenses, permits,
franchises, certificates, consents, approvals and authorizations (collectively
"Licenses") applied for, issued to, or owned or held by the Company. The Company
has all Licenses necessary for the conduct of its business assets and the
ownership and use of its assets, properties and the premises occupied by it.
(q) TAXES. All federal, state, county and local
taxes, including without limitation, income, excise, payroll, sales, use,
unemployment, social security, occupation, franchise, property, and other taxes,
duties or charges (collectively, "Taxes") levied, assessed or imposed upon the
Company and its business, assets or properties, have been duly and fully paid or
have been adequately provided for on the Financial Statements (as hereinafter
defined). In addition, Shareholders, acting in reliance upon the Company's
accountant, believe that all returns and reports with respect to Taxes required
by law or regulation to be filed by the Company, on or prior to the date hereof
shall have been duly and timely filed. There are no agreements, waivers or other
arrangements (oral or written) providing for extensions of time with respect to
the assessment or collection of unpaid Taxes nor are there any actions, suits,
proceedings, inquiries, investigations or claims of any nature or kind
whatsoever now pending or, to the actual knowledge of Shareholders, threatened,
against the Company with respect to any such returns or reports, or any such
Taxes, or any matters under discussion with any federal, state, county or local
authority relating to Taxes.
(r) LABOR DISPUTES; UNFAIR LABOR PRACTICES.
Except as disclosed in Schedule 3.4(r) hereto, there is not pending nor, to the
actual knowledge of Shareholders, threatened, any labor dispute, grievance,
strike or work stoppage involving any of the employees of the Company that
affects or that may affect the financial condition, business, operations, assets
or prospects of the Company. There is not pending nor, to the actual knowledge
of Shareholders, threatened, any charge or complaint against or involving the
Company, or any of its officers or employees, by the National Labor Relations
Board, the Occupational Health and Safety Administration, the Department of
Labor, or any similar federal, state or local board or agency, or any
representative thereof. There are no unfair employment or labor practice charges
presently pending nor, to the actual knowledge of Shareholders, threatened, by
or on behalf of any employee of the Company.
(s) FINANCIAL STATEMENTS.
(i) Shareholders have previously furnished
Purchaser with true, complete and correct copies of the unaudited financial
statements of the Company as of and for the twelve (12) month period ended
September 30, 1994 (the "September Financial Statements"). The September
Financial Statements contain (a) a balance sheet of the Company as of September
30, 1994 (the "September Balance Sheet"), (b) a statement of income and claimed
earnings for the Company for the twelve (12) month period ended September 30,
1994 (the "September P&L"), and (c) any notes related thereto. The September
Financial Statements have been prepared on an accrual basis from the books and
records of the Company and in accordance with
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generally accepted accounting principles. The September Balance Sheet fairly
presents the financial position of the Company as of the date thereof. The
September P&L fairly presents the results of the operations of the Company for
the twelve (12) month period ended September 30, 1994.
(ii) The Company has no liabilities or
obligations, fixed or contingent, accrued or unaccrued, that are not reflected,
adequately reserved against or otherwise disclosed on the September Balance
Sheet, excepting only those liabilities and obligations incurred by the Company
in the ordinary course of its business between the date of the September Balance
Sheet and the Closing Date, none of which liabilities is individually or
collectively material, incurred in violation of this Agreement, or would require
accrual and/or disclosure under generally accepted accounting principles.
(t) BOOKS AND RECORDS. The books and records of
the Company with respect to its assets, business, operations, properties and
prospects have been maintained in accordance with generally accepted accounting
principles and in the usual, regular and ordinary manner, and all entries with
respect thereto have been made and all transactions have been properly accounted
for. All applicable corporate and other laws relating to the maintenance of such
books and records have been complied with by Shareholders, or either of them,
and the Company.
(u) LIABILITIES. Except as either fully
disclosed in Schedule 3.4(u) hereto, or fully and properly reflected on or
reserved for in the September Balance Sheet or incurred by the Company after the
date of the September Balance Sheet only in the ordinary course of business,
none of which are either individually or collectively material and none of which
would require accrual or disclosure under generally accepted accounting
principles, the Company has no (i) debts, liabilities or obligations of a nature
required to be reflected or disclosed in financial statements prepared in
accordance with generally accepted accounting principles, or (ii) other accrued
debts or obligations, relating to or arising out of any act, transaction,
circumstance or state of facts that occurred or existed on or before September
30, 1994. Since September 30, 1994, the Company has not incurred any debts or
obligations, other than debts and obligations incurred in the ordinary course of
business of the Company, none of which are either individually or collectively
material and none of which would require accrual or disclosure under generally
accepted accounting principles. Schedule 3.4(u) hereto contains a true, complete
and correct list of all contracts and agreements pursuant to which the Company
has guaranteed or indemnified any debt, liability or obligation of any other
person or entity, including, without limitation, either of Shareholders or any
Affiliate (including, without limitation, the execution of any document
obligating the Company with respect to any performance or other bond), or
pursuant to which the Company has pledged or otherwise encumbered any of its or
their assets. Except as disclosed in Schedule 3.4(u) hereto, the Company is not
indebted to either of Shareholders or any of the Affiliates, nor are
Shareholders, or either of them, or any of the Affiliates, indebted to the
Company.
(v) SUBSEQUENT EVENTS. Since September 30,
1994, the Company has not:
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(i) created or suffered to exist any
material liens or encumbrances with respect to any of its assets which have
not been discharged, other than liens for nondelinquent taxes;
(ii) other than in the ordinary course of
business, sold or transferred any of its assets or property (including sales and
transfers to Affiliates);
(iii) suffered any material loss, or
material interruption in use, of any of its assets or properties (whether or not
covered by insurance), on account of fire, flood, riot, strike or other hazard
or Act of God;
(iv) suffered any material change in its
business, business activities, business prospects, or condition;
(v) written off any equipment as unusable
or obsolete or for any other reason;
(vi) waived any material rights;
(vii) paid any Affiliate or been charged by
any Affiliate for goods sold or services rendered, or paid any Affiliate or been
charged by any Affiliate for corporate overhead expenses, management fees, legal
or accounting fees, capital charges, or similar charges or expenses;
(viii) paid, declared or set aside any
dividends or other distributions on its securities of any class, or purchased,
exchanged or redeemed any of its securities of any class;
(ix) incurred or committed to incur any
individual capital expenditures in excess of $5,000 or in the aggregate in
excess of $25,000;
(x) incurred any indebtedness for borrowed
money;
(xi) increased the compensation payable to
any employee except in the ordinary course of business;
(xii) paid or incurred any management or
consulting fees;
(xiii) Except for LINDA ELIMORE, hired any
employee who shall have an annual salary in excess of $25,000; and
(xiv) without limitation by the enumeration
of any of the foregoing, entered into any material transaction other than in the
usual and ordinary course of business (the foregoing representation and warranty
shall not be deemed to be breached by virtue
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of the entry by Shareholders into this Agreement or their consummation of the
transactions contemplated hereby).
(w) NO MATERIAL CHANGES. The Company has not
suffered or been threatened with any material adverse change in its business or
financial condition, including, without limiting the generality of the
foregoing, the existence or threat of any labor dispute, or any material adverse
change in, or loss of, any material relationship between the Company and any of
its customers, suppliers or key employees.
(x) ERISA.
(i) Except as disclosed in Schedule 3.4(x)
hereto, the Company does not maintain, administer or contribute to, and did not
at any time during the past three (3) years, maintain, administer or contribute
to, any (A) employee pension benefit plan (as defined in Section 3(2) of the
Employee Retirement Income Security Act of 1974, as amended ("ERISA"), whether
or not excluded from coverage under specific Titles or Subtitles of ERISA) (the
employee pension benefit plans disclosed in Schedule 3.4(x) hereto are
hereinafter referred to as the "Pension Plans"); (B) employee welfare benefit
plan (as defined in Section 4.4(x) of ERISA, whether or not excluded from
coverage under specific Titles or Subtitles of ERISA) (the employee welfare
benefit plans disclosed in Schedule 3.4(x) hereto are hereinafter referred to as
the "Welfare Plans"); or (C) bonus, deferred compensation, stock purchase, stock
option, severance plan, insurance or similar arrangement (the plans, insurance
or similar arrangements so disclosed in Schedule 3.4(y) hereto are hereinafter
referred to as the "Employee Benefit Plans").
(ii) All Pension Plans, Welfare Plans and
Employee Benefit Plans and any related trust agreements or annuity contracts (or
any related trust instruments) comply with and are and have been operated in
accordance with ERISA, the Internal Revenue Code of 1986, as amended (the
"Code"), other federal statutes, state law and the regulations and rules
promulgated pursuant thereto. All necessary governmental approvals for the
Pension Plans, the Welfare Plans and the Employee Benefit Plans have been
obtained, and/or a favorable determination as to the qualification under the
Code of each of the Pension Plans and each amendment thereto has been made by
the Internal Revenue Service, and all of the Pension Plans remain qualified
under the Code.
(iii) No Pension Plan, no Welfare Plan, no
"disqualified person" (as such term is used in Section 4975(c)(1) of the Code)
has engaged, and Shareholders have not engaged, in any transaction in violation
of Section 406 of ERISA or any "prohibited transaction" (as defined in Section
4975(c)(1) of the Code) other than any such transaction which is exempt under
Section 408 of ERISA or Section 4975(d) of the Code.
(iv) The Company has not incurred any
liability to the Pension Benefit Guaranty Corporation ("PBGC") as a result of
the voluntary or involuntary termination of any Pension Plan subject to Title IV
of ERISA; there is currently no active filing by the Company with the PBGC (and
no proceeding has been commenced by the PBGC) to terminate any Pension Plan
subject to Title IV of ERISA maintained or funded, in whole or in part, by
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the Company, and the Company has not made a complete or partial withdrawal from
a multi-employer plan, as such term is defined in Section 3(37) of ERISA,
resulting in "withdrawal liability," as such term is defined in Section 4201 of
ERISA (without regard to subsequent reduction or waiver of such liability under
either Section 4207 or 4208 of ERISA).
(y) EMPLOYEES AND CONSULTANTS. Schedule 3.4(y)
hereto contains a true and complete list of all of the employees of the Company,
and such list fully and accurately reflects their salaries, wages, other
compensation (other than benefits under Employee Benefit Plans), dates of
employment, job descriptions and birth dates. Except as disclosed in Schedule
3.4(y) hereto, there are no oral or written agreements or other arrangements
with respect to employees or consultants to which the Company is a party, or by
which the Company is bound. Except as disclosed in Schedule 3.4(y) hereto, the
Company does not owe any past or present employee any sum other than for accrued
wages or salaries for the current payroll period, reimbursable expenses, accrued
vacation and holiday pay, sick leave rights and amounts payable under Employee
Benefit Plans, and all of such sums that accrue from the date hereof until the
Closing shall be paid by the Company on or prior to the Closing Date.
(z) LITIGATION. Except as disclosed in Schedule
3.4(z) hereto, there is no litigation or proceeding, in law or in equity, and to
the Shareholders' knowledge, there are no proceedings or investigations or
inquiries before any commission or other governmental or private administrative
authority, pending, or threatened, against the Company with respect to or
affecting the business or financial condition of the Company, or the
consummation of the transactions herein contemplated, or with respect to or
affecting the Pension Plans, Welfare Plans or Employee Benefit Plans of the
Company or the use of the assets of the Company.
(aa) UNASSERTED CLAIMS. Shareholders have no
actual knowledge of any 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 the Company, would have a
material adverse effect on the business or financial condition of the Company or
the consummation of the transactions herein contemplated, or the use of the
assets or properties of the Company after the Closing.
(ab) ABSENCE OF PRODUCT OR SERVICE WARRANTIES.
Except as disclosed in Schedule 3.4(ab) hereto, or included in Schedule 3.4(m)
hereto, neither the Company, nor the Shareholders, in their capacity of officer,
director, employee or agent of the Company, has made any written warranties with
respect to the quality or absence of defects of the products or services of the
Company that the Company has sold or performed, and that are in force as of the
date hereof. To the actual knowledge of Shareholders, there are no material
claims pending or threatened against the Company with respect to the quality of
or absence of defects in such products or services. The Company 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 during the five (5)
year period preceding the date hereof.
(ac) ABSENCE OF JUDICIAL ORDERS. The Company is
not a party to any decree, order or arbitration award (or agreement entered into
in any administrative, judicial or
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arbitration proceeding with any governmental authority) with respect to or
affecting its properties, assets, personnel or business activities.
(ad) COMPLIANCE WITH LAW. Except as set forth
in Schedule 3.4(ad), the Company, and except with respect to the matters covered
by 3.4(h) above, the conduct of the Business, the use by the Company of the
Company's properties, assets and personnel, the provision of the Company's
services, and the business activities of the Company are in compliance with all
applicable laws which noncompliance with would have a material adverse effect on
the Company, and the Company 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 Business, including, without
limitation, laws and regulations relating to occupational health and safety;
equal employment opportunities, fair employment practices, and sex, race,
religion and age discrimination; medicare; and the environment (including,
without limitation, laws, regulations relating to: toxic or hazardous
substances; reporting or notification for hazardous and extremely hazardous
substances (collectively referred to as "Environmental Laws")). Except as set
forth in Schedule 3.4(ad) hereto, the Company has not received notice of any
violation of a type referred to in any portion of this Section 3.4(ad).
(ae) HAZARDOUS MATERIALS. To Shareholders
actual knowledge there has been no storage, treatment, generation, discharge,
transportation or disposal of industrial, toxic or hazardous substances or solid
or hazardous waste by, or on behalf of, the Company, in violation of any
Federal, state or local law, statute, rule or regulation or the common law or
any decree, order, arbitration award or agreement with or any license or permit
from any Federal, state or local governmental authority. There has been no
spill, discharge, leak, emission, injection, escape, dumping, or release of any
kind by, or on behalf of, the Company into the environment (including, without
limitation, into air, water or ground water) of any materials including, without
limitation, industrial, toxic or hazardous substance or solid, medical or
hazardous waste, as defined under any Federal, state or local law, statute, rule
or regulation other than those releases permissible under such law, statute,
rule or regulation or allowable under applicable permits. Schedule 3.4(ae)
hereto sets forth a complete list of all aboveground and underground storage
tanks, vessels, and related equipment and containers that are subject to
Federal, state or local laws, statutes, rules or regulations, and sets forth
their present contents, what the contents have been at any time in the past, and
what program of remediation, if any, is contemplated with respect thereto.
(af) ACCURACY OF DOCUMENTS, REPRESENTATIONS AND
WARRANTIES. The copies of all documents furnished to Purchaser, or any of its
representatives by or on behalf of the Company or Shareholders, or any of them,
or its or their representatives, are true, complete and correct. No statement
contained in the exhibits, the schedules or the other documents delivered by or
on behalf of Shareholders or their representatives pursuant to or in connection
with this Agreement or the other agreements to be executed by Shareholders
pursuant hereto or any of the transactions contemplated hereby or thereby,
contains any untrue statement of a
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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.
(ag) THE JDS NOTES. The JDS Notes have a
principal balance as of the date hereof, and shall have a principal balance as
of the Closing Date, of $415,687.
ARTICLE IV
CONDUCT PRIOR TO THE CLOSING
4.1 GENERAL. Between the date hereof and the
Closing Date, Shareholders and Purchaser shall have the rights and obligations
that are set forth in this Article IV.
4.2 CONDUCT BY SHAREHOLDERS. The following are the
obligations of Shareholders:
(a) ACCESS TO RECORDS. Shareholders shall, and
shall cause the Company and its employees, officers, agents, representatives and
accountants to, fully cooperate with Purchaser to allow the officers, employees,
attorneys, consultants and accountants of Purchaser access during normal
business hours to all of the properties, books, contracts, documents and records
of the Company and furnish to Purchaser such information as Purchaser may at any
time and from time to time reasonably request.
(b) BUSINESS IN ORDINARY COURSE. Shareholders
shall cause the Company to carry on its business and affairs as heretofore
carried on, and Shareholders and the Company will not order, purchase or lease
any products, inventory, equipment, leased personalty, or other items, or
dispose of any of their assets or leased property, or issue any quotations, or
prepay any of its or their material obligations, incur any liabilities or
obligations, hire or discharge any employee or officer or, without limitation by
specific enumeration of the foregoing, enter into any other transaction, except
in the usual and ordinary course of its business in accordance with the past
practices of the Company. Without limiting the generality of the foregoing,
Shareholders shall not permit the Company, without consultation with and
disclosure to Purchaser, to:
(i) create or suffer to exist any liens or
encumbrances with respect to any of the assets or properties of the Company,
that shall not be discharged at or prior to the Closing Date, other than liens
for nondelinquent taxes;
(ii) incur any additional indebtedness for
borrowed money;
(iii) sell or transfer any material assets
or properties (including sales and transfers to Affiliates);
(iv) acquire or enter into any agreement or
understanding (oral or written) to acquire the stock or assets of any other
person, firm, corporation or other entity;
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(v) make any material change in the conduct
or nature of any aspect of their business, whether in the ordinary course of
business or not, or whether or not the change has or will have a material
adverse affect on the business activities, financial condition, or business
prospects of the Company;
(vi) waive any material rights;
(vii) pay any Affiliate, or be charged by
any Affiliate, for goods sold or services rendered or be charged by any
Affiliate for corporate overhead expenses, management fees, legal or accounting
fees, capital charges, or similar charges or expenses;
(viii) incur or commit to incur any
individual capital expenditures in excess of $5,000, or in the aggregate in
excess of $25,000;
(ix) amend employment contracts or the
terms and conditions of employment of any officer, director or employee earning
total annual compensation in excess of $25,000, other than normal merit and cost
of living increases to employees in accordance with the general prevailing
practices of the Company, existing prior to the date of this Agreement;
(x) pay or incur any management or
consulting fees;
(xi) hire any employee who shall have an
annual salary in excess of $25,000;
(xii) enter into any transaction other than
in the usual and ordinary course of business; or
(xiii) make any payments of principal in
respect of the JDS Notes.
(c) EMPLOYEES. Shareholders shall use their
best efforts to retain, and shall cause the Company to retain, the Business
intact, including keeping available the services of each of its present
employees, representatives and agents.
(d) DIVIDENDS. Shareholders shall cause the
Company to refrain from declaring, making or paying any dividend or other
distribution with respect to its capital stock or otherwise, or purchasing,
redeeming or otherwise acquiring any shares of its capital stock.
(e) CONFIDENTIALITY. Until the Closing, and at
all times thereafter as provided in Section 7.1(d) hereof, Shareholders will
maintain as confidential the discussions with Purchaser, and the terms and
conditions of this Agreement, and the other agreements to be executed in
connection herewith, and except as required by law will not make any trade press
or other announcement or disclosure in relation to such discussions whether
before or after Closing without the prior written consent of Purchaser.
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(f) EXCLUSIVITY. Shareholders will negotiate
the sale of the stock, assets and properties of the Company, or any portion
thereof, only with Purchaser and Shareholders will not permit the Company to,
directly or indirectly, enter into any discussion with, or disclose any
information in relation to the stock or the assets of the Company to, any other
person, firm or other entity, other than Purchaser, prior to the Closing Date
(or the last day of the Extended Closing Period in the event Purchaser exercises
its right to extend the Initial Closing Period), with a view to the sale of the
assets of the Company, or the Stock or any portion thereof.
(g) EQUITABLE RELIEF. Shareholders acknowledge
that the covenants contained in each of paragraphs (d) and (e) of this Section
4.2 are a material inducement for Purchaser to execute and deliver this
Agreement and to consummate the transactions contemplated hereby. Accordingly,
Shareholders acknowledge that the restrictions contained in each of paragraphs
(d) and (e) of this Section 4.2 are reasonable and necessary for the protection
of the business of Purchaser, the Company, and Purchaser's investment in the
Company, 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 Shareholders of any of the provisions of any of paragraphs
(d) or (e) of this Section 4.2, Purchaser shall be entitled to obtain, without
the necessity of posting bond therefor, an injunction (preliminary or permanent,
or a temporary restraining order) restraining Shareholders from the activity or
threatened activity constituting, or which would constitute, a breach.
