<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 17, 1998
REGISTRATION NO. 333-61035
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
STYLING TECHNOLOGY CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 2844 75-2665378
(STATE OR OTHER JURISDICTION (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
OF INCORPORATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
------------------------
2390 EAST CAMELBACK ROAD, SUITE 435
PHOENIX, ARIZONA 85016
(602) 955-3353
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
SEE "TABLE OF ADDITIONAL REGISTRANTS" ON THE FOLLOWING PAGE FOR INFORMATION
RELATING TO THE GUARANTORS OF SECURITIES REGISTERED HEREBY.
------------------------
SAM L. LEOPOLD
CHIEF EXECUTIVE OFFICER
2390 EAST CAMELBACK ROAD, SUITE 435
PHOENIX, ARIZONA 85016
(602) 955-3353
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
------------------------
COPIES TO:
ROBERT S. KANT, ESQ.
QUENTIN T. PHILLIPS, ESQ.
O'CONNOR, CAVANAGH, ANDERSON
KILLINGSWORTH & BESHEARS, P.A.
ONE EAST CAMELBACK, SUITE 1100
PHOENIX, ARIZONA 85012
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practical after the Registration Statement becomes effective.
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
------------------------
CALCULATION OF REGISTRATION FEE
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<CAPTION>
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PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO BE AGGREGATE OFFERING OFFERING PRICE AMOUNT OF
SECURITIES TO BE REGISTERED(1) REGISTERED PRICE PER UNIT(1) PER SHARE(1) REGISTRATION FEE(2)(3)
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<S> <C> <C> <C> <C>
10 7/8% Senior Subordinated Notes
Due 2008......................... $100,000,000 100% $100,000,000 $29,500
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</TABLE>
(1) Estimated solely for the purpose of calculating the amount of registration
fee pursuant to Rule 457 (f)(2), based on the stated principal amount of
each Outstanding Note (as defined) which may be received by the Registrant
in the exchange transaction in which the Exchange Notes (as defined) will be
offered.
(2) Registered herewith are Guarantees of Subsidiaries of Styling Technology
Corporation of the 10 7/8% Senior Subordinated Notes due 2008 for which no
additional consideration will be received. Accordingly, pursuant to Rule
457(o), under the Securities Act, which permits the registration fee to be
calculated on the basis of the maximum offering price of all securities
registered, no additional fee is included for the registration of such
Guarantees.
(3) This amount has been previously paid.
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<PAGE> 2
TABLE OF ADDITIONAL REGISTRANTS
TO AMENDMENT NO. 1 TO FORM S-4
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
<TABLE>
<CAPTION>
TAX
STATE OF IDENTIFICATION
NAME OF ENTITY ORGANIZATION NUMBER
-------------- -------------- --------------
<S> <C> <C>
Beauty Products Inc. ....................................... Wisconsin 39-1907817
Cosmetics International Inc. ............................... Wisconsin 39-1761136
European Touch Co., Incorporated............................ Wisconsin 39-1547653
European Touch, Ltd II...................................... Wisconsin 39-1559190
Gena Laboratories, Inc. .................................... Texas 75-0287780
J.D.S. Manufacturing Co., Inc. ............................. California 95-4128887
U.K. ABBA Products, Inc. ................................... California 33-0321417
</TABLE>
<PAGE> 3
PROSPECTUS
[STYLING TECHNOLOGY LOGO]
OFFER TO EXCHANGE
10 7/8% SENIOR SUBORDINATED NOTES DUE 2008
($100,000,000 PRINCIPAL AMOUNT OUTSTANDING)
FOR
10 7/8% SENIOR SUBORDINATED NOTES DUE 2008
($100,000,000 PRINCIPAL AMOUNT)
---------------------
The Exchange Offer will expire at 5:00 p.m., E.D.T., on November 6, 1998,
unless extended.
Styling Technology Corporation, a Delaware corporation (the "Company"),
hereby offers (the "Exchange Offer"), upon the terms and subject to the
conditions set forth in this Prospectus and the accompanying Letter of
Transmittal (the "Letter of Transmittal"), to exchange up to an aggregate
principal amount of $100,000,000 of its outstanding 10 7/8% Senior Subordinated
Notes due 2008 (the "Outstanding Notes") for an equal principal amount of its
10 7/8% Senior Subordinated Notes due 2008 in integral multiples of $1,000 (the
"Exchange Notes" and, together with the Outstanding Notes, the "Notes"). The
Exchange Notes will be general unsecured obligations of the Company and are
substantially identical (including principal amount, interest rate, maturity,
and redemption rights) to the Outstanding Notes for which they may be exchanged
pursuant to this Exchange Offer, except that the Exchange Notes will be
registered under the Securities Act of 1933, as amended, and therefore will not
be subject to certain transfer restrictions and registration rights relating to
the Outstanding Notes. The Outstanding Notes have been, and the Exchange Notes
will be, issued under an Indenture dated as of June 23, 1998 (the "Indenture"),
among the Company, certain of its subsidiaries (the "Guarantors"), and State
Street Bank and Trust Company of California, N.A., as trustee (the "Trustee").
See "Description of the Exchange Notes." There will be no proceeds to the
Company from the Exchange Offer; however, pursuant to a Registration Rights
Agreement dated as of June 23, 1998 (the "Registration Rights Agreement") among
the Company, the Guarantors, and the Initial Purchasers (as defined) of the
Outstanding Notes, the Company will bear certain offering expenses.
The Company will accept for exchange any and all Outstanding Notes validly
tendered on or prior to 5:00 p.m., E.D.T., on November 6, 1998, unless extended
(the "Expiration Date"). Tenders of Outstanding Notes may be withdrawn at any
time prior to 5:00 p.m., E.D.T., on the Expiration Date; otherwise such tenders
are irrevocable. State Street Bank and Trust Company of California, N.A., is
acting as Exchange Agent (the "Exchange Agent") in connection with the Exchange
Offer. The minimum period of time that the Exchange Offer will remain open is 30
business days from the date the Registration Statement is declared effective.
The Exchange Offer is not conditioned upon any minimum principal amount of
Outstanding Notes being tendered for exchange, but is otherwise subject to
certain customary conditions.
(Cover text continued on next page)
---------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 12 FOR A DISCUSSION OF CERTAIN RISKS
TO BE CONSIDERED IN CONNECTION WITH THE EXCHANGE OFFER AND IN EVALUATING AN
INVESTMENT IN THE EXCHANGE NOTES.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COM-
MISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
---------------------
The date of this Prospectus is September 17, 1998
<PAGE> 4
(Continued from Cover Page)
Interest on the Exchange Notes will accrue at a rate equal to 10 7/8% per
annum and will be payable semiannually in arrears on January 1 and July 1 of
each year commencing January 1, 1999. Interest on the Exchange Notes will accrue
from the most recent date to which interest has been paid on the Outstanding
Notes or, if no interest has been paid, from the date of original issuance of
the Outstanding Notes.
The Outstanding Notes in an aggregate principal amount of $100,000,000 were
sold by the Company as of June 23, 1998 (the "Initial Offering"), to NationsBanc
Montgomery Securities LLC, Friedman, Billings, Ramsey & Co., Inc., and Imperial
Capital, LLC (the "Initial Purchasers") pursuant to a Purchase Agreement among
the Company, the Guarantors, and the Initial Purchasers dated June 18, 1998 (the
"Purchase Agreement") in a transaction not registered under the Securities Act
of 1933, as amended (the "Securities Act"), in reliance upon the exemption
provided in Section 4(2) of the Securities Act. The Initial Purchasers
subsequently placed the Outstanding Notes with qualified institutional buyers in
reliance upon Rule 144A under the Securities Act. Accordingly, the Outstanding
Notes may not be re-offered, resold, or otherwise transferred in the United
States unless so registered or unless an applicable exemption from the
registration requirements of the Securities Act is available. The Exchange Notes
are being offered hereunder in order to satisfy the obligations of the Company
under the Registration Rights Agreement. See "The Exchange Offer."
Based on an interpretation by the staff of the Securities and Exchange
Commission (the "Commission") set forth in no-action letters issued to third
parties (including Exxon Capital Holdings Corporation (available April 13,
1989), Morgan Stanley & Co., Inc. (available June 5, 1991), Mary Kay Cosmetics,
Inc. (available June 5, 1991), and Sherman & Sterling (available July 2, 1993)),
the Company believes that Exchange Notes issued pursuant to this Exchange Offer
may be offered for resale, resold, and otherwise transferred by a holder who is
not an affiliate of the Company without compliance with the registration and
prospectus delivery provisions of the Securities Act, provided that the holder
is acquiring the Exchange Notes in its ordinary course of business and is not
participating in and has no arrangement or understanding with any person to
participate in the distribution (within the meaning of the Securities Act) of
the Exchange Notes. Persons wishing to exchange Outstanding Notes in the
Exchange Offer must represent to the Company that such conditions have been met.
Each broker-dealer that receives Exchange Notes for its own account
pursuant to the Exchange Offer (a "Participating Broker-Dealer") must
acknowledge that it will deliver a prospectus in connection with any resale of
such Exchange Notes. The Letter of Transmittal states that by so acknowledging
and by delivering a prospectus, a broker-dealer will not be deemed to admit that
it is an "underwriter" within the meaning of the Securities Act. This
Prospectus, as it may be amended or supplemented from time to time, may be used
by a broker-dealer in connection with resales of Exchange Notes received in
exchange for Outstanding Notes where such Outstanding Notes were acquired by
such broker-dealer as a result of market-making activities or other trading
activities. The Company has agreed that, for a period of 180 days after the
Expiration Date, it will make this Prospectus available to any Participating
Broker-Dealer for use in connection with any such resale. In addition, until 25
days after the Expiration Date, all dealers effecting transactions in the
Exchange Notes may be required to deliver a prospectus. See "Plan of
Distribution."
The Company does not intend to list the Exchange Notes on any national
securities exchange or to seek the admission thereof to trading on the Nasdaq
Stock Market, Inc. National Market. The Outstanding Notes are currently eligible
for trading in the Private Offering, Resales and Trading through Automated
Linkages ("PORTAL") Market of the Nasdaq Stock Market, Inc. Following
commencement of the Exchange Offer, the Outstanding Notes may continue to be
traded in the PORTAL Market. Following consummation of the Exchange Offer, the
Exchange Notes will not be eligible for trading in the PORTAL Market. The
Initial Purchasers are not obligated to make a market in the Exchange Notes and
any market-making may be discontinued at any time without notice. Accordingly,
no assurance can be given that an active public or other market will develop for
the Exchange Notes or as to the liquidity of or the trading market for the
Exchange Notes.
