<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
Current Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): June 18, 1998
STYLING TECHNOLOGY CORPORATION
----------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 0-21703 75-2665378
- ------------------ ---------------------------- ---------------------
(State or other (Commission File No.) (IRS Employer ID No.)
jurisdiction of
incorporation)
2390 East Camelback Road, Suite 435, Phoenix, Arizona 85016
----------------------------------------------------------------
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (602) 955-3353
<PAGE> 2
STYLING TECHNOLOGY CORPORATION
CURRENT REPORT ON
FORM 8-K
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS.
ACQUISITION OF EUROPEAN TOUCH, LTD. II
On June 23, 1998, Styling Technology Corporation (the "Company") acquired
all of the issued and outstanding common stock of European Touch, Ltd. II
("European Touch II"), pursuant to a Stock Purchase Agreement among the Company
and the former shareholders of European Touch II, dated June 23, 1998. European
Touch II produces whirlpool pedicure foot spas. The Company paid a purchase
price of approximately $22 million in cash for the European Touch II common
stock. The acquisition will be accounted for under the purchase method of
accounting.
ITEM 5. OTHER EVENTS
ACQUISITION OF PRO FINISH USA, LTD.; EUROPEAN TOUCH CO., INCORPORATED; BEAUTY
PRODUCTS INC.; AND COSMETICS INTERNATIONAL INC.
On May 22, 1998, the Company acquired substantially all of the assets and
assumed certain liabilities of Pro Finish USA, Ltd. ("Pro Finish"). The Company
paid Pro Finish, a producer of nail care products, a purchase price of $5
million. Concurrently with the acquisition of European Touch II on June 23,
1998 (described above), the Company acquired all of the issued and outstanding
capital stock of (i) European Touch Co. Incorporated ("European Touch"), Beauty
Products Inc. ("Beauty"), and Cosmetics International Inc., producers of nail
care products. The Company paid a purchase price of approximately $2.4 million,
$760,000, and $25,000 for the common stock of European Touch, Beauty, and
Cosmetics, respectively. These acquisitions will be accounted for under the
purchase method of accounting.
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS.
(a) FINANCIAL STATEMENTS OF EUROPEAN TOUCH, LTD II.
Report of Independent Public Accountants
Balance Sheets as of December 31, 1997 and March 31, 1998 (unaudited)
Statements of Operations For the Year Ended December 31, 1997 and the
Three Months Ended March 31, 1997 (unaudited) and 1998 (unaudited)
Statements of Stockholders' Equity For the Year Ended December 31,
1997 and the Three Months Ended March 31, 1998 (unaudited)
Statements of Cash Flows For the Year Ended December 31, 1997 and the
Three Months Ended March 31, 1997 (unaudited) and 1998 (unaudited)
Notes to Financial Statements
(b) PRO FORMA FINANCIAL STATEMENTS.
Introduction
Unaudited Pro Forma Consolidated Statement of Operations For the
Three Months Ended March 31, 1998
Unaudited Pro Forma Consolidated Statement of Operations For the Year
Ended December 31, 1997
Unaudited Pro Forma Condensed Consolidated Balance Sheet as of
March 31, 1998
Notes to Unaudited Pro Forma Consolidated Financial Data
(c) Exhibits.
Exhibit No. Description Of Exhibit
----------- ----------------------
10.23 Stock Purchase Agreement dated as of June 23, 1998 among
Styling Technology Corporation and the former shareholders
of European Touch, Ltd. II
23.1 Consent of Arthur Andersen LLP.
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 hereunto duly authorized.
STYLING TECHNOLOGY CORPORATION
By: /s/ Richard R. Ross
-----------------------------
Richard R. Ross
Executive Vice President, Chief
Financial Officer, Treasurer and
Secretary
July 7, 1998
2
<PAGE> 3
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Styling Technology Corporation:
We have audited the accompanying balance sheet of EUROPEAN TOUCH, LTD. II
(a Wisconsin S Corporation) as of December 31, 1997, and the related statements
of operations, stockholders' equity, and cash flows for the year then ended
December 31, 1997. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of European Touch, Ltd. II as
of December 31, 1997, and the results of its operations and its cash flows for
the year then ended in conformity with generally accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP
--------------------------------------
Arthur Andersen LLP
Phoenix, Arizona,
May 1, 1998.
3
<PAGE> 4
EUROPEAN TOUCH, LTD. II
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1997 1998
------------ -----------
(UNAUDITED)
-----------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 992,475 $ 429,636
Accounts receivable, net of allowance for doubtful
accounts of $54,945 and $54,945, respectively.......... 1,011,622 982,354
Inventory................................................. 440,446 560,957
---------- ----------
Total current assets.............................. 2,444,543 1,972,947
PROPERTY AND EQUIPMENT, net................................. 399,614 436,240
OTHER ASSETS................................................ 2,375 16,990
---------- ----------
$2,846,532 $2,426,177
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.......................................... $ 327,203 $ 285,012
Accrued liabilities....................................... 31,088 31,114
Current portion of deferred income........................ 58,675 54,214
Customer deposits and other............................... 78,956 58,651
---------- ----------
Total current liabilities......................... 495,922 428,991
DEFERRED INCOME, net of current portion..................... 50,000 46,183
---------- ----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, $1 par value, 1,000 shares authorized and
issued 750 shares outstanding.......................... 1,000 1,000
Treasury stock at cost, 250 shares........................ (58,000) (58,000)
Retained earnings......................................... 2,357,610 2,008,003
---------- ----------
Total stockholders' equity........................ 2,300,610 1,951,003
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.................. $2,846,532 $2,426,177
========== ==========
</TABLE>
The accompanying notes are an integral part of these balance sheets.
4
<PAGE> 5
EUROPEAN TOUCH, LTD. II
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED ------------------------
DECEMBER 31, MARCH 31, MARCH 31,
1997 1997 1998
------------ ---------- ----------
(UNAUDITED)
<S> <C> <C> <C>
NET SALES............................................. $8,628,485 $1,483,359 $2,094,596
COST OF SALES......................................... 3,713,799 592,063 877,060
---------- ---------- ----------
Gross profit........................................ 4,914,686 891,296 1,217,536
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES.......... 2,256,213 460,566 589,069
---------- ---------- ----------
INCOME FROM OPERATIONS................................ 2,658,473 430,730 628,467
OTHER INCOME.......................................... 106,394 31,222 32,126
---------- ---------- ----------
NET INCOME............................................ $2,764,867 $ 461,952 $ 660,593
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE> 6
EUROPEAN TOUCH, LTD. II
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK TOTAL
---------------- TREASURY RETAINED STOCKHOLDERS'
SHARES AMOUNT STOCK EARNINGS EQUITY
------ ------ -------- ----------- -------------
<S> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1996........ 1,000 $1,000 $(58,000) $ 1,418,893 $ 1,361,893
Net income........................ -- -- -- 2,764,867 2,764,867
Distributions to stockholders..... -- -- -- (1,826,150) (1,826,150)
----- ------ -------- ----------- -----------
BALANCE AT DECEMBER 31, 1997........ 1,000 1,000 (58,000) 2,357,610 2,300,610
Net income (unaudited)............ -- -- -- 660,593 660,593
Distributions to stockholders
(unaudited).................... -- -- -- (1,010,200) (1,010,200)
----- ------ -------- ----------- -----------
BALANCE AT MARCH 31, 1998
(unaudited)....................... 1,000 $1,000 $(58,000) $ 2,008,003 $ 1,951,003
===== ====== ======== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
6
<PAGE> 7
EUROPEAN TOUCH, LTD. II
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED ------------------------
DECEMBER 31, MARCH 31, MARCH 31,
1997 1997 1998
------------ --------- -----------
(UNAUDITED)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income......................................... $ 2,764,867 $ 461,952 $ 660,593
Adjustments to reconcile net income to net cash
provided by operating activities --
Depreciation and amortization................... 60,695 10,356 18,510
Loss on disposal of assets...................... 24,692 -- --
(Increase) decrease in accounts receivable...... (221,918) (146,847) 29,268
Increase in inventory........................... (189,348) -- (120,511)
Increase in other assets........................ (61) (59) (14,615)
Increase (decrease) in accounts payable and
accrued liabilities........................... 186,446 (62,445) (42,165)
Increase (decrease) in deferred income.......... 18,773 21,845 (8,278)
Increase (decrease) in customer deposits and
other......................................... 45,727 4,013 (20,305)
----------- --------- -----------
Net cash provided by operating
activities............................... 2,689,873 288,815 502,497
----------- --------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment................. (274,007) (17,091) (55,136)
----------- --------- -----------
Net cash used in investing activities...... (274,007) (17,091) (55,136)
----------- --------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Distributions to stockholders...................... (1,826,150) (157,941) (1,010,200)
----------- --------- -----------
Net cash used in financing activities...... (1,826,150) (157,941) (1,010,200)
----------- --------- -----------
NET INCREASE (DECREASE) IN CASH...................... 589,716 113,783 (562,839)
CASH AND CASH EQUIVALENTS, beginning of period....... 402,759 402,759 992,475
----------- --------- -----------
CASH AND CASH EQUIVALENTS, end of period............. $ 992,475 $ 516,542 $ 429,636
=========== ========= ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
7
<PAGE> 8
EUROPEAN TOUCH, LTD. II
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
(1) ORGANIZATION AND BASIS OF PRESENTATION:
Organization and Nature of Operations
European Touch, Ltd. II (European Touch II) was incorporated in 1985 to
manufacture and distribute whirlpool pedicure spas and accessories. European
Touch II sells its products primarily to wholesale distributors of professional
salon equipment, nail salons, and, to a lesser extent, spas and resorts
throughout the United States, as well as Canada, Europe, Latin America, Mexico
and Asia.
Acquisition
In accordance with the terms of a definitive Stock Purchase Agreement
among Styling Technology Corporation (STC) and the former shareholders of
European Touch, Ltd. II, Inc., STC agreed to acquired all of the stock of
European Touch II for a purchase price of approximately $20.3 million.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Cash and Cash Equivalents
All highly liquid investments with maturities of three months or less when
purchased are considered to be cash equivalents.
Inventory
Inventory is valued at the lower of cost (first-in, first-out) or net
realizable value. Reserves are established against inventory for excess,
slow-moving and obsolete items and for items where the net realizable value is
less than cost.
Inventory consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1997 1998
------------ -----------
(UNAUDITED)
<S> <C> <C>
Raw materials and work-in-process................... $ 30,831 $ 39,267
Finished goods...................................... 409,615 521,690
-------- --------
$440,446 $560,957
======== ========
</TABLE>
Property and Equipment
Property and equipment are recorded at cost and depreciation is provided
using the straight-line method over the estimated useful lives of the assets,
which range from 3-15 years.
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. Maintenance and repair
expenses charged to cost of operations were approximately $500, $0 and $134 for
the year ended December 31, 1997 and the three-month unaudited periods ended
March 31, 1997 and 1998, respectively.
Concentration of Credit Risk
Financial instruments which potentially subject European Touch II to
concentrations of credit risk consist principally of trade receivables.
Concentrations of credit risk with respect to trade receivables are described in
8
<PAGE> 9
EUROPEAN TOUCH, LTD. II
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Note 5. European Touch II establishes an allowance for doubtful accounts based
upon factors surrounding the credit risk of specific customers, historical
trends and other information.
Income Taxes
European Touch II's stockholders have elected to have European Touch II
treated as an S Corporation for income tax purposes. Therefore, no provision for
income taxes is reflected in the accompanying financial statements.
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.
Revenue Recognition
European Touch II recognizes revenue at the time product is shipped.
However, installment sales are accounted for under the installment method.
Installment sale terms require 50% in cash before shipment is made and monthly
payments for the balance over the period ranging from 12 to 24 months.
Installment sales are recognized as payments are received.
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 March 31, 1997 and 1998, include all adjustments, consisting of
normal recurring adjustments, necessary to present fairly European Touch II's
financial position, results of operations and cash flows as of and for the
periods then ended. Operating results for the three-month period ended March 31,
1998, are not necessarily indicative of the results that may be expected for the
fiscal year ending December 31, 1998.
(3) ACCOUNTS RECEIVABLE:
Accounts receivable include installment receivable amounts. Of the total of
these receivables of $217,350 and $200,794 as of December 31, 1997 and March 31,
1998 (unaudited), approximately $100,000 and $92,000, respectively, were due
beyond one year from these balance sheet dates.