(h) SEVERABILITY. Each and every provision set
forth in each of paragraphs (d) and (e) of this Section 4.2 is independent and
severable from the others, and no provision 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. The parties hereto agree that if any
provision of each of paragraphs (d) and (e) of this Section 4.2 shall be
declared by a court of competent jurisdiction to be unenforceable for any reason
whatsoever, the court may appropriately limit or modify such provision, and such
provision shall be given effect to the maximum extent permitted by applicable
law.
(i) CONSENTS. Shareholders shall use their best
efforts and make every good faith attempt to obtain any and all consent and
estoppel letters reasonably requested by Purchaser to or in connection with the
assignment of, or alternate arrangements satisfactory to Purchaser with respect
to, any contract, lease, license, permit, agreement or other instrument, that is
to be an asset of the Company, or which may be necessary, appropriate or
required in order to permit the conduct of the business and operations of the
Company after the Closing to be in all respects the same as the conduct of the
business and operations of the Company prior to the Closing.
4.3 OBLIGATIONS OF PURCHASER. The following shall
be Purchaser's obligations:
(a) NONDISCLOSURE/CONFIDENTIALITY. From and
after the date of this Agreement until the Closing, or in the event that the
Closing shall not occur, then thereafter, Purchaser shall not disclose to any
third party (other than to its employees having a need to know such information
in connection with the transaction contemplated hereby, or to its
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attorneys, accountants, consultants, investors and lenders), or use for any
purpose other than as contemplated by this Agreement, any information provided
Purchaser by the Company or Shareholders regarding the Company ("Information").
Purchaser agrees not to disseminate such Information 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 the Company. The preceding
two (2) 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 the
Company; or (iv) is required to be disclosed by law. Purchaser shall advise
Shareholders, in writing, of any request, including a subpoena or similar legal
inquiry, to disclose any such confidential information, such that Shareholders
can seek appropriate legal relief.
4.4 JOINT OBLIGATIONS OF SHAREHOLDERS AND
PURCHASER. The following shall apply with equal force to Shareholders and
Purchaser:
(a) NOTICE. Each party shall promptly give the
other parties written notice of the existence or occurrence of any condition
which would make any representation or warranty of the notifying party untrue or
which might reasonably be expected to prevent the consummation of the
transactions herein contemplated.
(b) PERFORMANCE. No party shall intentionally
perform or omit to perform any act that, if performed or omitted, would prevent
or excuse the performance of this Agreement by any party hereto or that would
result in any representation or warranty contained herein 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 V
CONDITIONS PRECEDENT TO CLOSING
5.1 CONDITIONS PRECEDENT TO SHAREHOLDERS'
OBLIGATIONS. The obligation of Shareholders to consummate the transactions
contemplated hereby is subject to fulfillment by Purchaser, or written waiver by
Shareholders, 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 Purchaser shall have been 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) PURCHASER'S OBLIGATIONS PERFORMED. All
obligations of Purchaser to be performed hereunder through and including 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.
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(c) PURCHASER'S CLOSING CERTIFICATE. Purchaser
shall have executed a closing certificate, dated as of the Closing Date, in form
and content substantially similar to Exhibit B attached hereto ("Purchaser's
Closing Certificate").
(d) SHAREHOLDERS' GUARANTIES. Purchaser shall
have secured the release of Shareholders from liability for any personal
guaranty issued by Shareholders as the shareholders of the Company with respect
to any liability of the Company for borrowed money, or, in the alternative,
Purchaser shall deliver an agreement of indemnification, in form and content
mutually satisfactory to Purchaser and Shareholders, pursuant to which Purchaser
will indemnify Shareholders for any such personal guaranty.
(e) RECEIPT OF OPINION OF PURCHASER'S COUNSEL.
Shareholders shall have received a favorable opinion of O'Connor, Cavanagh,
Anderson, Westover, Killingsworth & Beshears, P.A., counsel for Purchaser, in
form and substance satisfactory to counsel to the Company and Shareholders,
dated the Closing Date, and confirming the following:
(i) Purchaser is a corporation duly
organized, validly existing and in good standing under the laws of its state of
incorporation.
(ii) The execution and delivery of this
Agreement, the consummation of the transactions hereby contemplated, and the
fulfillment of the terms hereof, have been duly authorized by all appropriate
corporate action of Purchaser and will not violate any provisions of the
articles of incorporation or bylaws of Purchaser, 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 maturity under, any loan agreement, note,
debenture, indenture, mortgage, deed of trust or other agreement of which such
counsel have knowledge to which Purchaser is a party or by which either is
bound.
(iii) This Agreement has been duly executed
and delivered and this Agreement is the legal and binding obligation of
Purchaser.
5.2 CONDITIONS PRECEDENT TO PURCHASER'S
OBLIGATIONS. The obligations of Purchaser to consummate the transactions
contemplated hereby are subject to the fulfillment by Shareholders, 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 Shareholders 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) SHAREHOLDERS' OBLIGATIONS PERFORMED. All
obligations of Shareholders to be performed hereunder through and including the
Closing Date (including, without limitation, all obligations that Shareholders
would be required to perform at the Closing if the transaction contemplated
hereby was consummated) shall have been performed in all material respects.
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(c) CONSENTS. All of the consents, approvals
and estoppel letters referred to in Section 4.2(i) shall have been obtained and,
to the extent licenses, authorities or permits held by the Company are not
assignable or transferrable, Purchaser has either obtained licenses, authorities
and permits for the Company on substantially the same terms as such licenses,
authorities and permits were originally issued to the Company or has obtained
binding commitments from the applicable authorities to issue such licenses,
authorities and permits to the Company following the Closing.
(d) NO SUIT, PROCEEDING OR INVESTIGATION. No
suit, proceeding, inquiry 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 damages on account of, the consummation
of the transactions herein contemplated.
(e) CLOSING CERTIFICATE OF SHAREHOLDERS.
Shareholders shall have executed a closing certificate, dated the Closing Date,
in form and content substantially similar to Exhibit C attached hereto
("Shareholders' Closing Certificates").
(f) SUPPLIER AGREEMENTS. SMW (the "Supplier")
shall have entered into agreements with the Company satisfactory to Purchaser in
its sole discretion.
(g) RELEASES. Each Shareholder and each
director and officer of the Company shall generally release the Company from any
and all claims, whether known or unknown, other than indebtedness owing from the
Company to the Shareholders.
(h) STATE OF CALIFORNIA LICENSES, PERMITS AND
CERTIFICATES OF NECESSITY. Purchaser shall have received from the State of
California, and the County of Los Angeles, any and all licenses, permits,
authorities and certificates of necessity permitting the ownership of the Stock
by Purchaser and the ability of the Company to fully conduct and operate its
business after the Closing in the same manner as conducted and operated prior to
the Closing, including, without limitation, receipt by Purchaser from the
California State Department of Taxation and Finance to the effect that the
Company has filed, or is on extension to file, all franchise tax returns and has
paid all franchise taxes, penalties and interest, if any, due with respect
thereto (the "Tax Clearance Certificates").
(i) DISCLOSURE SCHEDULES. Purchaser shall have
received from Shareholders the Disclosure Schedules referred to in Section 3.4
hereof and all amendments and modifications thereto delivered pursuant to
Section 10.1, and Purchaser shall be reasonably satisfied with the nature and
extent of the disclosures made therein and the representations and warranties of
Shareholders, and either of them, as modified by the disclosures contained in
the Disclosure Schedules.
(j) AUTOMOBILES. Shareholders shall have
returned the 1994 Jeep Cherokee and 1994 Corvette to the Company on or prior to
the Closing.
(k) LIFE INSURANCE POLICIES. On or prior to the
Closing, Shareholders shall have caused the Company to assign to Shareholders
the life insurance policies maintained
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by the Company on the lives of such Shareholders. Purchaser shall have received
a statement from the insurer respecting the cash surrender value of such life
insurance policies as of the date of the assignment thereof to the Shareholders.
(l) 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.
(m) PURCHASER'S DUE DILIGENCE. Purchaser shall
have completed its due diligence investigation of the Company and the results of
such due diligence shall have been satisfactory to Purchaser, in its sole
discretion.
(n) RECEIPT OF OPINION OF COUNSEL FOR THE
COMPANY AND SHAREHOLDERS. Purchaser shall have received a favorable opinion of
Goldfarb, Sturman and Averbach, counsel for the Company and Shareholders, in
form and substance satisfactory to Purchaser's counsel, dated the Closing Date,
and confirming the following:
(i) The Company 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.
(ii) The Company was incorporated under the
laws of the State of California on October 9, 1987 and has an authorized capital
consisting of Ten Thousand (10,000) shares of Common Stock, par value $10.00 per
share, of which One Thousand (1,000) shares are validly issued and outstanding,
fully paid and non-assessable.
(iii) The execution and delivery of this
Agreement, the consummation of the transactions contemplated hereby, and the
fulfillment of the terms hereof, will not violate any provision of Company'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 the
Company or any Shareholder is a party or by which any of them 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.
Counsel may rely upon Shareholders' representations with respect to the
existence or nonexistence of any such loan agreement, note, debenture,
mortgages, deed of trust, lease, contract, agreement or other obligation.
(iv) Shareholders have full power and
authority to execute, deliver and perform this Agreement, and this Agreement is
the legal and binding obligation of Shareholders and is enforceable against both
of them in accordance with its terms.
(v) Except for matters disclosed in this
Agreement, counsel has no actual knowledge of any suits, actions, claims,
arbitrations, administrative or other proceedings or governmental investigations
pending or threatened against or affecting the Company, its business or its
assets and properties, or of any litigation affecting the right of any
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Shareholder 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 the Company's business or its assets and properties.
(vi) Shareholders have, and at the Closing
shall have effectively conveyed, transferred and assigned to Purchaser, good and
marketable title to the Stock, free and clear of all liens, pledges, claims and
encumbrances. Counsel may rely upon Shareholders' representations with respect
to their ownership of the Shares and the JDS Notes.
(o) JDS NOTES. Purchaser shall have received a
certification from each Shareholder respecting the outstanding indebtedness of
the Company under each of the JDS Notes.
ARTICLE VI
CLOSING
6.1 TIME AND PLACE OF CLOSING. The Closing shall
take place within ninety (90) days following the satisfaction of the condition
precedent set forth in Section 5.2(l) hereof (the "Initial Closing Date"), at
the offices of O'Connor, Cavanagh, Anderson, Westover, Killingsworth & Beshears,
P.A., One East Camelback Road, Phoenix, Arizona 85012. If at the end of the
Initial Closing Period Purchaser requires additional time in which to close the
transaction contemplated hereby, Purchaser shall, in its sole discretion, have
the right to deposit an additional Twenty-Five Thousand Dollars ($25,000) to be
applied against the Purchase Price as consideration to extend the Initial
Closing Period for an additional sixty (60) day period (the "Extended Closing
Period").
6.2 FORM OF DOCUMENTS. At the Closing, each party
shall deliver the documents, and shall perform the other acts, that are set
forth in this Article VI. All documents which Shareholders shall deliver shall
be in form and content reasonably satisfactory to Purchaser. All documents that
Purchaser shall deliver shall be in form and content satisfactory to
Shareholders.
6.3 PURCHASER'S DELIVERIES. Subject to the
fulfillment or written waiver of the conditions precedent set forth in Section
5.2 hereof, Purchaser shall execute and/or deliver to Shareholders at the
Closing all of the following:
(a) CASH PAYMENT. The Cash Payment.
(b) PROMISSORY NOTE. The Promissory Note.
(c) CORPORATE RESOLUTIONS. A certified copy of
resolutions of Purchaser's board of directors authorizing the execution,
delivery and performance of this Agreement, the other agreements referenced
herein to be executed by Purchaser, and the transactions contemplated hereby and
thereby.
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(d) OTHER DOCUMENTS. Without limitation by
specific enumeration of the foregoing, all other documents reasonably required
to consummate the transaction herein contemplated.
6.4 SHAREHOLDERS' DELIVERIES. Subject to the
fulfillment or waiver of the conditions set forth in Section 5.1 hereof,
Shareholders shall deliver to Purchaser at the Closing, and shall execute and/or
deliver to Purchaser all of the following:
(a) GOOD STANDING CERTIFICATES. Certificates of
good standing for the Company by the Secretary of State of California, such
certificates of good standing to be issued at a date not earlier than seven (7)
days prior to the Closing Date.
(b) CLOSING CERTIFICATE. Shareholders' Closing
Certificate executed by Shareholders.
(c) DELIVERY OF CORPORATE DOCUMENTS. All of the
following items shall have been delivered to Purchaser:
(i) Stock certificates representing the
Stock, duly endorsed in blank or accompanied by duly executed in-blank stock
transfer powers; and
(ii) The stock books, stock ledgers, minute
books and corporate seals for the Company.
(iii) The supplier agreements described in
Section 5.2(f).
(d) RELEASES. The releases described in Section
5.2(g) hereof.
(e) ACCOUNTANT'S CERTIFICATE. The accountant's
certificate required by Section 3.4(q).
(f) CONSENTS AND ESTOPPEL LETTERS. All
consents, approvals and estoppel letters for the assignment of contracts,
leases, purchase orders, sales orders, installation contracts, license
agreements, permits and licenses that are to be assigned to Purchaser or
acceptable alternate arrangements with respect thereto.
(g) STATE OF CALIFORNIA AND COUNTY CONSENTS.
All consents, approvals and authorizations to be obtained from the State of
California and the County of Los Angeles.
(h) TAX GOOD STANDING CERTIFICATE. A receipt
from the taxing authority of the State of California evidencing the filing of
all tax reports and the payment in full by the Company of all sales and use
taxes imposed.
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(i) JDS NOTES. The JDS Notes, duly assigned to
Purchaser or its designee.
(j) 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 in order to
assure himself that he receives good title to the Stock free and clear of all
liens, claims, charges, liabilities, encumbrances and security interests of
whatsoever kind and nature, and that the business, conducted by the Company
prior to the Closing may continue to be conducted by the Company, with no
adverse effect on such business, or the financial condition of the Company, or
the business and financial prospects of the Company. Shareholders shall be under
no obligation to supply such further documentation and Purchaser may then elect
not to close.
ARTICLE VII
POST CLOSING OBLIGATIONS
7.1 OBLIGATIONS OF SHAREHOLDERS.
(a) COVENANT NOT TO COMPETE. In consideration
of the execution and delivery of this Agreement by Purchaser, and in
consideration of the Purchase Price, and as additional consideration therefor,
each Shareholder unconditionally agrees that during the Restricted Period (as
defined below) each Shareholder will not, directly or indirectly (including,
without limitation, as a partner, shareholder, director, officer or employee of,
or lender or consultant to, any other person or entity), or in any other
capacity within, into or from the Restricted Territory (as defined below) engage
in the Business, or any aspect thereof, unless first authorized in writing by
Purchaser, which authorization may be withheld in the sole and absolute
discretion of Purchaser; provided, however, that Shareholders, individually or
jointly, shall have the right to promote "Nail and Skin Care Expositions"
throughout the United States and to engage in "other aspects of the beauty
business" that are not in competition with the business of the Company as of the
Closing Date. "Other aspects of the beauty business" shall include but not be
limited to the manufacture and/or sale of shampoos, hair sprays, hair brushes,
barrettes, and similar items, whether as business operators or as consultants.
For purposes of this Agreement, the term "Restricted Period" shall mean the
period ending five (5) years from the date of the Closing. For purposes of this
Agreement, the term "Restricted Territory" shall mean worldwide, including the
United States. If either Shareholder violates his obligations under this Section
7.1(a) (the "Violating Shareholder"), then the Restricted Period for the
Violating Shareholder(s) shall be extended by the period of time equal to that
period beginning when the activities constituting such violation commenced and
ending when the activities constituting such violation terminated.
(b) NONSOLICITATION. In consideration of the
execution and delivery of this Agreement by Purchaser, and in consideration of
the payments by Purchaser of the Purchase Price, each Shareholder agrees that
for a period of five (5) years following the Closing he will not, directly or
indirectly, solicit or cause others to solicit (i) in respect of the Business,
any person or other entity that is, or was within the twelve (12) month period
immediately prior
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to the Closing, a customer or supplier of the Company, or (ii) any person who,
on the date hereof, is an employee of the Company, for employment or as an
independent contractor with any person or entity, unless first authorized in
writing by Purchaser, which authorization may be withheld in the sole and
absolute discretion of Purchaser. If either Shareholder violates his obligations
under this Section 7.1(b), then the time periods hereunder with respect to the
breaching Shareholder only, shall be extended by the period of time equal to
that period beginning when the activities constituting such violation commenced
and ending when the activities constituting such violation terminated.
(c) TRADE SECRETS AND OTHER INFORMATION. After
the Closing, neither Shareholder will communicate or divulge to, or use for the
benefit of, any person, firm or corporation, other than Purchaser or the
Company, 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 the
Company, 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 Shareholders in
violation of this Agreement, or (ii) is required to be disclosed by law.
Shareholders will 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.
(d) CONFIDENTIALITY. At all times after the
Closing, each Shareholder will maintain as confidential the discussions among
Shareholders and Purchaser, and the terms and conditions of this Agreement, and
the other agreements to be executed in connection herewith, and except as
required by law will not make any trade press or other announcement or
disclosure in relation to such discussions whether before or after Closing
without the prior written consent of Purchaser.
(e) EQUITABLE RELIEF. Each Shareholder
acknowledges that the covenants contained in each of paragraphs (a), (b), (c)
and (d) of this Section 7.1 are a material inducement for Purchaser to execute
and deliver this Agreement and to consummate the transactions contemplated
hereby. Accordingly, each Shareholder acknowledges that the restrictions
contained in each of paragraphs (a), (b), (c) and (d) of this Section 7.1
(including, without limitation, the Restricted Period and the Restricted
Territory) are reasonable and necessary for the protection of the business of
the Company, and Purchaser's investment in the Company, 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 either Shareholder of any
of the provisions of any of paragraphs (a), (b), (c) or (d) of this Section 7.1,
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 Shareholder 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.
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(f) SEVERABILITY. Each and every provision set
forth in each of paragraphs (a), (b), (c) and (d) of this Section 7.1 is
independent and severable from the others, and no provision 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. The parties hereto agree that if
any provision of any of paragraphs (a), (b), (c) or (d) of this Section 7.1
shall be declared by a court of competent jurisdiction to be unenforceable for
any reason whatsoever, the court may appropriately limit or modify such
provision, and such provision shall be given effect to the maximum extent
permitted by applicable law.
(g) CONSENTS. Each Shareholder shall use his
best efforts and make every good faith attempt to obtain any and all consent and
estoppel letters reasonably requested by Purchaser to or in connection with the
assignment of, or alternate arrangements satisfactory to Purchaser with respect
to, any contract, lease, license, permit, agreement or other instrument, that is
to be an asset of the Company, or that may be necessary, appropriate or required
in order to permit the conduct of the business and operations of the Company
after the Closing to be in all respects the same as the conduct of the business
and operations of the Company prior to the Closing.
7.2 OBLIGATIONS OF BOTH SHAREHOLDERS AND PURCHASER;
FURTHER ASSURANCES. The parties shall execute such further documents, and
perform such further acts, as may be necessary to transfer and convey the Stock
to Purchaser, on the terms herein contained, and to otherwise comply with the
terms of this Agreement and consummate the transactions herein provided.