<PAGE> 5
(Continued from Cover Page)
Any Outstanding Notes not tendered and accepted in the Exchange Offer will
remain outstanding. To the extent that any Outstanding Notes of other holders
are tendered and accepted in the Exchange Offer, a holder's ability to sell
untendered Outstanding Notes could be adversely affected. Following consummation
of the Exchange Offer, the holders of untendered Outstanding Notes will continue
to be subject to the existing restrictions upon transfer thereof.
The Company expects that the Exchange Notes issued pursuant to this
Exchange Offer initially will be issued in the form of a Global Exchange Note
(as defined herein), which will be deposited with, or on behalf of, The
Depository Trust Company (the "Depositary") and registered in the Depositary's
name or in the name of Cede & Co., its nominee, in each case for credit to an
account of a direct or indirect participant in the Depositary, including Morgan
Guaranty Trust Company of New York, Brussels office, as operator of the
Euroclear System and Citibank, N.A., as depositary for Cedel, S.A. Beneficial
interests in the Global Exchange Note representing the Exchange Notes will be
shown on, and transfers thereof to qualified institutional buyers will be
effected through, records maintained by the Depositary and its participants.
After the initial issuance of the Global Exchange Note, Exchange Notes in
certificated form will be issued in exchange for the Global Exchange Note on the
terms set forth in the Indenture. See "Description of the Exchange
Notes -- Book-Entry, Delivery, and Form."
---------------------
No dealer, salesperson, or other person has been authorized to give
information or to make any representations not contained in this Prospectus,
and, if given or made, such information or representations must not be relied
upon as having been authorized by the Company. This Prospectus does not
constitute an offer to sell or the solicitation of an offer to buy any security
other than the Exchange Notes offered hereby, nor does it constitute an offer to
sell or the solicitation of an offer to buy any of the Exchange Notes to any
person in any jurisdiction in which it is unlawful to make such an offer or
solicitation to such person. Neither the delivery of this Prospectus nor any
sale made hereunder shall under any circumstances create any implication that
the information contained herein is correct as of any date subsequent to the
date hereof.
<PAGE> 6
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy statements, and other information with the
Commission. Such reports, proxy statements, and other information may be
inspected and copied at the public reference facilities maintained by the
Commission at Judiciary Plaza, Room 1024, 450 Fifth Street, N.W., Washington,
D.C. 20549; the Chicago Regional Office, Suite 1400, 500 West Madison Street,
Citicorp Center, Chicago, Illinois 60661; and the New York Regional Office,
Suite 1300, 7 World Trade Center, New York, New York 10048. Copies of such
material also can be obtained from the Public Reference Section of the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, upon payment of
the prescribed fees. The Commission maintains a Web site on the Internet that
contains reports, proxy and information statements, and other information
regarding registrants that file electronically with the Commission. The address
of this site on the Internet is http://www.sec.gov. The Company's Common Stock
is quoted on the Nasdaq National Market. The Company will furnish periodic
reports to the Trustee, which will make them available upon request to the
holders of the Notes.
The Company has agreed that, whether or not it is required to do so by the
rules and regulations of the Commission, so long as any Notes are outstanding,
it will furnish to the holders of the Notes following the consummation of the
Exchange Offer and file with the Commission (unless the Commission will not
accept such a filing) (i) all quarterly and annual financial information that
would be required to be contained in a filing with the Commission on Forms 10-Q
and 10-K if the Company were required to file such forms, including a
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" that describes the financial condition and results of operations of
the Company and its consolidated subsidiaries and, with respect to the annual
information only, a report thereon by the Company's certified public accountants
and (ii) all current reports that would be required to be filed with the
Commission on Form 8-K if the Company were required to file such reports, in
each case within the time periods specified in the Commission's rules and
regulations. In addition, for so long as any of the Notes remains outstanding,
the Company has agreed to make available to any prospective purchaser of Notes
or beneficial owner of the Notes in connection with any sale thereof the
information required by Rule 144A(d)(4) of the Securities Act.
NOTE REGARDING FORWARD-LOOKING INFORMATION
The information contained in this prospectus contains "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995, which are identified by the use of forward-looking terminology, such as
"may," "will," "could," "should," "expect," "anticipate," "intend," "plan,"
"estimate," or "continue" or the negative thereof or other variations thereof.
Such forward-looking statements are necessarily based on various assumptions and
estimates and are inherently subject to various risks and uncertainties,
including risks and uncertainties relating to the possible invalidity of the
underlying assumptions and estimates and possible changes or developments in
social, economic, business, industry, market, legal, and regulatory
circumstances and conditions and actions taken or omitted to be taken by third
parties, including customers, suppliers, business partners, and competitors and
legislative, regulatory, judicial, and other governmental authorities and
officials. In addition to any risks and uncertainties specifically identified in
the text surrounding such forward-looking statements, the statements in "Risk
Factors" beginning on page 12 of this prospectus or in the reports, proxy
statements, and other information referred to in "Available Information"
constitute cautionary statements identifying important factors that could cause
actual amounts, results, events, and circumstances to differ materially from
those reflected in such forward-looking statements.
(i)
<PAGE> 7
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements and the notes thereto that appear elsewhere
in this Prospectus. Unless the context otherwise requires, all references to the
"Company" mean Styling Technology Corporation and its subsidiaries. All
references to "STC" mean Styling Technology Corporation and its subsidiaries
without taking into account the Recent Acquisitions. All references to the
"Recent Acquisitions" mean the acquisition of Pro Finish USA, Ltd. ("Pro
Finish"), which was acquired in May 1998 (the "Pro Finish Acquisition"), the
acquisitions of European Touch Co., Incorporated and two related companies
(together, "European Touch") and European Touch, Ltd. II ("European Touch II"),
which were acquired in June 1998 (the "European Touch Acquisitions"), and the
acquisition of a controlling interest in Ft. Pitt Acquisition, Inc. and its 90%
owned subsidiary Ft. Pitt -- Framesi, Ltd. (together, "Framesi USA"), in August
1998. As used herein, the pro forma financial information includes the
adjustments described in "Unaudited Pro Forma Consolidated Financial Data."
THE COMPANY
The Company is a leading developer, producer, and marketer of a wide array
of professional salon products, addressing all salon product categories,
including hair care, nail care, and skin and body care products, as well as
salon appliances and sundries. Through strategic acquisitions, the Company has
acquired well-recognized brand names, a strong distribution network, established
marketing and salon industry education programs, and significant production and
sourcing capabilities. For the 12 months ended June 30, 1998, on a pro forma
basis, the Company generated net sales and EBITDA of $88.3 million and $25.5
million, respectively.
The Company believes it is the only company that develops, produces, and
markets products in each category of the professional salon products industry
and that its ability to offer customers a "one-stop shop" for brand-name
professional salon products creates a competitive advantage. The Company
currently sells more than 550 products under 17 principal brand names, including
ABBA Pure and Natural Hair Care(R) products, Biogenol(R) hair care products,
Body Drench(R) skin and body care products, Clean + Easy(R) hair removal
products, Framesi(R) hair care products, Gena(R) nail and pedicure products,
Kizmit(TM) acrylic nail enhancements, Revivanail(R) nail treatments, and
Roffler(R) hair care products. In the United States, the Company markets its
product lines through professional salon industry distribution channels to more
than 2,500 customers, consisting primarily of salon product and tanning supply
distributors (which resell to beauty and tanning salons), beauty supply outlets,
and salon chains. The Company also markets its products directly to more than
3,000 spas, resorts, and health and country clubs through its in-house sales
force. Internationally, the Company sells its products primarily through
international salon product distributors.
THE INDUSTRY
The professional salon products industry has grown significantly during the
last several years. According to industry sources, professional salon industry
revenue (which includes revenue from salon services and the sale of salon
products) for 1996 was approximately $40 billion in the United States and $80
billion worldwide, having grown approximately 10% from the prior year. Industry
sources estimate that there are approximately 127 million client visits to
salons each month and that there are more than 200,000 beauty salons and 1.8
million licensed cosmetologists in the United States. Professional salon
products companies sell their products primarily to regional, full-service salon
product distributors that resell products from multiple manufacturers to salons
and salon professionals. The Company estimates that sales to distributors
represent approximately 85% of revenue for professional salon product companies.
The professional salon products industry is highly fragmented. Of the
approximately 700 companies selling professional salon products in the United
States, most generate less than $10 million in sales and focus on a single
product category. For example, most companies offering professional salon hair
care products do not also offer nail or skin care products.
1
<PAGE> 8
Professional salon products have two end consumers: the salon professional
who uses them in the performance of salon services and the salon client who
purchases them for personal use. The Company believes salons typically generate
between 10% and 30% of their revenue from retail sales of professional salon
products. As the users and "prescribers" of professional salon products, salon
professionals typically select products on the basis of performance rather than
price. As a result, suppliers of professional salon products focus on educating
distributors and salon professionals on the uses and benefits of their products
and on industry trends. Because these products are "prescribed" by salon
professionals and are sold primarily in connection with the rendering of a
service, professional salon products typically foster strong brand loyalty and
exhibit relative price insensitivity. Consequently, professional salon products
generally command substantially higher profit margins than mass-marketed beauty
products.
BUSINESS STRENGTHS
The Company believes that the following business strengths provide it with
a competitive advantage in the professional salon products industry:
- - PREMIER BRAND NAMES. The Company offers a variety of well-known brands in all
professional salon product categories, including ABBA Pure and Natural Hair
Care(R), Alpha 9(R), Biogenol(R), Body Drench(R), Clean + Easy(R), Cosmic(R),
European Touch(TM), Framesi(R), Gena(R), Kizmit(TM), Omni P.O. Professionals
Only(R), One Touch(R), Pro Finish(TM), Revivanail(R), Roffler(R), SRC(TM), and
Suntopia(TM). The Company believes that the strength of its brand names is
based on the reputation of its products for quality among salon professionals,
the performance of its products, and its focused commitment to the needs of
salon professionals and their clientele. Because of the importance of proven
product performance to salon professionals, they remain extremely loyal to
their favorite brands. The Company's portfolio of well-recognized brands is a
significant driver of sales to distributors, beauty supply outlets, and salon
chains.
- - BREADTH OF PRODUCT OFFERINGS. The Company believes that it currently is the
only producer of professional salon products with offerings across all salon
product categories. As the Company has expanded its product offerings, it has
begun to provide distributors, beauty supply outlets, and salon chains with an
increasingly larger percentage of the products they require to service the
needs of salons and salon professionals. The Company believes the breadth of
its product offerings provides it with a significant competitive advantage by
allowing its distributors to purchase more products from fewer vendors and by
enabling the Company to cross-market its brands and offer tailored lines of
products to distributors, beauty supply outlets, and salon chains. This
"one-stop shop" approach also serves to strengthen the relationship between
the Company and its customers.