9
<PAGE> 10
EUROPEAN TOUCH, LTD. II
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(4) PROPERTY AND EQUIPMENT:
Property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1997 1998
------------ -----------
(UNAUDITED)
<S> <C> <C>
Leasehold improvements.............................. $ 9,400 $ 9,400
Production tooling and equipment.................... 210,943 263,303
Furniture and fixtures.............................. 149,800 149,800
Computers and vehicles.............................. 179,669 182,445
--------- ---------
549,812 604,948
Less- Accumulated depreciation...................... (150,198) (168,708)
--------- ---------
$ 399,614 $ 436,240
========= =========
</TABLE>
(5) CUSTOMER CONCENTRATION:
Sales to a major U.S. beauty distribution company as a percentage of total
net sales approximated 13%, 13% and 16% for the year ended December 31, 1997 and
the three-month unaudited periods ended March 31, 1997 and 1998, respectively.
Three of European Touch II's customers had accounts receivable totaling 45% and
28% (unaudited) of European Touch II's total accounts receivable balance as of
December 31, 1997 and March 31, 1998, respectively.
(6) RELATED PARTY TRANSACTIONS:
European Touch II leases its primary facilities from a partnership of which
all partners are stockholders of European Touch II. Lease expense related to
this space totaled $98,721, $37,260 and $45,332 for the year ended December
31, 1997 and the three-month unaudited periods ended March 31, 1997 and 1998,
respectively.
European Touch II advances certain expenses related to trade shows and
computer services to a company of which two of the three stockholders are
stockholders of European Touch II. Expenses paid by European Touch II on behalf
of the related company were approximately $39,000, $2,300 and $25,000 for the
year ended December 31, 1997 and the three-month unaudited periods ended March
31, 1997 and 1998, respectively. The total accounts receivable balance as of
December 31, 1997 and March 31, 1998, from this company was approximately $7,000
and $10,000, respectively.
(7) COMMITMENTS AND CONTINGENCIES:
Legal Matters
In the normal course of business, European Touch II 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 European Touch II's
financial conditions or results of operations.
10
<PAGE> 11
EUROPEAN TOUCH, LTD. II
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Operating Leases
European Touch II leases office and warehouse space under operating lease
agreements. Future lease payments under non-cancellable operating leases are as
follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
- ------------
<S> <C>
1998.................................................. $142,796
1999.................................................. 146,196
2000.................................................. 146,196
2001.................................................. 108,796
2002.................................................. 43,915
--------
$587,899
========
</TABLE>
Retirement Plans
European Touch II has a defined contribution plan under 401(k) (the Plan)
of the Internal Revenue Code. Employees of European Touch II are eligible to
participate in the Plan after completing one year of service, 1,000 work hours
and reaching age 21. Voluntary salary reductions may be elected by each
participating employee and contributed to the Plan (not to exceed $9,500 for a
calendar year). European Touch II may match up to 25% of the employee's
contribution up to a maximum of 6.5% of the employee's compensation. European
Touch II expensed $38,997 related to the Plan during 1997.
11
<PAGE> 12
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA
The following unaudited pro forma consolidated financial information should
be read in conjunction with the historical Consolidated Financial Statements and
notes thereto of the Company and European Touch II. In November 1996, the
Company commenced operations with an initial public offering and the
simultaneous acquisition of four businesses. The Company has acquired eight
other businesses since November 1996, including the acquisition of European
Touch II. The unaudited pro forma consolidated financial information reflects
the results of the Company (which includes all of the Company's acquisitions,
including the acquisition of European Touch Co., Incorporated; Beauty Products,
Inc.; and Cosmetics International Inc. (collectively, European Touch); as well
as substantially all of the assets of Pro Finish USA, Ltd. (together with the
acquisition of European Touch, the Recent Acquisitions). The unaudited pro forma
consolidated financial information also reflects certain pro forma adjustments
that are more fully described in the accompanying notes. The Unaudited Pro Forma
Consolidated Statement of Operations reflects the issuance and sale by the
Company of $100 million aggregate principal amount of 10 7/8% Senior
Subordinated Notes due 2008 (the Offering), the application of the net proceeds
therefrom, and the results of operations of the Company (which includes all of
the Company's acquisitions, including the Recent Acquisitions) as if each
acquisition, the Offering, and application of the net proceeds therefrom
occurred at the beginning of each period presented (including certain
adjustments to the historical financial statements that are more fully described
in the notes hereto). The Unaudited Pro Forma Condensed Consolidated Balance
Sheet reflects the historical financial information of the Company together with
the Offering and the application of the net proceeds therefrom and the Recent
Acquisitions as if each had occurred on March 31, 1998. The Unaudited Pro Forma
Consolidated Statement of Operations may not be indicative of actual results
that would have been achieved if the Offering, the application of the net
proceeds therefrom, and the acquisitions had occurred on the dates indicated or
the results that may be realized in the future. The unaudited pro forma
consolidated financial information contains only certain adjustments that are
directly attributable to the Offering, the application of net proceeds
therefrom, and the acquisitions.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
RECENT ACQUISITIONS
--------------------------------
EUROPEAN EUROPEAN PRO FORMA
STC(a) PRO FINISH TOUCH II TOUCH ADJUSTMENTS PRO FORMA
------- ---------- -------- -------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Net sales............................ $16,225 $2,011 $2,095 $1,476 $ -- $21,807
Cost of sales........................ 7,042 1,034 877 556 -- 9,509
------- ------ ------ ------ ------- -------
Gross profit......................... 9,183 977 1,218 920 -- 12,298
Selling, general, and administrative
expenses........................... 5,395 747 589 610 (144)(b) 7,197
------- ------ ------ ------ ------- -------
Income from operations............... 3,788 230 629 310 144 5,101
Interest and other income (expense),
net................................ (1,264) -- 32 -- (1,577)(c) (2,809)
------- ------ ------ ------ ------- -------
Income before extraordinary item and
taxes.............................. 2,524 230 661 310 (1,433) 2,292
Provision for income taxes........... 1,085 86 -- -- (181)(d) 990
------- ------ ------ ------ ------- -------
Income before extraordinary item..... 1,439 144 661 310 (1,252) 1,302
Extraordinary item, net of tax
benefit............................ -- -- -- -- (1,100)(e) (1,100)
------- ------ ------ ------ ------- -------
Net income........................... $ 1,439 $ 144 $ 661 $ 310 $(2,352) $ 202
======= ====== ====== ====== ======= =======
Diluted weighted average
outstanding shares................. -- -- -- -- -- 4,278
=======
Diluted Earnings Per Share
Income before extraordinary item... -- -- -- -- -- $ 0.30
Extraordinary item, net............ -- -- -- -- -- (0.25)
Net income......................... -- -- -- -- -- 0.05
=======
</TABLE>
12
<PAGE> 13
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
RECENT ACQUISITIONS
--------------------------------
CLEAN+EASY/ EUROPEAN EUROPEAN PRO FORMA
STC(a) ABBA ONE TOUCH PRO FINISH TOUCH II TOUCH ADJUSTMENTS PRO FORMA
------- ------ ----------- ---------- -------- -------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales.................. $38,108 $5,742 $18,902 $7,569 $8,628 $5,986 $ -- $ 84,935
Cost of sales.............. 16,756 2,780 11,212 4,189 3,713 1,828 (3,400) (f) 37,078
------- ------ ------- ------ ------ ------ ------- --------
Gross profit............... 21,352 2,962 7,690 3,380 4,915 4,158 3,400 47,857
Selling, general, and
administrative
expenses................. 12,201 2,358 7,312 2,812 2,256 2,911 (433) (b) 29,417
------- ------ ------- ------ ------ ------ ------- --------
Income from operations..... 9,151 604 378 568 2,659 1,247 3,833 18,440
Interest and other income
(expense), net........... (1,847) 50 129 (124) 106 (10) (9,539) (c) (11,235)
------- ------ ------- ------ ------ ------ ------- --------
Income before extraordinary
item and income taxes.... 7,304 654 507 444 2,765 1,237 (5,706) 7,205
Provision for income
taxes.................... 3,097 185 -- 111 -- 230 (409) (d) 3,214
------- ------ ------- ------ ------ ------ ------- --------
Income before extraordinary
item..................... 4,207 469 507 333 2,765 1,007 (5,297) 3,991
Extraordinary item, net.... (1,377) -- -- -- -- -- 1,377 (e) --
------- ------ ------- ------ ------ ------ ------- --------
Net income................. $ 2,830 $ 469 $ 507 $ 333 $2,765 $1,007 $(3,920) $ 3,991
======= ====== ======= ====== ====== ====== ======= ========
Diluted Weighted average
Shares outstanding....... 4,113
========
Diluted earnings per
share.................... $ 0.97
========
</TABLE>
13
<PAGE> 14
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
AS OF MARCH 31, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
RECENT ACQUISITIONS
------------------------------
PRO EUROPEAN EUROPEAN PRO FORMA
STC FINISH TOUCH II TOUCH ADJUSTMENTS PRO FORMA
------- ------ -------- ---------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents........ $ 2,528 $ 173 $ 430 $ 63 $100,000 (h) $ 15,751
(57,443)(h)
(30,000)(g)
Accounts receivable, net......... 15,605 774 982 585 -- 17,946
Inventory........................ 10,604 1,170 561 1,617 -- 13,952
Prepaid expenses and other
current assets................ 2,268 90 -- 104 -- 2,462
------- ------ ------ ------ -------- --------
Total current assets.......... 31,005 2,207 1,973 2,369 12,557 50,111
Property and equipment, net........ 3,010 144 436 284 -- 3,874
Goodwill, net...................... 56,475 898 -- -- 23,179 (g) 80,552
Other assets....................... 3,796 390 17 109 3,600 (h) 6,812
(1,100)(h)
------- ------ ------ ------ -------- --------
Total assets....................... $94,286 $3,639 $2,426 $2,762 $ 38,236 $141,349
======= ====== ====== ====== ======== ========
Current liabilities:
Accounts payable................. $ 4,841 $ 448 $ 285 $ 363 $ -- $ 5,937
Accrued liabilities.............. 4,698 297 31 86 -- 5,112
Current portion of long-term debt
and other..................... 8,228 120 113 197 (8,298)(h) 360
------- ------ ------ ------ -------- --------
Total current liabilities..... 17,767 865 429 646 8,298 11,409
------- ------ ------ ------ -------- --------
Long-term debt and other, less
current portion.................. 46,462 20 46 -- 100,000 (h) 100,983
------- ------ ------ ------ -------- --------
(45,545)(h)
--------
Stockholders' equity:
Common stock..................... 1 2,148 1 1 (2,150)(g) 1
Additional paid-in capital....... 27,925 336 2,008 17 (2,361)(g) 27,925
Retained earnings................ 3,931 270 -- 2,098 (2,368)(g) 2,831
(1,100)(h)
Treasury stock................... (1,800) -- (58) -- 58 (g) (1,800)
------- ------ ------ ------ -------- --------
Total stockholders' equity.... 30,057 2,754 1,951 2,116 (7,921) 28,957
------- ------ ------ ------ -------- --------
Total liabilities and stockholders'
equity........................... $94,286 $3,639 $2,426 $2,762 $ 38,236 $141,349
======= ====== ====== ====== ======== ========
</TABLE>
14
<PAGE> 15
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA
(a) Includes the results of U.K. ABBA Products Inc. ("ABBA") from June 1997 and
the Clean + Easy / One Touch product lines from December 1997, their
respective dates of acquisition.
(b) Reflects the net impact in selling, general, and administrative expenses of
an aggregate of (i) approximately $375,000 and $2.3 million for the three
months ended March 31, 1998 and the year ended December 31, 1997,
respectively, to reflect the elimination of salaries and benefits of
specific individuals not continuing with the combined companies, and (ii)
approximately $231,000 and $1.9 million for the three months ended March 31,
1998 and the year ended December 31, 1997, respectively, to reflect the
additional amortization of goodwill associated with each acquisition.
(c) Represents cash interest expense on the 10 7/8% Senior Subordinated Notes
issued and sold in the Offering (the Notes) plus amortization of related
financing costs.
(d) Reflects adjustment to the income tax provision, based on applying the
statutory income tax rates of each company, adjusted for goodwill
amortization from the ABBA, Gena Laboratories, Inc. and JDS Manufacturing
Co., Inc. acquisitions, which is not deductible for income tax reporting
purposes.
(e) Reflects the write-off of loans under the Existing Credit Facility of $2.0
million ($1.1 million on a tax adjusted basis) for the three months ended
March 31, 1998. Also includes an adjustment to remove the extraordinary
item for the year ended December 31, 1997.