ARTICLE VIII
INDEMNIFICATION
8.1 INDEMNIFICATION BY SHAREHOLDERS.
(a) GENERAL. Each Shareholder jointly and
severally covenants and agrees to defend, indemnify and hold Purchaser and the
Company 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)
with respect to or arising out of any claim, proceeding, action and/or cause of
action which Purchaser or the Company may suffer or incur by reason of: (a) the
inaccuracy of any of the representations or warranties of Shareholders, or
either of them, contained in this Agreement, or any of the agreements,
certificates, documents, exhibits or schedules delivered in connection with this
Agreement; (b) the failure to comply with, or the breach or default by a
Shareholder of any of the covenants, warranties or agreements made by a
Shareholder contained in this Agreement, or any of the agreements, certificates,
documents, exhibits or schedules delivered in connection with this Agreement; or
(c) any liability or obligation of the Company not reflected, provided for or
adequately reserved against on the Closing Balance Sheets. Purchaser shall be
entitled to offset against any amount owed by Purchaser to a Shareholder, any
amount owed to Purchaser or the Company by Shareholders, or either of them, or
any of the Affiliates.
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8.2 INDEMNIFICATION BY PURCHASER. Purchaser
covenants and agrees to defend, indemnify and hold Shareholders 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)
with respect to or arising out of any claim, proceeding, action and/or cause of
action which Shareholders may suffer or incur by reason of: (a) 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; (b) the failure to comply
with or 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; and (c) any act of Purchaser and/or the Company
occurring after the Closing.
8.3 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, if possible, within
sufficient time to respond to such claim or answer or otherwise plead in such
action (but in any event within thirty (30) 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 of
Indemnitor's choice shall not be unreasonably withheld or delayed, provided that
the Indemnitor confirms to the Indemnitee that it is a claim to which its rights
of indemnification apply. The Indemnitor shall have the right to settle or
compromise monetary claims; 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, 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.
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ARTICLE IX
TERMINATION
9.1 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 Shareholders
if the conditions precedent set forth in Section 5.1 are not satisfied or waived
in writing by Shareholders; or (b) by Purchaser if the conditions precedent set
forth in Section 5.2 are not satisfied or waived in writing by Purchaser.
9.2 REMEDIES. No party shall be limited to the
termination right granted in Section 9.1 hereof by reason of the nonfulfillment
of any condition precedent to such party's closing obligations 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 9.1 hereof, and
thereafter seek damages if permitted by, and only to the extent permitted in,
Section 9.3 hereof.
9.3 RIGHT TO DAMAGES. If this Agreement is
terminated, no party hereto shall have any liability or obligation to the other
except for the forfeiture or refund, as applicable, of the Earnest Money Deposit
as set forth in this Section 9.3; provided, however, that each party shall
remain liable for any material breach of any of the party's representations and
warranties or the terms of this Agreement, or any willful failure by the party
to perform any of his or its obligations or agreements contained in this
Agreement after all applicable conditions precedent set forth in Article IX have
been satisfied by the other party, in which case such nonperforming party shall
be liable for all of the other parties' out-of-pocket costs and expenses which
were incurred in connection with this Agreement, and all of the other documents
related to this transaction, the costs and fees for the audit, and those costs
and expenses which are incurred by the other party in pursuing such rights and
remedies (including reasonable attorneys' fees). If the Closing does not occur
due to either (a) the termination of this Agreement by Shareholders pursuant to
Section 9.1(a) hereof or (b) Purchaser's unwillingness or inability to close the
transactions contemplated hereby despite the satisfaction of the conditions
precedent set forth in Section 5.2, then Shareholders shall be entitled to
retain the Earnest Money Deposit. If the Closing does not occur due to either
(a) the termination of this Agreement by Purchaser pursuant to Section 9.1(b)
hereof or (b) the unwillingness or inability of either Shareholder to close the
transactions contemplated hereby despite the satisfaction of the conditions
precedent set forth in Section 5.1, then Purchaser shall be entitled to a refund
of the Earnest Money Deposit.
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ARTICLE X
MISCELLANEOUS
10.1 DISCLOSURE SCHEDULES. The Disclosure Schedules
referred to in Section 3.3 of this Agreement reflect information supplied to
Purchaser in the course of its investigation of the Company. Except with respect
to Financial Statements, Shareholders may supplement or amend any Disclosure
Schedule from time to time prior to or at the Closing, by notice in accordance
with the terms of this Agreement, including by delivering one or more
supplements or amendments to correct any matter which would constitute a breach
of any representation or warranty contained herein. No such supplement or
amended Disclosure Schedule shall be deemed to cure any breach for purposes of
Section 5.2; however, any such supplement or amendment will be effective to cure
and correct for all other purposes any breach of any representation or warranty
which would have existed but for such supplement or amendment, and all
references to any Disclosure Schedule hereto that is supplemented or amended as
provided in this Section 10.1 shall, for all purposes, whether or not the
Closing occurs, be deemed to be a reference to such Disclosure Schedule as so
supplemented or amended.
10.2 ASSIGNABILITY. Purchaser may assign all or
part of its rights under this Agreement to any entity that 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. In
the event that Purchaser shall assign its rights under this Agreement, it is
hereby agreed (a) that Purchaser shall at all times thereafter be and remain
expressly a third-party beneficiary under this Agreement and all documents,
instruments and agreements made and entered into pursuant hereto; and (b)
Purchaser shall remain liable to Shareholders in all respects as if the
assignment were not made if the Assignee is unable to satisfy its financial
obligations hereunder.
10.3 BROKERS AND FINDERS. Shareholders 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.
10.4 COSTS AND EXPENSES. Shareholders and Purchaser
shall each be 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 the Company.
10.5 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:
31
<PAGE> 32
If to Shareholders prior to or after the Closing:
Jack Sperling
10341 Vanalden Avenue
Northridge, California 91326
Gary Sperling
29016 Garden Oaks Court
Agoura Hills, California 91301
With a copy to:
Goldfarb, Sturman & Averbach
15760 Ventura Boulevard
Suite 1900
Encino, California 91436
Attention: Martin L. Sturman, Esq.
Fax: (818) 905-7173
If to Purchaser:
Leopold Styling Products, Inc.
5330 South Grape Lane
Greenwood Village, Colorado 80121
Attention: Kenneth Bernstein
Fax: (303) 741-5569
and
6105 North Palo Cristi Drive
Paradise Valley, Arizona 85253
Attention: Sam Leopold
Fax: (602) 468-3389
With a copy to:
O'Connor, Cavanagh, Anderson, Westover,
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.
32
<PAGE> 33
10.6 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. This Agreement may not be amended, modified,
supplemented or otherwise altered in any respect except by an agreement in
writing signed by the parties hereto. This Agreement supersedes all prior
written or oral agreements between or among Purchaser and Shareholders.
10.7 WAIVERS. 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 conferred in
this Agreement 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.
10.8 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.
10.9 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.
10.10 APPLICABLE LAW. This Agreement shall be
governed by and construed and enforced in accordance with the internal laws of
the State of Arizona without regard to the conflicts of laws principles of such
state.
10.11 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.
33
<PAGE> 34
IN WITNESS WHEREOF, the parties hereto have
executed this Agreement as of the date first above written.
SHAREHOLDERS:
/s/ JACK SPERLING
---------------------------------------
JACK SPERLING
/s/ GARY SPERLING
---------------------------------------
GARY SPERLING
PURCHASER:
Leopold Styling Products Inc., a Delaware
corporation
By: /s/ SAM LEOPOLD
-----------------------------------
Its: CEO, Vice President, Secretary
-----------------------------------
and Treasurer
-----------------------------------
34
<PAGE> 1
EXHIBIT 10.3
ASSET PURCHASE AGREEMENT
by and among
LEOPOLD STYLING PRODUCTS, INC.
("Purchaser")
DESIGNS BY NORVELL, INC.
("Seller")
and
JOY NORVELL MARTIN
("Stockholder")
Dated: April 5, 1996
<PAGE> 2
TABLE OF CONTENTS
ARTICLE I
<TABLE>
<CAPTION>
<S> <C>
Purchase and Sale of Assets...................................................... 2
1.1 Agreement to Purchase and Sell.......................................... 2
1.2 Enumeration of Purchased Assets......................................... 2
(a) Accounts Receivable............................................ 2
(b) Vehicles, Furniture, Fixtures and Equipment.................... 2
(c) Inventory...................................................... 2
(d) Claims and Rights to Purchased Assets.......................... 2
(e) Business Contracts............................................. 3
(f) Intellectual Property.......................................... 3
(g) Customer Lists................................................. 3
(h) Licenses, Permits and Approvals................................ 3
(i) Books and Records.............................................. 3
(j) Computer Software and Hardware................................. 4
(k) Leased Personalty.............................................. 4
(l) Names.......................................................... 4
(m) Phone Numbers.................................................. 4
(n) Deposits and Prepaid Expenses.................................. 4
1.3 Excluded Assets......................................................... 4
(a) Rights Hereunder............................................... 4
(b) Corporate Documents............................................ 4
(c) Seller's Records of Negotiations............................... 4
(d) Employee Records............................................... 4
(e) Tax Records.................................................... 4
(f) Assets Relating Solely to Other Divisions...................... 5
(g) Tax and Insurance Refunds...................................... 5
(h) Cash........................................................... 5
ARTICLE II
Assumption of Liabilities........................................................ 5
2.1 Assumed Liabilities..................................................... 5
(a) Trade Payables................................................. 5
(b) Payroll Payables............................................... 5
(c) First American Bank Debt....................................... 5
(d) Liabilities After Closing...................................... 5
</TABLE>
<PAGE> 3
<TABLE>
<S> <C>
2.2 Excluded Liabilities....................................................... 5
(a) Liabilities Hereunder............................................. 6
(b) Legal and Accounting Fees......................................... 6
(c) Tax Liabilities................................................... 6
(d) Liability to Purchaser for Breach................................. 6
(e) Liabilities to Employees.......................................... 6
(f) Property and Personal Injury Liabilities.......................... 6
(g) Liability for Medical, Dental and Disability...................... 7
(h) Liability to Others for Breach.................................... 7
(i) Liability Regarding Employee Welfare and Pension Benefits......... 7
(j) Liability for Violation of Law.................................... 7
(k) Environmental Laws................................................ 7
(l) Transfer and Use Tax Liabilities.................................. 7
(m) ERISA............................................................. 8
(n) Employee Grievances............................................... 8
(o) Seller's Indebtedness............................................. 8
(p) Stockholder and Affiliates........................................ 8
(q) Liabilities Not Assumed Hereunder................................. 8
2.3 No Expansion of Third Party Rights......................................... 8
2.4 Discharge of Obligations by Seller......................................... 8
ARTICLE III
Purchase Price and Manner of Payment................................................ 9
3.1 Purchase Price............................................................. 9
3.2 Payment of Purchase Price.................................................. 9
(a) Cash at Closing................................................... 9
(c) Adjustment to Purchase Price...................................... 9
3.3 Allocation of Purchase Price............................................... 10
ARTICLE IV
Representations and Warranties...................................................... 10
4.1 General Statement.......................................................... 10
4.2 Representations and Warranties of Purchaser................................ 11
(a) Organization...................................................... 11
(b) Power and Authority............................................... 11
(c) Enforceability.................................................... 11
(d) Conflicts; Consents............................................... 11
(e) Accuracy of Documents, Representations and Warranties............. 12
</TABLE>
<PAGE> 4
<TABLE>
<S> <C>
4.3 Representations and Warranties of Stockholder...................................... 12
(a) Ownership................................................................. 12
(b) Power and Authority....................................................... 12
(c) Enforceability............................................................ 12
(d) Conflicts; Consents....................................................... 12
(e) Accuracy of Documents, Representations and Warranties..................... 13
4.4 Representations and Warranties of Seller and Stockholder........................... 13
(a) Organization.............................................................. 13
(b) Qualification............................................................. 13
(c) Ownership................................................................. 13
(d) Power and Authority....................................................... 13
(e) Enforceability............................................................ 14
(f) Conflicts; Consents....................................................... 14
(g) Assets.................................................................... 14
(h) Ability to Conduct Seller's Business...................................... 15
(i) Real Property; Leases..................................................... 15
(j) Contracts................................................................. 15
(k) Insurance................................................................. 16
(l) Intellectual Property..................................................... 16
(m) Licenses and Permits...................................................... 17
(n) Taxes..................................................................... 17
(o) Labor Disputes; Unfair Labor Practices.................................... 17
(p) Financial Statements...................................................... 17
(q) Books and Records......................................................... 18
(r) Liabilities............................................................... 18
(s) Subsequent Events......................................................... 19
(t) No Material Changes....................................................... 20
(u) Renegotiation............................................................. 20
(v) ERISA..................................................................... 20
(w) Employees and Consultants................................................. 21
(x) Litigation................................................................ 22
(y) Unasserted Claims......................................................... 22
(z) Absence of Product or Service Warranties.................................. 22
(aa) Absence of Judicial Orders................................................ 22
(ab) Compliance with Law....................................................... 22
(ac) Hazardous Materials....................................................... 23
(ad) Accuracy of Documents, Representations and Warranties..................... 23
4.5 Further Representations and Warranties of Seller................................... 24
(a) Ability to Bear Risk; Business and Financial Knowledge and Experience..... 24
(b) Knowledge Respecting Purchaser............................................ 24
(c) Absence of Representations and Warranties................................. 24
(d) No Distribution........................................................... 24
(e) Stock Rights to be Restricted............................................. 24
(f) No Registration........................................................... 25
(g) No Obligation to Register................................................. 25
(h) Legend on Certificate..................................................... 25
(i) Stop Orders............................................................... 25
(j) Reliance Upon Information................................................. 25
</TABLE>
<PAGE> 5
ARTICLE V
<TABLE>
<S> <C>
Conduct Prior to the Closing................................................. 26
5.1 General............................................................. 26
5.2 Seller and Stockholder.............................................. 26
(a) Access to Records.......................................... 26
(b) Business in Ordinary Course................................ 26
(c) Certain Transactions....................................... 27
(d) Employees.................................................. 28
(e) Dividends.................................................. 28
(f) Confidentiality............................................ 28
(g) Exclusivity................................................ 28
(h) Consents................................................... 28
(i) Releases................................................... 29
(j) Minority Stockholder Consents.............................. 29
(k) Accounts Receivable........................................ 29
5.3 Purchaser........................................................... 29
5.4 Joint Obligations................................................... 30
(a) Notice..................................................... 30
(b) Performance................................................ 30
ARTICLE VI
Conditions Precedent to Closing.............................................. 30
6.1 Conditions Precedent to Seller's Obligations........................ 30
(a) Truth of Representations and Warranties.................... 30
(b) Leases..................................................... 30
(c) Leased Premises............................................ 31
(d) Assumed Liabilities........................................ 31
(e) Obligations Performed by Purchaser......................... 31
(f) Purchaser's Closing Certificate............................ 31
(g) No Suit, Proceeding or Investigation....................... 31
(h) Management Agreement....................................... 31
(i) Release from Creditors..................................... 32
</TABLE>
<PAGE> 6
<TABLE>
<S> <C>
6.2 Conditions Precedent to Purchaser's Obligations......................... 32
(a) Representations and Warranties................................. 32
(b) Inventory...................................................... 32
(c) Financing...................................................... 32
(d) Obligations Performed by Seller and Stockholder................ 32
(e) Consents....................................................... 32
(f) Certain Business Contracts..................................... 33
(g) Absence of Suits............................................... 33
(h) Lease Assumption Agreements.................................... 33
(i) Building Lease................................................. 33
(j) Closing Certificate of Seller and Stockholder.................. 33
(k) Bill of Sale and Documents of Title............................ 34
(l) Receipt of Satisfactory Audit Report........................... 34
(m) Purchaser's Due Diligence...................................... 34
(n) Receipt of Opinion of Counsel for Seller and Stockholder....... 34
(o) Disclosure Schedules........................................... 35
(p) Management Agreement........................................... 36
(q) Consents and Approvals......................................... 36
(r) Release from Creditors......................................... 36
(s) Schedule of Property and List of Creditors..................... 36
ARTICLE VII
Closing.......................................................................... 36
7.1 Time and Place of Closing............................................... 36
7.2 Form of Documents....................................................... 36
7.3 Purchaser's Deliveries.................................................. 37
(a) Funds.......................................................... 37
(b) The Stock Rights............................................... 37
(c) Good Standing Certificate...................................... 37
(d) Bill of Sale, Assignment and Assumption........................ 37
(e) Lease Assumption Agreement..................................... 37
(f) Closing Certificate............................................ 37
(g) Incumbency Certificate......................................... 37
(h) Corporate Resolutions.......................................... 37
(i) Management Agreement........................................... 37
(j) Other Documents................................................ 37
7.4 Seller's Deliveries..................................................... 37
(a) Good Standing and Existence Certificates....................... 38
(b) Incumbency Certificate......................................... 38
(c) Corporate Resolutions.......................................... 38
(d) Bill of Sale, Assignment and Assumption........................ 38
(e) Closing Certificate............................................ 38
(f) Opinion of Counsel............................................. 38
(g) Consents and Estoppel Letters.................................. 38
(h) The Leases..................................................... 38
(i) Releases....................................................... 38
</TABLE>
<PAGE> 7
<TABLE>
<S> <C>
(j) Management Agreement.................................... 38
(k) Other Documents......................................... 38
7.5 Stockholder's Deliveries......................................... 39
(a) Closing Certificate..................................... 39
(b) The Management Agreement................................ 39
(c) The Building Lease...................................... 39
ARTICLE VIII
Post-Closing Agreements................................................... 39
8.1 Maintenance of Existence......................................... 39
8.2 Use of Trademarks................................................ 39
8.3 Back-Up.......................................................... 39
8.4 Third-Party Claims............................................... 39
8.5 Further Assurances............................................... 39
8.6 Inspection of Books and Records.................................. 40
8.7 Payments of Accounts Receivable or Excluded Liabilities.......... 40
(a) Delivery of Accounts Receivable......................... 40
(b) Nonpayment of Accounts Receivable....................... 40
(c) Payment of Disputed Sums................................ 40
8.8 Satisfaction of Obligations and Liabilities...................... 41
8.9 Approval of Seller's Lenders..................................... 41
ARTICLE IX
Post Closing Obligations.................................................. 41
9.1 Obligations of Stockholder....................................... 41
(a) Covenant Not to Compete................................. 41
(b) Nonsolicitation......................................... 42
(c) Trade Secrets and Other Information..................... 42
(d) Confidentiality......................................... 42
(e) Equitable Relief........................................ 43
(f) Severability; Survival.................................. 43
9.2 Obligations of Purchaser......................................... 43
(a) Registration Rights..................................... 43
(b) Piggyback Registration.................................. 43
(c) Information Concerning Holder........................... 44
(d) Expenses................................................ 44
(e) Acceptance of Underwriting Agreement.................... 44
(f) Expiration of Registration Rights....................... 44
ARTICLE X
Indemnification........................................................... 45
10.1 Indemnification by Seller and Stockholder........................ 45
</TABLE>
<PAGE> 8
<TABLE>
<S> <C>
(a) General................................................ 45
(b) Environmental.......................................... 45
(c) Bulk Sales Matters..................................... 46
(d) Exclusion From Indemnification......................... 47
(e) Right of Offset........................................ 47
10.2 Indemnification by Purchaser.................................... 47
(a) Exclusion From Indemnification......................... 47
10.3 Notice and Right to Defend Third-Party Claims................... 47
ARTICLE XI
Termination.............................................................. 48
11.1 Right to Terminate.............................................. 48
11.2 Remedies........................................................ 48
(a) Proceed to Close....................................... 48
(b) Decline to Close....................................... 49
11.3 Events on Termination........................................... 49
11.4 Right to Damages................................................ 49
ARTICLE XII
Miscellaneous............................................................ 50
12.1 Assignability................................................... 50
12.2 Fees............................................................ 50
12.3 No Obligation to Hire........................................... 50
12.4 Notices......................................................... 50
12.5 Entire Agreement................................................ 52
12.6 Non-Waiver...................................................... 52
12.7 Counterparts.................................................... 52
12.8 Severability.................................................... 53
12.9 Applicable Law.................................................. 53
12.10 Construction.................................................... 53
Exhibit A Bill of Sale, Assignment and Assumption
Exhibit B Legal Opinion
Exhibit C Management Agreement
</TABLE>
<PAGE> 9
ASSET PURCHASE AGREEMENT
THIS ASSET PURCHASE AGREEMENT is made and entered into this 5th day of
April, 1996, by and among LEOPOLD STYLING PRODUCTS, INC., a Delaware
corporation ("Purchaser"); DESIGNS BY NORVELL, INC., a Tennessee corporation
("Seller"); and JOY NORVELL MARTIN ("Stockholder").
