UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1997
Commission File Number 0-21703
STYLING TECHNOLOGY CORPORATION
------------------------------------------------------
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 75-2665378
- ------------------------------ -------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
2390 East Camelback Road, Suite 435 Phoenix, Arizona 85016
- ---------------------------------------------------- ----------
(address of principal executive offices) (zip code)
(972) 296-2887
----------------------------------------------------
(registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
The number of shares of the issuer's class of capital stock as of the latest
practicable date, is as follows:
3,948,703 shares of Common Stock, $.0001 par value, as of August 14, 1997.
--------------------------------------------------------------------------
<PAGE>
STYLING TECHNOLOGY CORPORATION
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 1997
TABLE OF CONTENTS
PAGE
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -
December 31, 1996 and June 30, 1997 .............................. 3
Condensed Consolidated Statements of Operations -
Three Months ended June 30, 1996 (Predecessors)
and Three Months ended June 30, 1997............................. 4
Condensed Consolidated Statements of Operations -
Six Months ended June 30, 1996 (Predecessors)
and June 30, 1997................................................. 5
Condensed Consolidated Statements of Cash Flows (Predecessors) -
Six Months ended June 30, 1996.................................... 6
Condensed Consolidated Statement of Cash Flows -
Six Months ended June 30, 1997.................................... 7
Notes to Condensed Consolidated Financial Statements................ 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................... 10
PART II. OTHER INFORMATION................................................... 14
2
<PAGE>
ITEM 1. FINANCIAL STATEMENTS
STYLING TECHNOLOGY CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 1997 AND DECEMBER 31, 1996
June 30,
December 31, 1997
1996 (Unaudited)
----------- -----------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 4,492,000 $ 1,679,000
Accounts receivable, net of allowance for doubtful
accounts of $427,000 at December 31, 1996 and
June 30, 1997 1,640,000 5,667,000
Inventories, net 2,635,000 4,854,000
Prepaid expenses and other current assets 292,000 820,000
----------- -----------
Total current assets 9,059,000 13,020,000
----------- -----------
PROPERTY AND EQUIPMENT, net 1,125,000 1,457,000
GOODWILL AND OTHER 22,050,000 43,943,000
----------- -----------
Total assets $32,234,000 $58,420,000
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 3,000,000 $ 2,045,000
Accrued liabilities 1,518,000 2,810,000
Current portion of long-term debt 83,000 1,600,000
----------- -----------
Total current liabilities 4,601,000 6,455,000
----------- -----------
LONG-TERM DEBT, less current portion 2,316,000 24,152,000
----------- -----------
COMMITMENTS AND CONTINGENCIES
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, 4,756,554 shares issued
and 3,948,703 outstanding at December 31, 1996
and June 30, 1997 1,000 1,000
Additional paid-in capital 27,455,000 27,866,000
Retained earnings (deficit) (339,000) 1,746,000
Treasury stock (1,800,000) (1,800,000)
----------- -----------
Total stockholders' equity 25,317,000 27,813,000
----------- -----------
Total liabilities and stockholders' equity $32,234,000 $58,420,000
=========== ===========
The accompanying notes are an integral part of these
condensed consolidated balance sheets.
3
<PAGE>
STYLING TECHNOLOGY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Predecessor's Three Months Ended June 30, 1996 Three Months
----------------------------------------------- Ended
Body June 30,
Gena Drench JDS KII 1997
---------- --------- -------- --------- ----------
<S> <C> <C> <C> <C> <C>
NET SALES $2,304,000 $ 3,747,000 $ 764,000 $ 291,000 $7,437,000
COST OF SALES 1,328,000 2,159,000 305,000 134,000 3,246,000
---------- ----------- --------- --------- ----------
Gross profit 976,000 1,588,000 459,000 157,000 4,191,000
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 656,000 1,235,000 462,000 147,000 2,333,000
---------- ----------- --------- --------- ----------
Income (loss) from operations 320,000 353,000 (3) 10,000 1,858,000
INTEREST EXPENSE (INCOME) AND
OTHER, NET 6,000 (41,000) 9,000 18,000 114,000
---------- ----------- --------- --------- ----------
Income (loss) before income 314,000 394,000 (12) (8,000) 1,744,000
taxes
PROVISION FOR INCOME TAXES 109,000 150,000 -- -- 713,000
---------- ----------- --------- --------- ----------
Net income (loss) $ 205,000 $ 244,000 $ (12) $ (8,000) $1,031,000
========== =========== ========= ========= ==========
WEIGHTED AVERAGE SHARES
OUTSTANDING 4,129,000
==========
NET INCOME PER COMMON SHARE:
Primary $ .25
==========
Fully diluted $ .25
==========
</TABLE>
The accompanying notes are an integral part of these
condensed consolidated financial statements.
4
<PAGE>
STYLING TECHNOLOGY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Predecessor's Six Months Ended June 30, 1996 Six Months
----------------------------------------------- Ended
Body June 30,
Gena Drench JDS KII 1997
---------- --------- -------- --------- ----------
<S> <C> <C> <C> <C> <C>
NET SALES $4,352,000 $6,586,000 $1,665,000 $736,000 $14,916,000
COST OF SALES 2,536,000 3,465,000 675,000 343,000 6,480,000
---------- ---------- ---------- -------- -----------
Gross profit 1,816,000 3,121,000 990,000 393,000 8,436,000
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 1,378,000 2,402,000 928,000 329,000 4,731,000
---------- ---------- ---------- -------- -----------
Income from operations 438,000 719,000 62,000 64,000 3,705,000
INTEREST EXPENSE AND OTHER, NET 30,000 9,000 19,000 39,000 174,000
---------- ---------- ---------- -------- -----------
Income before income taxes 408,000 710,000 43,000 25,000 3,531,000
PROVISION FOR INCOME TAXES 144,000 270,000 17,000 -- 1,446,000
---------- ---------- ---------- -------- -----------
Net income $ 264,000 $ 440,000 $ 26,000 $ 25,000 $ 2,085,000
========== ========== ========== ======== ===========
WEIGHTED AVERAGE SHARES
OUTSTANDING 4,124,000
===========
NET INCOME PER COMMON SHARE:
Primary $ .51
===========
Fully diluted $ .51
===========
</TABLE>
The accompanying notes are an integral part of these
condensed consolidated financial statements.
5
<PAGE>
STYLING TECHNOLOGY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - PREDECESSORS
SIX MONTHS ENDED JUNE 30, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
Body
Gena Drench JDS KII
---- ------ --- ---
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C> <C>
Net income $ 264,000 $ 440,000 $ 26,000 $ 25,000
Adjustments to reconcile net income to net
cash used in operating activities-
Depreciation and amortization 72,000 66,000 7,000 11,000
Changes in assets and liabilities-
Accounts receivable (13,000) (643,000) 66,000 43,000
Inventory 258,000 997,000 (58,000) 146,000
Prepaid expenses and other assets 85,000 141,000 9,000 (4,000)
Accounts payable and
accrued liabilities (112,000) (242,000) 79,000 (33,000)
--------- --------- --------- ---------
Net cash provided by operating
activities 554,000 759,000 129,000 188,000
--------- --------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (10,000) (3,000) -- --
--------- --------- --------- ---------
Net cash used in investing activities (10,000) (3,000) -- --
--------- --------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Note Payable (146,000) -- -- --
Bank overdraft -- 127,000 (90,000) --
Payments of long-term debt 60,000 -- -- (105,000)
Net payments to parent (37,000) (883,000) -- --
--------- --------- --------- ---------
Net cash used in financing activities (123,000) (756,000) (90,000) (105,000)
--------- --------- --------- ---------
INCREASE IN CASH 421,000 -- 39,000 83,000
CASH AND CASH EQUIVALENTS, beginning of
period 198,000 -- 27,000 96,000
--------- --------- --------- ---------
CASH AND CASH EQUIVALENTS, end of period $ 619,000 $ -- $ 66,000 $ 179,000
========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these
condensed consolidated financial statements.
6
<PAGE>
STYLING TECHNOLOGY CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1997
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,085,000
Adjustments to reconcile net income to net cash used in
operating activities -
Depreciation and amortization 578,000
Interest accretion on note payable 85,000
Changes in assets and liabilities -
Accounts receivable (2,829,000)
Inventory 40,000
Prepaid expenses and other assets (161,000)
Accounts payable and accrued liabilities (1,635,000)
------------
Net cash used in operating activities (1,837,000)
------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of acquired businesses, net of cash acquired (21,816,000)
Purchases of property, plant and equipment (160,000)
Net cash used in investing activities (21,976,000)
------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of notes payable (454,000)
Proceeds from credit facility, net of financing costs 21,454,000
Net cash provided by financing activities 21,000,000
------------
DECREASE IN CASH AND CASH EQUIVALENTS (2,813,000)
CASH AND CASH EQUIVALENTS, beginning of period 4,492,000
------------
CASH AND CASH EQUIVALENTS, end of period $ 1,679,000
============
The accompanying notes are an integral part of these
condensed consolidated financial statements.
7
<PAGE>
STYLING TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. FORMATION OF THE COMPANY:
ACQUISITIONS AND INITIAL PUBLIC OFFERING
Styling Technology Corporation (the Company) was formed in June 1995. From June
1995 through November 26, 1996, the Company conducted no operations and its only
activities related to negotiating acquisitions and related financing. During
November 1996, the Company completed an initial public offering (the Offering)
of 3,115,852 shares of its common stock. Simultaneously with the consummation of
the Offering, the Company acquired in separate transactions four businesses that
develop, produce, and market professional salon products (collectively, the
Acquired Businesses).