- - STRONG DISTRIBUTION NETWORK. The Company has established relationships with
top salon product distributors, beauty supply outlets, and salon chains.
Unlike consumer products companies that sell a large percentage of their
products through a concentrated retailer base, the Company sells its products
into highly fragmented distribution channels of more than 2,500 distributors,
beauty supply outlets, and salon chains in the United States and
internationally and to more than 3,000 spas, resorts, and health and country
clubs through its in-house sales force. This extensive distribution network
creates a strong base from which the Company can pursue additional business
through cross-marketing of its current and future brands and new product
introductions. The breadth of its distribution network also enables the
Company to penetrate every major geographical market in the United States and
to expand its international business.
- - HISTORY OF SUCCESSFUL ACQUISITIONS. Since November 1996, the Company has
acquired and successfully integrated seven professional salon products
businesses, not including the Recent Acquisitions. The Company has integrated
acquired distribution channels into its existing operations; integrated
purchasing, production, and marketing efforts; and consolidated accounting,
human resources, and other back office functions. Acquisitions have been a
major factor in enabling the Company to increase its net sales to $88.3
million, on a pro forma basis for the latest 12 months (including the Recent
Acquisitions, other than the acquisition of a controlling interest in Framesi
USA), while achieving significant margin improvement. The Company is
developing an operating platform to allow it to support an increasing range of
professional salon products as it continues to acquire additional companies
and product lines.
2
<PAGE> 9
- - FAVORABLE COST STRUCTURE. Professional salon products typically command
higher margins and exhibit relative price insensitivity when compared to their
mass-market counterparts. The Company believes that it has been able to
achieve operating margins that exceed industry averages. These improved
operating margins result from the Company's success in utilizing its increased
purchasing power to achieve cost savings; integrating sourcing and
distribution capabilities; eliminating duplicative facilities, personnel, and
administrative functions; and consolidating sales and marketing and product
development, when appropriate. The Company also is taking advantage of the
highly competitive third-party manufacturing environment to reduce production
costs. Pro forma gross margins improved from 52.4% in 1996 to 56.3% in 1997,
and pro forma EBITDA margins improved from 17.6% in 1996 to 27.0% in 1997.
- - EXPERIENCED MANAGEMENT TEAM. The Company has an experienced management team
with significant industry experience. Sam Leopold, the Company's Chief
Executive Officer, has more than 12 years of experience in the professional
salon products industry, including as the owner of a chain of mall-based
retail salons. Other members of the Company's senior management team have, on
average, over 12 years of experience in the consumer and salon products
industry, particularly in the areas of sales, marketing, and operations. Mr.
Leopold beneficially owns approximately 25% of the Company's Common Stock, and
each other member of the Company's senior management team has an equity stake
in the Company.
STRATEGY
The Company's objective is to be the leading professional salon products
company in the United States and internationally. In order to achieve this
objective, the Company is pursuing a strategy of continued growth through
acquisitions and internal business expansion. Key elements of this strategy
include the following:
ACQUISITION STRATEGY
The Company seeks to acquire professional salon product businesses
possessing complementary salon products with well-recognized brand names and
strong distribution networks and to capitalize on the substantial fragmentation
and growth potential existing in the professional salon products industry. The
Company believes that there are many attractive acquisition candidates in the
professional salon products industry, primarily as a result of the highly
fragmented nature of the industry and the desire of owners for exit strategies.
The Company maintains a disciplined approach to acquisitions and evaluates each
potential acquisition based on the following acquisition goals:
- - CONTINUE TO ACQUIRE LEADING BRANDS. The Company plans to continue its
strategy of acquiring leading brand names that complement its portfolio of
brands and command strong customer loyalty. By following this strategy, the
Company plans to solidify its position as a leading supplier of professional
salon products and further enhance its relationships with distributors.
Additionally, well-known and well-respected professional brands are able to
command consistently higher prices than mass-marketed retail brands and lesser
known or respected professional brands.
- - DIVERSIFY AND STRENGTHEN PRODUCT OFFERINGS. The Company intends to acquire
companies and product lines that diversify and strengthen its portfolio of
salon products. In this regard, the Company seeks to acquire complementary
products that will enable it to offer multiple brands in each salon product
category and a broader range of products addressing the various niches within
these categories. The Company believes that this approach will enable it to
offer distributors and beauty supply outlets, which typically carry multiple
brands in each category, a more complete "one-stop shop" for the majority of
their salon products.
- - STRENGTHEN DISTRIBUTION NETWORK. The Company intends to acquire companies and
product lines that strengthen its relationships with domestic and
international distributors. By acquiring companies with strong distribution,
the Company will be in a position to increase sales by introducing its
existing products into new distribution channels and newly acquired or
developed products into existing distribution channels.
- - CONTINUE TO PURSUE ACQUISITIONS AT ATTRACTIVE CASH FLOW MULTIPLES. The
Company plans to continue to pursue acquisition candidates at attractive cash
flow multiples. To achieve this goal, the Company evaluates each acquisition
candidate's historical operating results and future earnings potential, the
size and
3
<PAGE> 10
anticipated growth of the market it serves, and its relative position in that
market. The Company seeks to acquire companies and product lines at
acquisition multiples of typically three to six times adjusted EBITDA.
INTERNAL GROWTH STRATEGY
The Company intends to increase sales and improve margins within its
existing product lines. Elements of its internal growth strategy include the
following:
- - LEVERAGE WELL-ESTABLISHED DISTRIBUTION CHANNELS. The Company intends to
leverage its distribution channels by providing distributors with an
increasingly comprehensive array of products. Through management's existing
relationships and those of acquired companies, the Company has developed and
integrated an increasingly extensive distribution network. The Company
believes that offering a growing array of well-known brands in all salon
product categories will further enhance its position as a key supplier to its
customers.
- - CAPITALIZE ON BRAND NAME RECOGNITION; LINE EXTENSIONS. The Company believes
the strong brand name recognition of its product lines lends itself to line
extension. For example, ABBA, one of the top brands in the aromatherapy
segment of the hair care category, recently introduced its Botanical High(TM)
line of volume therapy hair care products. The Company believes that the
loyalty of salons and salon professionals to strong brands generally makes
them receptive to line extensions that capitalize on the credibility of those
brands. Strong brand names also provide the Company the opportunity to
cross-market established and developing brands and products.
- - EXPAND DISTRIBUTION TO SALON CHAINS. The Company is aggressively targeting
sales directly to salon chains, which the Company believes are underserved by
distributors and other salon product companies. The Company believes that its
increasingly diverse product offerings will enable it to offer salon chains
the benefits of one-stop shopping, centralized single-source ordering,
tailored promotional programs, and dedicated customer service. The Company has
formed a sales and marketing team focused exclusively on further penetrating
this underserved segment of the salon product market.
- - EXPAND DISTRIBUTION OF EXISTING PRODUCTS INTERNATIONALLY. The Company
believes significant opportunities exist to increase sales and profits through
the expansion of the international distribution of its products. Currently,
the U.S. market for professional salon products represents approximately 50%
of the worldwide market. In contrast, only approximately 15% of the Company's
pro forma 1997 net sales were generated outside of the United States. In the
past year, the Company has expanded its international distribution to 38
countries. The Company will continue to focus on introducing its products into
its recently expanded international distribution channels, which provide
access to most international beauty markets.
- - ENHANCE OPERATIONAL EFFICIENCIES OF ACQUIRED BUSINESSES. To date, the Company
has successfully integrated seven acquired businesses. Following each
acquisition, the Company has enhanced operational efficiency by (i)
eliminating duplicative administrative functions, thereby lowering overhead
expenses, (ii) expanding distribution channels, and (iii) adding and
disseminating further market and product knowledge throughout the Company's
operations. The Company believes that the continued realization of operational
efficiencies will enhance internal growth and profitability.
- - CAPITALIZE ON LIFESTYLE TRENDS. The Company intends to continue to capitalize
on current lifestyle trends that are favorable to the professional salon
industry. Growing consumer focus on healthy living and personal indulgences
should continue to fuel expansion in the salon/spa industry, as the demand for
services such as body treatments and massages increases. Additionally, the
aging of the baby boomers (those born between 1945 and 1964) is expected to
benefit the salon industry.
4
<PAGE> 11
RECENT ACQUISITIONS
Concurrently with the consummation of the Initial Offering, the Company
acquired European Touch II at a purchase price of approximately $22 million in
cash and European Touch at a purchase price of $3.2 million in cash. European
Touch II is a leading developer, producer, and marketer of salon pedicure
equipment, with 1997 net sales of $8.6 million and adjusted EBITDA of $2.8
million. European Touch is a leading developer, producer, and marketer of
professional nail enhancement and treatment products, with 1997 net sales of
$6.0 million and adjusted EBITDA of $2.0 million. These acquisitions, together
with the recently completed Pro Finish Acquisition and the Company's existing
Alpha 9 and Omni product lines, will allow the Company to offer a range of
well-known brands in the nail care products category.
In August 1998, the Company acquired a controlling interest in Ft. Pitt
Acquisition, Inc. and its 90% owned subsidiary, Ft. Pitt-Framesi, Ltd.
(together, "Framesi USA"). Framesi USA holds exclusive license rights for the
sale in the United States and most of Latin America of Framesi hair color
products along with its complementary Biogenol line of shampoos, conditioners,
and styling products pursuant to the terms of an exclusive 40-year license with
Framesi S.p.A., based in Milan, Italy ("Framesi Italy"). Subsequently, the
Company acquired additional shares of Ft. Pitt Acquisition, Inc. from certain
minority shareholders. As of September 1, 1998, the Company owned approximately
80% of the outstanding capital stock of Ft. Pitt Acquisition, Inc. The Company
paid an aggregate purchase price of approximately $32.2 million for the Ft. Pitt
Acquisition, Inc. stock in the form of cash and seller carryback financing. The
Company has completed 11 acquisitions since November 1996.
---------------
The Company was incorporated in June 1995 in Delaware. The Company's
principal executive offices are located at 2390 East Camelback Road, Suite 435,
Phoenix, Arizona 85016, and its telephone number is (602) 955-3353.
5
<PAGE> 12
THE EXCHANGE OFFER
The Outstanding Notes...... The Outstanding Notes were sold by the Company as
of June 23, 1998, in the Initial Offering, to the
Initial Purchasers pursuant to the Purchase
Agreement. The Initial Purchasers subsequently
resold the Outstanding Notes to "Qualified
Institutional Buyers" as such term is defined in
Rule 144A under the Securities Act ("QIBs").