R E C I T A L S
A. seller develops, manufactures and distributes health and beauty care
products, accessories and equipment on a wholesale basis in the United States
and worldwide (the "Business") through its Bodydrench Division (the "Division").
Seller owns all of the assets and properties relating to or used in connection
with the Business.
B. Stockholder owns 98% 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 and properties used by the
Division in conducting the Business free and clear of any and all liens, claims,
charges, liabilities, encumbrances and security interests of whatsoever kind and
nature, except as otherwise disclosed herein and subject only to certain of
Seller's liabilities expressly assumed hereunder, all on the terms and subject
to the conditions contained in this Agreement.
D. Stockholder desires 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.
E. Seller and Stockholder acknowledge that Purchaser is relying on the
representations, warranties and covenants made herein by Seller and the
Stockholder in pursuing financing for the transactions contemplated herein.
F. The Board of Directors of Seller has determined that it would be in
the best interests of Seller and its stockholders to sell to Purchaser certain
of Seller's assets and properties used by the Division in conducting the
Business.
G. The Board of Directors of Seller has approved the execution and
delivery of this Agreement and the consummation of the transactions contemplated
by this Agreement and will recommend approval of such transactions to Seller's
Stockholders.
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:
<PAGE> 10
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 Stockholder agrees to cause
Seller to sell to Purchaser), all of the assets, properties and rights owned by
Seller (tangible and intangible), of whatever kind or nature (except only the
"Excluded Assets" as hereinafter defined) and wherever situated and located,
used by the Division in conducting the Business (hereinafter collectively
referred to in this Agreement as the "Purchased Assets"), as more particularly,
but not inclusively, 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, 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 and any liens and encumbrances disclosed herein.
1.2 ENUMERATION OF PURCHASED ASSETS. The Purchased Assets include,
without limitation, the following items:
(a) ACCOUNTS RECEIVABLE. All accounts receivable and
notes and other receivables (excluding accounts receivable from Stockholder,
Rick Norvell, Greg Norvell and Andy Martin) (the "Accounts Receivable") relating
to the Business, including but not limited to, those set forth on Schedule
1.2(a)(1) hereto, which sets forth the amount of each receivable (note or
otherwise) and the name and mailing address respecting each note or receivable
as of March 1, 1996 but excluding the accounts receivables set forth on Schedule
1.2(a)(2) hereto.
(b) VEHICLES, FURNITURE, FIXTURES AND EQUIPMENT. All of
Seller's motor vehicles, furniture, fixtures, equipment, machinery, parts and
tools (the "Equipment") used or intended for use by it in connection with the
Business, including, but not limited to, the Equipment set forth on Schedule
1.2(b) hereto, except for the objects referred to in Schedule 1.3(i), which
Seller shall have replaced with objects of comparable quality prior to Closing
and which shall be included as Equipment.
(c) INVENTORY. All inventory (including, without
limitation, finished goods and supplies) (the "Inventory") relating to the
Business conducted by the Division.
(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, other
than claims and rights to tax refunds and insurance refunds and any Excluded
Assets.
(e) BUSINESS CONTRACTS. All sales orders and sales
contracts, quotations, bids, sales and sales representative agreements, service
agreements, license agreements, supply agreements, franchise agreements and
technical service agreements relating to the Business of the Division (the
"Business Contracts"), and including each Business Contracts
2
<PAGE> 11
set forth on Schedule 1.2(e) hereto which sets forth an itemized list of the
Business Contracts that Seller reasonably believes will be in effect on the
Closing Date and including any other Business Contracts transferrable by Seller.
Attached to Schedule 1.2(e) are copies of the Business Contracts.
(f) INTELLECTUAL PROPERTY. All intellectual property
rights, if any, used in the conduct of or relating to the Business 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
developed by employees or stockholders of Seller 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 the Intellectual Property set
forth on Schedule 1.2(f) hereto and including any other Intellectual Property
transferrable by Seller. Attached to Schedule 1.2(f) are copies of all such
business and marketing plans, license agreements, copyrighted materials,
trademarks and trade names and all patents, and all applications therefor used
in the conduct of or relating to the Business conducted by the Division.
(g) CUSTOMER LISTS. All current and historical customer
lists, customer records and information relating to the Business conducted by
the Division. Schedule hereto sets forth a list of all previous (within the last
two (2) years from the date hereof) and existing customers of Seller with
respect to the Business of the Division and their last known business addresses.
(h) LICENSES, PERMITS AND APPROVALS. All of Seller's
licenses, permits, approvals and authorizations of whatsoever kind and type,
governmental or private, issued, applied for, or pending (the "Licenses and
Permits"), used in the conduct of or relating to the Business of the Division.
The Licenses and Permits are set forth on Schedule hereto. Attached to Schedule
are copies of all of the Licenses and Permits.
(i) BOOKS AND RECORDS. All of Seller's books and records
pertaining to the Business, including, without limitation, blueprints, drawings
and other technical papers (that are owned or used by Seller and are not
otherwise prohibited from transfer by contract between Seller and the owners
thereof), and accounts receivable, inventory, maintenance, and asset history
records, and excluding all employee and tax records (provided, however, that
access to such employee and tax records shall be provided to Seller pursuant to
Section 8.6 hereof).
(j) COMPUTER SOFTWARE AND HARDWARE. All computer software
and all hardware used or intended for use in connection with the Business,
owned, leased or licensed by or to Seller that is not otherwise prohibited from
transfer by contract between Seller and the owner thereof.
(k) LEASED PERSONALTY. The leasehold interests created by
all leases of personal property used in connection with the Business of the
Division, under which Seller is a lessee, including those leases that are
capitalized leases and any maintenance contracts and
3
<PAGE> 12
deposits in connection therewith (all such personal property that Seller is
leasing as lessee shall herein be referred to as "Leased Personalty"), including
the Leased Personalty set forth on Schedule hereto and any other Leased
Personalty transferrable by Seller. Attached to Schedule are copies of all the
lease agreements listed on Schedule .
(l) NAMES. All right, title and interest in and to the
names "Bodydrench," and any and all names associated with any product sold by
the Business through the Division at any time within the preceding 12 months,
and any derivations thereof (the "Names").
(m) PHONE NUMBERS. All telephone and facsimile numbers
used by the Division.
(n) DEPOSITS AND PREPAID EXPENSES. All of Seller's
deposits and prepaid expenses relating to the Business (the "Deposits"),
including, but not limited to the Deposits set forth on Schedule 1.2(n) hereto
(including any deposits with respect to the Leased Personalty assumed by
Purchaser pursuant to Section hereof) as reduced in the ordinary course of
business in accordance with past historical practices.
1.3 EXCLUDED ASSETS. The following assets of Seller shall be excluded
from the purchase and sale contemplated by this Agreement (the "Excluded
Assets"):
(a) RIGHTS HEREUNDER. Seller's rights under this
Agreement.
(b) CORPORATE DOCUMENTS. Seller's corporate charter,
minute and stock record books, and corporate seal.
(c) SELLER'S RECORDS OF NEGOTIATIONS. Seller's records
relating to the negotiation and sale of Seller's stock or assets.
(d) EMPLOYEE RECORDS. All of Seller's records with
respect to employees, provided that access thereto shall be provided to
Purchaser pursuant to Section 8.6 hereof.
(e) TAX RECORDS. All of Seller's books and records with
respect to taxes.
(f) ASSETS RELATING SOLELY TO OTHER DIVISIONS. All assets
of any kind used by Seller solely in the conduct of its business other than the
Business through the Division.
(g) TAX AND INSURANCE REFUNDS. All tax and insurance
refunds due or hereafter owing to Seller.
(h) CASH. All cash on hand and in banks as of the Closing
Date, and all right, title and interest in and to Seller's bank accounts
relating to the Business.
(i) CERTAIN EQUIPMENT. The Equipment set forth on
Schedule 1.3(i).
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ARTICLE II
ASSUMPTION OF LIABILITIES
2.1 ASSUMED LIABILITIES. At the Closing, Purchaser shall assume only
the following liabilities and obligations of Seller ("Assumed Liabilities"):
(a) TRADE PAYABLES. Up to $3,300,000 of Seller's accounts
payables owing by Seller, as of the Closing, to vendors with respect to the
Business ("Accounts Payable"). Schedule 2.1(a) hereto sets forth an itemized
list of all Accounts Payable outstanding as of January 31, 1996, and sets forth
the amount of each such Account Payable as of such date.
(b) TAXES AND PAYROLL PAYABLES. Up to an aggregate of
$560,000.00 of Seller's accrued but unpaid liabilities, as of the Closing,
incurred in connection with the Business with respect to payroll and vacation
and holiday pay, current accrued payroll taxes and contributions to Seller's
401K plan described in Schedule 4.4(w) for employees of the Division (other than
stockholder) (collectively, "Payroll Payables"). Schedule 2.1(b) hereto sets
forth an itemized list of all Payroll Payables outstanding as of January 31,
1996, and sets forth the amount of each such Payroll Payable as of such date.
(c) FIRST AMERICAN BANK DEBT. Up to $40,000.00 of
Seller's outstanding debt owing to First American Bank, as of the Closing, which
debt relates solely to the financing of a graphics computer used in connection
with the Business.
(d) LIABILITIES AFTER CLOSING. Those liabilities and
obligations arising from and after the Closing Date under the Business
Contracts, and all liabilities and obligations arising from the operation of the
Business of the Division after the Closing Date.
2.2 EXCLUDED LIABILITIES. Except only with respect to the liabilities
of Seller expressly assumed by Purchaser in Section 2.1 hereof, Purchaser shall
not be obligated to directly or indirectly pay, perform or discharge any other
claims, obligations or liabilities of Seller, including, without limitation the
following:
(a) LIABILITIES HEREUNDER. Any liabilities or obligations
of Seller under this Agreement.
(b) LEGAL AND ACCOUNTING FEES. Any liabilities for legal
and accounting and other expenses incurred by or on behalf of Seller or
Stockholder in connection with the negotiation of the transactions contemplated
by this Agreement, this Agreement, the sale of the Purchased Assets and the
documents related thereto.
(c) TAX LIABILITIES. Except as otherwise provided in
Section 2.1(b) hereof, any tax liabilities or obligations of Seller, whether or
not owed on or prior to the Closing Date, including, without limitation, (i) any
liabilities (federal, state, local and foreign) for taxes on or measured by
Seller's income; (ii) any liabilities for federal, state, local and foreign
income
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and employee FICA taxes that Seller is legally obligated to withhold through the
Closing Date whether or not Seller has withheld the same as required by law;
(iii) any liabilities for employer FICA and unemployment taxes; (iv) any
liabilities for franchise and excise taxes relating to the corporate status of
Seller; (v) any liabilities for property taxes; and (vi) any other taxes of any
kind or description.
(d) LIABILITY TO PURCHASER FOR BREACH. Any liabilities or
obligations of Seller to the extent that their existence or magnitude
constitutes or results in a breach of a representation, warranty or covenant
made by Seller or Stockholder to Purchaser, or makes the information contained
in the Exhibits, the Schedules or the other documents delivered by or on behalf
of Seller or Stockholder (or their representatives) pursuant to or in connection
with this Agreement or any of the transactions contemplated hereby untrue in any
material adverse respect.
(e) LIABILITIES TO EMPLOYEES. Any liabilities or
obligations of Seller not specifically assumed by Purchaser pursuant to Section
2.1(b) hereof with respect to payroll, bonuses, severance benefits, vacation pay
and other employment benefits or sums including, without limitation, FICA,
worker's compensation premiums or unemployment taxes to or on behalf of
employees of Seller, and any and all liabilities or obligations of Seller, or
any Affiliate or subsidiary of Seller, arising under any collective bargaining
agreement or union contract. For purposes of this Agreement, the term
"Affiliate" shall mean any entity in which Stockholder is an officer or
director, or in which Stockholder or the Seller, directly or indirectly, owns or
controls ten percent (10%) or more of the equity securities of the entity, or
any person related to Stockholder by blood or marriage.
(f) PROPERTY AND PERSONAL INJURY LIABILITIES. Any claims
against or liabilities of Seller for injury to or death of persons or damage to
or destruction of property (including, without limitation, any worker's
compensation claim) regardless of when such claim or liability is asserted,
including, without limitation, any claim or liability for damages in connection
with the foregoing, it being understood and agreed that any claim or liability
asserted after the Closing Date arising out of the sale of any product either
sold or manufactured by Seller or the performance of any services by Seller
prior to the Closing Date, shall be considered to be a claim against or a
liability of Seller for injury to or death of persons or damage to or
destruction of property and therefore, except as otherwise provided for herein,
not assumed hereunder by Purchaser.
(g) LIABILITY FOR MEDICAL, DENTAL AND DISABILITY. Any
liabilities for medical, dental and disability (both long-term and short-term)
benefits, whether insured or self-insured, based upon a condition known to exist
on or prior to the Closing Date or for claims incurred or disabilities
commencing prior to the Closing Date and any liability for the foregoing,
regardless of when accrued and regardless of when any condition existed, that
arises by virtue of an employment relationship at any time with Seller.
(h) LIABILITY TO OTHERS FOR BREACH. Any liabilities for
any breach of any representation, warranty or covenant, or for any claim for
indemnification, contained in any contract or other document referred to in
Article I hereof, agreed to be performed pursuant
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hereto by Purchaser, to the extent that such breach or claim arose out of or by
virtue of Seller's performance or nonperformance thereunder prior to the Closing
Date, it being understood that, as between Seller and Purchaser, this paragraph
shall apply notwithstanding any provisions that may be contained in any form of
consent to the assignment of any such contract or document that, by its terms,
imposes such liabilities upon Purchaser and which assignment is accepted by
Purchaser notwithstanding the presence of such a provision, and that Seller's
failure to discharge any such liability shall entitle Purchaser to
indemnification in accordance with the provisions of Article X hereof.
(i) LIABILITY REGARDING EMPLOYEE WELFARE AND PENSION
BENEFITS. Except as provided in Section 2.1(b) hereof, any liabilities or
obligations of Seller arising out of or in connection with any of Seller's past
or present employee welfare and pension benefit plans, including, without
limitation, any of Seller's liabilities or obligations to or on behalf of any
past or present employee of Seller arising under any collective bargaining
agreement, union contract, union health and welfare fund, or similar program.
(j) LIABILITY FOR VIOLATION OF LAW. Any liabilities or
obligations of Seller arising out of or in connection with any violation of a
statute or governmental rule, regulation or directive, which violation arises
out of any act or omission that occurred or commenced prior to the Closing Date.
(k) ENVIRONMENTAL LAWS. Any liabilities or obligations of
Seller with respect to, or relating to, Environmental Laws (as hereinafter
defined), or environmental matters.
(l) TRANSFER AND USE TAX LIABILITIES. Any liabilities or
obligations of Seller with respect to sales, use or transfer taxes, if any,
arising as a result of the transfer of the Purchased Assets by Seller to
Purchaser by virtue of the consummation of the transactions contemplated hereby.
Purchaser shall pay any tax charged on the retitling of motor vehicles.
Purchaser shall deliver to Seller a resale exemption certificate as to Inventory
sold hereunder.
(m) ERISA. Any liabilities or obligations of Seller with
respect to, or arising under the Employee Retirement Income Security Act of
1974, as amended ("ERISA"), or any Pension Plan, Welfare Plan or Employee
Benefit Plan, as each are hereinafter defined or as defined by ERISA, and any
related trust agreements or annuity contracts not expressly assumed in Section
2.1(b).
(n) EMPLOYEE GRIEVANCES. Any liabilities or obligations
of Seller with respect to, or arising under, any grievance brought by any
employee of Seller while in the employee of Seller or filed pursuant to any
collective bargaining agreement to which Seller is a party or by which Seller is
bound.
(o) SELLER'S INDEBTEDNESS. Any liabilities or obligations
with respect to indebtedness of Seller, including but not limited to
indebtedness owing to Dekalb County Bank, Department of Economic & Community
Development, Bank One, and Cumberland Area Investment Corp., and any other
indebtedness of Seller, except to the extent specifically assumed
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by Purchaser pursuant to Section 2.1(a), (b) or (c) hereof.
(p) STOCKHOLDER AND AFFILIATES. Any and all liabilities
or obligations of Seller with respect to any stockholder of Seller or any
Affiliate (as defined in Section 2.2(e) hereof) of Seller or any such
stockholder.
(q) LIABILITIES NOT ASSUMED HEREUNDER. Consistent with
and without limitation by the specific enumeration of the foregoing, any and all
liabilities or obligations not expressly assumed by Purchaser pursuant to the
provisions of Section 2.1 hereof.
2.3 NO EXPANSION OF THIRD PARTY RIGHTS. The assumption by Purchaser of
the Assumed Liabilities, and the transfer thereof by Seller, shall in no way
expand the rights and remedies of any third party against Seller or Purchaser as
assignee of Seller as compared to the rights and remedies which such third party
would have had against Seller or Purchaser as assignee of Seller had Purchaser
not assumed such liabilities. Without limiting the generality of the preceding
sentence, the assumption by Purchaser of such liabilities shall not create any
third party beneficiary rights.
2.4 DISCHARGE OF OBLIGATIONS BY SELLER. Seller shall make provisions
which are reasonably acceptable to Purchaser to discharge any Accounts Payable
in excess of the amount assumed by Purchaser pursuant to Section 2.1(a) hereof,
any Payroll Payable in excess of the amount assumed by Purchaser pursuant to
Section 2.1(b) hereof and any of the First American Bank Debt in excess of the
amount assumed by Purchaser pursuant to Section 2.1(c) hereof.
ARTICLE III
PURCHASE PRICE AND MANNER OF PAYMENT
3.1 PURCHASE PRICE. The purchase price of the Purchased Assets and the
Restrictive Covenants of Seller, Stockholder, Rick Norvell, and Greg Norvell as
referenced herein (the "Purchase Price"), shall be (i) Eight Million One Hundred
Thousand Dollars ($8,100,000), subject to adjustment as set forth in Sections
3.2(c) and 11.2(a) hereof (the "Cash Component"), plus (ii) the assumption of
the Assumed Liabilities and (iii) if applicable, the issuance of the Stock
Rights (as defined below).
3.2 PAYMENT OF PURCHASE PRICE. The Purchase Price shall be payable as
follows:
(a) CASH AT CLOSING. At the Closing, Purchaser shall pay
to Seller, by wire transfer, the Cash Component, subject to Section 5.2(i).
(b) STOCK RIGHTS. At the Closing, to the extent that the
sum of (i) the Payroll Payable assumed by Purchaser pursuant to Section 2.1(b)
hereof and (ii) the First American Debt assumed by Purchaser pursuant to Section
2.1(c) totals less than $600,000, then
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Purchaser shall grant to Seller the right (the "Stock Rights") to require
Purchaser to deliver to Seller a number of shares of common stock of the
Purchaser (the "Common Stock") determined by dividing (A) the amount by which
$600,000 exceeds the sum of (i) and (ii) above on the Closing Date by (B) the
Agreed Stock Price (as defined below). Such Stock Rights will be exercisable
only (1) in the event that Purchaser issues its Common Stock in a public
offering at any time during the three year period commencing on the Closing
Date, the Seller will be entitled to exercise its Stock Rights at any time
during the three (3) month period following the date the Common Stock is first
sold in a public offering, or (2) in the event no initial public offering of
Purchaser's Common Stock occurs on or before the third anniversary of the
Closing Date, the Seller will be entitled to exercise its Stock Rights only
during the 30 day period commencing on such third anniversary. In the event the
Stock Rights are exercised pursuant to clause (1) of the preceding sentence, the
Agreed Stock Price will be deemed to be 120% of the initial public offering
price per share of the Common Stock and in the event the Stock Rights are
exercised pursuant to clause (2) of the preceding sentence, the Agreed Stock
Price will be deemed to be the fair market value per share of the Common Stock
as determined by an independent securities dealer acceptable to Seller and
Purchaser.