The Company acquired all of the outstanding stock of Gena Laboratories, Inc.
(Gena) and JDS Manufacturing Co., Inc. (JDS) and certain assets and liabilities
of the Body Drench Division of Designs by Norvell, Inc. (Body Drench) and
Kotchammer Investments, Inc. (KII). The cost of the Acquired Businesses,
including direct acquisition costs, was approximately $22,900,000. The combined
purchase price was funded with approximately $20,800,000 in cash from the net
proceeds of the Offering, and approximately $2,100,000 of seller carryback
financing and issuance of common stock. The acquisitions were accounted for
using the purchase method of accounting. The historical financial results of the
individual Acquired Businesses are presented for comparative purposes as the
Predecessors of the Company.
Immediately following the purchase of the Acquired Businesses, the Company
commenced operations on November 27, 1996. After the purchase, the Company began
consolidating its operations, negotiated a new manufacturing agreement with a
major supplier, met with major customers to discuss its new marketing plans,
strengthened its distribution network, and established its infrastructure and
organization for the future growth of existing operations and for future
acquisitions.
During March 1997, the Company acquired inventory and other assets of the Utopia
line of high-end tanning products from Creative Laboratories, Inc. for
approximately $350,000. Effective June 26, 1997, the Company acquired U.K. ABBA
Products, Inc., a producer and marketer of an aromatherapy based line of hair
care products, for $20,000,000 (see Note 3).
NOTE 2. BASIS OF PRESENTATION:
The consolidated financial statements included herein have been prepared
pursuant to the rules and regulations of the Securities and Exchange Commission.
The statements presented do not include all information and footnotes required
to be in conformity with generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring adjustments) considered necessary for a fair presentation
have been included. Results of operations in interim periods are not necessarily
indicative of results for a full year. These consolidated financial statements
and notes thereto should be read in conjunction with the Company's consolidated
financial statements and notes thereto included in the Company's annual report
on Form 10-K for the year ended December 31, 1996. The preparation of financial
statements in accordance with generally accepted accounting principles requires
management to make estimates and assumptions. Such estimates and assumptions
affect the reported amounts of assets and liabilities as well as disclosure of
contingent assets and liabilities at the date of the accompanying consolidated
financial statements, and the reported amounts of the revenues and expenses
during the reporting periods. Actual results could differ from those estimates.
8
<PAGE>
NOTE 3. ACQUISITION OF U.K. ABBA PRODUCTS, INC.
Effective June 26, 1997, the Company acquired all of the issued and outstanding
capital stock of U.K. ABBA Products, Inc., (ABBA), a producer of a proprietary
line of aromatherapy-based professional hair care products. The Company paid a
purchase price of $20 million for the stock of ABBA. This transaction was
accounted for using the purchase method of accounting.
The following unaudited pro forma summary includes the combined results of
operations of Company and ABBA as if the acquisition had occurred at the
beginning of 1997, after giving effect to certain pro forma adjustments
permitted by the disclosure requirements of Accounting Principles Board Opinion
No. 16, BUSINESS COMBINATIONS. These adjustments include only the effect of
amortization of goodwill, interest expense that would have been incurred to
finance the purchase and the estimated related income tax effects. The pro forma
financial data is for informational purposes only, and is not necessarily
indicative of the results of operations as they would have been had the
transactions been effected on January 1, 1997, and is also not necessarily
indicative of future operating results.
For the six months June 30, 1997 ended, pro forma net sales were $20,658,000,
income from operations $3,724,000, net income was $1,297,000 and earnings per
share was $0.32.
In connection with the acquisition of ABBA, the Company entered into a six-year,
$28 million senior credit facility (The Credit Facility) with a group of banks
for whom Credit Agricole Indosuez acted as agent. The Credit Facility consists
of Term Loan A, Term Loan B and a Revolving Credit Facility. Term Loan A is a
$13.0 million term loan maturing in June 2002 with principal and interest
payable quarterly, at the agent's prime rate plus 1.50% (10.0% at June 30,
1997). Term Loan B is a $10.0 million term loan maturing in June 2003 with
principal and interest payable quarterly at the agent's prime rate plus 2.00%
(10.5% at June 30, 1997). The Revolving Credit Facility, which matures in June
2002, provides for up to $5.0 million in borrowings that may be used for general
corporate purposes, including working capital, acquisitions and repayment of
existing indebtedness. Interest is payable quarterly at the agent's prime rate
plus 1.50%. As of June 30, 1997, there were no borrowings outstanding under the
Revolving Credit Facility. Under the Credit Facility, the Company may prepay all
or part of the loan amounts at any time, without penalty. As a part of the
financing, the Company has granted a security interest in substantially all of
its assets to the agent, and recorded approximately $2.0 million in loan costs
(including the fair value of 150,000 market value warrants issued to the agent),
which are being amortized over the maturity period of the Credit Facility.
NOTE 4. INVENTORY
Inventories consist of the following at:
June 30, 1997 December 31,
(Unaudited) 1996
----------- ----------
Raw materials and work-in-process $1,346,000 $1,325,000
Finished goods 3,508,000 1,310,000
---------- ----------
$4,854,000 $2,635,000
========== ==========
9
<PAGE>
NOTE 5. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standard No. 128, (SFAS No. 128), EARNINGS PER SHARE, which
established a new accounting principle for accounting for earnings per share.
SFAS No. 128 is effective for the Company's fiscal year ended December 31, 1998.
When adopted, SFAS No. 128 will require restatement of prior years' earnings per
share. The pro forma SFAS No. 128 earnings per share is as follows for all
periods presented.
Three Months Six Months
Ended Ended
June 30, June 30,
1997 1997
------------ ----------
Basic EPS $.26 $.53
Diluted EPS .25 .51
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
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, South
America, Australia, and New Zealand. The Company offers 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 Company was founded in June 1995 and commenced operations on
November 26, 1996. On that date, simultaneous with the consummation of an
initial public offering, the Company acquired four professional salon products
businesses (the "Acquired Businesses") that, on a combined basis, have a
diversified line of well-established, brand-name salon products. In March 1997,
the Company acquired the Utopia line of premium tanning products from Creative
Laboratories, Inc. Effective June 26, 1997, the Company acquired U.K. ABBA
Products, Inc., a producer and marketer of an aromatherapy based line of hair
care products, for $20,000,000.
Except for the historical information contained herein, the discussion
in this Report 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 "Special Considerations" contained in Item 1 of
the Company's Form 10-K for the fiscal year ended December 31, 1996. Historical
Results are not necessarily indicative of trends in operating results for any
future period.
10
<PAGE>
RESULTS OF OPERATIONS - THREE MONTHS ENDED AND SIX MONTHS ENDED JUNE 30, 1997
The Company earned net income of $1,031,000, or $0.25 per share, for
the three months ended June 30, 1997. The Company earned net income of
$2,085,000, or $0.51 per share, for the six months ended June 30, 1997. These
results mark significant improvement over the operating results of the Acquired
Businesses during the same period in 1996. The Company attributes the
improvement in net income during the three and six months ended June 30, 1997
primarily to the successful implementation of a key component of its business
strategy, the enhancement of operating efficiencies of the Acquired Businesses.
Net sales amounted to $7,437,000 for the three months ended June 30,
1997, compared to combined net sales for the Acquired Businesses of $7,106,000
for the three months ended June 30, 1996. Net sales amounted to $14,916,000 for
the six months ended June 30, 1997, compared to combined net sales for the
Acquired Businesses of $13,339,000 for the six months ended June 30, 1996. The
$1,577,000, or 12%, increase in sales was primarily the result of increased
sales of the Company's Body Drench and Gena product lines as compared to the
sales achieved by the individual Acquired Businesses in the same periods during
1997. In particular, the Company's ability to satisfy demand, which had
previously gone unmet with respect to the Body Drench line due to capital
constraints of the prior owners, resulted in substantial sales growth in the
periods.
Cost of sales amounted to $3,246,000, or 44% as a percentage of net
sales, for the three months ended June 30, 1997, compared to $3,926,000, or 55%
as a percentage of the combined net sales of the Acquired Businesses for the
three months ended June 30, 1996. Cost of sales amounted to $6,480,000, or 43%
as a percentage of net sales, for the six months ended June 30, 1997, compared
to $7,019,000, or 53% as a percentage of the combined net sales of the Acquired
Businesses, for the six months ended June 30, 1996. As a result of the
foregoing, the Company realized gross profit for the three months and six months
ended June 30,1997, of $4,191,000, or 56%, and $8,436,000, or 57%, respectively,
compared to $3,180,000, or 45%, and $6,320,000, or 47%, respectively, realized
by the Acquired Businesses on a combined basis for the corresponding periods in
1996. This improvement in gross margin percentage is attributable primarily to
the negotiation of reduced product costs in December 1996 with the primary
supplier of the Company's Body Drench Line, as well as the consolidation of
warehousing and production functions of the Gena and Alpha 9/Omni product lines
at the Company's Duncanville, Texas facility, as well as the strategic
outsourcing of certain Alpha 9/Omni production functions.