(f) Reflects the adjustment to cost of sales related to the reduction of
third-party manufacturing costs negotiated in connection with the
acquisitions of ABBA and the Clean + Easy / One Touch product lines and
realized following the closing of such acquisition.
(g) To record the purchase prices of the Recent Acquisitions and the allocation
of these purchase prices to the net assets of the businesses acquired.
(h) To record the issuance of the Notes, including the payment of estimated
fees and expenses of $3.6 million. Also assumes the repayment of the
Existing Credit Facility and certain other debt, and the write-off of
deferred financing costs as a result of the refinancing of the previously
outstanding indebtedness.
15
<PAGE> 16
Exhibit No. Exhibit Index
----------- ----------------------
10.23 Stock Purchase Agreement dated as of June 23, 1998 among
Styling Technology Corporation and the former shareholders
of European Touch, Ltd. II
23.1 Consent of Arthur Andersen LLP.
<PAGE> 1
EXHIBIT 10.23
STOCK PURCHASE AGREEMENT
DATED AS OF JUNE 23, 1998
AMONG
STYLING TECHNOLOGY CORPORATION,
JOHN MEYEROVICH,
OLGA MEYEROVICH,
LEV YAKUBOVICH,
SVETLANA YAKUBOVICH,
JOSEPH J. GALATI, JR.,
AND
GAIL GALATI
<PAGE> 2
TABLE OF CONTENTS
PAGE
SECTION 1 PURCHASE OF STOCK................................................ 1
1.1 Purchase Of Stock.......................................... 1
SECTION 2 PURCHASE PRICE................................................... 1
2.1 Purchase Price............................................. 1
2.2 Tax Election............................................... 1
2.3 Automobile................................................. 1
SECTION 3 REPRESENTATIONS AND WARRANTIES................................... 2
3.1 Representations and Warranties of Shareholders............. 2
(a) Due Incorporation, Good Standing, and Qualification........ 2
(b) Capital Stock.............................................. 2
(c) Options, Warrants, and Rights.............................. 2
(d) No Subsidiaries............................................ 2
(e) Books and Records.......................................... 2
(f) Directors, Officers, and Bank Accounts..................... 2
(g) Financial Statements....................................... 2
(h) Actions in the Ordinary Course of Business................. 3
(i) No Material Change......................................... 3
(j) Title to Properties........................................ 3
(k) Condition of Assets and Properties......................... 3
(l) Real Estate................................................ 3
(m) Liabilities................................................ 3
(n) Litigation................................................. 4
(o) Rights and Licenses........................................ 4
(p) Taxes...................................................... 4
(q) Accounts Receivable........................................ 4
(r) Contracts.................................................. 4
(s) Compliance with Law and Other Regulations.................. 5
(t) Employee Benefit and Employment Matters.................... 5
(u) Insurance.................................................. 6
(v) No Payments to Directors, Officers, Shareholders, or Others 6
(w) No Prohibited Payments..................................... 6
(x) Charter, Bylaws, and Minute Books.......................... 7
(y) Intellectual Property...................................... 7
(z) Inventories................................................ 7
-i-
<PAGE> 3
TABLE OF CONTENTS
(CONTINUED)
PAGE
(aa) Agreement Not in Breach of Other Instruments Affecting
Company.................................................... 7
(bb) Consents and Approvals..................................... 8
(cc) Accuracy of Statements..................................... 8
(dd) Payment of Indebtedness.................................... 8
3.2 Representations and Warranties of Buyer.................... 8
(a) Due Incorporation, Good Standing, and Qualification....... 8
(b) Corporate Authority........................................ 8
(c) Capital Stock.............................................. 8
(d) Options, Warrants, and Rights.............................. 9
(e) Subsidiaries............................................... 9
(f) Financial Statements....................................... 9
(g) Actions in the Ordinary Course of Business................. 9
(h) No Material Change......................................... 9
(i) Title to Assets and Properties............................. 9
(j) Litigation................................................. 10
(k) Rights and Licenses........................................ 10
(l) No Violation............................................... 10
(m) Taxes...................................................... 10
(n) Accounts Receivable........................................ 10
(o) Contracts.................................................. 10
(p) Compliance with Law and Other Regulations.................. 11
(q) Employee Benefit and Employment Matters.................... 11
(r) Insurance.................................................. 12
(s) No Payments to Directors, Officers, Stockholders, or Others 12
(t) No Prohibited Payments..................................... 12
(u) Certificate of Incorporation, Bylaws, and Minute Books..... 12
(v) SEC Reports................................................ 12
(w) Accuracy of Statements..................................... 12
3.3 Further Representations and Warranties of Shareholders..... 12
(a) Ownership of Capital Stock of Company...................... 13
(b) Rights To Acquire Shares................................... 13
(c) Power of Shareholders to Execute Agreement................. 13
(d) Agreement Not in Breach of Other Instruments Affecting
Shareholders............................................... 13
SECTION 4 THE CLOSING...................................................... 13
-ii-
<PAGE> 4
TABLE OF CONTENTS
(CONTINUED)
PAGE
4.1 Closing.................................................... 13
4.2 Deliveries by Shareholders................................. 13
(a) Stock Certificates......................................... 13
(b) Resignation of Officers and Directors...................... 13
(c) General Releases........................................... 13
(d) Consents................................................... 13
(e) Opinion of Counsel for Company and Shareholders............ 13
(f) Books and Records.......................................... 14
(g) Consulting Agreement....................................... 14
(h) Facilitation Agreement..................................... 14
(i) Lease...................................................... 14
(j) Formulas................................................... 14
4.3 Deliveries by Buyer........................................ 15
(a) Purchase Price............................................. 15
(b) Facilitation Fee........................................... 15
(c) Certain Reimbursements..................................... 15
(d) Opinion of Counsel for Buyer............................... 15
(e) Consents and Approvals..................................... 15
(f) Consulting Agreement....................................... 16
(g) Facilitation Agreement..................................... 16
(h) Lease...................................................... 16
4.4 Further Assurances......................................... 16
SECTION 5 WAIVER AND MODIFICATION.......................................... 16
5.1 Waivers.................................................... 16
5.2 Modification............................................... 16
SECTION 6 NON-COMPETITION.................................................. 16
6.1 Non-competition............................................ 16
6.2 Duration and Extent of Restriction......................... 16
6.3 Restrictions with Respect to Customers..................... 16
6.4 Remedies for Breach........................................ 17
SECTION 7 INDEMNIFICATION.................................................. 17
7.1 Indemnification by Shareholders............................ 17
7.2 Indemnification by Buyer................................... 17
7.3 Notice and Right to Defend Third-Party Claims.............. 18
-iii-
<PAGE> 5
TABLE OF CONTENTS
(CONTINUED)
PAGE
7.4 Limitations Related to Indemnity........................... 18
SECTION 8 GENERAL.......................................................... 19
8.1 Indemnity Against Finders.................................. 19
8.2 Controlling Law............................................ 19
8.3 Notices.................................................... 19
8.4 Binding Nature of Agreement; No Assignment................. 20
8.5 Entire Agreement........................................... 20
8.6 Paragraph Headings......................................... 20
8.7 Gender..................................................... 20
8.8 Counterparts............................................... 21
-iv-
<PAGE> 6
STOCK PURCHASE AGREEMENT
AGREEMENT dated as of June 23, 1998 ("Agreement"), among STYLING
TECHNOLOGY CORPORATION, a Delaware corporation ("Buyer"); and JOHN MEYEROVICH,
OLGA MEYEROVICH, LEV YAKUBOVICH, SVETLANA YAKUBOVICH, JOSEPH J. GALATI, JR., AND
GAIL GALATI (such individuals individually called "Shareholder" and collectively
called "Shareholders").
Shareholders own 750 shares of Common Stock, no par value, of EUROPEAN
TOUCH, LTD II, a Wisconsin corporation, (hereinafter called "Company"),
comprising all of the outstanding shares of capital stock of Company
(hereinafter sometimes called the "Stock"). The business being conducted by
Company is the manufacture and distribution of whirlpool foot spas and related
salon furniture.
Buyer and Shareholders desire that Buyer acquire all of the presently
outstanding capital stock of Company on the terms and conditions hereinafter set
forth.
NOW, THEREFORE, in consideration of the foregoing recitals and of the
mutual covenants set forth herein, the parties agree as follows:
SECTION 1
PURCHASE OF STOCK
1.1 PURCHASE OF STOCK. Each Shareholder hereby sells, conveys,
transfers, and assigns to Buyer, free and clear of all liens, pledges, claims,
and encumbrances of every kind, nature, and description, and Buyer hereby
purchases and accepts from each Shareholder, the shares set forth beside the
signature of each Shareholder to this Agreement, which shares, collectively,
comprise all of the outstanding capital stock of Company.
SECTION 2
PURCHASE PRICE
2.1 PURCHASE PRICE. The purchase price for the Stock sold pursuant to
Section 1 above shall be $20,283,879 payable to Shareholders pursuant to their
written instructions in accordance with their proportionate share ownerships set
forth beside their respective signatures to this Agreement.
2.2 TAX ELECTION. Following the Closing, Buyer and Shareholders agree to
make a joint 338(h)(10) election with respect to Company's assets. In making
this election, Buyer shall use the book value of Company's assets (after
depreciation).
2.3 AUTOMOBILE. At, or immediately prior to the Closing, Company shall
transfer the 1998 Mercedes Benz ML 320 owned by Company to Joseph Galati.
SECTION 3
REPRESENTATIONS AND WARRANTIES
3.1 REPRESENTATIONS AND WARRANTIES OF SHAREHOLDERS. Except as otherwise
set forth in the Company Disclosure Schedule heretofore delivered by Company to
Buyer, Shareholders jointly and severally represent and warrant to Buyer that
the statements contained in this Section 3.1 are correct and complete as of the
date of this Agreement. The Company Disclosure Schedule will be arranged in
paragraphs corresponding to the lettered paragraphs contained in this Section
3.1.
(a) DUE INCORPORATION, GOOD STANDING, AND QUALIFICATION. Company is
a corporation duly organized, validly existing, and in good standing under the
laws of the jurisdiction of its incorporation with all requisite corporate power
and authority to own, operate, and lease its assets and properties and to carry
on its business as now being conducted. Company is not subject to any material
disability by reason of the failure to be
<PAGE> 7
duly qualified as a foreign corporation for the transaction of business or to be
in good standing under the laws of any jurisdiction. Schedule 3.1(a) hereto
constitutes a list setting forth, as of the date of this Agreement, each
jurisdiction in which Company is qualified to do business.
(b) CAPITAL STOCK. As of the date hereof, Company has an authorized
capital stock consisting of 2,800 shares of Common Stock, no par value, of which
750 shares are issued and outstanding. All of the issued and outstanding shares
of capital stock of Company have been duly authorized and validly issued and are
fully paid and nonassessable, except as provided in Section 180.0622 of the
Wisconsin Statutes. Company has no treasury shares.
(c) OPTIONS, WARRANTS, AND RIGHTS. Company does not have outstanding
any options, warrants, or other rights to purchase, or securities or other
obligations convertible into or exchangeable for, or contracts, commitments,
agreements, arrangements, or understandings, to issue, any shares of its capital
stock or other securities.
(d) NO SUBSIDIARIES. Company does not have any subsidiaries.
(e) BOOKS AND RECORDS. The books of account and other corporate
records of Company are complete and accurate in all material respects and have
been maintained in accordance with good business practices, and the matters
contained therein are appropriately reflected in Company's financial statements.
The minute books and stock records of Company previously provided to Buyer are
complete and accurate in all material respects for a corporation formed and
operated as a close corporation and all signatures included therein are the
genuine signatures of the persons whose signatures are required.
(f) DIRECTORS, OFFICERS, AND BANK ACCOUNTS. Schedule 3.1(f) is a
correct and complete list of all directors and officers of Company, all bank
accounts and safe deposit boxes of Company, and of all persons authorized to
sign checks drawn on such accounts and to have access to such safe deposit
boxes.