(c) ADJUSTMENT TO PURCHASE PRICE.
(i) If the value of the inventory as of the
Closing Date (as determined by the certified public accountant selected by
Purchaser) shall be less than Two Million Dollars ($2,000,000) (the "Minimum
Inventory Level"), then the Purchase Price pursuant to this Section 3.2 and the
Cash Component thereof pursuant to Section 3.2(a) shall be reduced by an amount
equal to the difference between the Minimum Inventory Level and the value of the
Inventory as of the Closing Date. For purposes of the calculation of the value
of the Inventory in this Section 3.2(c), the value of the Inventory shall not
include any Inventory that the Purchaser's certified public accountant deems
obsolete. For purposes of this Section 3.2(c)(i), the term "obsolete" shall mean
any products that do not have a shelf life of at least 1 year subsequent to
Closing.
(ii) If the value of the total Accounts
Receivable as of the Closing Date (as determined by the certified public
accountant selected by Purchaser) shall be less than One Million Five Hundred
Thousand Dollars ($1,500,000) (the "Minimum Accounts Receivable Level"), then
the Purchase Price pursuant to this Section 3.2 and the Cash Component thereof
pursuant to Section 3.2(a) shall be reduced by an amount equal to the difference
between the Minimum Accounts Receivable Level and the value of the Accounts
Receivable as of the Closing Date. For purposes of the calculation of the value
of the Accounts Receivable in this Section 3.2(c), the value of the Accounts
Receivable shall not include more than One Hundred Thousand Dollars ($100,000)
of Aged Accounts Receivable. For purposes of this Agreement, "Aged Accounts
Receivable" shall mean any Accounts Receivable that as of the Closing Date has
been outstanding for a period in excess of one hundred fifty (150) days.
(iii) If the value of the total Purchased Assets
(including Inventory as calculated pursuant to Section 3.2(c)(i) and Accounts
Receivable as calculated pursuant to Section 3.2(c)(ii) (the "Total Assets") as
of the Closing Date (as determined by the certified public accountant selected
by Purchaser) shall be less than Four Million Five Hundred
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Thousand Dollars ($4,500,000) (the "Minimum Asset Level"), then the Purchase
Price pursuant to this Section 3.2 and the Cash Component thereof pursuant to
Section 3.2(a) shall be reduced or further reduced, as the case may be, by an
amount equal to the difference between the Minimum Asset Level and the value of
the Total Assets as of the Closing Date.
3.3 ALLOCATION OF PURCHASE PRICE. The Purchase Price shall be allocated
among the Purchased Assets and the Restrictive Covenants as set forth in
Schedule 3.3 hereto. The allocations will be made in accordance with rules
promulgated under Section 1060 of the Internal Revenue Service. The parties
agree to report this transaction for federal tax purposes in accordance with
this allocation of the Purchase Price.
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 and in any financial statement, exhibit,
schedule or document delivered by or on behalf of a party hereto or their
representative to the other party pursuant to 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 warranties of the parties are initially made as of the date
hereof and are to be true and correct as of the Closing Date; thus, any
modifications thereof prior to the Closing Date shall be the subject of notice
designated as a "Supplemental Disclosure," communicated as hereinafter set forth
in Article 6 hereof and delivered on or before the Closing.
4.2 REPRESENTATIONS AND WARRANTIES OF PURCHASER. To induce Seller and
Stockholder to enter into this Agreement and to perform Seller's and
Stockholder's obligations hereunder, and with full knowledge that Seller and
Stockholder will rely thereon, Purchaser represents and warrants the truth,
accuracy and completeness of the following, as of the Closing Date, unless
otherwise noted, and subject only to the exceptions specifically set forth in
the 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
agreements referenced herein to which Purchaser is a party (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
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authorize the execution and delivery of this Agreement, the Other Purchaser
Agreements or the consummation of the transactions contemplated hereby or
thereby.
(c) ENFORCEABILITY. This Agreement and the Other
Purchaser Agreements have been 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, other
than the filings, registrations or qualifications under the federal and state
securities laws or "blue sky" laws of any state of the United States of America
that may be required to be made or obtained in connection with the issuance of
the Stock Rights or the Common Stock.
(e) ACCURACY OF DOCUMENTS, REPRESENTATIONS AND
WARRANTIES. The copies of all documents 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 or the Other Purchaser Agreements, 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 the Other Purchaser Agreements 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.
4.3 REPRESENTATIONS AND WARRANTIES OF STOCKHOLDER. To induce Purchaser
to enter into this Agreement and to perform Purchaser's obligations hereunder,
and with full knowledge that Purchaser will rely thereon, Stockholder represents
and warrants the truth, accuracy and completeness of the following as of the
Closing Date, unless otherwise noted, and subject to the exceptions expressly
set forth in the Disclosure Schedules attached hereto:
(a) OWNERSHIP. Stockholder owns 98% of the issued and
outstanding capital stock of Seller free and clear of any and all liens, claims,
charges, liabilities, encumbrances and security interests of whatsoever kind and
nature.
(b) POWER AND AUTHORITY. Stockholder has full right,
power and authority to execute and deliver this Agreement and the other
agreements referenced herein and to which Stockholder is a party (collectively
the "Other Stockholder Agreements"), and to
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consummate the transactions contemplated hereby and thereby.
(c) ENFORCEABILITY. This Agreement and the Other
Stockholder Agreements have been duly executed and delivered by Stockholder and
constitute legal, valid and binding obligations of Stockholder, enforceable
against Stockholder in accordance with their respective terms.
(d) CONFLICTS; CONSENTS. Neither the execution and
delivery of this Agreement or the Other Stockholder 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) any license, instrument,
contract or agreement to which Stockholder is a party or by which Stockholder is
bound; or (ii) any law, order, rule regulation, writ, injunction or decree that
is applicable to Stockholder. Neither the execution and delivery of this
Agreement or the Other Stockholder Agreements by Stockholder, nor the
consummation by Stockholder of the transactions contemplated hereby or thereby,
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.
Neither the execution and delivery of this Agreement or the Other Stockholder
Agreements by Stockholder, nor the consummation by Stockholder 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 furnished to Purchaser and its
representatives by or on behalf of Stockholder or Seller or its or their
representatives are true, complete and correct in all material respects. No
representation or warranty of Stockholder contained in this Agreement or the
Other Stockholder Agreements, and no statement contained in the Exhibits, the
Schedules or the other documents delivered by or on behalf of Stockholder or
Seller or its or their representatives pursuant to or in connection with this
Agreement or the Other Stockholder Agreements, 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.
4.4 REPRESENTATIONS AND WARRANTIES OF SELLER AND STOCKHOLDER. o 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
Stockholder, jointly and severally, represent and warrant the truth, accuracy
and completeness of the following, subject only to the exceptions specifically
set forth in the schedules called for by this Agreement (the "Disclosure
Schedules"):
(a) ORGANIZATION. Seller is a corporation duly organized
and validly existing under the laws of the State of Tennessee.
(b) QUALIFICATION. Seller has qualified as a foreign
corporation, and is in good standing, under the laws of all jurisdictions where
the nature of its business or the nature or location of its assets requires such
qualification (all of such jurisdictions are referred
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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) OWNERSHIP. The issued and outstanding capital stock
of Seller is owned as set forth on Schedule 4.4(c) hereto. The capital stock of
Seller owned by Stockholder is free and clear of any and all liens, claims,
charges, liabilities, encumbrances and security interests of whatsoever kind and
nature.
(d) POWER AND AUTHORITY. Subject to the approval of this
transaction by the owners of a majority of the outstanding stock of Seller,
Seller has full corporate power and authority (i) to own, operate and lease the
Purchased Assets and to carry on the Business as now being conducted, (ii) to
execute and deliver this Agreement and the agreements referenced herein and to
which Seller is a party (the "Other Seller Agreements"), and (iii) 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 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.
(e) ENFORCEABILITY. This Agreement and the Other Seller
Agreements have been 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.
(f) CONFLICTS; CONSENTS. 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. 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.
(g) ASSETS.
(i) Seller has good and marketable title to and
rightful possession of all of the Purchased Assets including those reflected in
the Balance Sheet (as hereinafter defined) or acquired by it subsequent to the
date of the Balance Sheet which is used in or necessary to the operation of the
Business (other than those assets disposed of after the date of the Balance
Sheet only in the ordinary course of business and not in violation of this
Agreement), free and clear of any and all mortgages, liens, pledges, privileges,
claims, rights, charges, encumbrances and security interests of whatsoever kind
or nature, except: (A) liens for current taxes not yet delinquent; and (B) liens
or liabilities disclosed in the Balance Sheet.
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(ii) The Inventories of the Division relating to
the Business reflected in the Balance Sheet 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 the Division relating
to the Business are in good and merchantable condition. Since the date of the
Balance Sheet, there have been no write-downs in the value of the Division's
Inventories relating to the business or write-offs with respect to such
Inventories.
(iii) The Accounts Receivable of the Seller
relating to the Business reflected in the Balance Sheet and those existing since
the date of the Balance Sheet or existing on the books of the Division at the
Closing are, to the best of Seller's and Stockholder's knowledge, good and
collectible within ninety (90) days thereafter, and none of such Accounts
Receivable are subject to the return of the merchandise or other property (other
than in the ordinary course of business) 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. However,
the parties hereto agree that returns of merchandise in aggregate in excess of
$5,000 shall not be deemed in the ordinary course of business.
(iv) The Equipment used in, or necessary to the
operation of, the Business reflected in the Balance Sheet and such items of
Equipment acquired since the date of the Balance Sheet to the Closing are in
good and working condition and repair, subject to normal wear and tear.
(h) ABILITY TO CONDUCT SELLER'S BUSINESS. The Purchased
Assets constitute all of the assets and properties that are necessary to permit
Purchaser to continue to conduct the Business [of the Division] as it is
presently being conducted after the Closing.
(i) REAL PROPERTY; LEASES. A true, complete and correct
list of all real property of every kind, and all interests in real property,
that is owned, leased, occupied or used in, or necessary to the operation of,
the Business is disclosed in Schedule 4.4(i) hereto.
(j) CONTRACTS. Schedule 4.4(j) hereto sets forth, with
respect to the Business and the Division, a true, complete and correct list of
every (written or oral) (i) union, collective bargaining or similar agreement,
together with all amendments thereto or interpretations thereof, such as
arbitration decisions and the like, to which the Seller is a party or are bound;
(ii) profit sharing, deferred compensation, bonus, stock option, stock purchase,
pension, retainer, consulting, retirement, welfare (including, without
limitation, retiree welfare benefit) or incentive plan or agreement maintained
or sponsored by Seller, or to which Seller contributes; (iii) plan providing for
"fringe benefits" to its employees or former employees, including, but not
limited to, vacation, sick leave, severance pay, medical, hospitalization, life
insurance and other plans, or related benefits; (iv) employment agreement that
is not terminable at will and without penalty on thirty (30) days or less prior
written notice or that provides for payments upon or after termination; (v)
agency, sales agency, brokerage, wholesaling, franchise, distributorship or
similar agreement or contract; (vi) loan agreement or letter of credit; (vii)
personal property lease; (viii) security or pledge agreement; (ix) mortgage or
deed of trust; (x) purchase commitment to, or contract or agreement with, any
supplier; (xi) contract or agreement relating to research and development; (xii)
license, authority or permit granted by Seller to any
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<PAGE> 23
person or entity; (xiii) contract or agreement to which Seller is a party or by
which Seller or any of its assets is bound, which reasonably may be expected to
involve future obligations or benefits in excess of $5,000 in any one calendar
year; and (xiv) contract or agreement to which Seller is a party or by which
Seller or any of its assets is bound, which is either individually or
collectively material to the condition (financial or otherwise), assets,
business or prospects of the Business and the Division (all of the foregoing
plans, contracts and agreements are referred to herein collectively as the
"Contracts"); provided, however, that "Contracts" shall refer only to the
foregoing plans, contracts and agreements related to the Business. Each of the
Contracts is in full force and effect and enforceable in accordance with its
respective terms and conditions, and (x) 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 Stockholder or any of
them, or any other party thereto under any of the Contracts; (y) no party to any
of the Contracts has given any notice of default or termination, nor do
Stockholder or Seller have any reason to believe that such notice shall be
given; and (z) Seller has not waived any material right under or with respect to
any of the Contracts. Seller is not, with respect to the Business and the
Division, bound by any agreement or arrangement to sell or provide goods or
services at prices below the prevailing market prices therefor, or to purchase
goods or services at prices above the prevailing market prices therefor.
However, in the normal course of business, Seller utilizes bottom line costing
with discounts to distributors based on volume in accordance with Seller's
historical practices. Except as disclosed in Schedule 4.4(j) hereto, Seller has
no reason to believe that there is a likelihood that any of the customers of or
suppliers to the Division will terminate its or their business relationship with
Seller for any reason whatsoever; provided, however, Seller and Stockholder
cannot guarantee that no such termination will occur. Schedule 4.4(j) hereto,
accurately describes all transactions that have occurred on or after March 1,
1991 between Seller and Stockholder, and/or any of the Affiliates (as defined in
Section 2.2(e) hereof).
(k) INSURANCE. Schedule 4.4(k) hereto contains a
description (identifying insurer, coverage, premiums, named insured, deductibles
and expiration date) of all policies of fire, liability and other forms of
insurance that currently are, or at any time within the past five (5) years have
been, maintained in force by or for the account of Seller with respect to the
business and assets of the Business and the Division (such policies are
hereinafter referred to as the "Policies"). Seller has been continuously, and is
presently, insured by insurers unaffiliated with Stockholder or Seller with
respect to its or their property and the conduct of its business in such amounts
and against such risks as are adequate to protect its business and assets,
including, without limitation, liability insurance. The insurance coverage
provided by the Policies presently in force will not in any material respect be
affected by, and will not terminate or lapse by reason of, the transactions
contemplated hereby. At no time subsequent to March 1, 1991, has Seller been
denied insurance or indemnity bond coverage. At no time subsequent to March 1,
1991, has any insurance carrier cancelled or reduced any insurance coverage for
Seller or given any notice or other indication of its intention to cancel or
reduce any such coverage.
(l) 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 or necessary to the operation of the
Business. Schedule 1.2(f) hereto sets forth a true,
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<PAGE> 24
complete and correct list of all of the Intellectual Property owned or used by
the Division. None of the matters covered by the Intellectual Property, nor any
of the products or services sold or provided by the Division, nor any of the
processes used or the business practices followed by the Division, infringes or
has infringed upon any trademark, trade name, fictitious name, service mark,
patent or copyright owned by any person or entity (or any application with
respect thereto), or constitutes unfair competition. Seller is not, and
following the Closing Purchaser will not be, obligated to pay any royalty or
other payment with respect to any of the Intellectual Property, except as
disclosed in Schedule 4.4(l). To the best of Seller's and Stockholder's
knowledge, no person or entity is producing, providing, selling or using
products or services that would constitute an infringement of any of the
Intellectual Property.
(m) LICENSES AND PERMITS. Schedule 1.2(h) hereto contains
a true, correct and complete list of all Licenses and Permits necessary for the
conduct of the Business of the Division as conducted by Seller. Seller has all
Licenses and Permits necessary for the conduct of the Business of the Division
as conducted by Seller and the ownership and use of its assets, properties and
the premises occupied by it, and the conduct of its business plan as presently
contemplated by Seller.
(n) TAXES. All federal, state, county and local taxes,
including without limitation, income, excise, payroll, sales, use, unemployment,
social security, occupation, franchise, property, and other taxes, duties or
charges (collectively, "Taxes") levied, assessed or imposed upon Seller with
respect to the Business, the Division, and the Purchased Assets have been duly
and fully paid or have been adequately provided for on the Financial Statements
(as hereinafter defined). In addition, all returns and reports with respect to
Taxes required by law or regulation to be filed by Seller, on or prior to the
date hereof shall have been duly and timely filed. There are no agreements,
waivers or other arrangements (oral or written) providing for extensions of time
with respect to the assessment or collection of unpaid Taxes (other than a
written agreement regarding the payment of delinquent payroll taxes) nor are
there any actions, suits, proceedings, inquiries, investigations or claims of
any nature or kind whatsoever now pending or, to the best knowledge and belief
of Seller and Stockholder, threatened, against Seller with respect to any such
returns or reports, or any such Taxes, or any matters under discussion with any
federal, state, county or local authority relating to Taxes.
(o) LABOR DISPUTES; UNFAIR LABOR PRACTICES. There is not
pending nor, to the best knowledge and belief of Seller and Stockholder,
threatened, any labor dispute, grievance, strike or work stoppage involving any
of the employees of Seller that affects or that may affect the financial
condition, business, operations, assets or prospects of the Business or the
Division. There is not pending nor, to the best knowledge and belief of Seller
and Stockholder, threatened, any charge or complaint against or involving
Seller, or any of its officers or employees, by the National Labor Relations
Board, the Occupational Health and Safety Administration, the Department of
Labor, or any similar federal, state or local board or agency, or any
representative thereof. There are no unfair employment or labor practice charges
presently pending nor, to the best knowledge and belief of Seller and
Stockholder, after due inquiry, threatened, by or on behalf of any employee of
Seller with respect to the Business or the Division.
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(p) FINANCIAL STATEMENTS.
(i) Seller and Stockholder have previously
furnished Purchaser with true, complete and correct copies of the unaudited
financial statements of Seller and the Division as of and for the twelve (12)
month period ended December 31, 1995 (the "Financial Statements"). The Financial
Statements are attached as Schedule 4.4(p) hereto. The Financial Statements
contain (a) a balance sheet of Seller and the Division as of December 31, 1995
(the "Balance Sheet"), (b) a statement of income and claimed earnings for Seller
and the Division for the twelve (12) month period ended December 31, 1995 (the
"P&L"), and (c) any notes related thereto. The Financial Statements have been
prepared on an accrual basis from the books and records of Seller and the
Division and in accordance with generally accepted accounting principles. The
Balance Sheet fairly presents the financial position of Seller and the Division
as of the date thereof. The P&L fairly presents the results of the operations of
Seller and the Division for the twelve (12) month period ended December 31,
1995.
(ii) With respect to the Division, Seller has no
liabilities or obligations, fixed or contingent, accrued or unaccrued, that are
not reflected, adequately reserved against or otherwise disclosed on the Balance
Sheet, excepting only those liabilities and obligations incurred by Seller in
the ordinary course of its business between the date of the Balance Sheet and
the Closing Date, none of which liabilities is individually or collectively
material, incurred in violation of this Agreement, or would require accrual
and/or disclosure under generally accepted accounting principles.
(q) BOOKS AND RECORDS. Seller's books and records of the
Division with respect to its assets, business, operations, properties and
prospects have been maintained in accordance with generally accepted accounting
principles and in the usual, regular and ordinary manner, and all entries with
respect thereto have been made and all transactions have been properly accounted
for. All applicable corporate and other materials laws relating to the
maintenance of such books and records have been complied with by Stockholder and
Seller in all material respects.