Selling, general, and administrative expenses were $2,333,000 or 31% as
a percentage of net sales, for the three months ended June 30, 1997, compared to
$2,500,000, or 35% as a percentage of the combined net sales of the Acquired
businesses, for the three months ended June 30, 1996. Selling, general, and
administrative expenses were $4,731,000, or 32% as a percentage of net sales,
for the six months ended June 30, 1997, compared to $5,037,000, or 38% as a
percentage of the combined net sales of the Acquired Businesses, for the six
months ended June 30, 1996. This improvement in selling, general, and
administrative expenses as a percentage of net sales is primarily attributable
to the elimination of duplicative management and other personnel, the
consolidation of certain accounting, human resources, and other administrative
functions of the Acquired Businesses, partially offset by approximately $400,000
of non-cash goodwill amortization resulting from acquisitions and increased
costs of operating as a public company.
11
<PAGE>
The provision for income taxes for the three months and six months
ended June 30, 1997 amounted to $713,000 and $1,446,000, respectively, which
represents an effective tax rate of approximately 41%.
Earnings before interest, taxes, depreciation and amortization
("EBITDA") was $2,184,000 for the three months ended June 30, 1997, compared to
$870,000 on a combined basis for the Acquired Businesses. Earnings before
interest, taxes, depreciation, and amortization ("EBITDA") was $4,284,000 for
the six months ended June 30, 1997, compared to $1,439,000 on a combined basis
for the Acquired Businesses as a result of the factors described above. EBITDA
is not intended to represent net cash provided by operating activities as
defined by generally accepted accounting principles and should not be considered
as an alternative to net income as an indicator of operating performance or to
net cash provided by operating activities as a measure of liquidity. The Company
believes EBITDA is a measure commonly reported and widely used by analysts,
investors, and other interested parties who monitor performance of companies
that employ a consolidation or "roll-up" strategy. Accordingly, this information
has been disclosed herein to permit a more complete comparative analysis of the
Company's operating performance relative to other consolidators.
SEASONALITY
Sales of the Company's indoor tanning products, which comprise a
significant portion of the Company's Body Drench and Utopia product lines, are
expected to be lowest in the third calendar quarter corresponding with the end
of the indoor tanning season in the United States. The Company believes,
however, that its efforts to increase its distribution of indoor tanning
products in Europe and other international locations will lessen the effects of
seasonal fluctuations on its sales. In addition, the acquisition of U.K. ABBA
Products, Inc., which does not have a significant seasonal component, will help
to lessen the seasonal effects described above on the consolidated operations of
the Company.
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital position increased to $6,565,000 at June
30, 1997 from $4,458,000 at December 31, 1996. The increase of $2,107,000 is
primarily due to the Company's results of operations for the six months ended
June 30, 1997. The Company's working capital at December 31, 1996 was primarily
the result of the completion of an initial public offering in November 1996,
which resulted in net proceeds to the Company of approximately $27,200,000,
reduced by the simultaneous distribution of the cash portion of the purchase
price of the Acquired Businesses of approximately $20,500,000 and the repurchase
of treasury shares from a founder of the Company for $1,800,000.
During the six months ended June 30, 1997, the Company used $1,837,000
of cash in operating activities, which resulted primarily from increased
investments in accounts receivable and the reduction of accounts payable and
accrued liabilities of $2,829,000 and $1,635,000, respectively. The investment
in accounts receivable is directly related to strong customer demand and the
resulting net sales recorded in the period as well as an unusually low accounts
receivable balance at December 31, 1996, due to the Company's focus on the
consolidation of operations following its initial public offering and
simultaneous acquisition of the Acquired Businesses in November 1996. The
reduction of accounts payable and accrued liabilities during the period relates
primarily to the payment of liabilities assumed in the acquisition of the
Acquired Businesses as well as related accrued acquisition and offering costs.
12
<PAGE>
Effective June 26, 1997, the Company acquired all of the issued and outstanding
capital stock of U.K. ABBA Products, Inc., (ABBA), a producer of a proprietary
line of aromatherapy-based professional hair care products. The Company paid a
purchase price of $20 million for the stock of ABBA. This transaction was
accounted for using the purchase method of accounting.
In connection with the acquisition of ABBA, the Company entered into a six-year,
$28 million senior credit Facility (The Credit Facility) with a group of banks
for whom Credit Agricole Indosuez acted as agent. The Credit Facility consists
of Term Loan A, Term Loan B and a Revolving Credit Facility. Term Loan A is a
$13.0 million term loan maturing in June 2002 with principal and interest
payable quarterly, at the agent's prime rate plus 1.50% (10.0% at June 30,
1997). Term Loan B is a $10.0 million term loan maturing in June 2003 with
principal and interest payable quarterly at the agent's prime rate plus 2.00%
(10.5% at June 30, 1997). The Revolving Credit Facility, which matures in June
2002, provides for up to 5.0 million in borrowings that may be used for general
corporate purposes, including working capital, acquisitions and repayment of
existing indebtedness. Interest is payable quarterly at the agent's prime rate
plus 1.50%. As of June 30, 1997, there were no borrowings outstanding under the
Revolving Credit Facility.
The Company's line of credit, current cash resources and expected cash
flows from operations are expected to be sufficient to fund the Company's
capital needs during the next twelve months at its current level of operations,
apart from capital needs resulting from acquisitions. However, the Company may
be required to obtain additional capital to fund its planned growth. 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 products companies possessing
complementary products with well-recognized brand names. The Company intends to
fund its future capital needs through a combination of current cash resources,
expected cash flows from operations, bank financing, seller notes payable,
issuance of common stock, and additional public or private debt or equity
financing. The availability of such capital resources cannot be assured and is
dependent upon prevailing market conditions, interest rates, and the financial
condition of the Company.
13
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable.
ITEM 2. CHANGES IN SECURITIES
Pursuant to a registration exemption under Section 4(2) of the
Securities Act of 1933, the Company granted James A. Brooks, Peter W. Burg,
Daniel Howell, and Sylvan Schefler, each a director of the Company, options to
purchase 2,500 shares of Common Stock at an exercise price of $10.875 per share
on June 2, 1997. The options vest and become exercisable in June 1998. Pursuant
to the same exemption, the Company granted Michael H. Feinstein, a director of
the Company, options to purchase 5,000 shares of Common Stock at an exercise
price of $10.875 per share upon his appointment to the Board of Directors on
June 24, 1997. The options vest and become exercisable in June 1998. Pursuant to
the same exemption, the Company granted Credit Agricole Indosuez a warrant to
purchase up to 150,000 shares of Common Stock at an exercise price of $10.18 per
share on June 25,1997, in connection with the Company's credit facility with
Credit Agricole Indosuez. The warrants expire in June 2002.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's 1997 Annual Meeting of Stockholders was held on June 2,
1997. The following nominees were elected to the Company's Board of Directors,
to serve until their successors are elected or have been qualified, or until
their earlier registration or removal.
Nominee Votes in Favor Withheld
------- -------------- --------
Sam L. Leopold 2,790,829 39,000
Thomas M. Clifford 2,790,829 39,000
James A. Brooks 2,790,829 39,000
Peter W. Burg 2,790,829 39,000
Daniel Howell 2,790,829 39,000
Sylvan Schefler 2,790,829 39,000
The following item was voted upon by the Company's stockholders.
Proposal to ratify the appointment of Arthur Andersen LLP as the
independent auditors of the Company for the fiscal year ending December 31,
1997.
Votes in Favor Opposed Abstained Broker Non-Vote
-------------- ------- --------- ---------------
2,778,729 40,000 500 0
14
<PAGE>
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS.
4.3 Form of Warrant issued to Credit Agricole Indosuez
11.1 Statement regarding computation of primary earnings
per share
11.2 Statement regarding computation of fully diluted earnings
per share
27 Financial Data Schedule
(b) REPORT ON FORM 8-K.
None.
15
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
STYLING TECHNOLOGY CORPORATION
Dated: August ___, 1997 By: /s/ Richard R. Ross
--------------------------------------
Richard R. Ross
Chief Financial Officer, Treasurer, and
Secretary (Duly authorized officer of the
registrant, principal financial and
accounting officer)
16
EXHIBIT 4.3
THIS WARRANT AND THE SHARES OF COMMON STOCK PURCHASABLE HEREUNDER HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR UNDER THE SECURITIES
LAWS OF ANY STATE OR OTHER JURISDICTION AND MAY NOT BE SOLD, OFFERED FOR SALE OR
OTHERWISE TRANSFERRED UNLESS REGISTERED OR QUALIFIED UNDER SAID ACT AND
APPLICABLE STATE SECURITIES LAWS OR UNLESS THE COMPANY RECEIVES AN OPINION OF
COUNSEL (WHO MAY BE AN EMPLOYEE OF SUCH HOLDER) REASONABLY SATISFACTORY TO THE
COMPANY THAT REGISTRATION, QUALIFICATION OR OTHER SUCH ACTIONS ARE NOT REQUIRED
UNDER SAID ACT. THE OFFERING OF THIS SECURITY HAS NOT BEEN REVIEWED OR APPROVED
BY ANY STATE'S SECURITIES ADMINISTRATOR. THIS WARRANT AND THE SHARES OF COMMON
STOCK PURCHASABLE HEREUNDER ARE ALSO BENEFITED BY A REGISTRATION RIGHTS
AGREEMENT, DATED AS OF JUNE 25, 1997, BY AND AMONG THE COMPANY AND THE OTHER
PARTIES LISTED THEREIN, A COPY OF WHICH IS ON FILE WITH THE COMPANY AND WILL BE
FURNISHED UPON WRITTEN REQUEST AND WITHOUT CHARGE.