(g) FINANCIAL STATEMENTS. The Balance Sheet of Company as of
December 31, 1997, as well as the Statements of Income, the Statements of
Stockholders' Equity, and the Statements of Cash Flows of Company for the year
ended December 31, 1997, and all related schedules and notes to the foregoing,
have been reported on by Arthur Andersen LLP, independent public accountants,
and the Balance Sheet of Company as of May 31, 1998 and the Statement of
Operations, the Statement of Shareholders' Equity, and the Statement of Cash
Flows of Company for the five months ended May 31, 1998 have been prepared by
Company without audit. All of the foregoing financial statements have been
prepared in accordance with generally accepted accounting principles, which were
applied on a consistent basis (except as defined therein) and present fairly, in
all material respects, the financial position, results of operations, and
changes in financial position of Company as of their respective dates and for
the periods indicated. Company has no material liabilities or obligations of a
type that would be included in a balance sheet prepared in accordance with
generally accepted accounting principles, except as and to the extent disclosed
or reflected in the Balance Sheet of Company as of May 31, 1998 ("Company's Base
Balance Sheet") or incurred since the date of that balance sheet in the ordinary
course of business.
(h) ACTIONS IN THE ORDINARY COURSE OF BUSINESS. Since the date of
Company's Base Balance Sheet, Company (i) has not taken any action outside the
ordinary and usual course of business; (ii) has not borrowed any money or become
contingently liable for any obligation or liability of another; (iii) has not
failed to pay any of its debts and obligations as they become due; (iv) has not
incurred any debt, liability, or obligation of any nature to any party, except
for obligations arising from the purchase of goods or the rendition of services
in the ordinary course of business; and (v) has not failed to use its best
efforts to preserve its business organization intact, to keep available the
services of its employees and independent contractors, and to preserve its
relationships with its customers, suppliers, and others with which it deals.
(i) NO MATERIAL CHANGE. Since the date of Company's Base Balance
Sheet, there has not been and there is not threatened (i) any material adverse
change in the financial condition, business, assets,
2
<PAGE> 8
properties, or operating results of Company, (ii) any loss or damage (whether or
not covered by insurance) to any of the assets or properties of Company, which
materially affects or impairs its ability to conduct its business, or (iii) any
mortgage or pledge of any assets or properties of Company, or any indebtedness
incurred by Company, other than indebtedness, not material in the aggregate,
incurred in the ordinary course of business.
(j) TITLE TO PROPERTIES. Except as set forth in Schedule 3.1(j),
Company has good and marketable title to all of its real and personal assets and
properties, including all assets and properties reflected in Company's Base
Balance Sheet or acquired subsequent to the date of Company's Base Balance
Sheet, except assets or properties disposed of subsequent to the date of
Company's Base Balance Sheet in the ordinary course of business or pursuant to
Section 2.3 of this Agreement. Except as set forth in Schedule 3.1(j), such
assets and properties are subject to no mortgage, indenture, pledge, lien,
claim, encumbrance, charge, security interest or title retention, or other
security arrangement, except for liens for the payment of federal, state, and
other taxes, the payment of which is neither delinquent nor subject to
penalties, and except for other liens and encumbrances incidental to the conduct
of the business of Company or the ownership of its assets or properties, which
were not incurred in connection with the borrowing of money or the obtaining of
advances and which do not in the aggregate materially detract from the value of
the assets or properties of Company or materially impair the use thereof in the
operation of its business, except in each case as disclosed in Company's Base
Balance Sheet. All leases pursuant to which Company leases any substantial
amount of real or personal property are valid and effective in accordance with
their respective terms.
(k) CONDITION OF ASSETS AND PROPERTIES. To the knowledge of
Shareholders and the Company's officers and employees with responsibilities for
such matters, the buildings, equipment, machinery, fixtures, furniture,
furnishings, office equipment, and all other tangible personal assets and
properties of Company presently used in, or necessary for the operation of,
Company's business, do not require any repairs other than normal maintenance and
are in good operating condition and in a state of reasonable maintenance and
repair, except for ordinary wear and tear.
(l) REAL ESTATE. Company has no interest as owner, lessor, lessee,
or otherwise in any real estate, except as set forth in Schedule 3.1(l).
(m) LIABILITIES. Except as set forth in Schedule 3.1(m), Company has
no obligations or liabilities whether related to tax or non-tax matters,
liquidated or unliquidated, fixed or contingent, or otherwise, except and to the
extent reflected or reserved against on Company's Base Balance Sheet or in this
Agreement other than obligations or liabilities incurred in the ordinary course
of its business and disclosed to the extent required by this Agreement. Without
limiting the foregoing, to the knowledge of Shareholders and the Company's
officers and employees with responsibilities for such matters, Company does not
have any obligation or liability, contingent or otherwise, with respect to
product warranties relating to products sold by it that, in Company's reasonable
judgment, are not adequately covered by insurance. Company has not shipped its
products to any customer on a contingent or similar basis.
(n) LITIGATION. There are no actions, suits, proceedings, or other
litigation pending or, to Shareholders' knowledge and the knowledge of
Shareholders and the Company's officers and employees with responsibilities for
litigation matters, threatened against Company, at law or in equity, or before
or by any federal, state, municipal, or other governmental department,
commission, board, bureau, agency, or instrumentality that, if determined
adversely to Company, would individually or in the aggregate have a material
adverse effect on the business, assets, properties, operations, operating
results, prospects, or condition, financial or otherwise, of Company.
(o) RIGHTS AND LICENSES. To the knowledge of Shareholders and the
Company's officers and employees with responsibilities for such matters, Company
is not subject to any material disability or liability by reason of its failure
to possess any patent, patent right, trademark, trademark right, trade name,
trade name right, or license. Schedule 3.1(o) hereto contains a true, correct,
and complete list of all Licenses and Permits necessary for the conduct of
Company's business. Company has all Licenses and Permits necessary for the
conduct of the business
3
<PAGE> 9
conducted by it and the ownership and use of its assets and properties and the
premises occupied by it, and the conduct of its business as presently conducted.
(p) TAXES. Company has duly filed in correct form all Tax Returns
relating to the activities of Company required or due to be filed (with regard
to applicable extensions) on or prior to the date hereof. All such Tax Returns
are complete and accurate in all material respects, and Company has paid or made
provision for the payment of all Taxes that have been incurred or are due or
claimed to be due from Company by federal, state, or local taxing authorities
for all periods ending on or before the date hereof, other than Taxes or other
charges that are not delinquent or are being contested in good faith and have
not been finally determined and have been disclosed to Buyer. The amounts set up
as reserves for Taxes on the books of Company are sufficient in the aggregate
for the payment of all unpaid Taxes (including any interest or penalties
thereon), whether or not disputed, accrued, or applicable. No claims for Taxes
or assessments are being asserted, or to the knowledge of Shareholders and the
Company's officers and employees with responsibilities for such matters,
threatened against Company. Company has furnished to Buyer a list of all Tax
Returns filed for it. For purposes of this Agreement, the term "Taxes" shall
mean all taxes, charges, fees, levies, or other assessments, including, without
limitation, income, gross receipts, excise, property, sales, transfer, license,
payroll, and franchise taxes, imposed by the United States, or any state, local,
or foreign government or subdivision or agency thereof; and such term shall
include any interest, penalties, or additions to tax attributable to such
assessments or to the failure to file any Tax Return; and the term "Tax Return"
shall mean any report, return, or other information required to be supplied to a
taxing authority or required by a taxing authority to be supplied to any other
person.
(q) ACCOUNTS RECEIVABLE. The accounts receivable of Company have
been acquired in the ordinary course of business, are valid and enforceable,
and, to the knowledge of Shareholders and the Company's officers and employees
with responsibilities for such matters, are fully collectible, subject to no
defenses, deductions, set-offs, or counterclaims, except to the extent of the
reserve reflected in Company's Base Balance Sheet (in accordance with generally
accepted accounting principles consistently applied) or in such other amount
that is not material in the aggregate. To the knowledge of Shareholders and the
Company's officers and employees with responsibilities for such matters, each
such account receivable is fully collectible to the extent of the face value
thereof (less the amount of the reserve for doubtful accounts, if any, reflected
on the books of Company with respect to such account), no later than 30 days
after such account receivable is due, and no account receivable is due more than
90 days after it was created.
(r) CONTRACTS. Except as set forth in Schedule 3.1(r), Company is
not a party to (i) any plan or contract providing for bonuses, pensions,
options, stock purchases, deferred compensation, retirement payments, or profit
sharing, (ii) any collective bargaining or other contract or agreement with any
labor union, (iii) any lease, installment purchase agreement, or other contract
with respect to any real or personal property used or proposed to be used in its
operations, excepting, in each case, items included within aggregate amounts
disclosed or reflected in Company's Base Balance Sheet, (iv) any employment
agreement or other similar arrangement not terminable by it upon 30 days or less
notice without material penalty to it, (v) any contract or agreement for the
purchase of any commodity, material, fixed asset, or equipment in excess of
$50,000, (vi) any contract or agreement creating an obligation of $50,000 or
more, (vii) any contract, agreement, mortgage, or lease, which by its terms does
not terminate or is not terminable by it without material penalty to it, (viii)
any loan agreement, indenture, promissory note, conditional sales agreement, or
other similar type of arrangement, or (ix) any material license agreement. All
material mortgages, leases, contracts, agreements, and other arrangements to
which Company is a party are valid and enforceable in accordance with their
terms; Company and, to the knowledge of Shareholders and the Company's officers
and employees with responsibilities for such matters, all other parties to each
of the foregoing have performed all material obligations required to be
performed to date; neither Company, nor, to the knowledge of Shareholders and
the Company's officers and employees with responsibilities for such matters, any
such other party is in material default or in material arrears under the terms
of any of the foregoing; and, to the knowledge of Shareholders and the Company's
officers and employees with responsibilities for such matters, no condition
exists or event has occurred that, with the giving of notice or lapse of time or
both, would constitute a material default under any of them.
4
<PAGE> 10
(s) COMPLIANCE WITH LAW AND OTHER REGULATIONS. Company is in
compliance in all material respects with all requirements (including those
relating to environmental matters) of federal, state, or local law and all
requirements of all governmental bodies and agencies having jurisdiction over
it, the conduct of its business, the use of its assets and properties, and all
premises occupied by it. To the knowledge of Shareholders and the Company's
officers and employees with respect to such matters, there is no environmental
contamination, toxic waste, or other discharge, spill, construction component,
structural element or condition, adversely affecting any of the properties of
Company, nor has Company received any official notice or citation that any of
its properties in any material way contravene any federal, state, or local law
or regulation relating to environmental, health, or safety matters, including
without limitation any CERCLA or OSHA requirements. Without limiting the
foregoing, Company has properly filed all reports, paid all monies, and obtained
all licenses, permits, certificates, and authorizations needed or required for
the conduct of its business and the use of its assets and properties and the
premises occupied by it in connection therewith and is, to the knowledge of
Shareholders and the Company's officers and employees with responsibilities for
such matters, in compliance in all material respects with all conditions,
restrictions, and provisions of all of the foregoing. Company has not received
any notice from any federal, state, or local authority or any insurance or
inspection body that any of its assets, properties, facilities, equipment, or
business procedures or practices fails to comply with any applicable law,
ordinance, regulation, building, or zoning law or requirement of any public
authority or body.
(t) EMPLOYEE BENEFIT AND EMPLOYMENT MATTERS. Company and its "ERISA
Affiliates" (as determined under Section 414(b), (c), (m), or (o) of the
Internal Revenue Code of 1986, as amended (the "Code")) (i) maintain,
administer, or contribute to, or at any time during the past six years have
maintained, administered, or contributed to, only those employee pension benefit
plans (as defined in Section 3(2) of ERISA, whether or not excluded from
coverage under specific Titles or Subtitles of ERISA) described in Schedule
3.1(t) (the "Company Pension Plans"); and (ii) Company and its ERISA Affiliates
maintain, administer, or contribute to only those employee welfare benefit plans
(as defined in Section 3(1) of ERISA, whether or not excluded from coverage
under specific Titles or Subtitles of ERISA) described in Schedule 3.1(t) (the
"Company Welfare Plans"). For the benefit of their employees, Company and all
ERISA Affiliates maintain, administer, or contribute to only those bonus,
deferred compensation, stock purchase, stock option, severance plan, insurance,
or similar arrangements described in Schedule 3.1(t) ("Company Employee Benefit
Plans"). Except as disclosed in Schedule 3.1(t), the Internal Revenue Service
has determined that each Company Pension Plan intended to be "qualified" under
Section 401(a) of the Code is so qualified and that the trust forming a part
thereof is tax exempt under Section 501(a) of the Code from the date of its
establishment until the date hereof, and Company does not know of any matter
that would adversely affect such qualified or tax-exempt status of such plan or
trust. Full payment has been made, or will be made in accordance with Sections
404(a)(6) and 412 of the Internal Revenue Code, of all amounts that either
Company or any ERISA Affiliate is required to pay under the terms of each of the
Company Pension Plans and Company Welfare Plans, and all such amounts are
properly accrued on Company's Base Balance Sheet; and none of the Company
Pension Plans or any trust established thereunder has incurred any "accumulated
funding deficiency" (as defined in Sections 302 of ERISA and 412 of the Internal
Revenue Code), whether or not waived, as of the last day of the most recent
fiscal year of each of such Plans ended prior to the date of this Agreement.