Registration
Requirements............... Pursuant to the Purchase Agreement, the Company,
the Guarantors, and the Initial Purchasers entered
into the Registration Rights Agreement, which
grants the holders of the Outstanding Notes certain
exchange and registration rights. The Exchange
Offer is intended to satisfy such exchange and
registration rights, which terminate upon the
consummation of the Exchange Offer. If applicable
law or applicable interpretations of the staff of
the Commission do not permit the Company to effect
the Exchange Offer, the Company and the Guarantors
agreed to file a shelf registration (the "Shelf
Registration Statement") covering resales of the
Outstanding Notes. See "The Exchange
Offer -- Resale of Exchange Notes" and "The
Exchange Offer -- Shelf Registration Statement."
The Exchange Offer......... The Company is offering to exchange $1,000
principal amount of the Exchange Notes for each
$1,000 principal amount of Outstanding Notes. As of
the date hereof, $100.0 million aggregate principal
amount of Outstanding Notes are outstanding. The
Company will issue the Exchange Notes subsequent to
the Expiration Date and on or before November 20,
1998 (the "Exchange Date"), unless the Exchange
Offer is extended. See "Risk Factors -- Exchange
Offer Procedures; Consequences of Failure to
Exchange."
Based on an interpretation of the staff of the
Commission set forth in no-action letters issued to
third parties, the Company believes that the
Exchange Notes issued pursuant to the Exchange
Offer in exchange for Outstanding Notes may be
offered for resale, resold, and otherwise
transferred by any holder thereof (other than any
such holder which is an "affiliate" of the Company
within the meaning of Rule 405 under the Securities
Act) without compliance with the registration and
prospectus delivery provisions of the Securities
Act, provided that such Exchange Notes are acquired
in the ordinary course of such holder's business
and that such holder does not intend to participate
and has no arrangement or understanding with any
person to participate in the distribution of such
Exchange Notes.
Any holder who tenders in the Exchange Offer with
the intention to participate, or for the purpose of
participating, in a distribution of the Exchange
Notes could not rely on the position of the staff
of the Commission enunciated in Exxon Capital
Holdings Corporation (available April 13, 1989) or
similar no-action letters and, in the absence of an
exemption therefrom, must comply with the
registration and prospectus delivery requirements
of the Securities Act in connection with the resale
transaction. Failure to comply with such
requirements in such instance may result in such
holder incurring liability under the Securities Act
for which the holder is not indemnified by the
Company.
Each Participating Broker-Dealer that receives
Exchange Notes for its own account in exchange for
Outstanding Notes, where such Outstanding Notes
were acquired by such broker-dealer as a result of
market-
6
<PAGE> 13
making activities or other trading activities, must
acknowledge that it will deliver a prospectus in
connection with any resale of Exchange Notes. The
Letter of Transmittal for the Exchange Offer states
that by so acknowledging and by delivering a
prospectus, a broker-dealer will not be deemed to
admit that it is an "underwriter" within the
meaning of the Securities Act. This Prospectus, as
it may be amended or supplemented from time to
time, may be used by a broker-dealer in connection
with resales of Exchange Notes received in exchange
for Outstanding Notes where such Outstanding Notes
were acquired by such broker-dealer as a result of
market-making activities or other trading
activities. The Company has agreed to make this
Prospectus available to any Participating
Broker-Dealer for use in connection with any such
resale for a period of up to 180 days from the
consummation of the Exchange Offer. See "Plan of
Distribution."
Expiration Date............ 5:00 p.m., E.D.T., on November 6, 1998, unless
extended.
Interest on the Exchange
Notes.................... Interest on the Exchange Notes will accrue at a
rate equal to 10 7/8% per annum and will be payable
semi-annually in arrears on January 1 and July 1 of
each year, commencing January 1, 1999. Interest on
the Exchange Notes will accrue from the most recent
date to which interest has been paid on the
Outstanding Notes or, if no interest has been paid,
from the date of original issuance of the
Outstanding Notes.
Procedures for Tendering
Outstanding Notes........ Each holder of Outstanding Notes wishing to accept
the Exchange Offer must complete, sign, and date
the accompanying Letter of Transmittal, or a
facsimile thereof, in accordance with the
instructions contained herein and therein, and mail
or otherwise deliver such Letter of Transmittal, or
such facsimile, together with the Outstanding Notes
and any other required documentation to the
Exchange Agent at the address set forth herein. By
executing the Letter of Transmittal, each holder
will represent to the Company that, among other
things, the holder or person receiving such
Exchange Notes, whether or not such person is the
holder, is acquiring the Exchange Notes in the
ordinary course of business and that neither the
holder nor any such other person has any
arrangement or understanding with any person to
participate in the distribution of such Exchange
Notes. In lieu of physical delivery of the
certificates representing Outstanding Notes,
tendering holders may transfer Outstanding Notes
pursuant to the procedure for book-entry transfer
as set forth under "The Exchange
Offer -- Procedures for Tendering."
Each Participating Dealer that acquired Outstanding
Notes as a result of market-making or other trading
activities must acknowledge that it will deliver a
prospectus in connection with any resale of such
Exchange Notes. See "Plan of Distribution."
Special Procedures for
Beneficial Owners........ Any beneficial owner whose Outstanding Notes are
registered in the name of a broker-dealer,
commercial bank, trust company, or other nominee
and who wishes to tender should contact such
registered holder promptly and instruct such
registered holder to tender on such beneficial
owner's behalf.
7
<PAGE> 14
If such beneficial owner wishes to tender on such
owner's own behalf, such owner must prior to
completing and executing the Letter of Transmittal
and delivering its Outstanding Notes, either make
appropriate arrangements to register ownership of
the Outstanding Notes in such owner's name or
obtain a properly completed bond power from the
registered holder. The transfer of record ownership
may take considerable time.
Guaranteed Delivery
Procedures............... Holders of Outstanding Notes who wish to tender
their Outstanding Notes and whose Outstanding Notes
are not immediately available or who cannot deliver
their Outstanding Notes, the Letter of Transmittal,
or any other documents required by the Letter of
Transmittal to the Exchange Agent (or comply with
the procedures for book-entry transfer) prior to
the Expiration Date must tender their Outstanding
Notes according to the guaranteed delivery
procedures set forth in "The Exchange
Offer -- Guaranteed Delivery Procedures."
Withdrawal Rights.......... Tenders of Outstanding Notes may be withdrawn at
any time prior to 5:00 p.m., E.D.T., on the
Expiration Date pursuant to the procedures
described under "The Exchange Offer -- Withdrawal
of Tenders."
Acceptance of Outstanding
Notes and Delivery of
Exchange Notes........... Subject to certain conditions, the Company will
accept for exchange any and all Outstanding Notes
that are properly tendered in the Exchange Offer
prior to 5:00 p.m., E.D.T., on the Expiration Date.
The Exchange Notes issued pursuant to the Exchange
Offer will be delivered on the Exchange Date. See
"The Exchange Offer -- Terms of the Exchange
Offer."
Federal Income Tax
Consequences............. The issuance of the Exchange Notes to holders of
the Outstanding Notes pursuant to the Exchange
Offer should not be a taxable event for United
States federal income tax purposes. See "Certain
Income Tax Considerations."
Effect on Holders of
Outstanding Notes........ As a result of the making of this Exchange Offer,
the Company will have fulfilled one of its
obligations under the Registration Rights
Agreement, and, with certain exceptions noted
below, holders of Outstanding Notes who do not
tender their Outstanding Notes will not have any
further registration rights under the Registration
Rights Agreement or otherwise. Such holders will
continue to hold the untendered Outstanding Notes
and will be entitled to all the rights and subject
to all the limitations applicable thereto under the
Indenture, except to the extent such rights or
limitations, by their terms, terminate or cease to
have further effectiveness as a result of the
Exchange Offer. All untendered Outstanding Notes
will continue to be subject to certain restrictions
on transfer. Accordingly, if any Outstanding Notes
are tendered and accepted in the Exchange Offer,
the trading market of the untendered Outstanding
Notes could be adversely affected. See "Risk
Factors -- Exchange Offer Procedures" and "Risk
Factors -- Absence of a Public Market; Restrictions
on Transfer."
Exchange Agent............. State Street Bank and Trust Company of California,
N.A. (the "Exchange Agent").
8
<PAGE> 15
SUMMARY OF TERMS OF THE EXCHANGE NOTES
Securities Offered............ $100.0 million in aggregate principal amount of
10 7/8% Senior Subordinated Notes of the
Company due 2008 (the "Exchange Notes").
Maturity Date................. July 1, 2008.
Interest Payment Dates........ January 1 and July 1, commencing January 1,
1999.
Subsidiary Guarantees......... The Exchange Notes will be jointly and
severally guaranteed by each of the Company's
existing domestic subsidiaries and certain
future domestic subsidiaries of the Company
(each a "Guarantor" and, collectively, the
"Guarantors").
Subordination................. The Exchange Notes will be general unsecured
obligations of the Company, will be
subordinated in right of payment to all current
and future Senior Debt (as defined), and senior
or pari passu in right of payment to all
existing and future subordinated Debt (as
defined) of the Company. The Subsidiary
Guarantees will be general unsecured
obligations of the Guarantors, will be
subordinated in right of payment to all Senior
Debt of the Guarantors, and will rank senior or
pari passu in right of payment to all existing
and future subordinated Debt of the Guarantors.
The Company recently entered into a new credit
facility consisting of a revolving credit
facility and an acquisition term loan facility
in the aggregate principal amount of $50.0
million (the "New Credit Facility"). Any
borrowings under the New Credit Facility will
be Senior Debt. As of August 4, 1998, the
Company had approximately $25.0 million of
Senior Debt. See "Certain Indebtedness -- New
Credit Facility" and "Risk
Factors -- Subordination of the Notes and the
Subsidiary Guarantees."
Optional Redemption........... On or after July 1, 2003, the Company may
redeem the Exchange Notes, in whole or in part,
at the redemption prices set forth herein, plus
accrued and unpaid interest thereon, to the
date of redemption. See "Description of the
Exchange Notes -- Optional Redemption."
Change of Control............. Upon a Change of Control (as defined), the
Company will be required to make an offer to
repurchase all outstanding Notes at 101% of the
aggregate principal amount thereof, plus
accrued and unpaid interest thereon to the date
of repurchase. See "Description of the Exchange
Notes -- Repurchase at the Option of Holders --
Change of Control."