Dated: June 25, 1997
WARRANT
To Purchase 150,000 Shares of Common Stock
EXPIRING June 25, 2002
THIS IS TO CERTIFY THAT, for value received, INDOSUEZ CM II,
INC., or registered assigns (the "Holder") is entitled to purchase from Styling
Technology Corporation, a Delaware corporation (the "Company"), at any time or
from time to time prior to 5:00 p.m., New York City time, on June 25, 2002 at
the place where a Warrant Agency (as hereinafter defined) is located, at the
Exercise Price (as hereinafter defined), the number of shares of Common Stock,
par value $0.0001 per share (the "Common Stock"), of the Company shown above,
all subject to adjustment and upon the terms and conditions as hereinafter
provided, and is entitled also to exercise the other appurtenant rights, powers
and privileges hereinafter described. This Warrant is one of one or more
warrants (the "Warrants") of the same form and having the same terms as this
Warrant.
Certain terms used in this Warrant are defined in Article V.
<PAGE>
2
ARTICLE I
EXERCISE OF WARRANTS
1.1 METHOD OF EXERCISE. To exercise this Warrant in whole or
in part, the Holder shall deliver to the Company, at the Warrant Agency, (a)
this Warrant, (b) a written notice, in substantially the form of the
Subscription Notice attached hereto, of such Holder's election to exercise this
Warrant, which notice shall specify the number of shares of Common Stock to be
purchased, the denominations of the share certificate or certificates desired
and the name or names in which such certificates are to be registered, and (c)
payment of the Exercise Price with respect to such shares. Notwithstanding the
foregoing, this Warrant shall be exercisable only, to the extent and at the time
or times, that the Holder could legally take possession and title of such
shares. Payment made pursuant to clause (c) above may be made, at the option of
the Holder: (x) by cash, certified or bank cashier's check or wire transfer, (y)
the surrender to the Company of securities of the Company having a value equal
to the aggregate Exercise Price, as determined in good faith by the Company's
board of directors, or (z) the delivery of a notice to the Company that the
Holder is exercising this Warrant by authorizing the Company to reduce the
number of shares of Common Stock subject to this Warrant by the number of shares
having an aggregate value equal to the aggregate Exercise Price, as determined
in good faith by the Company's board of directors.
The Company shall, as promptly as practicable and in any event
within three Business Days thereafter, execute and deliver or cause to be
executed and delivered, in accordance with such notice, a certificate or
certificates representing the aggregate number and type of shares of Common
Stock specified in said notice. The share certificate or certificates so
delivered shall be in such denominations as may be specified in such notice or,
if such notice shall not specify denominations, shall be in the amount of the
number of shares of Common Stock for which the Warrant is being exercised, and
shall be issued in the name of the Holder or such other name or names as shall
be designated in such notice, subject to Section 1.4. Such certificate or
certificates shall be deemed to have been issued, and such Holder or any other
Person so designated to be named therein shall be deemed for all purposes to
have become a holder of record of such shares, as of the date the aforementioned
notice is received by the Company. If this Warrant shall have been exercised
only in part, the Company shall, at the time of delivery of the certificate or
certificates, deliver to the Holder a new Warrant evidencing the rights to
<PAGE>
3
purchase the remaining shares of Common Stock called for by this Warrant, which
new Warrant shall in all other respects be identical with this Warrant, or, at
the request of the Holder, appropriate notation may be made on this Warrant
which shall then be returned to the Holder. The Company shall pay all expenses,
taxes and other charges payable in connection with the preparation, issuance and
delivery of share certificates and new Warrants, except that, if share
certificates or new Warrants shall be registered in a name or names other than
the name of the Holder, funds sufficient to pay all transfer taxes payable as a
result of such transfer shall be paid by the Holder at the time of delivering
the aforementioned notice of exercise or promptly upon receipt of a written
request of the Company for payment.
1.2 SHARES TO BE FULLY PAID AND NONASSESSABLE. All shares of
Common Stock issued upon the exercise of this Warrant shall be validly issued,
fully paid and nonassessable and free from all preemptive rights of any
stockholder, and from all taxes, liens and charges with respect to the issue
thereof (other than transfer taxes) and, if the Common Stock is then listed on
any national securities exchanges (as defined in the Exchange Act) or quoted on
NASDAQ within 120 days after completion of a public offering of the Company's
Stock pursuant to a Registration Statement under the Securities Act, be duly
listed or quoted thereon, as the case may be.
1.3 NO FRACTIONAL SHARES TO BE ISSUED. The Company shall not
be required to issue fractions of shares of Common Stock upon exercise of this
Warrant. If any fraction of a share would, but for this Section, be issuable
upon any exercise of this Warrant, and if the Company shall have elected not to
issue such fraction of a share, in lieu of such fractional share the Company
shall pay to the Holder, in cash, an amount equal to such fraction of the Fair
Market Value per share of outstanding Common Stock of the Company on the
Business Day immediately prior to the date of such exercise.
1.4 SHARE LEGEND. Each certificate for shares of Common Stock
issued upon exercise of this Warrant, unless at the time of exercise such shares
are registered under the Securities Act, shall bear the following legend:
"THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED, OR UNDER THE SECURITIES LAWS OF ANY STATE OR OTHER
JURISDICTION AND MAY NOT BE SOLD, OFFERED FOR SALE OR OTHERWISE
TRANSFERRED UNLESS REGISTERED OR QUALIFIED UNDER SAID ACT AND
APPLICABLE STATE SECURITIES LAWS OR UNLESS THE COMPANY RECEIVES AN
OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE COMPANY THAT
<PAGE>
4
REGISTRATION, QUALIFICATION OR OTHER SUCH ACTIONS ARE NOT REQUIRED
UNDER SAID ACT. THE OFFERING OF THIS SECURITY HAS NOT BEEN REVIEWED OR
APPROVED BY ANY STATE SECURITIES ADMINISTRATOR. THIS SECURITY IS ALSO
BENEFITED BY A REGISTRATION RIGHTS AGREEMENT, DATED AS OF JUNE 25,
1997, BETWEEN THE COMPANY AND THE OTHER PARTIES LISTED THEREIN, A COPY
OF WHICH IS ON FILE WITH THE COMPANY AND WILL BE FURNISHED UPON WRITTEN
REQUEST AND WITHOUT CHARGE."
Any certificate issued at any time in exchange or substitution
for any certificate bearing such legend (except a new certificate issued upon
completion of a public distribution pursuant to a registration statement under
the Securities Act) shall also bear such legend unless, in the opinion of
counsel selected by the holder of such certificate (who may be an employee of
such holder) reasonably satisfactory to the Company, the securities represented
thereby are no longer subject to restrictions on resale under the Securities
Act.
1.5 RESERVATION; AUTHORIZATION. The Company has reserved and
will keep available for issuance upon exercise of the Warrants the total number
of shares of Common Stock deliverable upon exercise of all Warrants from time to
time outstanding. The issuance of such shares has been duly and validly
authorized and, when issued and sold in accordance with the Warrants, such
shares will be duly and validly issued, fully paid and nonassessable.
ARTICLE II
WARRANT AGENCY; TRANSFER, EXCHANGE
AND REPLACEMENT OF WARRANTS
2.1 WARRANT AGENCY. At any time during which there are more
than 25 holders of Warrants, if the Requisite Holders shall request appointment
of an independent warrant agency with respect to the Warrants, the Company shall
promptly appoint and thereafter maintain, at its own expense, an agency, which
agency may be the Company's then existing transfer agent (the "Warrant Agency"),
for certain purposes specified herein, and shall give prompt notice of such
appointment (and appointment of any successor Warrant Agency) to all holders of
Warrants. Until an independent Warrant Agency is so appointed, the Company shall
perform the obligations of the Warrant Agency provided herein at its address set
forth in Section 6.1 hereof or such other address as the Company shall specify
by notice to all Warrantholders.
<PAGE>
5
2.2 OWNERSHIP OF WARRANT. The Company may deem and treat the
Person in whose name this Warrant is registered as the holder and owner hereof
(notwithstanding any notations of ownership or writing hereon made by any Person
other than the Warrant Agency) for all purposes and shall not be affected by any
notice to the contrary, until presentation of this Warrant for registration of
transfer as provided in this Article II.
2.3 TRANSFER OF WARRANT. The Company agrees to maintain at the
Warrant Agency books for the registration of transfers of the Warrants, and
transfer of this Warrant and all rights hereunder shall be registered, in whole
or in part, on such books, upon surrender of this Warrant at the Warrant Agency,
together with a written assignment of this Warrant duly executed by the Holder
or his duly authorized agent or attorney, with (unless the Holder is the
original Warrantholder) signatures guaranteed by a bank or trust company or a
broker or dealer registered with the NASD, and funds sufficient to pay any
transfer taxes payable upon such transfer. Upon surrender the Company shall
execute and deliver a new Warrant or Warrants in the name of the assignee or
assignees and in the denominations specified in the instrument of assignment,
and this Warrant shall promptly be cancelled. Notwithstanding the foregoing, a
Warrant may be exercised by a new holder in accordance with the procedures set
forth herein without having a new Warrant issued. The Warrant Agency shall not
be required to register any transfers if the Holder fails to furnish to the
Company, after a request therefor, an opinion of counsel reasonably satisfactory
to the Company that such transfer is exempt from the registration requirements
of the Securities Act; PROVIDED that the Company agrees not to request an
opinion of counsel with respect to transfers by an affiliate of Credit Agricole
Indosuez to its employees so long as such persons furnish documentation
reasonably satisfactory to the Company.