Neither any Company Pension Plan or Company Welfare Plan nor, to the knowledge
of Shareholders and the Company's officers and employees with responsibilities
for employee benefits matters, any Company Pension Plan or Company Welfare Plan
fiduciary 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 that is exempt under Section 408 of ERISA or
section 4975(d) of the Code. Except as set forth in Schedule 3.1(t), Company has
furnished to Buyer true and complete copies of each Company Pension Plan,
Company Welfare Plan, and Company Employee Benefit Plan and related trust
agreements or annuity contracts, Internal Revenue Service determination letters
and summary plan descriptions; all of the foregoing plans and agreements are
valid, binding, and in full force and effect, and there are no defaults
thereunder; and none of the rights of Company or any of its ERISA Affiliates
thereunder will be impaired by this Agreement or the consummation of the
transaction contemplated by this Agreement. Company is not a party to any
collective bargaining agreement and, to the best of each Shareholder's
knowledge, there is no material request for union representation pending or
threatened against Company. Neither Company nor any of its ERISA Affiliates has
incurred any liability to the PBGC as a result of the voluntary or involuntary
termination of any Company Pension Plan subject to Title IV of ERISA; there is
currently no active filing by Company or any of
5
<PAGE> 11
its ERISA Affiliates with the PBGC (and no proceeding has been commenced by the
PBGC) to terminate any Company Pension Plan subject to Title IV of ERISA
maintained or funded, in whole or in part, by Company or any of its ERISA
Affiliates; and neither Company nor any of its ERISA Affiliates has 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). The
employment of each employee of Company is terminable at will without material
cost to Company. Company has complied in all material respects with all other
applicable federal, state, and local laws relating to the employment of labor
including, but not limited to, the provisions thereof relative to wages, hours,
collective bargaining, working conditions, and payment of taxes of any kind,
and, except as described in Schedule 3.1(t), Company is not liable for any
arrears of wages or any taxes or penalties for failure to comply with any of the
foregoing or has any obligations for any vacation, sick leave, or other
compensatory time. All independent contractors of Company are paid salaries or
other compensation in accordance with the amounts set forth in Schedule 3.1(t),
and Schedule 3.1(t) correctly and accurately sets forth all salaries, expenses,
and personal benefits paid to or accrued for all directors, officers, and
principal shareholders of Company as of the date of this Agreement, all of which
are reflected as appropriate in Company's Base Balance Sheet.
(u) INSURANCE. Company maintains in full force and effect insurance
coverage on its assets, properties, premises, operations, and personnel in such
amounts as Company deems appropriate. Schedule 3.1(u) 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 maintained in force by or for the account
of Company with respect to the business and assets of Company (such policies are
hereinafter referred to as the "Policies"). Company has been continuously, and
is presently, insured by insurers unaffiliated with Company with respect to its
property and the conduct of its business in such amounts and against such risks
as Company has reasonably deemed 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.
(v) NO PAYMENTS TO DIRECTORS, OFFICERS, SHAREHOLDERS, OR OTHERS.
Except as set forth in Schedule 3.1(v) or in Section 2.3, since the date of
Company's Base Balance Sheet, there has not been any purchase or redemption of
any shares of capital stock of Company or any transfer, distribution, or payment
by Company, directly or indirectly, of any assets or properties to any director,
officer, shareholder, or other person other than the payment of compensation for
services actually rendered at rates not in excess of the rates prevailing on the
date of Company's Base Balance Sheet and dividend distributions in the ordinary
course of business consistent with past practices.
(w) NO PROHIBITED PAYMENTS. Neither Company nor any officer,
director, employee, independent contractor, or agent, acting on behalf of
Company, has at any time (i) made any contributions to any candidate for
political office in violation of law or failed to disclose fully any
contributions to any candidate for political office in accordance with any
applicable statute, rule, regulation, or ordinance requiring such disclosure,
(ii) made any payment to any local, state, federal, or foreign governmental
officer or official, or other person charged with similar public or quasi-public
duties, other than payments required or allowed by applicable law, (iii) made
any payment outside the ordinary course of business to any purchasing or selling
agent or person charged with similar duties of any entity to which Company sells
products or renders services or from which Company buys products or services for
the purpose of influencing such agent or person to buy products or services from
or sell products or services to Company, or (iv) engaged in any transaction,
maintained any bank account, or used any corporate funds, except for
transactions, bank accounts, and funds that have been and are reflected in the
normally maintained books and records of Company.
(x) CHARTER, BYLAWS, AND MINUTE BOOKS. Company has heretofore
delivered to Buyer true and complete copies of the charter and bylaws of Company
as currently in effect. The minute books of Company contain complete and
accurate (in all material respects) records of all meetings and other corporate
actions held or taken by the Boards of Directors (or committees of the Boards of
Directors) and shareholders of Company since its incorporation.
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(y) INTELLECTUAL PROPERTY. Except as set forth in Schedule 3.1(y),
Company owns or holds all of the rights to use all formulas, packaging, logos,
trademarks, trade names, trade secrets, fictitious names, service marks,
patents, and copyrights that are used in or necessary to the operation of its
business. Schedule 3.1(y) hereto sets forth a true, complete, and correct list
of all material Intellectual Property owned or used by Company. Except as set
forth in Schedule 3.1(y), Company owns all rights with respect to, and has good
and marketable title to, all of the trademarks and formulas that are used in or
are necessary to the conduct of the Business. Company is not, and following the
Closing, neither Buyer nor Company will be, obligated to pay any royalty or
other payment with respect to any of such formulas. To the knowledge of
Shareholders and the Company's officers and employees with responsibilities for
intellectual property matters, none of the matters covered by the Intellectual
Property, nor any of the products or services sold or provided by Company, nor
any of the processes used or the business practices followed by Company,
infringes or has infringed upon any trademark, trade name, trade secret,
fictitious name, service mark, patent, or copyright owned by any person or
entity (or any application with respect thereto), or constitutes unfair
competition. Company is not, and following the Closing neither Buyer nor Company
will be, obligated to pay any royalty or other payment with respect to any of
the Intellectual Property. To the knowledge of Shareholders and the Company's
officers and employees with responsibilities for intellectual property, except
as disclosed in Schedule 3.1(y), no person or entity is producing, providing,
selling, or using products or services that would constitute an infringement of
any of the Intellectual Property.
(z) INVENTORIES. The Inventories are in good and merchantable
condition and are stated at not more than the lower of cost or market, with
adequate adjustments for obsolete or obsolescent items. Since the date of
Company's Base Balance Sheet, there have not been and there are not required to
be any write-downs in the value of the Company's Inventories or write-offs with
respect to such Inventories. The raw materials, work in progress, and finished
goods inventory of Company are all in good condition and are usable and
currently being used in the present production and sales activities of Company,
and Company does not have on hand or on order any raw materials, work in
progress, or finished goods inventory materially in excess of its normal
requirements (based upon sales experience for the last 12 months) for products
that are included in its current line and for which Company is now taking
orders. Without limiting the foregoing, (i) Company does not have more than a
six-month supply of raw materials, work in progress or finished goods inventory,
and (ii) all work in progress and finished goods inventory being transferred to
Buyer pursuant to this Agreement are in accordance with customers'
specifications.
(aa) AGREEMENT NOT IN BREACH OF OTHER INSTRUMENTS AFFECTING COMPANY.
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 the articles of incorporation or bylaws of Company,
nor will they result in the breach of any term or provision of, or result in the
termination or modification of, or constitute a default under, or permit any
party to modify or terminate, any loan agreement, note, debenture, indenture,
mortgage, deed of trust, lease, contract, agreement, or other material
obligation of any description to which Company is a party or by which it is
bound, or any judgment, decree, order, or award of any court, government body,
or arbitration, or any applicable law, rule, or regulation.
(bb) CONSENTS AND APPROVALS. Company and Shareholders have obtained
all necessary consents and approvals of other persons to the performance by
Shareholders of the transactions contemplated by this Agreement.
(cc) ACCURACY OF STATEMENTS. Neither this Agreement nor the
Company's Disclosure Schedule contains or will contain an untrue statement of a
material fact or omits or will omit to state a material fact necessary to make
the statements contained herein or therein, in light of circumstances in which
they are made, not misleading.
(dd) PAYMENT OF INDEBTEDNESS. All indebtedness owing to Company by
any director, officer, or shareholder of Company has been paid in full.
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<PAGE> 13
(ee) FINANCIAL CONDITION. As of the Closing Date, Company's Net
Assets are equal to or greater than $1,328,071. As used herein, "Net Assets"
means Company's stockholders' equity less any cash held by Company, all
calculated in accordance with generally accepted accounting principles
consistently applied. Company has, as of the Closing Date, sufficient cash and
accounts receivable to satisfy its obligations and to pay its expenses as they
come due.
3.2 REPRESENTATIONS AND WARRANTIES OF BUYER. Except as otherwise set
forth in the Buyer Disclosure Schedule heretofore delivered by Buyer to
Shareholders, except as disclosed in Buyer's Annual Report on Form 10-K for the
year ended December 31, 1997 (without regard to documents incorporated therein
by reference), Buyer represents and warrants to Shareholders that the statements
contained in this Section 3.2 are correct and complete in all material respects
as of the date of this Agreement. The Buyer Disclosure Schedule will be arranged
in paragraphs contained in this Section 3.2.
(a) DUE INCORPORATION, GOOD STANDING, AND QUALIFICATION. Each of
Buyer and its subsidiaries is a corporation duly organized, validly existing,
and in good standing under the laws of its jurisdiction of incorporation with
all requisite corporate power and authority to own, operate, and lease its
assets and properties and to carry on its business as now being conducted.
Neither Buyer nor any of its subsidiaries is subject to any material disability
by reason of the failure to be duly qualified as a foreign corporation for the
transaction of business or to be in good standing under the laws of any
jurisdiction. As used in this Agreement with reference to Buyer, the term
"subsidiaries" shall include all direct or indirect subsidiaries of Buyer other
than Company.
(b) CORPORATE AUTHORITY. Buyer has the corporate power and authority
to enter into this Agreement and carry out the transactions contemplated hereby.
The Board of Directors of Buyer has duly authorized the execution, delivery, and
performance of this Agreement. No other corporate proceedings on the part of
Buyer or its subsidiaries, including the approval of Buyer's stockholders, are
necessary to authorize the execution and delivery by Buyer of this Agreement or
the consummation by Buyer of the transactions contemplated hereby. This
Agreement has been duly executed and delivered by and constitutes a legal,
valid, and binding agreement of Buyer, enforceable against it in accordance with
its terms, except that (i) such enforcement may be subject to bankruptcy,
insolvency, reorganization, moratorium, or other similar laws now or hereafter
in effect relating to creditors' rights, and (ii) the remedy of specific
performance and injunctive and other forms of equitable relief may be subject to
equitable defenses and to the discretion of the court before which any
proceeding therefore may be brought.
(c) CAPITAL STOCK. As of March 27, 1998, Buyer had an authorized
capital stock consisting of 10,000,000 shares of Common Stock, $0.0001 par
value, of which 4,034,703 shares were issued and outstanding, and 1,000,000
shares of Preferred Stock, $0.0001 par value, of which no shares were issued and
outstanding. As of such date, 598,530 shares of capital stock were reserved for
issuance upon the exercise of outstanding stock options. As of such date, there
were warrants outstanding to acquire 383,000 shares of Common Stock of Buyer.
All of the issued and outstanding shares of capital stock of Buyer and of each
of its subsidiaries have been duly authorized and validly issued and are fully
paid and nonassessable. Buyer has treasury shares.
(d) OPTIONS, WARRANTS, AND RIGHTS. Neither Buyer nor any of its
subsidiaries has outstanding any options, warrants, or other rights to purchase,
or securities or other obligations convertible into or exchangeable for, or
contracts, commitments, agreements, arrangements or understandings to issue, any
shares of its capital stock or other securities, other than those referred to in
Section 3.2(c).