Covenants..................... The Indenture will restrict, among other
things, the ability of the Company and its
subsidiaries to incur additional indebtedness,
issue preferred stock, enter into sale and
leaseback transactions, incur liens, pay
dividends or make certain other restricted
payments, apply net proceeds from certain asset
sales, enter into certain transactions with
affiliates, merge or consolidate with any other
person, sell stock of subsidiaries, and assign,
transfer, lease, convey, or otherwise dispose
of substantially all of the assets of the
Company. See "Description of Exchange
Notes -- Certain Covenants."
RISK FACTORS
See "Risk Factors" for a discussion of certain factors that should be
considered in evaluating an investment in the Exchange Notes.
9
<PAGE> 16
SUMMARY HISTORICAL AND PRO FORMA CONSOLIDATED FINANCIAL DATA
(DOLLARS IN THOUSANDS)
The following unaudited consolidated financial information should be read
in conjunction with the Unaudited Pro Forma Consolidated Financial Data and the
notes thereto and the historical Consolidated Financial Statements and notes
thereto of STC and European Touch II contained elsewhere in this registration
statement. In November 1996, Styling Technology Corporation commenced operations
with an initial public offering and the simultaneous acquisition of four
businesses. Styling Technology Corporation has acquired seven other businesses
since November 1996. The unaudited pro forma consolidated financial information
reflects the results of the Company (which includes all of the Company's
acquisitions, including the Recent Acquisitions, other than the acquisition of a
controlling interest in Framesi USA). 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 Data reflects the Initial 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,
other than the acquisition of a controlling interest in Framesi USA) as if each
acquisition, the Initial 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 to the Unaudited Pro Forma Consolidated Financial Data contained
elsewhere in this registration statement). The Unaudited Pro Forma Consolidated
Statement of Operations Data referred to above may not be indicative of actual
results that would have been achieved if the Initial Offering and 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 Initial Offering, the
application of net proceeds therefrom, and the acquisitions. The table also
presents certain historical actual consolidated financial information. The
consolidated statement of operations data for the period from November 27, 1996
to December 31, 1996 and for the year ended December 31, 1997, are derived from
the consolidated financial statements of the Company, which have been audited by
Arthur Andersen LLP, independent public accountants, as indicated in their
report included elsewhere herein. The unaudited consolidated financial
information as of June 30, 1998 and for the six months ended June 30, 1997 and
1998, are derived from the Company's unaudited interim consolidated financial
statements and in the opinion of management, reflect all adjustments, consisting
of only normal recurring adjustments.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED JUNE 30,
DECEMBER 31, ------------------
1997 1997 1998
------------ ------- -------
<S> <C> <C> <C>
UNAUDITED STATEMENT OF OPERATIONS DATA -- PRO FORMA:
Net sales................................................. $84,935 $41,243 $44,594
Gross profit(1)........................................... 47,857 23,483 25,323
Selling, general, and administrative expenses(2).......... 29,417 15,364 14,479
Income from operations(3)................................. 18,440 8,119 10,844
Income before extraordinary item and income taxes......... 7,205 2,501 5,226
Net income(4)............................................. 3,991 1,313 1,911
Diluted earnings per share................................ .97 .32 .44
Diluted weighted average shares outstanding............... 4,113 4,124 4,356
</TABLE>
10
<PAGE> 17
<TABLE>
<CAPTION>
NOVEMBER 27, SIX MONTHS ENDED
1996 TO YEAR ENDED JUNE 30,
DECEMBER 31, DECEMBER 31, ----------------------
1996 1997 1997 1998
------------ ------------ ------- -----------
<S> <C> <C> <C> <C>
ACTUAL CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Net sales........................................... $ 1,083 $ 38,108 $14,916 $35,299
Cost of sales....................................... 571 16,756 6,480 15,492
------- -------- ------- -------
Gross profit........................................ 512 21,352 8,436 19,807
Selling, general, and administrative expenses....... 737 12,201 4,731 11,909
------- -------- ------- -------
Income (loss) from operations....................... $ (225) $ 9,151 $ 3,705 $ 7,898
======= ======== ======= =======
Income (loss) before extraordinary item............. $ (151) $ 4,207 $ 2,085 $ 3,004
Extraordinary item, net of tax benefit.............. -- (1,377) -- (1,091)
------- -------- ------- -------
Net income (loss)................................... $ (151) $ 2,830 $ 2,085 $ 1,913
======= ======== ======= =======
OTHER DATA:
Ratio of earnings to fixed charges(5)............... -- 5.0x 21.3x 3.0x
</TABLE>
<TABLE>
<CAPTION>
AS OF
JUNE 30,
1998
--------
<S> <C>
UNAUDITED CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents................................. $ 11,657
Working capital........................................... 37,987
Total assets.............................................. 143,594
Long-term debt, including current maturities.............. 102,208
Total stockholders' equity................................ 30,678
</TABLE>
- ---------------
(1) Reflects the adjustment to cost of sales related to a reduction of
third-party manufacturing costs negotiated in connection with the Company's
acquisitions of ABBA and the Clean + Easy/One Touch product lines, and
realized following the closing of such acquisitions, for the year ended
December 31, 1997, and the six months ended June 30, 1997, of approximately
$3.4 million and $1.8 million, respectively. No adjustment is included for
the six months ended June 30, 1998 as the actual operations for these
divisions are included in the operations of STC for this period.
(2) Reflects the net impact in selling, general, and administrative expenses of
an aggregate of (i) approximately $2.3 million, $800,000, and $617,000 for
the year ended December 31, 1997, and the six months ended June 30, 1997 and
1998, respectively, to reflect the elimination of salaries and benefits of
specific individuals not continuing with the combined companies, and (ii)
approximately $1.9 million, $1.1 million, and $408,000 for the year ended
December 31, 1997, and the six months ended June 30, 1997 and 1998,
respectively, to reflect the additional amortization of goodwill associated
with each acquisition.
(3) Represents cash interest expense on the Notes plus amortization of related
financing costs.
(4) Reflects adjustment to the income tax provision based on applying the
statutory income tax rates of each company, adjusted for goodwill
amortization from the acquisitions of ABBA, Gena, and JDS, which is not
deductible for income tax reporting purposes. Also includes an adjustment to
remove the extraordinary item for the year ended December 31, 1997.
(5) The ratio of earnings to fixed charges has been calculated by dividing
income before income taxes and fixed charges by fixed charges. Fixed charges
for this purpose include interest expense, amortization of deferred
financing costs and one-third of operating lease payments (the portion
deemed to be representative of the interest factor).
11
<PAGE> 18
RISK FACTORS
Holders of the Outstanding Notes should carefully review the information
set forth below, in addition to the other information in this Prospectus, before
deciding to tender their Outstanding Notes in the Exchange Offer.
EXCHANGE OFFER PROCEDURES; CONSEQUENCES OF FAILURE TO EXCHANGE
Issuance of the Exchange Notes in exchange for Outstanding Notes pursuant
to the Exchange Offer will be made only after the timely receipt by the Company
of such Outstanding Notes, a properly completed and duly executed Letter of
Transmittal, and all other required documents. Therefore, holders of the
Outstanding Notes desiring to tender such Outstanding Notes in exchange for
Exchange Notes should allow sufficient time to ensure timely delivery. The
Company is under no duty to give notification of defects or irregularities with
respect to the tenders of Outstanding Notes for exchange. Outstanding Notes that
are not tendered or are tendered but not accepted will, following the
consummation of the Exchange Offer, continue to be subject to the existing
restrictions upon transfer thereof. Upon consummation of the Exchange Offer, the
registration rights under the Registration Rights Agreement will terminate. In
addition, any holder of Outstanding Notes who tenders in the Exchange Offer for
the purpose of participating in a distribution of the Exchange Notes may be
deemed to have received restricted securities and, if so, will be required to
comply with the registration and prospectus delivery requirements of the
Securities Act in connection with any resale transaction. Each broker-dealer
that receives Exchange Notes for its own account in exchange for the Outstanding
Notes, where such Outstanding Notes were acquired by such broker-dealer as a
result of market-making activities or other trading activities, must acknowledge
that it will deliver a prospectus in connection with any resale of such Exchange
Notes. See "Plan of Distribution." TO THE EXTENT THAT SOME OF THE OUTSTANDING
NOTES ARE TENDERED AND ACCEPTED IN THE EXCHANGE OFFER, THE TRADING MARKET FOR
UNTENDERED AND TENDERED BUT UNACCEPTED OUTSTANDING NOTES COULD BE ADVERSELY
AFFECTED.
LEVERAGE
The Company is highly leveraged. On June 30, 1998, the Company had total
indebtedness of approximately $102.2 million and stockholders' equity of
approximately $30.7 million. In addition, the Company, subject to certain
conditions, will be able to borrow up to an additional $25.0 million under the
New Credit Facility. As of September 1, 1998, the Company had approximately
$25.0 million of Senior Debt incurred under the New Credit Facility, which is
included in the $102.2 million above. See "Certain Indebtedness -- New Credit
Facility." Subject to certain conditions, the Company and its subsidiaries will
be permitted to incur additional indebtedness in the future. See
"Capitalization," "Selected Consolidated Financial Data," and "Description of
the Exchange Notes."
The Company's ability to make scheduled payments of principal of, or to pay
the interest on, or to refinance, its indebtedness (including the Exchange
Notes), or to fund planned capital expenditures and product development expense
will depend on its future performance, which, to a certain extent, is subject to
general economic, financial, competitive, legislative, regulatory, and other
factors that are beyond its control. Following the Offering and the closing of
the New Credit Facility, the Company's line of credit, current cash resources,
and expected cash flows from operations are expected to be sufficient to fund
the Company's capital needs during the next 12 months at its current level of
operations, apart from capital needs resulting from acquisitions. However, the
Company may be required to obtain additional capital to fund its planned growth
and future acquisitions. In addition, the Company may need to refinance all or a
portion of the principal of the Exchange Notes on or prior to maturity. There
can be no assurance that the Company will generate sufficient cash flow from
operations or that future borrowings will be available under the New Credit
Facility in an amount sufficient to enable the Company to service its
indebtedness, including the Exchange Notes, or to fund its other liquidity
needs. In addition, there can be no assurance that the Company will be able to
effect any such refinancing on commercially reasonable terms or at all. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
The degree to which the Company will be leveraged following the Offering
could have important consequences to holders of the Exchange Notes, including
(i) making it more difficult for the Company to raise additional funds to
finance desired acquisitions, (ii) increasing the Company's vulnerability to
general
12
<PAGE> 19
adverse economic and industry conditions, (iii) limiting the Company's ability
to obtain other funds to finance future working capital, capital expenditures,
product development, and other general corporate requirements, (iv) requiring
the dedication of a substantial portion of the Company's cash flow from
operations to the payment of the principal of and interest on its indebtedness
(including the Exchange Notes), thereby reducing the availability of such cash
flow to fund working capital, capital expenditures, product development, or
other general corporate purposes, (v) limiting the Company's flexibility in
planning for, or reacting to, changes in its business and the industry, and (vi)
placing the Company at a competitive disadvantage as compared to less leveraged
competitors. In addition, the Indenture and the New Credit Facility contain
financial and other restrictive covenants limiting the ability of the Company,
among other things, to borrow additional funds. Failure by the Company to comply
with such covenants could result in an event of default that, if not cured or
waived, could have a material adverse effect on the Company. The degree to which
the Company is leveraged could prevent it from repurchasing all of the Exchange
Notes tendered to it upon the occurrence of a Change of Control. See
"Description of the Exchange Notes -- Repurchase at Option of Holder -- Change
of Control" and "Certain Indebtedness."