2.4 DIVISION OR COMBINATION OF WARRANTS. This Warrant may be
divided or combined with other Warrants upon surrender hereof and of any Warrant
or Warrants with which this Warrant is to be combined at the Warrant Agency,
together with a written notice specifying the names and denominations in which
the new Warrant or Warrants are to be issued, signed by the holders hereof and
thereof or their respective duly authorized agents or attorneys. Subject to
compliance with Section 2.3 as to any transfer which may be involved in the
division or combination, the Company shall execute and deliver a new Warrant or
Warrants in exchange for the Warrant or Warrants to be divided or combined in
accordance with such notice.
<PAGE>
6
2.5 LOSS, THEFT, DESTRUCTION OR MUTILATION OF WARRANTS. Upon
receipt of evidence satisfactory to the Company of the loss, theft, destruction
or mutilation of any Warrant and, in the case of any such loss, theft or
destruction, upon receipt of indemnity or security reasonably satisfactory to
the Company (the original Warrantholder's or any institutional Holder's
indemnity being satisfactory indemnity in the event of loss, theft or
destruction of any Warrant owned by such holder), or, in the case of any such
mutilation, upon surrender and cancellation of such Warrant, the Company will
make and deliver, in lieu of such lost, stolen, destroyed or mutilated Warrant,
a new Warrant of like tenor and representing the right to purchase the same
aggregate number of shares of Common Stock as provided for in such lost, stolen,
destroyed or mutilated Warrant.
2.6 EXPENSES OF DELIVERY OF WARRANTS. The Company shall pay
all expenses, taxes (other than transfer taxes or income taxes of a Holder) and
other charges payable in connection with the preparation, issuance and delivery
of Warrants and shares issuable upon exercise of the Warrants hereunder.
ARTICLE III
CERTAIN RIGHTS
3.1 REGISTRATION RIGHTS. The Common Stock issuable upon
exercise of this Warrant is entitled to the benefits of the Registration Rights
Agreement dated as of June 25, 1997, by and among the Company and the other
parties listed therein (the "Registration Rights Agreement"). The Company shall
keep a copy of the Registration Rights Agreement, and any amendments thereto, at
the Warrant Agency and shall furnish copies thereof to the Holder upon request.
3.2 CONTEST AND APPRAISAL RIGHTS. Upon each determination of
Fair Market Value hereunder (other than a determination relating solely to
setting the value of fractional shares), the Company shall promptly give notice
thereof to all Warrantholders, setting forth in reasonable detail the
calculation of such Fair Market Value and the method and basis of determination
thereof, as the case may be. If the Requisite Holders shall disagree with such
determination and shall, by notice to the Company given within 30 days after the
Company's notice of such determination, elect to dispute such determination,
such dispute shall be resolved in accordance with this Section 3.2. In the event
that a determination of Market Price, or a determination of Fair Market Value
solely involving Market Price, is disputed, such dispute shall be submitted, at
<PAGE>
7
the Company's expense, to a New York Stock Exchange member firm selected by the
Company and acceptable to the Warrantholders, whose determination of Fair Market
Value and/or Market Price, as the case may be, shall be binding on the Company
and the Warrantholders. In the event that a determination of Fair Market Value,
other than a determination solely involving Market Price, is disputed, such
dispute shall be resolved through the Appraisal Procedure.
ARTICLE IV
ANTIDILUTION PROVISIONS
4.1 ADJUSTMENTS GENERALLY. The Exercise Price and the number
of shares of Common Stock (or other securities or property) issuable upon
exercise of this Warrant shall be subject to adjustment from time to time upon
the occurrence of certain events, as provided in this Article IV.
4.2 COMMON STOCK REORGANIZATION. If the Company shall after
the date of issuance of this Warrant subdivide its outstanding shares of Common
Stock into a greater number of shares or consolidate its outstanding shares of
Common Stock into a smaller number of shares (any such event being called a
"Common Stock Reorganization"), then (a) the Exercise Price shall be adjusted,
effective immediately after the record date at which the holders of shares of
Common Stock are determined for purposes of such Common Stock Reorganization, to
a price determined by multiplying the Exercise Price in effect immediately prior
to such record date by a fraction, the numerator of which shall be the number of
shares of Common Stock outstanding on such record date before giving effect to
such Common Stock Reorganization and the denominator of which shall be the
number of shares of Common Stock outstanding after giving effect to such Common
Stock Reorganization, and (b) the number of shares of Common Stock subject to
purchase upon exercise of this Warrant shall be adjusted, effective at such
time, to a number determined by multiplying the number of shares of Common Stock
subject to purchase immediately before such Common Stock Reorganization by a
fraction, the numerator of which shall be the number of shares outstanding after
giving effect to such Common Stock Reorganization and the denominator of which
shall be the number of shares of Common Stock outstanding immediately before
such Common Stock Reorganization.
<PAGE>
8
4.3 COMMON STOCK DISTRIBUTION. (a) If the Company shall after
the date of issuance of this Warrant issue or otherwise sell or distribute any
shares of Common Stock, otherwise than pursuant to a Common Stock Reorganization
(any such event, including any event described in paragraphs (b) and (c) below,
being herein called a "Common Stock Distribution"), if such Common Stock
Distribution shall be for a consideration per share less than the Fair Market
Value per share of outstanding Common Stock of the Company on the date of such
Common Stock Distribution, or on the first date of the announcement of such
Common Stock Distribution (whichever is less), then, effective upon such Common
Stock Distribution, the number of shares of Common Stock purchasable upon
exercise of this Warrant shall be adjusted by multiplying the number of shares
of Common Stock subject to purchase upon exercise of this Warrant by a fraction,
the numerator of which shall be the total number of shares of Common Stock
outstanding (and issuable upon exercise or conversion of outstanding options,
warrants and convertible securities) immediately prior to such Common Stock
Distribution plus the number of shares of Common Stock issued (or deemed to be
issued pursuant to paragraphs (b) and (c) below) in such Common Stock
Distribution and the denominator of which shall be an amount equal to the sum of
(A) the number of shares of Common Stock outstanding (and issuable upon exercise
or conversion of outstanding options, warrants and convertible securities)
immediately prior to such Common Stock Distribution, plus (B) the number of
shares of Common Stock which the aggregate consideration, if any, received by
the Company (determined as provided below) for such Common Stock Distribution
would buy at the Fair Market Value thereof, as of the date immediately prior to
such Common Stock Distribution or as of the date immediately prior to the date
of announcement of such Common Stock Distribution (whichever is less). In the
event of any such adjustment, the Exercise Price for each Warrant shall be
adjusted to a number determined by dividing the Exercise Price immediately prior
to such Common Stock Distribution by the fraction used for purposes of the
aforementioned adjustment.
The provisions of this paragraph (a), including by operation
of paragraph (b) or (c) below, shall not operate to increase the Exercise Price
or to reduce the number of shares of Common Stock subject to purchase upon
exercise of this Warrant.
(b) If the Company shall after the date of issuance of this
Warrant issue, sell, distribute or otherwise grant in any manner (whether
directly or by assumption in a merger or otherwise) any rights to subscribe for
or to purchase, or any warrants or options for the purchase of, Common Stock or
any stock or securities convertible into or exchangeable for Common Stock (such
rights, warrants or options being herein called "Options" and such convertible
<PAGE>
9
or exchangeable stock or securities being herein called "Convertible
Securities"), whether or not such Options or the rights to convert or exchange
any such Convertible Securities are immediately exercisable, and the price per
share for which Common Stock is issuable upon the exercise of such Options or
upon conversion or exchange of such Convertible Securities (determined by
dividing (i) the aggregate amount, if any, received or receivable by the Company
as consideration for the granting of such Options, plus the minimum aggregate
amount of additional consideration payable to the Company upon the exercise of
all such Options, plus, in the case of Options to acquire Convertible
Securities, the minimum aggregate amount of additional consideration, if any,
payable upon the issue or sale of such Convertible Securities and upon the
conversion or exchange thereof, by (ii) the total maximum number of shares of
Common Stock issuable upon the exercise of such Options or upon the conversion
or exchange of all such Convertible Securities issuable upon the exercise of
such Options) shall be less than the Fair Market Value per share of outstanding
Common Stock of the Company on the date of granting such Options or on the date
of announcement thereof (whichever is less), then for purposes of paragraph (a)
above, the total maximum number of shares of Common Stock issuable upon the
exercise of such Options or upon conversion or exchange of the total maximum
amount of such Convertible Securities issuable upon the exercise of such Options
shall be deemed to have been issued as of the date of granting of such Options
and thereafter shall be deemed to be outstanding and the Company shall be deemed
to have received as consideration such price per share, determined as provided
above, therefor. Except as otherwise provided in paragraph (d) below, no
additional adjustment of the number of shares of Common Stock purchasable upon
the exercise of this Warrant or of the Exercise Price shall be made upon the
actual exercise of such Options or upon conversion or exchange of such
Convertible Securities.
(c) If the Company shall after the date of issuance of this
Warrant issue, sell or otherwise distribute or grant (whether directly or by
assumption in a merger or otherwise) any Convertible Securities, whether or not
the rights to exchange or convert thereunder are immediately exercisable, and
the price per share for which Common Stock is issuable upon such conversion or
exchange (determined by dividing (i) the aggregate amount received or receivable
by the Company as consideration for the issue, sale or distribution of such
Convertible Securities, plus, the minimum aggregate amount of additional
consideration, if any, payable to the Company upon the conversion or exchange
thereof, by (ii) the total maximum number of shares of Common Stock issuable
upon the conversion or exchange of all such Convertible Securities) shall be
<PAGE>
10
less than the Fair Market Value per share of outstanding Common Stock of the
Company on the date of such issue, sale or distribution or on the date of
announcement thereof (whichever is less), then, for purposes of paragraph (a)
above, the total maximum number of shares of Common Stock issuable upon
conversion or exchange of all such Convertible Securities shall be deemed to
have been issued as of the date of the issue, sale or distribution of such
Convertible Securities and thereafter shall be deemed to be outstanding and the
Company shall be deemed to have received as consideration such price per share,
determined as provided above, therefor. Except as otherwise provided in
paragraph (d) below, no additional adjustment of the number of shares of Common
Stock purchasable upon exercise of this Warrant or of the Exercise Price shall
be made upon the actual conversion or exchange of such Convertible Securities.