(e) SUBSIDIARIES. The outstanding shares of capital stock of the
subsidiaries of Buyer owned by Buyer or any of its subsidiaries are owned free
and clear of all claims, liens, charges, and encumbrances. Buyer does not own,
directly or indirectly, any capital stock or other equity securities of any
corporation or have any direct or indirect equity or ownership interest in any
corporation or other business, other than with respect to its subsidiaries.
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<PAGE> 14
(f) FINANCIAL STATEMENTS. The Consolidated Balance Sheet of Buyer
and its subsidiaries as of December 31, 1997, as well as the Consolidated
Statements of Income, the Consolidated Statements of Stockholders' Equity, and
the Consolidated Statements of Cash Flows of Buyer and its subsidiaries for the
period ended December 31, 1996, and all related schedules and notes to the
foregoing, have been reported on by Arthur Andersen LLP, independent public
accountants. All of the foregoing financial statements have been prepared in
accordance with generally accepted accounting principles which were applied on a
consistent basis (except as described therein), and present fairly, in all
material respects the financial position, results of operations, and changes of
financial position of Buyer and its subsidiaries as of their respective dates
and for the periods indicated. Neither Buyer nor any of its subsidiaries has any
material liabilities or obligations of a type that would be included in a
balance sheet prepared in accordance with generally accepted accounting
principles, except as and to the extent disclosed or reflected in the
Consolidated Balance Sheet of Buyer and its subsidiaries as of March 31, 1998
("Buyer's Base Balance Sheet"), or incurred since March 31, 1998 in the ordinary
course of business.
(g) ACTIONS IN THE ORDINARY COURSE OF BUSINESS. Since the date of
Buyer's Base Balance Sheet, neither Buyer nor any of its subsidiaries (i) has
taken any action outside the ordinary and usual course of business; (ii) has
borrowed any money or become contingently liable for any obligation or liability
of another; (iii) has failed to pay any of its debts and obligations as they
become due; (iv) has incurred any debt, liability, or obligation of any nature
to any party, except for obligations arising from the purchase of goods or the
rendition of services in the ordinary course of business; or (v) has failed to
use its best efforts to preserve its business organization intact, to keep
available the services of its employees and independent contractors, or to
preserve its relationships with its customers, suppliers, and others with which
it deals.
(h) NO MATERIAL CHANGE. Since the date of Buyer's Base Balance
Sheet, there has not been and there is not threatened (i) any material adverse
change in the financial condition, business, properties, assets, or operating
results of Buyer and its subsidiaries taken as a whole, or (ii) any loss or
damage (whether or not covered by insurance) to any of the assets or properties
of Buyer or its subsidiaries, which materially affects or impairs their ability
to conduct their business.
(i) TITLE TO ASSETS AND PROPERTIES. Buyer and its subsidiaries have
good and marketable title to all of their respective real and personal assets
and properties, including all assets and properties reflected in Buyer's Base
Balance Sheet, or acquired subsequent to the date of Buyer's Base Balance Sheet,
except assets or properties disposed of subsequent to that date in the ordinary
course of business. Such assets and properties are subject to no mortgage,
indenture, pledge, lien, claim, encumbrance, charge, security interest or title
retention, or other security arrangement, except for liens for the payment of
federal, state, and other taxes, the payment of which is neither delinquent nor
subject to penalties, and except for other liens and encumbrances incidental to
the conduct of the business of Buyer and its subsidiaries or the ownership of
their assets or properties, which were not incurred in connection with the
borrowing of money or the obtaining of advances, and which do not in the
aggregate materially detract from the value of the net assets or properties of
Buyer and its subsidiaries taken as a whole or materially impair the use thereof
in the operation of their respective businesses, except in each case as
disclosed in Buyer's Base Balance Sheet. All leases pursuant to which Buyer or
any of its subsidiaries lease any substantial amount of real or personal
property are valid and effective in accordance with their respective terms.
(j) LITIGATION. There are no actions, suits, proceedings, or other
litigation pending or, to the knowledge of Buyer and its directors, officers,
and employees with responsibilities for litigation matters, threatened against
Buyer or any of its subsidiaries, at law or in equity, or before or by any
federal, state, municipal, or other governmental department, commission, board,
bureau, agency, or instrumentality that, if determined adversely to Buyer or any
of its subsidiaries, would individually or in the aggregate have a material
adverse effect on the business, assets, properties, or prospects or on the
condition, financial or otherwise, of Buyer and its subsidiaries taken as a
whole.
(k) RIGHTS AND LICENSES. To the knowledge of Buyer and its officers
and employees with respect to such matters, neither Buyer nor any of its
subsidiaries is subject to any material disability or liability by
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<PAGE> 15
reason of its failure to possess any patent, patent right, trademark, trademark
right, trade name, trade name right, or license.
(l) NO VIOLATION. The execution and delivery of this Agreement and
the consummation of the transactions contemplated hereby will not violate or
result in a breach by Buyer or any of its subsidiaries of, or constitute a
default under, or conflict with, or cause any acceleration of any obligation
with respect to, (i) any provision or restriction of any charter, bylaw, loan,
indenture, or mortgage of Buyer or any of its subsidiaries, or (ii) any
provision or restriction of any lien, lease agreement, contract, instrument,
order, judgment, award, decree, ordinance, or regulation or any other
restriction of any kind or character to which any assets or properties of Buyer
or any of its subsidiaries is subject or by which Buyer or any of its
subsidiaries is bound.
(m) TAXES. Buyer has duly filed in correct form all Tax Returns
relating to the activities of Buyer and its subsidiaries required or due to be
filed (with regard to applicable extensions) on or prior to the date hereof. All
such Tax Returns are accurate and complete in all material respects, and Buyer
has paid or made provision for the payment of all Taxes that have been incurred
or are due or claimed to be due from Buyer or any of its subsidiaries by
federal, state, or local taxing authorities for all periods ending on or before
the date hereof, other than Taxes or other charges that are not delinquent or
are being contested in good faith and have not been finally determined and have
been disclosed to Company. The amounts set up as reserves for Taxes on the books
of Buyer and its subsidiaries are sufficient in the aggregate for the payment of
all unpaid Taxes (including any interest or penalties thereon), whether or not
disputed, accrued, or applicable. No claims for taxes or assessments are being
asserted or threatened against Buyer or any of its subsidiaries.
(n) ACCOUNTS RECEIVABLE. The accounts receivable of Buyer and its
subsidiaries have been acquired in the ordinary course of business, are valid
and enforceable, and, to the knowledge of Buyer and its officers and employees
with respect to such matters, are fully collectible, subject to no known
defenses, setoffs, or counterclaims, except to the extent of the reserve
reflected in the books of Buyer and its subsidiaries or in such other amount
which is not material in the aggregate.
(o) CONTRACTS. Neither Buyer nor any of its subsidiaries is a party
to (i) any plan or contract providing for bonuses, pensions, options, stock
purchases, deferred compensation, retirement payments, or profit sharing, (ii)
any collective bargaining or other contract or agreement with any labor union,
(iii) any lease, installment purchase agreement, or other contract with respect
to any real or personal property used or proposed to be used in its operations
excepting, in each case, items included within aggregate amounts disclosed or
reflected in Buyer's Base Balance Sheet, (iv) any employment agreement or other
similar arrangement not terminable by it upon 30 days or less notice without
material penalty to it, (v) any contract or agreement for the purchase of any
commodity, material, fixed asset, or equipment in excess of $100,000, (vi) any
contract or agreement creating an obligation of $100,000 or more, (vii) any
contract or agreement, which by its terms does not terminate or is not
terminable by it without material penalty to it, (viii) any loan agreement,
indenture, promissory note, conditional sales agreement, or other similar type
of arrangement, or (ix) any material license agreement. All material contracts,
agreements, and other arrangements to which Buyer or any of its subsidiaries is
a party are valid and enforceable in accordance with their terms; Buyer, its
subsidiaries, and, to the knowledge of Buyer and its officers and employees with
respect to such matters, all other parties to each of the foregoing have
performed all obligations required to be performed to date; neither Buyer, nor
any of its subsidiaries, nor, to the knowledge of Buyer and its officers and
employees with respect to such matters, any such other party is in default or in
arrears under the terms of any of the foregoing; and no condition exists or
event has occurred that, with the giving of notice or lapse of time or both,
would constitute a default under any of them.
(p) COMPLIANCE WITH LAW AND OTHER REGULATIONS. To the knowledge of
Buyer and its officers and employees with respect to such matters, each of Buyer
and its subsidiaries is in compliance in all material respects with all
requirements (including those relating to environmental matters) of federal,
state, and local law and all requirements of all governmental bodies and
agencies having jurisdiction over it, the conduct of its business, the use of
its assets and properties, and all premises occupied by it. There is no
environmental contamination, toxic waste, or other discharge, spill,
construction component, structural element or condition,
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<PAGE> 16
adversely affecting any of the properties of Buyer or its subsidiaries, nor has
Buyer or any of its subsidiaries received any official notice or citation that
the properties of Buyer or its subsidiaries in any material way contravene any
federal, state, or local law or regulation relating to environmental, health, or
safety matters, including without limitation any requirements of the
Comprehensive Environmental Response Compensation and Liability Act ("CERCLA")
nor any OSHA requirements. Without limiting the foregoing, each of Buyer and its
subsidiaries has properly filed all reports, paid all monies, and obtained all
licenses, permits, certificates, and authorizations needed or required for the
conduct of its business and the use of its assets and properties and the
premises occupied by it in connection therewith and, to the knowledge of Buyer
and its officers and employees with respect to such matters, is in compliance in
all material respects with all conditions, restrictions, and provisions of all
of the foregoing. Neither Buyer nor any of its subsidiaries has received any
notice from any federal, state, or local authority or any insurance or
inspection body that any of its assets, properties, facilities, equipment, or
business procedures or practices fails to comply in any material respect with
any applicable law, ordinance, regulation, building, or zoning law or
requirement of any public authority or body.
(q) EMPLOYEE BENEFIT AND EMPLOYMENT MATTERS. Buyer and its "ERISA
Affiliates" (as determined under Section 414(b), (c), (m), or (o) of the Code,
(i) maintain, administer, or contribute to, or at any time during the past six
years have maintained, administered, or contributed to, only those employee
pension benefit plans (as defined in Section 3(2) of ERISA, whether or not
excluded from coverage under specific Titles or Subtitles of ERISA) described in
Buyer's Disclosure Schedule (the "Buyer Pension Plans"); and (ii) maintain,
administer, or contribute to only those employee welfare benefit plans (as
defined in Section 3(1) of ERISA, whether or not excluded from coverage under
specific Titles or Subtitles of ERISA) described in Buyer's Disclosure Schedule
(the "Buyer Welfare Plans"). Buyer and all ERISA Affiliates maintain,
administer, or contribute to only those bonus, deferred compensation, stock
purchase, stock option, severance plan, insurance, or similar arrangements
described in Buyer's Disclosure Schedule ("Buyer Employee Benefit Plans").
Except as disclosed in Buyer's Disclosure Schedule, the Internal Revenue Service
has determined that each Buyer Pension Plan intended to be "qualified" under
Section 401(a) of the Code is so qualified and that the trust forming a part
thereof is tax exempt under Section 501(a) of the Code from the date of its
establishment until the date hereof, and Buyer does not know of any matter that
would adversely affect such qualified or tax-exempt status of such plan or
trust. Full payment has been made, or will be made in accordance with Sections
404(a)(6) and 412 of the Code, of all amounts that either Buyer or any ERISA
Affiliate is required to pay under the terms of each of the Buyer Pension Plans
and Buyer Welfare Plans, and all such amounts are properly accrued on Buyer's
Base Balance Sheet; and none of the Buyer Pension Plans or any trust established
thereunder has incurred any "accumulated funding deficiency" (as defined in
Sections 302 of the ERISA and 412 of the Code), whether or not waived, as of the
last day of the most recent fiscal year of each of such Plans ended prior to the
date of this Agreement. Neither any Buyer Pension Plan or Buyer Welfare Plan nor
any Buyer Pension Plan or Buyer Welfare Plan fiduciary 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
that is exempt under Section 408 of ERISA or Section 4975(d) of the Code.