The obligation of the lenders to advance funds under the New Credit
Facility is conditioned upon, among other things, the execution of definitive
loan documents. No assurance can be given that the Company and the lenders will
enter into such definitive documents or that any funds will be advanced under
such facility. See "Certain Indebtedness -- New Credit Facility."
SUBORDINATION OF THE EXCHANGE NOTES AND THE SUBSIDIARY GUARANTEES
The Exchange Notes and the Subsidiary Guarantees will be subordinated in
right of payment to all current and future Senior Debt of the Company and the
Guarantors, including any indebtedness under the New Credit Facility. The
Indenture, however, provides that the Company may not, and may not permit any of
the Guarantors to, incur or otherwise become liable for any indebtedness that is
subordinate or junior in right of payment to any Senior Debt and senior in any
respect in right of payment to the Exchange Notes or any of the Subsidiary
Guarantees. Upon any distribution to creditors of the Company in a liquidation
or dissolution of the Company or in a bankruptcy, reorganization, insolvency,
receivership, or similar proceeding relating to the Company or its property, the
lenders under the New Credit Facility and other creditors that are holders of
Senior Debt will be entitled to be paid in full before any payment may be made
with respect to the Exchange Notes. In addition, the subordination provisions of
the Indenture provide that payments with respect to the Exchange Notes will be
blocked in the event of a payment default on Senior Debt and may be blocked for
up to 179 days each year in the event of certain non-payment defaults on Senior
Debt. In the event of a bankruptcy, liquidation, or reorganization of the
Company, the holders of the Exchange Notes will participate ratably with all
holders of subordinated indebtedness of the Company that is deemed to be of the
same class as the Exchange Notes, and potentially with all other general
creditors of the Company, based upon the respective amounts owed to each holder
or creditor, in the remaining assets of the Company. If any of the foregoing
events occur, there can be no assurance that there would be sufficient assets to
pay amounts due on the Exchange Notes. As a result, holders of the Exchange
Notes may receive less, ratably, than the holders of Senior Debt.
Any borrowings under the New Credit Facility will be Senior Debt. As of
September 1, 1998, the Company has borrowed approximately $25.0 million of
Senior Debt under the New Credit Facility. See "Certain Indebtedness -- New
Credit Facility." The Indenture permits the incurrence of substantial additional
indebtedness, including Senior Debt, by the Company and its subsidiaries in the
future. See "Description of the Exchange Notes."
CERTAIN FACTORS THAT COULD ADVERSELY AFFECT OPERATING RESULTS
The Company's operating results are affected by a wide variety of factors
that could adversely impact its net sales and operating results. These factors,
many of which are beyond the control of the Company, include the Company's
ability to identify trends in the professional salon products industry and to
create and introduce products on a timely basis that take advantage of those
trends, continued market acceptance of its products among salon professionals
and their clientele, the Company's ability to arrange for timely production and
delivery of its products, the level and timing of orders placed by customers,
and competition and competitive pressures on prices.
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The success of the Company's operations depends to an extent upon a number
of factors relating to discretionary consumer spending. These factors include
economic conditions, such as employment, business conditions, interest rates,
and tax rates, as well as the continued growth of the professional salon
products industry. There can be no assurance that consumer spending will not be
adversely affected by general social trends and economic conditions, thereby
impacting the Company's growth, net sales, and profitability. If the demand for
professional salon products and related merchandise were to decline, the
Company's business, financial condition, and operating results could be
adversely affected.
ACQUISITION STRATEGY
The success of the Company's acquisition strategy will depend in large part
on its ability to acquire and operate successfully additional professional salon
product businesses. There can be no assurance that any additional suitable
acquisitions can be identified or consummated. In addition, increased
competition for acquisition candidates may increase purchase prices for
acquisitions to levels beyond the Company's financial capability or assessment
of value. The Company expects to use cash and its securities, including its
Common Stock, as the primary consideration for future acquisitions. The size,
timing, and integration of any future acquisitions may cause substantial
fluctuations in operating results from quarter to quarter. Consequently,
operating results for any quarter may not be indicative of the results that may
be achieved for any subsequent fiscal quarter or for a full fiscal year.
INTEGRATION OF BUSINESS OPERATIONS
The Company completed four acquisitions during fiscal 1996 and three
acquisitions during fiscal 1997 and has completed four acquisitions in fiscal
1998. There can be no assurance that the Company will be able to integrate
effectively the operations of acquired businesses with the Company's operations,
to manage effectively the combined operations of acquired businesses, to achieve
the Company's operating and growth strategies with respect to these businesses,
to obtain increased revenue opportunities as a result of the anticipated
synergies created by expanded product offerings and additional distribution
channels, or to reduce the overall selling, general, and administrative expenses
associated with acquired operations. The integration of the management,
operations, and facilities of acquired businesses could involve unforeseen
difficulties, which could have a material adverse effect on the Company's
business, financial condition, and operating results.
The Company conducts due diligence reviews of each acquired business and
receives representations and warranties regarding each acquired business. There
can be no assurance, however, that unforeseen liabilities will not arise in
connection with the operation of the businesses acquired to date or future
acquired businesses or that any contractual purchase price adjustments, rights
of set-off, or other remedies available to the Company will be sufficient to
compensate the Company in the event unforeseen liabilities arise.
The Company anticipates using the opportunities created by the combination
of acquired businesses to effect what the Company believes will be substantial
cost savings, including a reduction in operating expenses as a result of the
elimination of duplicative administrative, warehouse, and distribution
facilities, functions, and personnel. Significant uncertainties, however,
accompany any business combination, and there can be no assurance that the
Company will be able to achieve anticipated integration of facilities,
functions, and personnel in order to achieve operating efficiencies or otherwise
realize cost savings as a result of the acquisitions to date or future
acquisitions. The inability to achieve the anticipated cost savings could have a
material adverse effect on the Company's business, financial condition, and
operating results.
CONSUMER PREFERENCES AND NEW PRODUCT INTRODUCTIONS
Consumer preferences in the professional salon products industry depend to
a significant extent on the prescriptive role of salon professionals. Relatively
few products achieve wide acceptance in the professional salon market. The
Company believes that its success in the professional salon products industry
depends, in part, on its ability to introduce new and attractive products on a
regular basis that anticipate and respond to changing consumer demands and
preferences in a timely manner. There can be no assurance that any new products
introduced by the Company will achieve any significant degree of market
acceptance or that any acceptance that is achieved will be sustained for any
significant amount of time. The failure of new product lines or product
innovations to achieve or sustain market acceptance could have a material
adverse effect on the Company's business, financial condition, and operating
results.
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MANAGEMENT OF GROWTH
Since its initial public offering in November 1996, the Company's
operations have undergone significant changes and growth, including the
acquisition and integration of seven professional salon product businesses (not
including the Recent Acquisitions or the acquisition of a controlling interest
in Framesi USA), the expansion of its product lines and distribution channels,
and the restructuring of its third-party manufacturing arrangements. The
Company's growth and expanding operations may place a significant strain on the
Company's management, administrative, operational, and financial resources as
well as increased demands on its systems and controls. The Company's ability to
manage its growth will require it to continue to integrate successfully the
operations of any acquired businesses with the Company's operations; to enhance
further its operational, financial, and management systems and its marketing
programs; to motivate, manage, and retain its current employees; and to
identify, hire, and train additional employees. The failure of the Company to
manage its growth on an effective basis could have a material adverse effect on
the Company's business, financial condition, and operating results.
DEPENDENCE ON DISTRIBUTION CHANNELS
The Company sells a significant portion of its products to professional
salon product distributors and salon chains. Distributors and salon chains in
the United States and in foreign markets have periodically experienced
consolidation and other ownership changes and may in the future consolidate,
undergo restructurings, or realign their affiliations, which could decrease the
number of salons that sell the Company's products or increase the ownership
concentration within the professional salon products industry. Some of these
distributors may be thinly capitalized and unable to withstand changes in
business conditions. If a significant distributor of the Company's products
discontinues selling the Company's products, performs poorly and is unable to
pay for purchased products, or reorganizes or liquidates and is unable to
continue selling the Company's products, the Company's business, financial
condition, and operating results could be materially and adversely affected. In
addition, the laws and regulations of various states may limit the ability of
the Company to change distributors under certain circumstances, making it
difficult to terminate a distributor without good or just cause, as defined by
applicable statutes or regulations. The resulting difficulty or inability to
replace distributors, poor performance of the Company's distributors, or the
Company's inability to collect accounts receivable from its major distributors
could have a material adverse effect on the Company's business, financial
condition, and operating results. See "Business -- Sales and Distribution."
DEPENDENCE ON THIRD PARTIES FOR MANUFACTURING
The Company depends upon third parties to manufacture most of its products.
Although the Company owns most of the formulations, tools, and molds used in the
manufacturing processes of its products, the Company has limited control over
the manufacturing processes themselves. As a result, any difficulties
encountered by the third-party manufacturers that result in product defects,
production delays, cost overruns, or the inability to fulfill orders on a timely
basis could have a material adverse effect on the Company's business, financial
condition, and operating results.
The Company generally does not have long-term contracts with its
third-party manufacturers. Although the Company believes it would be able to
secure other third-party manufacturers to produce its products as a result of
its ownership of the formulations, tools, and molds used in the manufacturing
process, the Company's operations would be adversely affected if it lost its
relationship with any of its current suppliers (including particularly two
manufacturers of hair removal appliances in China) or if its current suppliers'
operations or sea or air transportation with its China-based manufacturers were
disrupted or terminated even for a relatively short period of time. See "-- Risk
of International Operations." The Company's tools and molds are located at the
facilities of its domestic and offshore third-party manufacturers. Accordingly,
significant damage to such facilities could result in the loss of or damage to a
material portion of its key tools and molds and production delays could result
while new facilities are being arranged and replacement tools and molds are
being produced. The Company does not maintain an inventory of sufficient size to
provide protection for any significant period against an interruption of supply,
particularly if it were required to obtain alternative sources of supply.