(d) If the purchase price provided for in any Option referred
to in paragraph (b) above, the additional consideration, if any, payable upon
the conversion or exchange of any Convertible Securities referred to in
paragraph (b) or (c) above, or the rate at which any Convertible Securities
referred to in paragraph (b) or (c) above are convertible into or exchangeable
for Common Stock shall change at any time (other than under or by reason of
provisions designed to protect against, and having the effect of protecting
against, dilution upon an event which results in a related adjustment pursuant
to this Article IV), the number of shares of Common Stock purchasable upon
exercise of this Warrant and the Exercise Price then in effect shall forthwith
be readjusted (effective only with respect to any exercise of this Warrant after
such readjustment) to the number of shares of Common Stock purchasable upon
exercise of this Warrant and the Exercise Price which would then be in effect
had the adjustment made upon the issue, sale, distribution or grant of such
Options or Convertible Securities been made based upon such changed purchase
price, additional consideration or conversion rate, as the case may be;
PROVIDED, HOWEVER, that such readjustment shall give effect to such change only
with respect to such Options and Convertible Securities as then remain
outstanding. If, at any time after any adjustment of the number of shares of
Common Stock purchasable upon exercise of each Warrant or the Exercise Price
shall have been made pursuant to this Article IV on the basis of the issuance of
any Option or Convertible Securities or after any new adjustments of the number
of shares of Common Stock purchasable upon exercise of each Warrant or the
Exercise Price shall have been made pursuant to this paragraph, the right of
conversion, exercise or exchange in such Option or Convertible Securities shall
expire or terminate, and the right of conversion, exercise or exchange in
respect of a portion of such Option or Convertible Securities shall not have
<PAGE>
11
been exercised, such previous adjustment shall be rescinded and annulled.
Thereupon, a recomputation shall be made of the effect of such Option or
Convertible Securities on the basis of treating the number of shares of Common
Stock, if any, theretofore actually issued or issuable pursuant to the previous
exercise of such right of conversion, exercise or exchange as having been issued
on the date or dates of such conversion, exercise or exchange and for the
consideration actually received and receivable therefor, and treating any such
Option or Convertible Securities which then remain outstanding as having been
granted or issued immediately after the time of any such issuance for the
consideration per share for which shares of Common Stock are issuable under such
Option or Convertible Securities; and, if and to the extent called for by the
foregoing provisions of this Section on the basis aforesaid, a new adjustment of
the number of shares of Common Stock purchasable upon exercise of each Warrant
and the Exercise Price shall be made, which new adjustment shall supersede
(effective only with respect to any exercise of this Warrant after such
readjustment) the previous adjustment so rescinded and annulled.
(e) If the Company shall after the date of issuance of this
Warrant pay a dividend or make any other distribution upon any capital stock of
the Company payable in Common Stock, Options or Convertible Securities, then,
for purposes of paragraph (a) above, such Common Stock, Options or Convertible
Securities, as the case may be, shall be deemed to have been issued or sold
without consideration.
(f) If any shares of Common Stock, Options or Convertible
Securities shall be issued, sold or distributed for cash, the consideration
received therefor shall be deemed to be the amount received by the Company
therefor prior to deduction of any underwriting commissions or concessions paid
or allowed by the Company in connection therewith. If any shares of Common
Stock, Options or Convertible Securities shall be issued, sold or distributed
for a consideration other than cash, the amount of the consideration other than
cash received by the Company shall be deemed to be the Fair Market Value of such
consideration, prior to deduction of any expenses incurred and any underwriting
commissions or concessions paid or allowed by the Company in connection
therewith. If any shares of Common Stock, Options or Convertible Securities
shall be issued in connection with any merger in which the Company is the
surviving corporation, the amount of consideration therefor shall be deemed to
be the Fair Market Value of such portion of the assets and business of the
nonsurviving corporation as shall be attributable to such Common Stock, Options
or Convertible Securities, as the case may be. If any Options shall be issued in
connection with the issue and sale of other securities of the Company, together
<PAGE>
12
comprising one integral transaction in which no specific consideration is
allocated to such Options by the parties thereto, such Options shall be deemed
to have been issued for consideration to be determined pursuant to the Appraisal
Procedure.
(g) If the Company shall take a record of the holders of the
Common Stock for the purpose of entitling them to receive a dividend or other
distribution payable in Common Stock, Options or Convertible Securities or to
subscribe for or purchase Common Stock, Options or Convertible Securities, then
such record date shall be deemed to be the date of the issue, sale, distribution
or grant of the shares of Common Stock deemed to have been issued or sold upon
the declaration of such dividend or the making of such other distribution or the
date of the granting of such right of subscription or purchase, as the case may
be.
(h) For purposes of determining whether any adjustment is
required pursuant to this Article IV, any security of the Company having rights
substantially equivalent to the Common Stock as to dividends or upon
liquidation, dissolution or winding up of the Company shall be treated as if
such security were Common Stock.
4.4 DIVIDENDS. If the Company shall after the date of issuance
of this Warrant issue or distribute to all or substantially all holders of
shares of Common Stock evidences of indebtedness, any other securities of the
Company or any property, assets or cash, and if such issuance or distribution
does not constitute a Common Stock Reorganization or a Common Stock Distribution
(any such nonexcluded event being herein called a "Dividend"), (i) the number of
shares of Common Stock subject to purchase upon exercise of this Warrant shall
be increased (but not decreased), effective immediately after the record date at
which the holders of shares of Common Stock are determined for purposes of such
Dividend, to a number determined by multiplying the number of shares of Common
Stock subject to purchase immediately before such Dividend by a fraction, the
numerator of which shall be the Fair Market Value per share of outstanding
Common Stock on such record date and the denominator of which shall be the Fair
Market Value per share of outstanding Common Stock of the Company on such record
date less the then Fair Market Value of the evidences of indebtedness,
securities, cash, or property or other assets issued or distributed in such
Dividend with respect to one share of Common Stock, and (ii) the Exercise Price
shall be decreased (but not increased) to a price determined by multiplying the
Exercise Price then in effect by a fraction, the numerator of which shall be the
number of shares of Common Stock subject to purchase upon exercise of this
Warrant immediately before such Dividend and the denominator of which shall be
the number of shares of Common Stock subject to purchase upon exercise of this
<PAGE>
13
Warrant immediately after such Dividend. If after the date of issuance of this
Warrant the Company repurchases shares of Common Stock for a per share
consideration which exceeds the Fair Market Value (as calculated immediately
prior to such repurchase), then the number of shares of Common Stock purchasable
upon exercise of this Warrant and the Exercise Price shall be adjusted in
accordance with the foregoing provisions, as if, in lieu of such repurchases,
the Company had (I) distributed a Dividend having a Fair Market Value equal to
the Fair Market Value of all property and cash expended in the repurchases, and
(II) effected a reverse split of the Common Stock in the proportion required to
reduce the number of shares of Common Stock outstanding from (A) the number of
such shares outstanding immediately before such first repurchase to (B) the
number of such shares outstanding immediately following all the repurchases.
4.5 CAPITAL REORGANIZATION. If after the date of issuance of
this Warrant there shall be any consolidation or merger to which the Company is
a party, other than a consolidation or a merger in which the Company is a
continuing corporation and which does not result in any reclassification of, or
change (other than a Common Stock Reorganization or a change in par value), in,
outstanding shares of Common Stock, or any sale or conveyance of the property of
the Company as an entirety or substantially as an entirety (any such event being
called a "Capital Reorganization"), then, effective upon the effective date of
such Capital Reorganization, the Holder shall have the right to purchase, upon
exercise of this Warrant, the kind and amount of shares of stock and other
securities and property (including cash) which the Holder would have owned or
have been entitled to receive after such Capital Reorganization if this Warrant
had been exercised immediately prior to such Capital Reorganization, assuming
such holder (i) is not a person with which the Company consolidated or into
which the Company merged or which merged into the Company or to which such sale
or conveyance was made, as the case may be ("constituent person"), or an
Affiliate of a constituent person and (ii) failed to exercise his rights of
election, if any, as to the kind or amount of securities, cash or other property
receivable upon such Capital Reorganization (provided that if the kind or amount
of securities, cash or other property receivable upon such Capital
Reorganization is not the same for each share of Common Stock held immediately
prior to such consolidation, merger, sale or conveyance by other than a
constituent person or an Affiliate thereof and in respect of which such rights
of election shall not have been exercised ("non-electing share"), then for the
purposes of this Section the kind and amount of shares of stock and other
securities or other property (including cash) receivable upon such Capital
Reorganization shall be deemed to be the kind and amount so receivable per share
<PAGE>
14
by a plurality of the non-electing shares). As a condition to effecting any
Capital Reorganization, the Company or the successor or surviving corporation,
as the case may be, shall execute and deliver to each Warrantholder and to the
Warrant Agency an agreement as to the Warrantholder's rights in accordance with
this Section 4.5, providing for subsequent adjustments as nearly equivalent as
may be practicable to the adjustments provided for in this Article IV. The
provisions of this Section 4.5 shall similarly apply to successive Capital
Reorganizations.