Neither Buyer or any of its subsidiaries is a party to any collective bargaining
agreement and, to the best of Buyer's knowledge, there is no material request
for union representation pending or threatened against Buyer of any of its
subsidiaries. Neither Buyer nor any of its ERISA Affiliates has incurred any
liability to the PBGC as a result of the voluntary or involuntary termination of
any Buyer Pension Plan subject to Title IV of ERISA; there is currently no
active filing by Buyer or any of its ERISA Affiliates with the PBGC (and no
proceeding has been commenced by the PBGC) to terminate any Buyer Pension Plan
subject to Title IV of ERISA maintained or funded, in whole or in part, by Buyer
or any of its ERISA Affiliates; and neither Buyer nor any of its ERISA
Affiliates has 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). Each of Buyer and its subsidiaries has complied with all other
applicable federal, state, and local laws relating to the employment of labor
including, but not limited to, the provisions thereof relative to wages, hours,
collective bargaining, working conditions, and payment of taxes of any kind, and
neither Buyer nor any of its subsidiaries is liable for any arrears of wages or
any taxes or penalties for failure to comply with any of the foregoing or has
any obligations for any vacation, sick leave, or other compensatory time.
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<PAGE> 17
(r) INSURANCE. Buyer and each of its subsidiaries maintain in full
force and effect insurance coverage on their assets, properties, premises,
operations, and personnel in such amounts as Buyer has reasonably deemed
adequate for its business.
(s) NO PAYMENTS TO DIRECTORS, OFFICERS, STOCKHOLDERS, OR OTHERS.
Since the date of Buyer's Base Balance Sheet, there has not been any purchase or
redemption of any shares of capital stock of Buyer or its subsidiaries or any
transfer, distribution, or payment by Buyer or its subsidiaries, directly or
indirectly, of any assets or properties to any director, officer, principal
stockholder, or other person other than the payment of compensation for services
actually rendered at rates not in excess of the rates prevailing on the date of
Buyer's Base Balance Sheet.
(t) NO PROHIBITED PAYMENTS. Neither Buyer and its subsidiaries nor,
to the knowledge of Buyer, any officer, director, employee, independent
contractor, or agent, acting on behalf of Buyer or its subsidiaries, has at any
time (i) made any contributions to any candidate for political office in
violation of law or failed to disclose fully any contributions to any candidate
for political office in accordance with any applicable statute, rule,
regulation, or ordinance requiring such disclosure, (ii) made any payment to any
local, state, federal, or foreign governmental officer or official, or other
person charged with similar public or quasi-public duties, other than payments
required or allowed by applicable law, (iii) made any payment outside the
ordinary course of business to any purchasing or selling agent or person charged
with similar duties of any entity to which Buyer or its subsidiaries sell
products or render services or from which Buyer or its subsidiaries buy products
or services for the purpose of influencing such agent or person to buy products
or services from or sell products or services to Buyer or its subsidiaries, or
(iv) engaged in any transaction, maintained any bank account, or used any
corporate funds, except for transactions, bank accounts, and funds that have
been and are reflected in the normally maintained books and records of Buyer or
its subsidiaries.
(u) CERTIFICATE OF INCORPORATION, BYLAWS, AND MINUTE BOOKS. Buyer
has heretofore delivered to Company true and complete copies of the Certificate
of Incorporation and bylaws of Buyer as currently in effect. The minute books of
Buyer contain complete and accurate (in all material respects) records of all
meetings and other corporate actions held or taken by the Board of Directors (or
committees of the Boards of Directors) and stockholders of Buyer since its
incorporation.
(v) SEC REPORTS. Buyer's Form 10-K Report for the year ended
December 31, 1997, and all subsequent reports and proxy statements filed by
Buyer thereafter with the SEC pursuant to Section 13(a) or 14(a) of the
Securities Exchange Act of 1934, do not contain a misstatement of a material
fact or omit to state a material fact required to be stated therein or necessary
to make the statements therein not misleading as of the time the document was
filed. No report, proxy statement, or other document has been required to be
filed by Buyer pursuant to Section 13(a) or 14(a) of the Securities Exchange Act
of 1934 that has not been filed.
(w) ACCURACY OF STATEMENTS. Neither this Agreement nor the Buyer
Disclosure Schedule contains or will contain an untrue statement of a material
fact or omits to state a material fact necessary to make the statements
contained herein or therein, in light of the circumstances in which they are
made, not misleading.
3.3 FURTHER REPRESENTATIONS AND WARRANTIES OF SHAREHOLDERS. Each
Shareholder represents, warrants, and acknowledges individually for such
Shareholder to Buyer as follows:
(a) OWNERSHIP OF CAPITAL STOCK OF COMPANY. Such Shareholder owns the
number of shares of Common Stock of Company set forth next to such Shareholder's
signature to this Agreement. Such Shareholder has good, marketable, and
unencumbered title to such stock, and there are no restrictions on such
Shareholder's right to transfer such stock to Buyer pursuant to this Agreement.
(b) RIGHTS TO ACQUIRE SHARES. Such Shareholder does not have any
outstanding options, warrants, or other rights to purchase or subscribe to, or
contracts or commitments to sell, or any interests,
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instruments, evidences of indebtedness, or other securities convertible in any
manner into, shares of Company's capital stock.
(c) POWER OF SHAREHOLDERS TO EXECUTE AGREEMENT. Such Shareholder has
the full power and authority to execute, deliver, and perform this Agreement,
and this Agreement is the legal and binding obligation of such Shareholder and
is enforceable against such Shareholder in accordance with its terms, except
that (i) such enforcement may be subject to bankruptcy, insolvency,
reorganization, moratorium, or other similar laws now or hereafter in effect
relating to creditors' rights, and (ii) the remedy of specific performance and
injunctive and other forms of equitable relief may be subject to equitable
defenses and to the discretion of the court before which any proceeding
therefore may be brought.
(d) AGREEMENT NOT IN BREACH OF OTHER INSTRUMENTS AFFECTING
SHAREHOLDERS. The execution and delivery of this Agreement, the consummation of
the transactions hereby contemplated, and the fulfillment of the terms hereof
will not 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 agreement or other instrument of any description to which such
Shareholder is a party or by which such Shareholder is bound, or any judgment,
decree, order, or award of any court, governmental body, or arbitrator, or any
applicable law, rule, or regulation.
SECTION 4
THE CLOSING
4.1 CLOSING. The closing (the "Closing") of the transactions
contemplated by this Agreement shall take place at the offices of O'Connor,
Cavanagh, Anderson, Killingsworth & Beshears, P.A., One East Camelback, Suite
1100, Phoenix, Arizona on June 23, 1998 at 7:00 a.m., Phoenix time, or at such
other date, time, and place as may be agreed upon in advance, in writing by
Buyer and Shareholders, which date is referred to herein as the "Closing Date."
The transactions contemplated by this Agreement will be effective as of 7:00
a.m., Phoenix time, June 23, 1998.
4.2 DELIVERIES BY SHAREHOLDERS. At the Closing, Shareholders shall
deliver:
(a) STOCK CERTIFICATES. Certificates for 750 shares of Company's
Common Stock endorsed in blank, or with stock powers executed in blank attached,
with all required transfer stamps, if any, affixed.
(b) RESIGNATION OF OFFICERS AND DIRECTORS. The written resignations
of all directors and officers of Company.
(c) GENERAL RELEASES. General releases between Company and each
director, officer, and Shareholder of Company.
(d) CONSENTS. The written consents to assignment of all parties
whose written consent is necessary to the continued effectiveness and validity,
after consummation of the transactions contemplated by this Agreement, of all
contracts, agreements, indentures, or leases to which Company is a party, and
written evidence of other consents and approvals of the transactions
contemplated hereby.
(e) OPINION OF COUNSEL FOR COMPANY AND SHAREHOLDERS. The opinion of
Foley & Lardner, counsel for Company and Shareholders, dated the Closing Date,
in form and substance reasonably satisfactory to Buyer and its counsel but
subject to such standard assumptions, limitations and qualifications as such
counsel may reasonably deem appropriate, to the effect that:
(i) Company is a corporation validly existing, and in active
status under the laws of the state of Wisconsin and has the corporate power and
authority under the laws of such state to own, lease, and operate its
properties, and to carry on its business as now being conducted;
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(ii) Company was incorporated under the laws of the state of
Wisconsin on October 13, 1988 and has an authorized capital consisting of 2,800
shares of Common Stock, no par value, of which 750 shares are validly issued and
outstanding, fully paid, and nonassessable, except pursuant to Section 180.0622
of the Wisconsin Statutes;
(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
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;
(iv) Each Shareholder has the power to execute and deliver
this Agreement, and this Agreement has been duly authorized, executed, and
delivered by each of them and constitutes the legal, valid, and binding
obligation of each of them;
(v) Such counsel knows of no actions, suits or, proceedings
pending or threatened against Company at law or in equity, or before or by any
federal, state, municipal, or other governmental department, commission, board,
bureau, agency, or instrumentality that would result in a breach of the
representation and warranty set forth in Section 3.1(j) of this Agreement, or of
any litigation affecting the right of any Shareholder to enter into or perform
this Agreement; and
(vi) Shareholders have effectively conveyed, transferred, and
assigned to Buyer, good and marketable title to the Stock, to such counsel's
knowledge, free and clear of all liens, pledges, claims, and encumbrances.
Such opinion may be based as to factual matters upon a certificate or
certificates of Shareholders or of an officer or officers of Company and such
other matters as such counsel deems appropriate, and such counsel may rely on
opinions of other counsel reasonably satisfactory to Buyer, which opinion is
delivered in connection with this Agreement.
(f) BOOKS AND RECORDS. All of the books, records, and files of
Company, including Company's corporate minute books, stock books or records, and
employee and tax records.
(g) CONSULTING AGREEMENT. A fully executed Consulting Agreement
between Joe Galati and Buyer in the form agreed to between Joe Galati and Buyer.
(h) FACILITATION AGREEMENT. A fully executed Facilitation Agreement
between Joe Galati and Buyer in the form agreed to between Joe Galati and Buyer.
(i) LEASE. A fully executed Lease between Buyer and JJL Enterprises
of Wisconsin.
All assignments, consents, certificates, and other documents delivered by
Shareholders shall be in form reasonably satisfactory to counsel for Buyer.
4.3 DELIVERIES BY BUYER. At the Closing, Buyer shall deliver:
(a) PURCHASE PRICE. Payment of the purchase price provided for in
Section 2 in immediately available funds by cashier's check or wire transfer.
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(b) FACILITATION FEE. Payment of the facilitation fee of $1,691,121
to Joe Galati pursuant to the Facilitation Agreement referred to in Section
4.2(h) above.
(c) CERTAIN REIMBURSEMENTS. Reimbursement for Hart-Scott-Rodino
filing fees, if any, required to be paid by Company or Shareholders in
connection with this transaction.
(d) OPINION OF COUNSEL FOR BUYER. The opinion of O'Connor, Cavanagh,
Anderson, Killingsworth & Beshears, a professional association, counsel for
Buyer, dated the Closing Date, satisfactory in form and substance to
Shareholders and their counsel, but subject to such standard assumptions,
limitations and qualifications as such counsel may reasonably deem appropriate,
to the effect that:
(i) Buyer and each of its subsidiaries are corporations duly
organized, validly existing, and in good standing under the laws of the state of
their incorporations and have the corporate power and authority under the laws
of such state to own, lease, and operate their properties, to carry on their
businesses as then being conducted, and to consummate the transactions
contemplated hereby;
(ii) all necessary corporate proceedings of the Board of
Directors and stockholders of Buyer and its subsidiaries to approve and adopt
this Agreement and authorize the execution and delivery of this Agreement and
the consummation of the transactions contemplated by this Agreement have been
duly and validly taken;
(iii) Buyer has the corporate power and authority to execute
and deliver this Agreement and the other agreements referred to in this
Agreement, and this Agreement and the other agreements referenced to herein have
been duly authorized, executed, and delivered by it and constitutes its legal,
valid, and binding obligation;
(iv) such counsel knows of no actions, suits, or proceedings
pending or threatened against Buyer or any of its subsidiaries at law or in
equity, or before or by any federal, state, municipal, or other governmental
department, commission, board, bureau, agency, or instrumentality that would
result in a breach of the representation and warranty set forth in Section
3.2(j) of this Agreement; and
(v) 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 Buyer's certificate of
incorporation or bylaws nor will they result in a breach of or constitute a
default by Buyer or any of its subsidiaries under any provision of any material
indenture, mortgage, lien, lease, agreement, contract, instrument, order,
judgment, decree, award, ordinance, regulation, or any other restriction of any
kind or character known to such counsel, to which Buyer or any of its
subsidiaries is a party or by which any of them are bound.