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Although the Company does not purchase directly the raw materials used to
manufacture the majority of its products, it is potentially subject to
variations in the prices it pays its third-party manufacturers for products
depending on their cost for raw materials.
DEPENDENCE ON FRAMESI ITALY
The Company holds exclusive license rights for the sale of Framesi brand
hair color and hair care products in the majority of the Western Hemisphere,
including the United States and most of Latin America. The Company imports hair
color products manufactured by Framesi Italy. The Company sells these products
pursuant to an exclusive 40-year license with Framesi Italy that expires in
2036. In addition, pursuant to the license the Company manufactures and sells
hair care products under the Framesi and Biogenol brand names. Consequently, any
difficulties encountered by Framesi Italy with respect to product defects,
production delays, cost overruns, or the inability to fulfill orders on a timely
basis or the termination or breach of the license agreement by either party
could have a material adverse effect on the Company's business, financial
conditions, and operating results.
DEPENDENCE ON MAJOR CUSTOMERS
The Company depends upon salon product and tanning supply distributors,
beauty supply outlets, and salon chains to distribute its products. During 1997,
the Company's largest customer, Sally Beauty Company, Inc. ("Sally"), a division
of Alberto-Culver Company, accounted for approximately 13% of the net sales of
the Company. Sally would have accounted for approximately 9% of the pro forma
consolidated net sales of the Company during 1997. The Company currently
maintains more than 5,500 active customer accounts. The Company does not have
long-term contracts with any of its customers. An adverse change in, or
termination of, the Company's relationship with, or an adverse change in the
financial viability of, one or more of its major customers, including Sally,
could have a material adverse effect on the Company's business, financial
condition, and operating results.
DEPENDENCE ON KEY PERSONNEL
The Company's success depends to a significant degree upon the skills of
its current key employees and its ability to identify, hire, and retain
additional sales, marketing, and financial personnel. There can be no assurance
that the Company will be successful in retaining its existing key personnel or
in attracting and retaining additional key personnel. The loss of services of
key personnel, particularly Sam Leopold (the Company's Chairman, President, and
Chief Executive Officer), or the inability to attract and retain additional
qualified personnel could have a material adverse effect upon the Company's
business, financial condition, and operating results. The Company has an
employment agreement with Mr. Leopold that extends through September 2001.
RISK OF INTERNATIONAL OPERATIONS
International sales comprised approximately 15% of the Company's pro forma
consolidated net sales during 1997. The Company intends to expand its
international sales through acquisitions and internal growth. In addition,
certain of the Company's products are manufactured in China. See "-- Dependence
on Third Parties for Manufacturing." The foreign manufacture and sale of
products and the purchase of raw materials and components from foreign suppliers
may be materially and adversely affected by political and economic conditions
abroad, including foreign currency rate fluctuations. Protectionist trade
legislation in either the United States or foreign countries, such as a change
in the current tariff structures, export compliance laws, or other trade
policies could materially and adversely affect the Company's ability to
manufacture or sell products in foreign markets.
The Company's relationships with third-party manufacturers in China could
be disrupted or adversely affected due to a number of factors, including
governmental regulation, fluctuations in exchange rates, and changes in economic
and political conditions in China. If the Company's supply sources in China were
disrupted for any reason, the Company believes, based on existing market
conditions, that it could establish alternative supply relationships. However,
because establishing these relationships involves numerous uncertainties
relating to delivery requirements, price, payment terms, quality control, and
other matters, the Company is unable to predict whether such relationships would
be on terms satisfactory to the Company.
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The Company's relationships with its third-party manufacturers in China are
also subject to risks associated with changes in United States legislation and
regulations relating to imports, including quotas, duties, taxes, and other
charges or restrictions on imports. Products that the Company imports from China
currently receive preferential tariff treatment accorded goods from countries
granted "most favored nation" status. Under the Trade Act of 1974, the President
of the United States is authorized, upon making specified findings, to waive
certain restrictions that would otherwise render China ineligible for most
favored nation treatment. The President has waived these provisions each year
since 1979. Most favored nation status was accordingly renewed in June 1997
despite legislation pursued by Congress demanding that China desist from certain
trade and military activities. Congress will continue to monitor these
activities and may encourage the President to reconsider the renewal of most
favored nation status for China in June 1998. No assurance can be given that
China will continue to enjoy most favored nation status in the future. Raw
materials and finished products entering the United States from China without
the benefit of most favored nation treatment would be subject to significantly
higher duty rates.
INTELLECTUAL PROPERTY
The market for the Company's products depends to a significant extent upon
the goodwill associated with its trademarks and trade names. Therefore,
trademark protection is important to the Company's business. Although a number
of the Company's trademarks and trade names are registered in the United States
and in foreign countries, there can be no assurance that the Company will be
successful in asserting trademark or trade name protection for its trademarks
and trade names in the United States or other markets, and the costs to the
Company of such efforts may be substantial. In addition, the laws of certain
foreign countries may not protect the Company's intellectual property rights to
the same extent as the laws of the United States.
While the Company currently holds certain patents, the Company does not
consider any single patent to be material to the conduct of its business. To the
extent the Company asserts its patent rights, there can be no assurance that any
patents issued to the Company will not be challenged, invalidated, or
circumvented, that any rights granted thereunder will provide adequate
protection to the Company, or that the Company will have sufficient resources to
prosecute infringements of its rights. The Company relies primarily on trade
secret protection for its proprietary information. There can be no assurance
that the Company will be able to protect its intellectual property or that third
parties will not assert intellectual property infringement claims against the
Company. See "Business -- Intellectual Property."
COMPETITION
The professional salon products industry is highly competitive. The
Company's products compete directly against professional salon and other similar
products sold through distributors of professional salon products and
professional salons. In addition, the Company's professional salon products
compete indirectly against hair care, nail care, and skin and body care products
as well as salon appliances and sundries sold through a variety of non-salon
retail channels, including department stores, mall-based specialty stores and,
to a lesser extent, mass merchants, drugstores, supermarkets, telemarketing
programs, television "infomercials," and catalogs. Current and potential
competitors include a number of companies that have substantially greater
resources than the Company, including better brand-name recognition, broader
product lines, and wider distribution channels. The professional salon products
industry is characterized by a lack of significant barriers to entry with
respect to the development and production of professional salon products, which
may result in new competition, including possible imitators of one or more of
the Company's recognized product lines. In addition, it is common in the
professional salon products industry for companies to market products that are
similar to products being successfully marketed by competitors. Increased
competition and any reductions in competitors' prices that require the Company
to implement price reductions in order to remain competitive could have a
material adverse effect on the Company's business, financial condition, and
operating results. See "Business -- Competition."
REGULATION AND POTENTIAL CLAIMS
Certain of the Company's advertising and product labeling practices are
subject to regulation by the Federal Trade Commission ("FTC"), and certain of
its professional salon product production practices are subject to regulation by
the Food and Drug Administration ("FDA") as well as by various other federal,
state,
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and local regulatory authorities. Compliance with federal, state, and local laws
and regulations has not had a material adverse effect on the Company to date.
Nonetheless, federal, state, and local regulations in the United States that are
designed to protect consumers have had, and can be expected to have, an
increasing influence on product claims, production methods, product content,
labeling, and packaging. In addition, any expansion by the Company of its
operations to produce professional salon products that include over-the-counter
drug ingredients (such as certain sun screen ingredients) would result in the
Company becoming subject to additional FDA regulations as well as a higher
degree of inspection and greater burden of regulatory compliance than currently
exist. The nature and use of professional salon products could give rise to
product liability claims if one or more users of the Company's products were to
suffer adverse reactions following their use of the products. Such reactions
could be caused by various factors, many of which are beyond the Company's
control, including hypoallergenic sensitivity and the possibility of malicious
tampering with the Company's products. In the event of such an occurrence, the
Company could incur substantial litigation expense, receive adverse publicity,
and suffer a loss of sales.
The operations of the Company subject it to federal, state, and local
governmental regulations related to the use, storage, discharge, and disposal of
hazardous chemicals. The failure by the Company to comply with current or future
environmental regulations could result in the imposition of fines on the
Company, suspension of production, or a cessation of operations. Compliance with
such regulations could require the Company to acquire costly equipment or to
incur other significant expenses. Any failure by the Company to control the use,
or adequately restrict the discharge, of hazardous substances could subject it
to future liabilities. The Company believes that it is in substantial compliance
with applicable federal, state, and local rules and regulations governing the
discharge of hazardous materials into the environment. There are no significant
capital expenditures for environmental control matters anticipated in the
current year or expected in the near future. See "Business -- Government
Regulation."
RESTRICTIVE DEBT COVENANTS
The New Credit Facility and the Indenture contain certain restrictive
financial and operating covenants that limit the discretion of the Company with
respect to certain business matters. These covenants will place significant
restrictions on, among other things, the ability of the Company to incur
additional indebtedness, to create liens or other encumbrances, to make certain
payments and investments, and to sell or otherwise dispose of assets and merge
or consolidate with other entities. The New Credit Facility requires the Company
to meet certain financial ratios and tests. A failure to comply with the
obligations contained in the New Credit Facility or the Indenture, if not cured
or waived, could result in the acceleration of the related debt and the
acceleration of debt under other instruments that contain cross-acceleration or
cross-default provisions. If, as a result thereof, a default occurs with respect
to Senior Debt, the subordination provisions in the Indenture would likely
restrict payments to the holders of the Exchange Notes. In addition, if the
Company were obligated to repay all or a significant portion of its
indebtedness, there can be no assurance that the Company would have sufficient
cash to do so or that the Company could successfully refinance such
indebtedness. Other indebtedness of the Company that may be incurred in the
future may contain financial or other covenants more restrictive than those of
the New Credit Facility or the Exchange Notes. See "Certain Indebtedness -- New
Credit Facility," "Description of Notes -- Subordination," and "Description of
the Exchange Notes -- Certain Covenants."
POSSIBLE INABILITY TO FUND A CHANGE OF CONTROL OFFER
Upon a Change of Control, the Company will be required to offer to
repurchase all outstanding Exchange Notes at 101% of the principal amount
thereof, plus accrued and unpaid interest to the date of repurchase. There can
be no assurance, however, that sufficient funds will be available at the time of
any Change of Control to make any required repurchases of Exchange Notes
tendered or that restrictions in the New Credit Facility will allow the Company
to make such required repurchases. Despite these provisions, the Company could
enter into certain transactions, including certain recapitalizations, that would
not constitute a Change of Control, but would increase the amount of debt
outstanding at such time. See "Description of the Exchange Notes -- Repurchase
at the Option of Holders."