(r) LIABILITIES. Except as either fully disclosed in
Schedule 4.4(r) hereto, or fully and properly reflected on or reserved for in
the Balance Sheet or incurred by Seller, with respect to the Business, the
Division or the Purchased Assets, after the date of the Balance Sheet only in
the ordinary course of business, not in violation of this Agreement, none of
which are either individually or collectively material and none of which would
require accrual or disclosure under generally accepted accounting principles,
Seller, with respect to the Business, the Division, or the Purchased Assets, has
no (i) debts, liabilities or obligations of a nature required to be reflected or
disclosed in financial statements prepared in accordance with generally accepted
accounting principles, or (ii) other debts, liabilities or obligations, whether
accrued, absolute, contingent or otherwise, whether due or to become due,
relating to or arising out of any act, transaction, circumstance or state of
facts that occurred or existed on or before the date of the Balance Sheet. Since
the date of the Balance Sheet, Seller has not incurred any debts, liabilities or
obligations, whether accrued, absolute, contingent or otherwise, whether due or
to become due, with respect to the Business, the Division or the Purchased
Assets, other than debts, liabilities and obligations incurred in the ordinary
course of business, none of which are
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either individually or collectively material and none of which would require
accrual or disclosure under generally accepted accounting principles. Schedule
4.4(r) hereto contains a true, complete and correct list of all contracts and
agreements with respect to the Business, the Division, or the Purchased Assets,
pursuant to which Seller has guaranteed or indemnified any debt (other than the
endorsement of checks in the ordinary course of business), liability or
obligation of any other person or entity, including, without limitation, any
Stockholder or any Affiliate (including, without limitation, the execution of
any document obligating Seller with respect to any performance or other bond),
or pursuant to which Seller has pledged or otherwise encumbered any of the
assets and properties used in, or necessary to the operation of, the Business.
Except as disclosed in Schedule 4.4(r) hereto, the Division is not indebted to
Stockholder or any of the Affiliates, nor is Stockholder or any Affiliate,
indebted to the Division, nor are any Purchased Assets subject to any lien or
claim of Stockholder or Affiliate.
(s) SUBSEQUENT EVENTS. Except as disclosed in Schedule
4.4(s), since the date of the Balance Sheet, neither Seller nor Stockholder,
with respect to the Business, the Division, and the Purchased Assets, have:
(i) created or suffered to exist any material
liens or encumbrances with respect to any of the Purchased Assets which have
not been discharged, other than liens for nondelinquent taxes;
(ii) sold or transferred any of the Purchased
Assets except Inventory;
(iii) suffered any material loss, or material
interruption in use, of any of the Purchased Assets (whether or not covered by
insurance), on account of fire, flood, riot, strike or other hazard or Act of
God;
(iv) suffered any material and adverse change in
its business, business activities, business prospects, or condition (financial
or otherwise) with respect to the Business or the Division;
(v) written off any Equipment as unusable or
obsolete or for any other reason;
(vi) waived any material rights; (VII) paid any
Affiliate or been charged by any Affiliate for goods sold or services rendered,
or paid any Affiliate or been charged by any Affiliate for corporate overhead
expenses, management fees, legal or accounting fees, capital charges, or similar
charges or expenses;
(viii) paid, declared or set aside any dividends or
other distributions using any of the Purchased Assets on its securities of any
class, or purchased, exchanged or redeemed any of its securities of any class;
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(ix) incurred or committed to incur any
individual capital expenditures with respect to the Business in excess of $5,000
or in the aggregate in excess of $25,000;
(x) incurred any indebtedness for borrowed
money;
(xi) increased the compensation payable to any
employee of the Business except in the ordinary course of business;
(xii) paid or incurred any management or
consulting fees with respect to the Business;
(xiii) hired any employee with respect to the
Business who shall have an annual salary in excess of $25,000; and
(xiv) without limitation by the enumeration of any
of the foregoing, entered into any material transaction other than in the usual
and ordinary course of business (the foregoing representation and warranty shall
not be deemed to be breached by virtue of the entry by Seller or Stockholder
into this Agreement or their consummation of the transactions contemplated
hereby).
(t) NO MATERIAL CHANGES. Seller has not suffered or been
threatened with any material adverse change in the Division's business or
financial condition, business activities, or business prospects, including,
without limiting the generality of the foregoing, the existence or threat of any
labor dispute, or any material adverse change in, or loss of, any material
relationship between the Division and any of its customers, suppliers or key
employees.
(u) RENEGOTIATION. Seller is not subject to any legal
obligations to renegotiate, nor does Stockholder have any knowledge or reason to
believe that there exists any claim or legal right to renegotiate, any contract,
loan, agreement, lease, sublease or instrument with respect to the Business, the
Division or the Purchased Assets, to which Seller is now or has been bound.
(v) ERISA.
(i) Seller does not maintain, administer or
contribute to, and did not at any time during the past three (3) years,
maintain, administer or contribute to, with respect to the Business, the
Division or the Purchased Assets, any (A) employee pension benefit plan (as
defined in Section 3(2) of the Employee Retirement Income Security Act of 1974,
as amended ("ERISA"), whether or not excluded from coverage under specific
Titles or Subtitles of ERISA) (except for the employee pension benefit plans
disclosed in Schedule 4.4(v) hereto, which are hereinafter referred to as the
"Pension Plans"); (B) employee welfare benefit plan (as defined in Section 3(1)
of ERISA, whether or not excluded from coverage under specific Titles or
Subtitles of ERISA) (except for the employee welfare benefit plans disclosed in
Schedule 4.4(v) hereto, which are hereinafter referred to as the "Welfare
Plans"); or (C) bonus, deferred compensation, stock purchase, stock option,
severance plan, insurance or similar arrangement
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(except for the plans, insurance or similar arrangements disclosed in Schedule
4.4(v) hereto, which are hereinafter referred to as the "Employee Benefit
Plans").
(ii) All Pension Plans, Welfare Plans and
Employee Benefit Plans and any related trust agreements or annuity contracts (or
any related trust instruments) with respect to the Business, the Division or the
Purchased Assets, comply with and are and have been operated in accordance with
ERISA, the Internal Revenue Code of 1986, as amended (the "Code"), other federal
statutes, state law and the regulations and rules promulgated pursuant thereto.
All necessary governmental approvals for the Pension Plans, the Welfare Plans
and the Employee Benefit Plans, with respect to the Business, the Division or
the Purchased Assets, have been obtained, and/or a favorable determination as to
the qualification under the Code of each of the Pension Plans and each amendment
thereto has been made by the Internal Revenue Service, and all of the Pension
Plans remain qualified under the Code.
(iii) No Pension Plan, no Welfare Plan, no
"disqualified person" (as such term is used in Section 4975(c)(1) of the Code)
has engaged, and neither the Seller nor Stockholder has engaged, in any
transaction in violation of Section 406 of ERISA or any "prohibited transaction"
(as defined in Section 4975(c)(1) of the Code) other than any such transaction
which is exempt under Section 408 of ERISA or Section 4975(d) of the Code, with
respect to the Business, the Division or the Purchased Assets.
(iv) Seller has not incurred any liability to the
Pension Benefit Guaranty Corporation ("PBGC"), with respect to the Business, the
Division or the Purchased Assets, as a result of the voluntary or involuntary
termination of any Pension Plan subject to Title IV of ERISA; there is currently
no active filing by Seller with the PBGC (and no proceeding has been commenced
by the PBGC) to terminate any Pension Plan subject to Title IV of ERISA
maintained or funded, in whole or in part, by Seller, with respect to the
Business, the Division or the Purchased Assets, and Seller has not made a
complete or partial withdrawal from a multi-employer plan, as such term is
defined in Section 3(37) of ERISA, resulting in "withdrawal liability," as such
term is defined in Section 4201 of ERISA (without regard to subsequent reduction
or waiver of such liability under either Section 4207 or 4208 of ERISA).
(w) EMPLOYEES AND CONSULTANTS. Schedule 4.4(w) hereto
contains a true and complete list of all of the employees of Seller employed
with respect to the Business, the Division or the Purchased Assets. Except as
disclosed in Schedule 4.4(w), each such employee's employment with Seller
relates solely to the Business. Except as disclosed in Schedule 4.4(w) hereto,
there are no oral or written agreements or other arrangements with respect to
employees or consultants with respect to the Business, the Division or the
Purchased Assets, to which Seller is a party, or by which Seller is bound, and
the employment of each employee of Seller is terminable at will, without cost to
Seller other than payment of salary, earned bonuses, accrued personal days and
accrued vacation. Except for any amounts accruing from Seller up to the Closing
Date with respect to the 401(k) Employee Benefit Plan of Seller disclosed in
Schedule 4.4(w) hereto, Seller does not owe any past or present employee of the
Division any sum other than for accrued wages or salaries for the current
payroll period, reimbursable expenses, accrued vacation and holiday pay, sick
leave rights and amounts payable under Employee Benefit Plans, and all of such
sums that accrue from the date hereof until the
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Closing, excluding such sums that are Assumed Liabilities of Purchaser under
Section 2.1, shall be paid by Seller on or prior to the Closing Date.
(x) LITIGATION. Except as disclosed in Schedule 4.4(x)
hereto, 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 Stockholder, after due inquiry, threatened,
against Seller with respect to or affecting the business or financial condition
of the Business, the Division, the Purchased Assets, or the consummation of the
transaction herein contemplated, or with respect to or affecting the Pension
Plans, Welfare Plans or Employee Benefit Plans of Seller or the use of the
Purchased Assets (either by Purchaser or Seller after the Closing Date or by
Seller prior thereto).
(y) UNASSERTED CLAIMS. There are no facts with respect to
the Business, the Division or the Purchased Assets 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 the Business
or the Division or the consummation of the transactions herein contemplated, or
the use of the Purchased Assets after the Closing.
(z) ABSENCE OF PRODUCT OR SERVICE WARRANTIES. Except as
disclosed in Schedule 4.4(z) hereto, neither Seller nor any officer, director,
employee or agent of Seller, has made any oral or written warranties with
respect to the quality or absence of defects of the products or services of the
Business or the Division that Seller has sold or performed, and that are in
force as of the date hereof. There are no material claims pending or, to the
best knowledge and belief of Seller and Stockholder, anticipated or threatened
against Seller with respect to the quality of or absence of defects in such
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 during the five (5) year period preceding the date hereof.
(aa) ABSENCE OF JUDICIAL ORDERS. Neither Seller nor
Stockholder is 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 its properties, assets,
personnel or business activities of the Business or the Division.
(ab) COMPLIANCE WITH LAW. Seller, the conduct of the
Business, the use by Seller of Seller's properties, assets and personnel, the
provision of Seller's services, and the business activities of the Division 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 Business or the Division, including, without limitation, laws and
regulations and the common law relating to occupational health and safety; equal
employment opportunities, fair employment practices, and sex, race, religion and
age
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<PAGE> 30
discrimination; medicare, medicaid or other healthcare activities; and the
environment (including, without limitation, laws, regulations and the common law
relating to: toxic or hazardous substances or solid or hazardous waste
treatment, storage, disposal, generation and transportation; air, water and
noise pollution; ground water contamination, the handling, transportation,
storage, release or threatened release into the environment of hazardous
materials or hazardous substances; storage tanks, vessels and related equipment;
the protection of wildlife, marine sanctuaries or wetlands; reporting or
notification for hazardous and extremely hazardous substances; the protection of
natural resources and the health and safety of employees and other persons
(collectively referred to as "Environmental Laws")). Except as set forth in
Schedule 4.4(ab) hereto, Seller has not received notice of any violation of a
type referred to in any portion of this Section 4.4(ab).
(ac) HAZARDOUS MATERIALS. There has been no storage,
treatment, generation, discharge, transportation or disposal of industrial,
toxic or hazardous substances or solid or hazardous waste by, or on behalf of,
Seller with respect to the Business, the Division or the Purchased Assets in
violation of any Federal, state or local law, statute, rule or regulation or the
common law or any decree, order, arbitration award or agreement with or any
license or permit from any Federal, state or local governmental authority. There
has been no spill, discharge, leak, emission, injection, escape, dumping, or
release of any kind by, or on behalf of, Seller, with respect to the Business,
the Division or the Purchased Assets, into the environment (including, without
limitation, into air, water or ground water) of any materials including, without
limitation, industrial, toxic or hazardous substance or solid, medical or
hazardous waste, as defined under any Federal, state or local law, statute, rule
or regulation other than those releases permissible under such law, statute,
rule or regulation or allowable under applicable permits. Schedule 4.4(ac)
hereto sets forth a complete list of all aboveground and underground storage
tanks, vessels, and related equipment and containers, with respect to the
Business, the Division or the Purchased Assets, that are subject to Federal,
state or local laws, statutes, rules or regulations, and sets forth their
present contents, what the contents have been at any time in the past, and what
program of remediation, if any, is contemplated with respect thereto.
(ad) ACCURACY OF DOCUMENTS, REPRESENTATIONS AND
WARRANTIES. The copies of all documents furnished to Purchaser, or any of its
representatives by or on behalf of Seller or Stockholder or any of their
representatives are true, complete and correct in all material respects. No
representation or warranty of Seller or Stockholder contained in this Agreement
or the Other Seller Agreements, and no statement contained in the Exhibits, the
Schedules or the other documents delivered by or on behalf of Seller or
Stockholder or their representatives pursuant to or in connection with this
Agreement or the Other Seller Agreements 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.
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:
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<PAGE> 31
(a) ABILITY TO BEAR RISK; BUSINESS AND FINANCIAL
KNOWLEDGE AND EXPERIENCE. Seller (i) can bear the economic risk of the
acquisition of the Stock Rights, 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 Stock Rights.
(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 Stock Rights, (ii) has been encouraged and has had the opportunity to rely
upon the advice of Seller's and Stockholder's legal counsel and accountants and
other advisers with respect to the acquisition of the Stock Rights; 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 Stock Rights as Seller 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 Stock Rights.
(d) NO DISTRIBUTION. Seller is acquiring the Stock Rights
for Seller's own account without a view to public distribution or resale, Seller
does not have any contract, undertaking, agreement or arrangement to transfer,
sell or otherwise dispose of any portion of the Stock Rights or any interest
therein to any other person.
(e) STOCK RIGHTS TO BE RESTRICTED. Seller understands
that the Stock Rights will be restricted securities within the meaning of Rule
144 under the Securities Act of 1933, as amended (the "1933 Act").
(f) NO REGISTRATION. Seller understands that the Stock
Rights will 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 Stock Rights are subsequently 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) except as provided in Section 9.2 hereof, Purchaser will be under no
obligation to register the Stock Rights 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 therefore may be precluded
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<PAGE> 32
from transferring, selling or otherwise disposing of the Stock Rights 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 Stock Rights a
legend substantially to the following effect:
"THE STOCK RIGHTS EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND ARE
'RESTRICTED SECURITIES' AS DEFINED BY RULE 144 UNDER THAT ACT. THE
STOCK RIGHTS MAY NOT BE SOLD, TRANSFERRED, PLEDGED OR HYPOTHECATED IN
THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT REGISTERING THE
STOCK RIGHTS UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR, IN LIEU
THEREOF, AN OPINION OF COUNSEL REASONABLY ACCEPTABLE TO THIS COMPANY TO
THE EFFECT THAT REGISTRATION IS NOT REQUIRED UNDER THAT ACT. WITHOUT
LIMITING THE FOREGOING, THE STOCK RIGHTS MAY NOT BE TRANSFERRED, SOLD
OR OTHERWISE DISPOSED OF WITHOUT AN OPINION OF COUNSEL REASONABLY
ACCEPTABLE TO THIS COMPANY THAT SUCH TRANSFER, SALE OR OTHER
DISPOSITION DOES NOT VIOLATE THE SECURITIES LAWS OF ANY APPLICABLE
JURISDICTION OR ANY RULES OR REGULATIONS THEREUNDER."
(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 Stock Rights by Seller or its
respective successors or assigns otherwise than as contemplated hereby.
(j) RELIANCE UPON INFORMATION. Seller understands that
the Stock Rights are being issued in reliance on specific exemptions
from the registration requirements of federal and state securities laws
and that Purchaser is relying upon the truth and accuracy of the
representations, warranties, agreements, acknowledgements and
understandings set forth therein in order to determine the suitability
of Seller to acquire the Stock Rights.
ARTICLE V
CONDUCT PRIOR TO THE CLOSING
5.1 GENERAL. Seller, Stockholder and Purchaser shall have the rights
and obligations with respect to the period between the date hereof and the
Closing Date set forth in the remainder of this Article V.
5.2 SELLER AND STOCKHOLDER. The following are the obligations of Seller
and/or Stockholder:
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(a) ACCESS TO RECORDS. Seller, Stockholder and Seller's
employees, 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, with respect to the Business, the Division or
the Purchased Assets, 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 Stockholder understand
and agree that prior to the Closing, Purchaser's certified public accountants
shall perform an audit with respect to Seller and the Division, and Seller and
Stockholder agree to cooperate fully with Purchaser's accountants.
(b) BUSINESS IN ORDINARY COURSE. Seller shall carry on
the Business as heretofore carried on and will not order, sell, purchase or
lease any products, Inventory, Equipment, Leased Personalty, or other items, or
dispose of any of its assets or leased property, or issue any quotations, or
prepay any of its material obligations, hire or discharge any employee or
officer or, without limitation by specific enumeration of the foregoing, enter
into any other transaction, except in the usual and ordinary course of the
Business in accordance with Seller's past practices. Without limiting the
generality of the foregoing, Seller will not, insofar as any of the following
has any material effect on the Business, the Division or the Purchased Assets,
(i) except as otherwise authorized in this Section, grant any increase in the
compensation payable or to become payable by the Division to any of its
directors, officers, employees or agents, other than normal merit and
cost-of-living increases to employees in accordance with Seller's general
prevailing practices existing prior to the date of this Agreement; (ii) acquire,
or enter into any agreement or understanding (oral or written) to acquire, the
stock, assets or business or goodwill of any other person, firm or other entity;
(iii) enter into or amend any bonus, incentive compensation, deferred
compensation, profit sharing, retirement, pension, group insurance, death
benefit or other fringe benefits plan, trust agreement or arrangement, or any
employment, compensation or consulting agreement involving or affecting any
group of employees or consultants or any single employee or consultant earning a
total annual compensation in excess of $25,000; (iv) incur any indebtedness for
borrowed money; (v) declare or pay dividends or make any other distributions
with respect to its capital; (vi) make any payments (other than normal payments
of salaries as an employee of Seller, made in the ordinary course) to
Stockholder or Affiliate; or (vii) permit any receivable relating to the
Business due from Stockholder or Affiliate to increase or decrease from the
level reflected on the Balance Sheet.
(c) CERTAIN TRANSACTIONS. Seller shall not, without the
prior written consent of Purchaser:
(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 material assets or
property used in, or necessary for the operation of, the Business (including
sales and transfers to an Affiliate);
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(iii) make any material change in the conduct or
nature of any aspect of the 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 business activities or financial condition of the Division.
(iv) waive any material rights affecting the
Business, the Division, or the assets and properties to be purchased under this
Agreement;
(v) pay any Affiliates or be charged by any
Affiliates more than $2,000 for goods sold or services rendered or be charged by
any Affiliates for corporate overhead expenses, management fees, legal or
accounting fees, capital charges, or similar charges or expenses with respect to
the Business;
(vi) incur or commit to incur any individual
capital expenditures in excess of $10,000 or in the aggregate in excess of
$50,000 with respect to the Business;
(vii) materially increase the compensation payable
to any employee in the Division;
(viii) pay or incur any management or consulting
fees with respect to the Business, except Seller may continue to pay $3,000 per
month to Susan Jorenby;
(ix) allow the Division to hire any employee who
shall have an annual salary in excess of $25,000;
(x) incur any indebtedness for borrowed money
other than up to $500,000 from Bank One for the purchase of new products for
sale by the Division;
(xi) make any prepayments (but shall make
required payments) under or with respect to any Accounts Payable with respect to
the Business; and
(xii) without limitation by the enumeration of any
of the foregoing, enter into any material transaction other than in the usual
and ordinary course of business with respect to the Business.
(d) EMPLOYEES. Seller and Stockholder shall use their
best efforts to retain the Business intact, including keeping available the
services of Seller's present employees, representatives and agents.
(e) DIVIDENDS. Seller shall refrain from making or paying
any dividend or other distribution using any of the Purchased Assets with
respect to its capital stock or otherwise, or purchasing, redeeming or otherwise
acquiring any shares of its capital stock that requires Seller to use any of the
Purchased Assets.