4.6 CERTAIN OTHER EVENTS. If any event occurs after the date
of issuance of this Warrant as to which the foregoing provisions of this Article
IV are not strictly applicable or, if strictly applicable, would not, in the
good faith judgment of the Board of Directors of the Company, fairly protect the
purchase rights of the Warrants in accordance with the essential intent and
principles of such provisions, then such Board shall make such adjustments in
the application of such provisions, in accordance with such essential intent and
principles, as shall be reasonably necessary, in the good faith opinion of such
Board, to protect such purchase rights as aforesaid, but in no event shall any
such adjustment have the effect of increasing the Exercise Price or decreasing
the number of shares of Common Stock subject to purchase upon exercise of this
Warrant, or otherwise adversely affect the Warrantholders.
4.7 ADJUSTMENT RULES. (a) Any adjustments pursuant to this
Article IV shall be made successively whenever an event referred to herein shall
occur.
(b) If the Company shall set a record date to determine the
holders of shares of Common Stock for purposes of a Common Stock Reorganization,
Common Stock Distribution, Dividend or Capital Reorganization, and shall legally
abandon such action prior to effecting such Action, then no adjustment shall be
made pursuant to this Article IV in respect of such action.
(c) No adjustment in the amount of shares purchasable upon
exercise of this Warrant or in the Exercise Price shall be made hereunder unless
such adjustment increases or decreases such amount or price by one percent or
more, but any such lesser adjustment shall be carried forward and shall be made
at the time and together with the next subsequent adjustment which together with
any adjustments so carried forward shall serve to adjust such amount or price by
one percent or more.
(d) No adjustment in the Exercise Price shall be made
hereunder if such adjustment would reduce the exercise price to an amount below
par value of the Common Stock, which par value shall initially be $0.0001 per
share of Common Stock.
<PAGE>
15
(e) No adjustment shall be made pursuant to this Article IV in
respect of the issuance (or deemed issuance) or repurchase of shares of Common
Stock in connection with the exercise of the Warrants.
4.8 PROCEEDINGS PRIOR TO ANY ACTION REQUIRING ADJUSTMENT. As a
condition precedent to the taking of any action which would require an
adjustment pursuant to this Article IV, the Company shall take any action which
may be necessary, including obtaining regulatory approvals or exemptions, in
order that the Company may thereafter validly and legally issue as fully paid
and nonassessable all shares of Common Stock which the holders of Warrants are
entitled to receive upon exercise thereof.
4.9 NOTICE OF ADJUSTMENT. Not less than 20 nor more than 60
days prior to the record date or effective date, as the case may be, of any
action which requires or might require an adjustment or readjustment pursuant to
this Article IV, the Company shall give notice to each Warrantholder of such
event, describing such event in reasonable detail and specifying the record date
or effective date, as the case may be, and, if determinable, the required
adjustment and the computation thereof. If the required adjustment is not
determinable at the time of such notice, the Company shall give notice to each
Warrantholder of such adjustment and computation promptly after such adjustment
becomes determinable.
ARTICLE V
DEFINITIONS
The following terms, as used in this Warrant, have the
following respective meanings:
"Appraisal Procedure" means a procedure whereby two
independent appraisers, one chosen by the Company and one by the Requisite
Holders, shall mutually agree upon the determinations then the subject of
appraisal. Each party shall deliver a notice to the other appointing its
appraiser within 15 days after the Appraisal Procedure is invoked. If within 30
days after appointment of the two appraisers they are unable to agree upon the
amount in question, a third independent appraiser shall be chosen within 10 days
thereafter by the mutual consent of such first two appraisers or, if such first
<PAGE>
16
two appraisers fail to agree upon the appointment of a third appraiser, such
appointment shall be made by the American Arbitration Association, or any
organization successor thereto, from a panel of arbitrators having experience in
the appraisal of the subject matter to be appraised. The decision of the third
appraiser so appointed and chosen shall be given within 30 days after the
selection of such third appraiser. If three appraisers shall be appointed and
the determination of one appraiser is disparate from the middle determination by
more than twice the amount by which the other determination is disparate from
the middle determination, then the determination of such appraiser shall be
excluded, the remaining two determinations shall be averaged and such average
shall be binding and conclusive on the Company and the Warrantholders; otherwise
the average of all three determinations shall be binding and conclusive on the
Company and the Warrantholders. The costs of conducting any Appraisal Procedure
shall be borne by the Warrantholders requesting such Appraisal Procedure, except
(a) the fees and expenses of the appraiser appointed by the Company and any
costs incurred by the Company shall be borne by the Company, (b) the fees and
expenses of the appraiser appointed by the Requisite Holders and any costs
incurred by the Requisite Holders shall be borne by the Requisite Holders, and
(c) the fees and expenses of a third appraiser shall be borne equally by the
Company and the Requisite Holders, provided that if such Appraisal Procedure
shall result in a determination that is disparate by 5% or more to the benefit
of the holder from the Company's initial determination, all costs of conducting
such Appraisal Procedure shall be borne by the Company.
"Business Day" shall mean (a) if any class of Common Stock is
listed or admitted to trading on a national securities exchange, a day on which
the principal national securities exchange on which such class of Common Stock
is listed or admitted to trading is open for business or (b) if no class of
Common Stock is so listed or admitted to trading, a day on which any New York
Stock Exchange member firm is open for business.
"Capital Reorganization" shall have the meaning set forth in
Section 4.5.
"Closing Price" with respect to any security on any day means
(a) if such security is listed or admitted for trading on a national securities
exchange, the reported last sales price regular way or, if no such reported sale
occurs on such day, the average of the closing bid and asked prices regular way
on such day, in each case as reported in the principal consolidated transaction
reporting system with respect to securities listed on the principal national
securities exchange on which such class of security is listed or admitted to
<PAGE>
17
trading, or (b) if such security is not listed or admitted to trading on any
national securities exchange, the last quoted sales price, or, if not so quoted,
the average of the high bid and low asked prices in the over-the-counter market
on such day as reported by NASDAQ or any comparable system then in use or, if
not so reported, as reported by any New York Stock Exchange member firm
reasonably selected by the Company for such purpose.
"Common Stock" shall have the meaning set forth in the first
paragraph of this Warrant subject to adjustment pursuant to Article IV.
"Common Stock Distribution" shall have the meaning set forth
in Section 4.3(a).
"Common Stock Reorganization" shall have the meaning set
forth in Section 4.2.
"Company" shall have the meaning set forth in the first
paragraph of this Warrant.
"Convertible Securities" shall have the meaning set forth in
Section 4.3(b).
"Dividend" shall have the meaning set forth in Section 4.4.
"Exchange Act" means the Securities Exchange Act of 1934, as
amended, and any similar or successor federal statute, and the rules and
regulations of the Securities and Exchange Commission (or its successor)
thereunder, all as the same shall be in effect at the time.
"Exercise Price" shall mean $10.18 per share of Common Stock
acquired pursuant to the exercise of this Warrant.
"Fair Market Value" means the fair market value of the
business or property in question, as determined in good faith by the Board of
Directors of the Company, provided, however, that the Fair Market Value of any
security for which a Closing Price is available shall be the Market Price of
such security. The Fair Market Value of the Common Stock shall be the Fair
Market Value of the entire equity interest in the Company and its subsidiaries
as a going concern, minus the Fair Market Value of the Company's equity
securities (if any) entitled to a preference over the Common Stock in the event
of a liquidation of the Company. Notwithstanding the foregoing, if, at any date
of determination of the Fair Market Value of the entire equity interest in the
<PAGE>
18
Company, the Common Stock of any class shall then be publicly traded, the Fair
Market Value of the Company on such date shall be the Market Price on such date
multiplied by the number of shares of Common Stock on a fully diluted basis,
giving effect to any consideration to be paid to the Company in connection with
the exercise or conversion of any security.
"Holder" shall have the meaning set forth in the first
paragraph of this Warrant.
"Market Price" with respect to any security on any day means
the average of the daily Closing Prices of a share or unit of such security for
the 10 consecutive Business Days ending on the most recent Business Day for
which a Closing Price is available; provided, however, that in the event that,
in the case of Common Stock, the Market Price is determined during a period
following the announcement by the Company of (A) a dividend or distribution of
Common Stock, or (B) any subdivision, combination or reclassification of Common
Stock and prior to the expiration of 20 Business Days after the ex-dividend date
for such dividend or distribution, or the record date for such subdivision,
combination or reclassification, then, and in each such case, the Market Price
shall be appropriately adjusted to reflect the current market price per share
equivalent of Common Stock.
"NASD" means The National Association of Securities Dealers,
Inc.
"NASDAQ" means The National Association of Securities
Dealers, Inc. Automated Quotation System.
"Options" shall have the meaning set forth in Section
4.3(b).
"Registration Rights Agreement" shall have the meaning set
forth in Section 3.1.
"Requisite Holders" means the holders of Warrants to purchase
a majority of the shares of Common Stock issuable upon exercise of the Warrants
(excluding Warrants held by the Company or any of its subsidiaries) at the time
outstanding.
"Securities Act" shall mean the Securities Act of 1933, as
amended, and any similar or successor federal statute, and the rules and
regulations of the Securities and Exchange Commission (or its successor)
thereunder, all as the same shall be in effect at the time.
<PAGE>
19
"Warrant Agency" shall have the meaning set forth in Section
2.1.