With respect to the opinions expressed pursuant to clauses (iv) and (v) of
this subparagraph, such opinion may be based as to factual matters upon a
certificate or certificates of an officer or officers of Buyer or its
subsidiaries and such other matters as such counsel deems appropriate, and such
counsel may rely on opinions of other counsel reasonably satisfactory to
Shareholders, which opinion is delivered in connection with this Agreement.
(e) CONSENTS AND APPROVALS. Written evidence of all consents and
approvals of the transactions contemplated hereby.
(f) CONSULTING AGREEMENT. A fully executed Consulting Agreement
between Joseph J. Galati, Jr. and Buyer in the form agreed to between Joseph J.
Galati, Jr. and Buyer.
(g) FACILITATION AGREEMENT. A fully executed Facilitation Agreement
between Joe Galati and Buyer in the form agreed to between Joseph J. Galati, Jr.
and Buyer.
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(h) LEASE. A fully executed Lease between Buyer and JJL Enterprises
of Wisconsin.
All certificates and other documents delivered by Buyer shall be in form
reasonably satisfactory to counsel for Shareholders.
4.4 FURTHER ASSURANCES. Shareholders and Buyer shall execute and deliver
all such other instruments and take all such other action as any party may
reasonably request from time to time, before or after the Closing, in order to
effectuate the transactions provided for herein. The parties shall cooperate
with each other and with their respective counsel and accountants in connection
with any steps to be taken as a part of their respective obligations under this
Agreement, including the preparation of financial statements.
SECTION 5
WAIVER AND MODIFICATION
5.1 WAIVERS. The failure of any Shareholder to comply with any of his or
her obligations, agreements, or conditions as set forth in this Agreement may be
waived expressly in writing by Buyer. The failure of Buyer to comply with any of
its obligations, agreements, or conditions as set forth in this Agreement may be
waived expressly in writing by the Shareholders acting unanimously.
5.2 MODIFICATION. This Agreement may be modified at any time in any
respect by the mutual written consent of all of the parties.
SECTION 6
NON-COMPETITION
6.1 NON-COMPETITION. Because of the importance of Shareholders to the
development and operation of the business of Company, as well as their knowledge
of and reputation in Company's industry, Buyer is unwilling to enter into and
perform this Agreement unless Shareholders all enter into the non-competition
agreement contained in this Section 6. To induce Buyer to enter into this
Agreement and for the benefit of Buyer, Shareholders agree as follows:
6.2 DURATION AND EXTENT OF RESTRICTION. Shareholders shall not, for a
period ending five years after the Closing Date, within the United States or
foreign countries, engage in a business (a) the same as, substantially similar
to, or in general competition with the business being conducted by Company, as
defined in the recitals of this Agreement, at or within 12 months prior to the
Closing Date or (b) pursuing a "roll-up" or "consolidation" business strategy
involving salon products. The term "engage in" shall include, but shall not be
limited to, activities, whether direct or indirect, as proprietor, partner,
shareholder, principal, agent, employee, consultant or lender; provided,
however, that the ownership of not more than 5% in the aggregate by Shareholders
of the stock of a publicly held corporation shall not be included in such term.
6.3 RESTRICTIONS WITH RESPECT TO CUSTOMERS. In furtherance of, and
without in any way limiting the restriction in Section 6.1, for the period
specified in Section 6.2, Shareholders shall not, directly or indirectly,
(a) request any past, present, or future customers of Company to
curtail or cancel their business with Buyer or any of its subsidiaries;
(b) disclose the identity of any past, present, or future customers
of Company, Buyer, or any subsidiary of Buyer to any other person, firm or
corporation engaged in a business the same as, substantially similar to, or in
general competition with the business being conducted by Company, as defined in
the recitals of this Agreement;
(c) solicit, canvas, or accept, or authorize any other person to
solicit, canvas, or accept, from any past, present, or future customers of
Company, Buyer or any subsidiary of Buyer, any business for any other
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person, firm, or corporation engaged in a business the same as, substantially
similar to, or in general competition with the business being conducted by
Company, as defined in the recitals of this Agreement; or
(d) induce or attempt to influence any employee of Company to
terminate his or her employment with Company, Buyer, or any subsidiary of Buyer.
As used in this Section 6.3 "future customer" shall mean a customer with
whom business will have been transacted between the date hereof and the end of
the term specified in Section 6.2.
6.4 REMEDIES FOR BREACH. Shareholders acknowledge that the restrictions
contained in this Section 6, in view of the nature of the business in which
Company is engaged, are reasonable and necessary to protect the legitimate
interests of Buyer and that any violation of these restrictions would result in
irreparable injury to Buyer. Shareholders agree that, in the event of a
violation of any of such restrictions, Buyer shall be entitled to preliminary
and permanent injunctive relief as well as an equitable accounting of all
earnings, profits, and other benefits arising from such violation, which rights
shall be cumulative and in addition to any other rights or remedies to which
Buyer may be entitled. In the event of a violation by any Shareholder, the
period of non-competition referred to in Section 6.2 for such Shareholder shall
be extended by a period of time equal to that period beginning when such
violation commenced and ending when the activities constituting such violation
shall have been finally terminated.
SECTION 7
INDEMNIFICATION
7.1 INDEMNIFICATION BY SHAREHOLDERS. Shareholders, jointly and
severally, covenant and agree to defend, indemnify, and hold Buyer 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)
resulting from any demand, claim, proceeding, action, or cause of action that
Buyer may suffer or incur by reason of (a) the material inaccuracy of any of the
representations or warranties of any Shareholder contained in this Agreement, or
in the Company Disclosure Schedule (except the representations and warranties
contained in Section 3.3, for which only the breaching Shareholder(s) shall be
obligated); or (b) the failure to comply with, or the breach, or the default by
any Shareholder of any of the covenants, warranties, or agreements made by any
Shareholder contained in this Agreement.
7.2 INDEMNIFICATION BY BUYER. Buyer 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) resulting from any demand, claim, proceeding, action,
or cause of action that any Shareholder may suffer or incur by reason of (a) the
inaccuracy of any of the representations or warranties of Buyer contained in
this Agreement or in the Buyer Disclosure Schedule; or (b) the failure to comply
with, the breach or the default by Buyer of any of the covenants, warranties, or
agreements made by Buyer in this Agreement.
7.3 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 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 reasonably 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
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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 sole cost and 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.
7.4 LIMITATIONS RELATED TO INDEMNITY. Notwithstanding anything to the
contrary herein:
(a) Each Shareholder shall be individually responsible for
indemnification arising out of any breach of a representation and warranty made
pursuant to Section 3.3 as to such Shareholder and the other Shareholders shall
not be jointly or severally liable for such indemnification obligations;
(b) Except as set forth in Section 7.4(a) above, each Shareholder's
responsibility for any indemnification under this Section 7 shall be limited to
the result obtained by multiplying the total indemnity by the proportionate
ownership interest each Shareholder had in the Stock, as set forth beside their
respective signatures to this Agreement;
(c) Shareholders shall have no obligation to indemnify any loss by
Buyer under this Agreement, unless, and only to the extent that all such losses
in the aggregate exceed $500,000;
(d) Buyer shall have no obligation to indemnify any loss by
Shareholders under this Agreement, unless, and only to the extent that all such
losses in the aggregate exceed $500,000;
(e) In no event shall the aggregate liabilities of the Shareholders
under this Agreement exceed $7,000,000;
(f) In no event shall the aggregate liabilities of Buyer under this
Agreement exceed $7,000,000; and
(g) The obligations of the Shareholders under this Section 7 shall
expire on the date that their representations and warranties shall expire, which
shall be the first anniversary of the Closing Date (the "Indemnification
Period").
SECTION 8
GENERAL
8.1 INDEMNITY AGAINST FINDERS. Each party hereto shall indemnify and
hold the other parties harmless against any claim for finders' fees based on
alleged retention of a finder by it.
8.2 CONTROLLING LAW. This Agreement, and all questions relating to its
validity, interpretation, performance, and enforcement, shall be governed by and
construed in accordance with the laws of Wisconsin, notwithstanding any
Wisconsin or other conflict-of-law provisions to the contrary.
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8.3 NOTICES. Except to the extent otherwise set forth herein, all
notices, requests, demands, and other communications required or permitted under
this Agreement shall be in writing and shall be deemed to have been duly given,
made and received when personally delivered or when deposited in the United
States mails, first class postage prepaid, return receipt requested, or when
sent by overnight express delivery with a signature required upon receipt,
addressed as set forth below:
If to Buyer:
Styling Technology Company
2390 East Camelback Road, Suite 435
Phoenix, Arizona 85016
(602) 955-3353
(602) 955-3383
Attention: Sam Leopold
with a copy given in the manner
prescribed above, to:
O'Connor, Cavanagh, Anderson,
Killingsworth & Beshears, P.A.
One East Camelback Road, Suite 1100
Phoenix, Arizona 85012
Phone: (602) 263-2606
Fax: (602) 263-2900
Attention: Robert S. Kant, Esq.
If to Shareholders:
Joseph J. Galati, Jr. and Gail Galati
16820 Burnet Ct.
Brookefield, Wisconsin 53005
John Meyerovich and Olga Meyerovich
496 West Willow Court
Fox Point, Wisconsin 53217
Lev Yakubovich and Svetlana Yakubovich
2555 North Lake Drive, #16
Milwaukee, Wisconsin 53211
With a copy to:
Foley & Lardner
Verex Plaza
150 East Gilman Street
Madison, Wisconsin 53703-2808
Phone: (608) 258-4220
Fax: (608) 258-4258
Attention: Blaine Renfert, Esq.
Any party may alter the address to which communications or copies are to
be sent by giving notice to such other parties of change of address in
conformity with the provisions of this paragraph for the giving of notice.
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8.4 BINDING NATURE OF AGREEMENT; NO ASSIGNMENT. This Agreement shall be
binding upon and inure to the benefit of the parties hereto and their respective
successors and assigns, except that no party may assign, delegate, or transfer
its rights or obligations under this Agreement without the prior written consent
of the other parties hereto. Shareholders recognize and agree that,
notwithstanding anything to contrary in this Agreement, Buyer may assign,
delegate, or transfer its rights under this Agreement to any of Buyer's lenders.
Any assignment, delegation, or transfer made in violation of this Section 8.4
shall be null and void.
8.5 ENTIRE AGREEMENT. This Agreement, the Schedules hereto, and the
Facilitation Agreement, Consulting Agreement, and the Lease contain the entire
understanding among the parties hereto with respect to the subject matter hereof
and supersede all prior and contemporaneous agreements and understandings,
inducements or conditions, express or implied, oral or written, except as herein
contained. The express terms hereof control and supersede any course of
performance and/or usage of the trade inconsistent with any of the terms hereof.
This Agreement may not be modified or amended other than by an agreement in
writing.
8.6 PARAGRAPH HEADINGS. The paragraph headings in this Agreement are for
convenience only; they form no part of this Agreement and shall not affect its
interpretation.
8.7 GENDER. Words used herein, regardless of the number and gender
specifically used, shall be deemed and construed to include any other number,
singular or plural, and any other gender, masculine, feminine or neuter, as the
context requires.
8.8 COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which shall be deemed to be an original, but all of which
shall constitute one and the same agreement.
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IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day and year first above written.
STYLING TECHNOLOGY CORPORATION
By: /s/ Sam L. Leopold
---------------------------------------
Chairman of the Board, President,
and Chief Executive Officer
NUMBER OF SHARES SHAREHOLDERS:
/s/ John Meyerovich
------------------------------------------
250 John Meyerovich
/s/ Olga Meyerovich
------------------------------------------
Olga Meyerovich
/s/ Lev Yakubovich
------------------------------------------
250 Lev Yakubovich
/s/ Svetlana Yakubovich
------------------------------------------
Svetlana Yakubovich
/s/ Joseph J. Galati, Jr.
------------------------------------------
250 Joseph J. Galati, Jr.
/s/ Gail Galati
------------------------------------------
Gail Galati
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Exhibit 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the inclusion in this
Current Report on Form 8-K of our report dated May 1, 1998 covering the
financial statements of European Touch, Ltd. II ("European Touch II") and the
incorporation by reference of this report in the previously filed Registration
Statements on Forms S-8 No. 333-43599 and No. 333-47131, filed on December 31,
1997 and February 27, 1998, respectively. It should be noted that we have not
audited any financial statements of European Touch II subsequent to December 31,
1997 or performed any audit procedures subsequent to the date of our report.
/s/ Arthur Andersen LLP
---------------------------
Arthur Andersen LLP
Phoenix, Arizona,
June 22, 1998