(f) CONFIDENTIALITY. Except as disclosed to Purchaser,
Seller and Stockholder will maintain as confidential the discussions between
them and Purchaser, and the
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terms and conditions of this Agreement, and except as required by law will 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.
(g) EXCLUSIVITY. Seller and Stockholder will negotiate
the sale of the Purchased Assets with Purchaser and its affiliates only, and
will not directly or indirectly enter into any discussion with or disclose any
information in relation to Seller or the Business to any other person prior to
August 31, 1996, with a view to a sale that would include all or a portion of
the Purchased Assets. Seller and Stockholder shall promptly advise Purchaser of
any initiatives after the date hereof by any other person, firm or other entity
to so acquire the assets of the Business or the Division and the terms and
conditions thereof.
(h) CONSENTS. Seller and Stockholder shall use their best
efforts and make every good faith attempt to obtain any consent and estoppel
letters required to transfer the Purchased Assets or otherwise reasonably
requested by Purchaser in connection with the assignment of, or alternate
arrangements satisfactory to Purchaser with respect to, any Material Business
Contract, Personalty Lease, lease, consent, license, agreement, or other
instrument, permit, or governmental or private agreement or authorization
including, without limitation, required consents and estoppel letters from those
persons, firms, corporations or other entities, set forth in Schedule 5.2(h)
hereto, which are to be assigned to Purchaser hereunder 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. For purposes of this Section 5.2(h), Material Business
Contracts shall be defined as any single contract that has or may reasonably be
expected to produce revenue to the Division of more than $25,000 in any year, or
any group of contracts that collectively with other contracts produces or may
reasonably be expected to produce revenues of more than $50,000 in any year.
(i) RELEASES. Promptly after the execution of this
Agreement, Seller and Stockholder shall use their best efforts and make every
good faith attempt to obtain releases in form and substance satisfactory to
Purchaser with respect to each of the Excluded Liabilities, including but not
limited to releases with respect to each of the indebtednesses of Seller set
forth in Section 2.2(o) hereof. Within thirty (30) days after the execution of
this Agreement, Seller shall provide to Purchaser evidence satisfactory to
Purchaser that a release with respect to each such Excluded Liability in excess
of $25,000 will be obtained. If Seller fails to obtain releases in form and
substance satisfactory to Purchaser with respect to any Excluded Liabilities in
excess of $25,000 prior to the Closing Date, Purchaser shall deduct from the
Cash Component an amount equal to the full amount (including any interest
accruing thereon) of each of such Excluded Liabilities for which release has
been obtained ("Unreleased Excluded Liabilities") and deposit such deducted
amount into an escrow account (the "Escrowed Funds") at Closing with an escrow
agent mutually agreeable to the parties hereto. On or prior to the Closing Date,
Purchaser and Seller shall enter into an Escrow Agreement with the escrow agent
which shall authorize the escrow agent (1) to pay the Unreleased Excluded
Liabilities in accordance with the terms thereof and (2) upon payment in full or
release of each of the Unreleased Excluded Liabilities, to remit the remainder
of the Escrow Funds to Seller.
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(j) MINORITY STOCKHOLDER CONSENTS. Seller and Stockholder
shall exercise their best efforts and make every good faith attempt to obtain a
consent, in form and substance satisfactory to Purchaser, to the transactions
contemplated by this Agreement from all of Seller's stockholders that are not a
party to this Agreement.
(k) ACCOUNTS RECEIVABLE. Notwithstanding any of the
foregoing, Seller shall use its best efforts to collect on its most aged
accounts receivables first.
5.3 PURCHASER. From and after the date of this Agreement until the
Closing, or in the event that the Closing shall not occur then thereafter,
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 and lenders), or use for any purpose other than as contemplated by
this Agreement, any proprietary information regarding Seller; provided, however,
that Seller and Stockholder acknowledge that during the period from the date of
this Agreement to the Closing Date, Purchaser and its representatives intend to
engage in discussions with the current and past accountants, lenders and vendors
of Seller and expressly authorize Purchaser and its representatives during the
course of such discussions to use any of the information regarding Seller or the
Business as Purchaser and/or its representatives deems necessary and provided
further that Seller and Stockholder shall hold Purchaser and its representatives
harmless against the disclosure of any information during the course of such
discussions. 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 the Division'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 two (2) 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, Stockholder 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 omit to perform any act that, if omitted to be
performed, would prevent or
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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
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) LEASES. Purchaser shall have entered into a Lease
Assignment and Assumption Agreements in the form and substance reasonably
satisfactory to Purchaser and Seller (the "Lease Assumption Agreements"),
pursuant to which Purchaser shall have assumed the Leases.
(c) LEASED PREMISES. Purchaser shall have entered into a
Lease with Joy Norvell for the premises (except that 1,000 square feet of
warehouse space shall be excepted from the Lease) relating to the Business, now
occupied by Seller, which shall provide for taxes, insurance, utilities and
routine maintenance repairs to be paid by Purchaser and shall provide for a
lease term of one (1) year with options to renew for four additional one (1)
year terms followed by an option to renew for a further five (5) year term, rent
of $77,400 per year, and repairs over $5,000 to be paid for by Joy Norvell (the
"Building Lease"). Such Building Lease shall be in form and substance
satisfactory to Purchaser and shall provide that after the initial one (1) year
term either party may terminate the Building Lease by providing ninety (90) days
written notice to the other party.
(d) ASSUMED LIABILITIES. Purchaser shall have entered
into the Bill of Sale, Assignment and Assumption in the form and substance
reasonably satisfactory to Purchaser and Seller (the "Bill of Sale, Assignment
and Assumption"), pursuant to which Purchaser shall assume the Assumed
Liabilities and will have obtained the consent of the lender with respect to the
First American Bank Debt referred to in Section 2.1(c) hereof and the lessor of
Seller's Lebanon Warehouse, both of whom will release Seller from all liability
with respect to the assumed liabilities.
(e) 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
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if the transaction contemplated hereby was consummated) shall have been
performed in all material respects.
(f) PURCHASER'S CLOSING CERTIFICATE. Purchaser shall have
executed a closing certificate, dated as of the Closing Date, in form and
content reasonably acceptable to Seller ("Purchaser's Closing Certificate"),
pursuant to which (i) Purchaser shall represent and warrant to Seller that
Purchaser's representations and warranties to Seller are true and correct as of
the Closing Date as if then originally made (or, if any such representation or
warranty is untrue in any respect, specifying the respect in which the same is
untrue), (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.
(g) 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.
(h) MANAGEMENT AGREEMENT. Purchaser shall have entered
into a management agreement with the Seller pursuant to which each of Rick
Norvell and Greg Norvell shall render services to Purchaser (the "Management
Agreement"). The Management Agreement shall provide that Rick Norvell shall
provide services to Purchaser for a term of three (3) years, shall provide for
compensation of $200,000 per year to the Seller with respect to such services,
shall contain restrictive covenants and set-off rights consistent with this
Agreement, shall provide for eligibility for incentive stock options and shall
include as a condition for continuation of the Management Agreement that (i)
earnings for calendar year 1997 from continuing operations increase at least
twelve percent (12%) over earnings from continuing operations for calendar year
1996 (as recasted by Purchaser's certified public accountants) and (ii) revenues
and earnings from continuing operations for each of the calendar years 1998 and
1999 for the Division increase by at least twelve percent (12%) over the prior
immediately preceding calendar year's revenues and earnings from continuing
operations. The Management Agreement shall provide that Greg Norvell shall
provide services to Purchaser for a term of one (1) year, shall provide for
compensation to the Seller of $50,000 per year, and shall contain restrictive
covenants and set-off rights consistent with the Agreement.
(i) RELEASE FROM CREDITORS. Seller shall have been
generally released from any and all liabilities, obligations or claims, whether
known or unknown, with respect to the Assumed Liabilities set forth in Section
2.1 hereof.
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 Stockholder 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 Stockholder shall be true and
correct in all material respects
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when made and shall be true and correct in all material respects as if
originally made on and as of the Closing Date.
(b) INVENTORY. The value of the Inventory as of the
Closing Date shall be no less than the Minimum Inventory Level as calculated in
accordance with Section 3.2(c) hereof and shall be comprised of no less than
$300,000 worth of product that is marketable and sellable in the month of the
Closing Date.
(c) FINANCING. Purchaser shall have received proceeds of
its financing in an amount and on terms acceptable to Purchaser (in its
reasonable business discretion).
(d) OBLIGATIONS PERFORMED BY SELLER AND STOCKHOLDER. All
obligations of Seller and Stockholder to be performed hereunder through, and
including on the Closing Date (including, without limitation, all obligations
which Seller and Stockholder would be required to perform at the Closing if the
transaction contemplated hereby was consummated) shall have been performed in
all material respects.
(e) CONSENTS. All of the consents and estoppel letters
referred to in Section 5.2(h) hereof, shall have been obtained or, to the extent
any licenses, permits, consents or authorizations held by Seller are not
assignable, Purchaser has either obtained licenses, permits, consents, or
authorizations on substantially the same terms as such licenses, permits,
consents, or authorizations have been issued to Seller, or has obtained binding
commitments from the applicable governmental authorities (in form and content
satisfactory to Purchaser in the exercise of its sole discretion) to issue such
licenses and permits to Purchaser following the Closing.
(f) CERTAIN BUSINESS CONTRACTS. Purchaser shall have
received the consents or reasonable assurance that the assignment will be
accepted by the other contracting party referred to in Section 5.2(h) hereof
with respect to those Business Contracts identified in Section 5.2(h), or
requiring the consent to assignment of a third party, or such Business Contracts
shall have been, with the consent of Purchaser, cancelled effective as of the
Closing Date and shall have been re-signed in the name of Purchaser effective as
of the Closing Date. In addition, Purchaser shall have entered into, or obtained
reasonable assurances that it shall enter into supply agreements with Amole,
Erickson Cosmetic Company, Midwest Bottle, Custom Packaging, Team Packaging,
Packaging Technology and Customer Graphics, or alternate suppliers acceptable to
Purchaser, in any case on terms reasonably satisfactory to Purchaser.
(g) 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 materially
hinder, or to seek material damages on account of, the consummation of the
transactions herein contemplated.
(h) LEASE ASSUMPTION AGREEMENTS. Seller shall have
entered into the Lease Assumption Agreements.
(i) BUILDING LEASE. Joy Norvell shall have entered into
the Building Lease.
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(j) CLOSING CERTIFICATE OF SELLER AND STOCKHOLDER. Seller
and Stockholder shall have executed a closing certificate, dated the Closing
Date, in form and content reasonably acceptable to Purchaser ("Seller's Closing
Certificate"), pursuant to which Seller and Stockholder jointly and severally
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: (aa) there shall have been no material adverse change in the assets,
business operations or condition, financial or otherwise, of the Division; (bb)
the Division shall not have incurred any liabilities or obligations not
reflected on the Balance Sheet except only in the ordinary course of business,
not in violation of this Agreement, none of which are either individually or in
the aggregate material and adverse; (cc) there shall have been no property
damage, destruction or loss (whether or not covered by insurance) which
materially adversely affects the business or assets of the Division; (dd) no
suit, action or proceeding shall have been instituted or, to the best of
Seller's and Stockholder's knowledge and belief, threatened against the Division
(or against Seller or Stockholder with respect to the Division) an adverse
determination of which could reasonably be expected to have a material adverse
effect on the business or financial condition of the Division; and (ee) no
strike, work stoppage or labor slow-down shall have been instituted or, to the
best of Seller's and Stockholder's knowledge and belief after due inquiry,
threatened by any group of employees of the Division, and (ii) that (aa)
Seller's and Stockholder's representations and warranties to Purchaser are true
and correct as of the Closing Date as if then originally made (or if any such
representation or warranty is untrue in any respect, specifying the respect in
which the same is untrue); (bb) all covenants and obligations required by the
terms hereof to be performed by Seller and Stockholder on or before the Closing
Date have been fully performed, or waived by Purchaser; (cc) all documents to be
executed and delivered by Seller and/or Stockholder at or prior to the Closing
have been executed by duly authorized officers of Seller and/or Stockholder; and
(dd) Seller's Business as conducted by the Division prior to Closing is lawful
and proper in all material respects and do not violate any applicable federal,
state, county or township laws, rules, regulations or requirements, the
non-compliance with which would have a material and adverse effect on Seller's
Business as conducted by the Division or the use of the Purchased Assets by
Purchaser after the Closing, and that after the Closing neither Seller nor
Stockholder know or have any reason to believe that the use of the Purchased
Assets by Purchaser to conduct its health and beauty care business in the same
manner and to the same extent as Seller conducted Seller's Business as conducted
by the Division before Closing, would violate any applicable federal, state,
county or township laws, rules, regulations or requirements of a material
nature. Such certificate, if and when delivered, shall for all purposes of this
Agreement constitute additional joint and several representations and warranties
of Seller and Stockholder to the same extent as if made in this Agreement.
(k) BILL OF SALE AND DOCUMENTS OF TITLE. Seller shall
have delivered to Purchaser the Bill of Sale, Assignment and Assumption in form
and content as attached hereto as Exhibit A together with such other documents
of title and transfer 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.
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(l) 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.
(m) 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.
(n) RECEIPT OF OPINION OF COUNSEL FOR SELLER AND
STOCKHOLDER. Purchaser shall have received a favorable opinion (the "Legal
Opinion") of legal counsel for Seller and Stockholder reasonably acceptable to
Purchaser. The Legal Opinion shall be substantially in the form attached hereto
as Exhibit B.
(o) DISCLOSURE SCHEDULES. Purchaser shall have received
from Seller and Stockholder any Supplemental Disclosure Schedules referred to in
Section 4.1 hereof not less than ten (10) days prior to the Closing Date and
Purchaser shall, in the exercise of its sole discretion, be entirely satisfied
with the nature and extent of the disclosure made therein and the
representations and warranties of Seller and Stockholder as modified by the
disclosures contained in the Disclosure Schedules and any Supplemental
Disclosure Schedules.
(p) MANAGEMENT AGREEMENT. Seller, Rick Norvell and Greg
Norvell, respectively, shall have executed and delivered to Purchaser the
Management Agreement attached as Exhibit C.
(q) CONSENTS AND APPROVALS. Purchaser shall have received
all necessary consents and approvals with respect to the issuance of Stock
Rights pursuant to this Agreement.
(r) RELEASE FROM CREDITORS. Each of Seller's creditors
shall have generally released Purchaser from any and all liabilities,
obligations or claims, whether known or unknown, with respect to the Excluded
Liabilities set forth in Section 2.2 hereof, except for unknown potential
claimants, governmental taxing authorities, governmental regulatory authorities,
the Internal Revenue Service, the Tennessee Department of Revenue, governmental
and public utility companies, vendors that have not been specifically designated
by Purchaser, employees, and other unidentified general unsecured creditors.
(s) SCHEDULE OF PROPERTY AND LIST OF CREDITORS. Purchaser
shall have received from Seller and Stockholder a list of Seller's existing
creditors and a schedule of the property to be transferred pursuant to this
Agreement in accordance with any applicable Bulk Sales Act.
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ARTICLE VII
CLOSING
7.1 TIME AND PLACE OF CLOSING. The transactions contemplated by this
Agreement shall be consummated (the "Closing") within forty-five (45) days
following the later to occur of the conditions precedent specified in Sections
6.2(c) and 6.2(m), or at such later date as the parties may mutually in writing
agree (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,
Stockholder and Purchaser; provided, however, in no event shall the Closing
occur within ninety (90) days from the date of this Agreement.
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 Stockholder 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 Stockholder.
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) FUNDS. The Cash Component of the Purchase Price to be
paid at the Closing.
(b) THE STOCK RIGHTS. The Stock Rights.
(c) 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.
(d) BILL OF SALE, ASSIGNMENT AND ASSUMPTION. The Bill of
Sale, Assignment and Assumption executed by Purchaser.
(e) LEASE ASSUMPTION AGREEMENT. The Lease Assumption
Agreement executed by Purchaser.
(f) CLOSING CERTIFICATE. Purchaser's Closing Certificate
executed by Purchaser.
(g) 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.
(h) 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.
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(i) MANAGEMENT AGREEMENT. The Management Agreement
executed by the Purchaser.
(j) OTHER DOCUMENTS. Without limitation by specific
enumeration of the foregoing, all other documents reasonably required to
consummate the transaction herein contemplated.
7.4 SELLER'S DELIVERIES. Subject to the fulfillment or waiver of the
conditions set forth in Section 6.1 hereof, Seller shall deliver to Purchaser at
the Closing physical possession of all Purchased Assets, and shall execute
(where applicable in recordable form) and/or deliver to Purchaser all of the
following:
(a) GOOD STANDING AND EXISTENCE CERTIFICATES.
Certificates of valid existence of Seller from the Secretary of State of
Tennessee and certificates of good standing or certificates of existence from
each state in which Seller is qualified to transact business issued not earlier
than three (3) days prior to the Closing Date.
(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, ASSIGNMENT AND ASSUMPTION. The Bill of
Sale, Assignment and Assumption 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 Stockholder.
(f) OPINION OF COUNSEL. The Legal Opinion executed by
legal counsel for the Seller and Stockholder.
(g) CONSENTS AND ESTOPPEL LETTERS. All necessary consents
and estoppel letters for the assignment of contracts, leases, purchase orders,
sales orders, installation contracts, license agreements, permits and licenses
which are to be assigned to Purchaser or permitted alternate arrangements with
respect thereto.
(h) THE LEASES. The Lease Assumption Agreements executed
by Seller.
(i) RELEASES. The releases described in Section 5.2(i).
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(j) MANAGEMENT AGREEMENT. The Management Agreement
executed by Seller, Rick Norvell and Greg Norvell.
(k) 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.
7.5 STOCKHOLDER'S DELIVERIES. Subject to the fulfillment or waiver of
the conditions set forth in Section 6.1 hereof, Stockholder shall execute and
deliver to Purchaser at the Closing all of the following:
(a) CLOSING CERTIFICATE. Seller's Closing Certificate
executed by Seller and Stockholder.
(b) THE BUILDING LEASE. The Building Lease executed by
Joy Norvell. ARTICLE VIII
POST-CLOSING AGREEMENTS
8.1 MAINTENANCE OF EXISTENCE. Seller shall retain its corporate
existence and Stockholder shall cause Seller to retain its corporate existence
under the laws of the State of Tennessee at least until the first anniversary of
the Closing Date.
8.2 USE OF TRADEMARKS. Neither Seller nor Stockholder shall use and/or
license or give any third party permission to use, any name or trademark that is
deceptively similar to any of the names or trademarks that are included among
the Purchased Assets. In the event that Seller or Stockholder learns of any such
prohibited use, Seller and Stockholder shall immediately notify Purchaser of
such use in writing. Seller and Stockholder shall diligently assist Purchaser,
upon Purchaser's request and at Purchaser's expense, to prosecute any violation
of the intellectual property rights acquired hereunder.
8.3 BACK-UP. Seller and Stockholder shall, at Purchaser's request,
furnish, at Purchaser's cost and expense, 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 Stockholder's possession
or are otherwise reasonably available to Seller or Stockholder.
8.4 THIRD-PARTY CLAIMS. The parties shall cooperate with each other
with respect to the defense of any claims or litigation made or commenced by
third parties subsequent to the Closing Date that are not 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
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prior to the Closing Date shall be provided pursuant to Section 8.6 hereof.
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.
8.6 INSPECTION OF BOOKS AND RECORDS. Purchaser and Seller shall each
make the books and records of Seller purchased or retained, respectively,
pursuant to Sections 1.2(i), 1.3(e) and 1.3(f), including, without limitation,
books and records pertaining to Seller's employees, available for inspection by
the other party, or by its authorized representatives, for reasonable business
purposes at all reasonable times during normal business hours, for a three (3)
year period after the Closing Date. The parties respective rights of inspection
shall include, at the expense of the requesting party, the right to make
extracts, copies or summaries. The representatives of a party inspecting the
records of the other party shall be reasonably satisfactory to the other party.