"Warrantholder" means a holder of a Warrant.
"Warrants" shall have the meaning set forth in the first
paragraph of this Warrant.
ARTICLE VI
MISCELLANEOUS
6.1 NOTICES. All notices, requests, consents and other
communications provided for herein shall be in writing and shall be effective
upon delivery in person, faxed, or mailed by certified or registered mail,
return receipt requested, postage pre-paid, addressed as follows:
(i) if to the Company, to 1146 South Cedar Ridge,
Duncanville, Texas 75137, Attention: Richard R. Ross; with a copy to
O'Connor, Cavanagh, Anderson, Killingsworth & Beshears, P.A., One East
Camelback Road, Phoenix, Arizona 85012, Attention: Robert S. Kant,
Esq.;
(ii) if to an initial Holder of Warrants, to such Holder c/o
Credit Agricole Indosuez at 1211 Avenue of the Americas, 7th Floor, New
York, New York 10036, with a copy to Cahill Gordon & Reindel, 80 Pine
Street, New York, New York 10005, Attention: John Schuster, Esq., and
if to any subsequent Holder of Warrants, to it at such address as may
have been furnished to the Company in writing by such Holder;
or, in any case, at such other address or addresses as shall have been furnished
in writing to the Company (in the case of a holder of Warrants) or to the
Holders of Warrants (in the case of the Company) in accordance with the
provisions of this paragraph.
6.2 WAIVERS; AMENDMENTS. No failure or delay of the Holder in
exercising any power or right hereunder shall operate as a waiver thereof, nor
shall any single or partial exercise of any such right or power, or any
abandonment or discontinuance of steps to enforce such a right or power,
preclude any other or further exercise thereof or the exercise of any other
right or power. The rights and remedies of the Holder are cumulative and not
exclusive of any rights or remedies which it would otherwise have. The
provisions of this Warrant may be amended, modified or waived with (and only
<PAGE>
20
with) the written consent of the Company and the Requisite Holders; provided,
however, that no such amendment, modification or waiver shall, without the
written consent of each Warrantholder whose interest might be adversely affected
by such amendment, modification or waiver, (a) change the number of shares of
Common Stock subject to purchase upon exercise of this Warrant, the Exercise
Price or provisions for payment thereof or (b) amend, modify or waive the
provisions of this Section or Articles III or IV. The provisions of the
Registration Rights Agreement may be amended, modified or waived only in
accordance with the respective provisions thereof.
Any such amendment, modification or waiver effected pursuant
to this Section or the applicable provisions of the Registration Rights
Agreement shall be binding upon the holders of all Warrants and Warrant Shares,
upon each future holder thereof and upon the Company. In the event of any such
amendment, modification or waiver the Company shall give prompt notice thereof
to all Warrantholders and, if appropriate, notation thereof shall be made on all
Warrants thereafter surrendered for registration of transfer or exchange.
No notice or demand on the Company in any case shall entitle
the Company to any other or further notice or demand in similar or other
circumstances.
6.3 GOVERNING LAW. This Warrant shall be construed in
accordance with and governed by the laws of the State of Delaware without regard
to principles of conflicts of law.
6.4 SURVIVAL OF AGREEMENTS; REPRESENTATIONS AND WARRANTIES
ETC. All representations, warranties and covenants made by the Company herein or
in any certificate or other instrument delivered by or on behalf of it in
connection with the Warrants shall be considered to have been relied upon by the
Holder and shall survive the issuance and delivery of the Warrants, regardless
of any investigation made by the Holder, and shall continue in full force and
effect so long as any Warrant is outstanding. All statements in any such
certificate or other instrument shall constitute representations and warranties
hereunder.
6.5 COVENANTS TO BIND SUCCESSOR AND ASSIGNS. All covenants,
stipulations, promises and agreements in this Warrant contained by or on behalf
of the Company shall bind its successors and assigns, whether so expressed or
not.
<PAGE>
21
6.6 SEVERABILITY. In case any one or more of the provisions
contained in the Registration Rights Agreement or this Warrant shall be invalid,
illegal or unenforceable in any respect, the validity, legality or
enforceability of the remaining provisions contained herein and therein shall
not in any way be affected or impaired thereby. The parties shall endeavor in
good faith negotiations to replace the invalid, illegal or unenforceable
provisions with valid provisions the economic effect of which comes as close as
possible to that of the invalid, illegal or unenforceable provisions.
6.7 SECTION HEADINGS. The sections headings used herein are
for convenience of reference only, are not part of this Warrant and are not to
affect the construction of or be taken into consideration in interpreting this
Warrant.
6.8 NO RIGHTS AS STOCKHOLDER. This Warrant shall not entitle
the Holder to any rights as a stockholder of the Company.
6.9 NO IMPAIRMENT. The Company shall not by any action
including, without limitation, amending its certificate of incorporation or
through any reorganization, transfer of assets, consolidation, merger,
dissolution, issue or sale of securities or any other voluntary action, avoid or
seek to avoid the observance or performance of any of the terms of this Warrant,
but will at all times in good faith assist in the carrying out of all such terms
and in the taking of all such actions as may be necessary or appropriate to
protect the rights of the Holder against impairment. Without limiting the
generality of the foregoing, the Company will (a) not, directly or indirectly,
increase the par value of any shares of Common Stock receivable upon the
exercise of this Warrant above the amount payable therefor upon such exercise
immediately prior to such increase in par value, (b) take all such action as may
be necessary or appropriate in order that the Company may validly and legally
issue fully paid and nonassessable shares of Common Stock upon the exercise of
this Warrant, and (c) use its commercially reasonable best efforts to obtain all
such authorizations, exemptions or consents from any public regulatory body
having jurisdiction thereof as may be necessary to enable the Company to perform
its obligations under this Warrant.
<PAGE>
IN WITNESS WHEREOF, Styling Technology Corporation has caused
this Warrant to be executed in its corporate name by one of its officers
thereunto duly authorized, and attested by its Secretary or an Assistant
Secretary, all as of the day and year first above written.
STYLING TECHNOLOGY CORPORATION
By:
---------------------------------
Name:
-------------------------------
Title:
------------------------------
Attest:
- ---------------------------------
Name:
----------------------------
Title:
---------------------------
<PAGE>
SUBSCRIPTION NOTICE
(To be executed upon exercise of Warrant)
TO :
The undersigned hereby irrevocably elects to exercise the
right to purchase represented by the attached Warrant for, and to purchase
thereunder, _________________ shares of Common Stock, as provided for therein,
and tenders herewith payment of the Exercise Price in full in accordance with
the terms of the attached Warrant.
Please issue a certificate or certificates for such shares of
Common Stock in the following name or names and denominations:
If said number of shares shall not be all the shares issuable
upon exercise of the attached Warrant, a new Warrant is to be issued in the name
of the undersigned for the balance remaining of such shares less any fraction of
a share paid in cash.
Dated: _____________, 19__
_____________________________________
Note: The above signature should
correspond exactly with the
name on the face of the
attached Warrant or with the
name of the assignee appearing
in the assignment form below.
<PAGE>
ASSIGNMENT
(To be executed upon assignment of Warrant)
For value received, ______________________________ hereby
sells, assigns and transfers unto __________________ the attached Warrant,
together with all rights, title and interest therein, and does hereby
irrevocably constitute and appoint _________________ attorney to transfer said
Warrant on the books of ____________________, with full power of substitution in
the premises.
____________________________________
Note: The above signature should
correspond exactly with the
name on the face of the
attached Warrant.
EXHIBIT 11.1
COMPUTATION OF PRIMARY EARNINGS PER SHARE
Three Months Six Months
Ended Ended
June 30, June 30,
1997 1997
------------ ----------
Shares
Weighted average number of common
shares outstanding 3,948,703 3,948,703
Additional shares assuming conversion of:
Stock options and warrants 168,325 166,823
---------- ----------
Weighted average shares outstanding 4,117,028 4,115,526
========== ==========
Net income $1,031,000 $2,085,000
========== ==========
Primary earnings per share $ 0.25 $ 0.51
========== ==========
EXHIBIT 11.2
COMPUTATION OF FULLY DILUTED EARNINGS PER SHARE
Three Months Six Months
Ended Ended
June 30, June 30,
1997 1997
------------ ----------
Shares
Weighted average number of common
shares outstanding 3,948,703 3,948,703
Additional shares assuming conversion of:
Stock options and warrants 180,199 175,776
---------- ----------
Weighted average shares outstanding 4,128,902 4,124,479
========== ==========
Net income $1,031,000 $2,085,000
========== ==========
Fully diluted earnings per share $ 0.25 $ 0.51
========== ==========
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 1,679
<SECURITIES> 0
<RECEIVABLES> 5,667
<ALLOWANCES> 427
<INVENTORY> 4,854
<CURRENT-ASSETS> 13,020
<PP&E> 1,457
<DEPRECIATION> 0
<TOTAL-ASSETS> 58,420
<CURRENT-LIABILITIES> 6,455
<BONDS> 0
0
0
<COMMON> 1
<OTHER-SE> 27,812
<TOTAL-LIABILITY-AND-EQUITY> 58,420
<SALES> 14,916
<TOTAL-REVENUES> 14,916
<CGS> 6,480
<TOTAL-COSTS> 11,211
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 174
<INCOME-PRETAX> 3,531
<INCOME-TAX> 1,446
<INCOME-CONTINUING> 3,531
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,085
<EPS-PRIMARY> 0.51
<EPS-DILUTED> 0.51
</TABLE>