The party requesting inspection of records of the other party shall reimburse
such other party for the other party's out-of-pocket costs and expenses of
complying with this Section.
8.7 PAYMENTS OF ACCOUNTS RECEIVABLE OR EXCLUDED LIABILITIES.
(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 ACCOUNTS RECEIVABLE. In the event any
Account Receivable is not fully paid to Purchaser within sixty (60) days after
the Closing Date, Purchaser may, at its option, tender it to Seller and/or
Stockholder for the immediate payment by Seller or Stockholder at the face
amount or the unpaid portion thereof. Seller and Stockholder shall only be
required to make payments pursuant to this Section 8.7(b) in an amount up to
five percent (5%) of the value of the Accounts Receivable as of the Closing
Date. Notwithstanding the immediately preceding sentence, Seller and Stockholder
shall not be responsible for any Accounts Receivable that is not fully paid
solely as a result of Purchaser's wanton or willful acts of bad faith. 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 to Seller
under this Agreement, the Building Lease, the Management Agreement or otherwise.
(c) PAYMENT OF DISPUTED SUMS. The parties recognize that
certain liabilities described in Article II may, depending upon certain factors
(by way of example and not limitation, such as when the particular liability was
incurred, whether it is current or reflected on the Balance Sheet), may, in
accordance with Section 2.1, be an Assumed Liability or, in accordance with
Section 2.2, be an Excluded Liability. The parties also recognize that Purchaser
may be called upon to discharge liabilities of this type and the importance of
their prompt discharge to Purchaser's future conduct of its business.
Accordingly, in the conduct of its business, it is understood that Purchaser may
(but shall not be obligated to) discharge certain
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liabilities with respect to the Division within the above-described categories
which may in fact constitute an Excluded Liability with respect to which there
is not a good faith dispute between Seller and the party to whom the Excluded
Liability is owed, as to Seller's liability therefor; provided, however,
Purchaser will give Seller twenty (20) days notice prior to discharging any such
liability. In such event, Purchaser shall give Seller notice in person to
Stockholder or by U.S. Mail, telephone, facsimile or overnight delivery, of the
liability or obligation to be discharged by Purchaser pursuant to this Section
and Seller shall, upon request of Purchaser, promptly reimburse Purchaser for
the amount thereof. Seller shall have no obligation to reimburse Purchaser
unless the liability is an Excluded Liability and Seller is legally responsible
to the person to whom the Excluded Liability is paid and without any right of
offset that Seller reasonably and in good faith believes is applicable to the
liability or obligation. The obligations of Seller and Stockholder to reimburse
Purchaser pursuant to this Section 8.7(c) shall be joint and several.
8.8 SATISFACTION OF OBLIGATIONS AND LIABILITIES. Seller shall (a) pay
or cause to be paid all of the obligations and liabilities arising out of the
Business, the Division or the Purchased Assets as they mature, except for
obligations and liabilities contested in good faith, (b) maintain in all
material respects and perform its obligations under all agreements and contracts
to which it is bound in accordance with their terms and (c) comply in all
material respects with all requirements of applicable federal, state and local
laws, rules and regulations. Seller shall pay or cause to be paid in full all
bills and invoices for labor, goods, materials, services and utilities of any
kind relating to the Business, the Division or the Purchased Assets which were
contracted for by Seller which were delivered to or performed on the Division,
except for bills and invoices the payment of which is contested in good faith.
8.9 APPROVAL OF SELLER'S LENDERS. Seller shall have received consents
or releases from all of its lenders or other creditors that have filed liens
against any of the Purchased Assets or whose consent is otherwise required for
the transfer of the Purchased Assets.
ARTICLE IX
POST CLOSING OBLIGATIONS
9.1 OBLIGATIONS OF STOCKHOLDER.
(a) COVENANT NOT TO COMPETE. In consideration of the
execution and delivery of this Agreement by Purchaser, and in consideration of
the Purchase Price, and as additional consideration therefor, Seller and
Stockholder unconditionally agree that during the Restricted Period (as defined
below) Seller and Stockholder will not, directly or indirectly (including,
without limitation, as a partner, shareholder, director, officer or employee of,
or lender or consultant to, any other person or entity), or in any other
capacity within, into or from the Restricted Territory (as defined below) engage
in Seller's Business as conducted by the Division, or any aspect thereof, unless
first authorized in writing by Purchaser, which authorization may be withheld in
the sole and absolute discretion of Purchaser. For purposes
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of this Agreement, the term "Restricted Period" shall mean the period ending
five (5) years from the Closing Date. For purposes of this Agreement, the term
"Restricted Territory" shall mean worldwide, including the United States. If
Seller or Stockholder violates any obligations under this Section 9.1(a) then
the Restricted Period for that breaching entity shall be extended by the period
of time equal to that period beginning when the activities constituting such
violation commenced and ending when the activities constituting such violation
terminated. For purposes of this Section 9.1 only, Rick and Greg Norvell will be
included within the defined term "Stockholder."
(b) NONSOLICITATION. In consideration of the execution
and delivery of this Agreement by Purchaser, and in consideration of the
payments by Purchaser of the Purchase Price, Seller and Stockholder agree that
for a period of five (5) years following the Closing Seller and Stockholder will
not, directly or indirectly, solicit or cause others to solicit (i) in respect
of Seller's Business as conducted by the Division, any person or other entity
that is, or was within the twelve (12) month period immediately prior to the
Closing, a customer or supplier of the Division, or (ii) any person who, on the
date hereof, is an employee of the Division, for employment or as an independent
contractor with any person or entity, unless first authorized in writing by
Purchaser, which authorization may be withheld in the sole and absolute
discretion of Purchaser. If Seller or Stockholder violates its obligations under
this Section 9.1(b), then the time periods hereunder with respect to the
breaching entity only, shall be extended by the period of time equal to that
period beginning when the activities constituting such violation commenced and
ending when the activities constituting such violation terminated.
(c) TRADE SECRETS AND OTHER INFORMATION. After the
Closing, neither Seller nor 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 the Business conducted by
the Division, 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
Stockholder in violation of this Agreement, or (ii) is required to be disclosed
by law. Seller and Stockholder will 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.
(d) CONFIDENTIALITY. At all times after the Closing,
Seller and Stockholder will maintain as confidential the discussions among them
and Purchaser, and the terms and conditions of this Agreement, and the other
agreements to be executed in connection herewith, and except as required by law
will not make any trade press or other announcement or disclosure in relation to
such discussions whether before or after Closing without the prior written
consent of Purchaser.
(e) EQUITABLE RELIEF. Seller and Stockholder acknowledge
that the covenants contained in each of paragraphs (a), (b), (c) and (d) of this
Section 9.1 are a material inducement for Purchaser to execute and deliver this
Agreement and to consummate the
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transactions contemplated hereby. Accordingly, Seller and Stockholder
acknowledge that the restrictions contained in each of paragraphs (a), (b), (c)
and (d) of this Section 9.1 (including, without limitation, the Restricted
Period and the Restricted Territory) are 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 Seller or
Stockholder of any of the provisions of any of paragraphs (a), (b), (c) or (d)
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 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.
(f) SEVERABILITY; SURVIVAL. Each and every provision set
forth in this Section 9.1 is independent and severable from the others, and no
provision 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.
The parties hereto agree that if any provision of this Section 9.1 shall be
declared by a court of competent jurisdiction to be unenforceable for any reason
whatsoever, the court may appropriately limit or modify such provision, and such
provision shall be given effect to the maximum extent permitted by applicable
law. Each provision of this Section 9.1 shall survive the Closing.
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 upon the exercise of the Stock Rights, if any,
granted in accordance with Section 3.2(c) hereof; and
(iii) The term "Holder" means the Stockholder.
(b) PIGGYBACK REGISTRATION. Commencing 180 days after the
Purchaser has completed such 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
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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 mailing of such notice by Purchaser
in accordance with Section 12.4, 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 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(b)
shall expire on the second anniversary of the receipt by Holders of the Common
Stock underlying the Stock Rights.
ARTICLE X
INDEMNIFICATION
10.1 INDEMNIFICATION BY SELLER AND STOCKHOLDER.
(a) GENERAL. Seller and Stockholder, jointly and
severally, 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)
with respect to or arising out of any demand, claim, inquiry, investigation,
proceeding, action or cause of action that Purchaser may suffer or incur by
reason of: (a) the material inaccuracy of any of the representations or
warranties of Seller or Stockholder contained in this Agreement, or any of the
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agreements, certificates, documents, exhibits or schedules delivered in
connection with this Agreement; (b) any of the Excluded Liabilities; (c) 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 Stockholder
contained in this Agreement, or any of the agreements, certificates, documents,
exhibits or schedules delivered in connection with this Agreement.
(b) ENVIRONMENTAL. Seller and Stockholder, jointly and
severally, 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 by reason of
the breach of the representations set forth in Section 4.4(ab) or 4.4(ac),
including, but not limited to, the investigation, defense or settlement of any
claim covered by this indemnity) with respect to or arising out of any demands,
claims, inquiries, investigations, proceedings, actions or causes of action,
environmental assessments and/or remediation expenses that Purchaser, may suffer
or incur by reason of any breach of the representations set forth in Section
4.4(ab) or Section 4.4(ac) or:
(i) any generation, transportation, storage,
treatment or disposal of industrial, toxic or hazardous substances or solid or
hazardous wastes by, for the account, or for the benefit of Seller, occurring on
or prior to the Closing Date including, without limitation, any waste or other
disposal activities or discharges which occurred at a facility on which any
portion of Seller's (or its predecessors') business was conducted, any waste or
other disposal activities or discharges which occurred off of any such facility
with regard to wastes and other substances generated at or on such facility, and
any waste or other disposal activities or discharges which occurred on real
estate owned or leased by Seller (or its predecessor) at any time whether or not
Seller (or its predecessor) owned or leased such real estate at the time such
waste or other disposal activities or discharges were engaged in, and whether or
not Seller performed such waste or other disposal activities or discharges;
(ii) any spills, discharges, leaks, emissions,
injections, escapes, dumping, or any releases or threatened releases as defined
now or in the future under the Comprehensive Environmental Response,
Compensation, and Liability Act of 1980, P.L. 96-510, as amended or
reauthorized from time to time, or any other similar Federal, state or local
laws, statutes, rules or regulations occurring on or prior to the Closing Date,
including, but not limited to, both those releases or incidents involving
potential or actual environmental contamination which required notification or
reporting to appropriate Federal, state or local officials or agencies, or
clean-up or remedial activities and those releases or incidents which occurred
prior to the Closing Date, of any requirements imposing such notification or
reporting obligations or clean-up or remedial activities, but which would have
been subject to such obligations if they had occurred subsequent to the
effective date of such requirements;
(iii) any discharges to surface waters or
groundwaters occurring on or prior to the Closing Date;
(iv) any air emissions occurring on or prior to
the Closing Date;
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(v) the exposure of and resulting consequences
to any persons, including, but not limited to, employees of Seller, to any
mineral, chemical or industrial product, raw material intermediate, by-product
or waste, or substance created, generated, processed, handled or originating at
a facility at which Seller or Seller's predecessor conducted business on or
prior to the Closing Date or otherwise used by Seller or Seller's predecessor in
the conduct of its business or contained in or constituting a part of
merchandise which was sold by Seller or Seller's predecessor;
(vii) any violations by Seller occurring on or
prior to the Closing Date of Federal, state or local (A) environmental laws, (B)
mine safety and reclamation laws, or (C) occupational or employee health and
safety laws;
(vii) any and all actions, failures to act and
negligence by Seller, or anyone acting for, or on behalf of Seller in
monitoring, maintaining and upkeep of on-site storage, treatment and disposal
facilities on or prior to the Closing Date;
(viii) any use, removal, maintenance or monitoring
of storage tanks by Seller, or anyone acting for, or on behalf of Seller on or
prior to the Closing Date; and
(ix) any violations, fees, obligations or
failures by Seller, or anyone acting for, or on behalf of Seller to comply with
any and all permit requirements on or prior to the Closing Date.
(c) BULK SALES MATTERS. Seller and Stockholder, jointly
and severally, 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)
with respect to or arising out of any demand, claim, inquiry, investigation,
proceeding, action or cause of action which Purchaser may suffer or incur by
reason of any liability or obligation of Seller or Stockholder, of whatsoever
nature and type, with respect to or arising under any applicable Bulk Sales Act.
(d) EXCLUSION FROM INDEMNIFICATION. Seller and
Stockholder shall have no obligation to defend, indemnify and hold Purchaser
harmless pursuant to Section 10.1(a) hereof with respect to any liability that
is an Assumed Liability expressly set forth in Section 2.1 hereof.
(e) RIGHT OF OFFSET. Purchaser shall be entitled to
offset any amount owed to Purchaser by Seller or Stockholder against any amount
owing from Purchaser under the Building Lease, the Management Agreement, or
otherwise to Seller or Stockholder. In addition, the Stock Rights will not be
exercisable in the event any amount is owed to Purchaser by Seller or
Stockholder and remains unpaid.
10.2 INDEMNIFICATION BY PURCHASER. Purchaser covenants and agrees to
defend, indemnify and hold Seller and Stockholder harmless for, from and against
any and all
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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) with respect to or arising out of any demand, claim,
inquiry, investigation, proceeding, action and or cause of action that Seller or
Stockholder may suffer or incur by reason of: (a) 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; (b) any Assumed Liability; or (c) 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.
(a) EXCLUSION FROM INDEMNIFICATION. Purchaser shall have
no obligation to defend, indemnify and hold Seller or Stockholder harmless
pursuant to this Section 10.2 hereof with respect to any liability that is an
Excluded Liability set forth in Section 2.2 hereof.
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, if possible, 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, provided that the Indemnitor confirms to the Indemnitee that it is a
claim to which its rights of indemnification apply. 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, 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,
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whose consent to the selection of counsel shall not be unreasonably withheld or
delayed.
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; or (b) by Purchaser if the conditions precedent set forth in Section
5.2(i) or Section 6.2 are not satisfied or waived in writing by Purchaser.
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 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. If
Purchaser elects to proceed to Closing pursuant to this Section 11.2(a) despite
Seller's violation of any condition precedent set forth in Section 6.2(b), the
Purchase Price and the Cash Component thereof shall be reduced in accordance
with Section 3.2(c). If Seller violates its covenant set forth in Section 5.2(b)
and Purchaser elects to proceed to Closing notwithstanding such violation, the
Purchase Price and the Cash Component thereof shall be reduced or further
reduced, as the case may be, by an amount equal to the damages caused by
Seller's violation to Purchaser (as determined by the certified public
accountant selected by Purchaser).
(b) DECLINE TO CLOSE. Decline to proceed to Closing,
terminate this Agreement as provided in Section 11.1 hereof, and thereafter seek
damages as limited by, and only to the extent permitted in, Section 11.4 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 Stockholder 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
spreadsheet data compiled utilizing confidential or financial information
pertaining to Seller.
11.4 RIGHT TO DAMAGES. If this Agreement is terminated, no party hereto
shall have any liability or obligation to the other except as provided in the
next paragraph; provided,
45
<PAGE> 54
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, her 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(g)
or 11.3 hereof, 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 accounting and attorneys' fees).
If Seller and/or Stockholder fails to proceed with the Closing for any
reason other than in accordance with Section 11.1 hereof, Seller and Stockholder
shall be jointly and severally liable to pay Purchaser a fee of $350,000 (the
"Termination Fee") in addition to paying all of Purchaser's out-of-pocket costs
and expenses, which amount shall be payable by wire transfer of same day funds
within two days after the date such amount becomes due. Seller and Stockholder
acknowledge that the agreements contained in this Section 11.4 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 Stockholder fail to promptly pay the Termination Fee, Seller and
Stockholder shall also pay Purchaser all its costs and expenses incurred by it
in pursuing payment of such Termination Fee (including reasonable attorneys'
fees).
If the certified public accountant chosen by Purchaser to audit the
Business determines that Seller has violated Section 5.2(b) or Section 5.2(c)
hereof and as a result thereof Purchaser elects to terminate this Agreement,
Seller and Stockholder shall be jointly and severally liable for all of
Purchaser's out-of-pocket 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 Purchaser in pursuing such rights and remedies (including
reasonable accounting and attorneys' fees).
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.
12.2 FEES. Seller, Stockholder 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. Stockholder and Seller shall be solely responsible for
46
<PAGE> 55
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 (except as
provided in Section 11.4) 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 Stockholder or Seller.
12.3 NO OBLIGATION TO HIRE. Nothing contained in this Agreement shall
impose, or be deemed to impose, upon Purchaser any obligation to employ or
retain any persons who are employed by Seller as of the Closing Date or to offer
employment to such persons under similar working conditions as those existing
prior to the Closing.
12.4 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:
Designs by Norvell, Inc.
115 Edgewood Street
Alexandria, TN 37012
Attention: Joy Norvell Martin
FAX: (615) 529-2166
With a copy to:
Manier, Herod, Hollabaugh & Smith
First Union Tower, Suite 2200
150 Fourth Avenue North
Nashville, TN 37219-2494
Attention: Mary Paty Lynn Jetton, Esq.
FAX: (615) 242-4203
If to Stockholder:
Joy Norvell
c/o Designs by Norvell, Inc.
115 Edgewood Street
Alexandria, TN 37012
FAX: (615) 529-2166
47
<PAGE> 56
With a copy to:
Manier, Herod, Hollabaugh & Smith
First Union Tower, Suite 2200
150 Fourth Avenue North
Nashville, TN 37219-2494
Attention: Mary Paty Lynn Jetton, Esq.
FAX: (615) 242-4203
If to Purchaser:
Leopold Styling Products, Inc.
6105 North Palo Cristi Drive
Paradise Valley, AZ 85253
Attention: Mr. Sam Leopold
FAX: (602) 481-3328
With a copy to:
O'Connor, Cavanagh, Anderson,
Killingsworth & Beshears, P.A.
One E. 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.
12.5 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.
12.6 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.
48
<PAGE> 57
12.7 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.
12.8 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.
12.9 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 Arizona applicable to contracts
made in that state.
12.10 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: PURCHASER:
DESIGNS BY NORVELL, INC., LEOPOLD STYLING PRODUCTS, INC.,
a Tennessee corporation a Delaware corporation
By:__________________________ By:____________________________
Its:_________________________ Its:___________________________
STOCKHOLDER:
_____________________________
Joy Norvell Martin
49
<PAGE> 58
AGREEMENT OF RICK NORVELL AND GREG NORVELL
The undersigned hereby acknowledge and agree to be bound by the
provisions of Section 9.1 of the foregoing Asset Purchase Agreement.
___________________________
Rick Norvell
___________________________
Greg Norvell
50
<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)
<S> <C> <C> <C> <C>
The computation of per share
earning is as follows:
Pro forma net income............. $2,617,000 $2,660,000 $1,653,000 $1,649,000
========== ========== ========== ==========
Pro forma weighted average number
of shares outstanding.......... 3,838,429 3,838,429 3,838,429 3,838,429
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.................... 3,998,531 3,998,531 3,998,531 3,998,531
========== ========== ========== ==========
Net income (loss) per share...... $.65 $.67 $.41 $.41
========== ========== ========== ==========
</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
September 20, 1996
<PAGE> 1
EXHIBIT 23.3
I hereby consent to the use of my name as a director to be elected upon
consumation of the initial public offering in the Styling Technology
Corporation's Registration Statement on Form S-1.
/s/ Sylvan Schefler
- --------------------------------
Sylvan Schefler
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET OF STYLING TECHNOLOGY CORPORATION, A COMPANY FORMED IN JUNE 1995 TO
ACQUIRE FOUR COMPANIES IN THE PROFESSIONAL BEAUTY SUPPLY INDUSTRY AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<EXCHANGE-RATE> 1
<CASH> 1
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1
<PP&E> 66
<DEPRECIATION> 0
<TOTAL-ASSETS> 67
<CURRENT-LIABILITIES> 66
<BONDS> 0
0
0
<COMMON> 1
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 67
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 0
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