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FRAUDULENT CONVEYANCE
Under applicable provisions of federal bankruptcy law or comparable
provisions of state fraudulent transfer law, if, among other things, the Company
or any Guarantor, at the time it incurred the indebtedness evidenced by the
Exchange Notes or its Subsidiary Guarantee, (i) (a) was rendered insolvent by
reason of such occurrence or (b) was engaged in a business or transaction for
which the assets remaining with the Company or such Guarantor constituted
unreasonably small capital or (c) intended to incur, or believed that it would
incur, debts beyond its ability to pay such debts as they mature, and (ii) the
Company or such Guarantor received less than reasonably equivalent value or fair
consideration for the incurrence of such indebtedness, then the Exchange Notes
and the Subsidiary Guarantees, and any pledge or other security interest
securing such indebtedness, could be voided, or claims in respect of the
Exchange Notes or the Subsidiary Guarantees could be subordinated to all other
debts of the Company or such Guarantor, as the case may be. In addition, the
payment of interest and principal by the Company pursuant to the Exchange Notes
or the payment of amounts by a Guarantor pursuant to a Subsidiary Guarantee
could be voided and required to be returned to the person making such payment or
to a fund for the benefit of the creditors of the Company or such Guarantor, as
the case may be.
The measures of insolvency will vary depending upon the law applied in any
proceeding with respect to the foregoing. Generally, however, the Company or a
Guarantor would be considered insolvent if (i) the sum of its debts, including
contingent liabilities, were greater than the saleable value of all of its
assets at a fair valuation or the present fair saleable value of its assets were
less than the amount that would be required to pay its probable liability on its
existing debts, including contingent liabilities, as they become absolute and
mature or (ii) it could not pay its debts as they become due.
On the basis of historical financial information, recent operating history,
and other factors, the Company believes that, after giving effect to the
indebtedness incurred in connection with the Offering, the application of the
net proceeds therefrom, and the establishment of the New Credit Facility,
neither the Company nor any Guarantor will be insolvent, will have unreasonably
small capital for the business in which it is engaged, or will incur debts
beyond its ability to pay such debts as they mature. There can be no assurance,
however, as to what standard a court would apply in making such determinations
or that a court would agree with the Company's conclusions in this regard.
ABSENCE OF A PUBLIC MARKET; RESTRICTIONS ON TRANSFER
The Outstanding Notes are currently owned by a relatively small number of
beneficial owners. The Outstanding Notes have not been registered under the
Securities Act and are subject to significant restrictions on resale. The
Exchange Notes are a new issue of securities for which there is currently no
active trading market. The Company does not intend to apply for a listing or
quotation of the Exchange Notes on any securities exchange or stock market. The
Initial Purchasers have informed the Company that they currently intend to make
a market in the Exchange Notes. However, the Initial Purchasers are not
obligated to do so, and any such market making may be discontinued at any time
without notice. No assurance can be given as to the liquidity of the trading
market for the Exchange Notes. Accordingly, there can be no assurance as to the
development or liquidity of any market for the Exchange Notes. Future trading
prices of the Exchange Notes will depend upon many factors, including, among
others, prevailing interest rates, the market for similar securities, and other
factors, including general economic conditions and the financial condition of
the Company.
The Exchange Offer will not be conditioned upon any minimum or maximum
aggregate principal amount of Outstanding Notes being tendered for exchange. No
assurance can be given as to the liquidity of the trading market for the
Exchange Notes, or, in the case of non-tendering holders of the Outstanding
Notes, the trading market for the Outstanding Notes following the Exchange
Offer.
To the extent that all or most of the holders of the Outstanding Notes
tender such Notes, the liquidity of the Exchange Notes should be increased as a
result of the larger size of the issue. However, there can be no assurance that
any or all holders of the Outstanding Notes will accept the Exchange Offer. To
the extent that fewer of the holders of the Outstanding Notes accept the
Exchange Offer, the liquidity of the Exchange Notes
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could be decreased. In addition, wide acceptance of the Exchange Offer will
affect and could decrease the liquidity of the Outstanding Notes held by
non-tendering holders.
The liquidity of, and trading market for, the Outstanding Notes or the
Exchange Notes also may be adversely affected by general declines in the market
for similar securities. Such a decline may adversely affect such liquidity and
trading markets independent of the financial performance of, and prospects for,
the Company.
CONTROL BY MANAGEMENT
Mr. Leopold, the Chairman of the Board, President, and Chief Executive
Officer of the Company, beneficially owns approximately 25% of the outstanding
shares of the Company's Common Stock. Consequently, Mr. Leopold will have the
ability to influence the election of all of the directors of the Company and
thereby control the business, affairs, and management of the Company. In
addition, Mr. Leopold will have the ability to influence most matters requiring
stockholder approval including significant corporate matters, such as the
amendment of the Company's Certificate of Incorporation and any merger,
consolidation, or sale of all or substantially all of the assets of the Company.
Such a high level of ownership may have the effect of delaying, deterring, or
preventing a change in the control of the Company, even when such a change would
be in the best interests of the other stockholders or the holders of the Notes,
and may adversely affect the voting and other rights of the other holders of the
Company's Common Stock.
POSSIBLE VOLATILITY OF MARKET PRICE OF COMMON STOCK
The market price of the Company's Common Stock has increased dramatically
since the Company's initial public offering in November 1996. The period was
marked by generally rising stock prices, extremely favorable industry
conditions, and substantially improved operating results by the Company. There
can be no assurance that these favorable conditions will continue. The trading
price of the Company's Common Stock in the future could be subject to wide
fluctuations in response to quarterly variations in operating results of the
Company, actual or anticipated announcements of new products by the Company or
its competitors, changes in analysts' estimates of the Company's financial
performance, general conditions in the markets in which the Company competes,
worldwide economic and financial conditions, and other events or factors. The
stock market also has experienced extreme price and volume fluctuations that
have particularly affected the market prices for many rapidly expanding
companies and that often have been unrelated to the operating performance of
such companies. These broad market fluctuations and other factors may adversely
affect the market price of the Company's Common Stock. Any reduction in the
trading price of the Company's Common Stock could adversely affect the Company's
ability to acquire additional businesses.
YEAR 2000 COMPLIANCE
Many currently installed computer systems and software products are coded
to accept only two-digit entries in the date code field. Beginning in the year
2000, these date code fields will need to accept four-digit entries to
distinguish 21st century dates from 20th century dates. As a result, computer
systems and software used by many companies may need to be upgraded to comply
with such "Year 2000" requirements. Significant uncertainty exists concerning
the potential effects associated with such compliance. The Company has assessed
and continues to assess the impact the Year 2000 issue will have on its
reporting and operating systems. The Company is addressing the Year 2000 issue
by upgrading to a new release of its key operating and financial software
system, which will be Year 2000 compliant. The Company will test the new system
for Year 2000 compliance when the system is upgraded. In addition, during 1998
the Company intends to assess the impact any Year 2000 compliance problems
suffered by its customers, third-party contract manufacturers, and suppliers may
have on the Company. Although the Company does not anticipate that the Year 2000
issue will have a significant impact on its business, any significant Year 2000
compliance problem of any of the Company, its customers, or its third-party
contract manufacturers or suppliers could have a material adverse effect on the
Company's business, financial condition, and operating results.
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THE EXCHANGE OFFER
PURPOSE AND EFFECT OF THE EXCHANGE OFFER
The Outstanding Notes were sold by the Company on June 23, 1998 to the
Initial Purchasers pursuant to the Purchase Agreement. The Initial Purchasers
subsequently placed the Outstanding Notes with QIBs in reliance on Rule 144A
under the Securities Act. As a condition of the purchase of the Outstanding
Notes by the Initial Purchasers, the Company and the Guarantors entered into the
Registration Rights Agreement with the Initial Purchasers, which requires, among
other things, that the Company and the Guarantors file with the Commission a
registration statement under the Securities Act with respect to an offer by the
Company to the holders of the Outstanding Notes to issue and deliver to such
holders, in exchange for Outstanding Notes, a like principal amount of Exchange
Notes. The Company and the Guarantors are required to use their best efforts to
cause the registration statement relating to the Exchange Offer (the
"Registration Statement") to be declared effective by the Commission under the
Securities Act and commence the Exchange Offer. The Exchange Notes are to be
issued without a restrictive legend, and based on interpretations by the staff
of the Commission, the Company believes that the Exchange Notes may be reoffered
and resold by a holder that is not an "affiliate" of the Company within the
meaning of Rule 405 under the Securities Act without compliance with the
registration and prospectus delivery provisions of the Securities Act, provided
that the holder is acquiring the Exchange Notes in its ordinary course of
business and is not participating in and has no arrangement or understanding
with any person to participate in the distribution of the Exchange Notes. A copy
of the Registration Rights Agreement has been filed as an exhibit to the
Registration Statement of which this Prospectus is a part. See "-- Resale of
Exchange Notes."
Each broker-dealer that receives Exchange Notes for its own account in
exchange for Outstanding Notes, where such Outstanding Notes were acquired by
such broker-dealer as a result of market-making activities or other trading
activities, must acknowledge that it will deliver a prospectus in connection
with any resale of such Exchange Notes. See "Plan of Distribution."
The term "Holder" with respect to the Exchange Offer means any person in
whose name the Outstanding Notes are registered on the books of the Company or
any other person who has obtained a properly completed bond power from the
registered holder.
TERMS OF THE EXCHANGE OFFER
Upon the terms and subject to the conditions set forth in this Prospectus
and in the Letter of Transmittal, the Company will accept any and all
Outstanding Notes validly tendered and not withdrawn prior to 5:00 p.m., E.D.T.,
on the Expiration Date. On the Exchange Date, the Company will issue $1,000
principal amount of Exchange Notes in exchange for $1,000 principal amount of
Outstanding Notes accepted in the Exchange Offer. Holders may tender some or all
of their Outstanding Notes pursuant to the Exchange Offer. However, Outstanding
Notes may be tendered only in integral multiples of $1,000.
The form and terms of the Exchange Notes are the same as the form and terms
of the Outstanding Notes except that (i) the Exchange Notes have been registered
under the Securities Act and hence will not bear legends restricting the
transfer thereof and (ii) the holders of the Exchange Notes will not be entitled
to certain rights under the Registration Rights Agreement. The Exchange Notes
will evidence the same debt as the Outstanding Notes and will be entitled the
benefits of the Indenture.
As of the date of this Prospectus, $100.0 million aggregate principal
amount of the Outstanding Notes was outstanding and registered in the name of
Cede & Co., as nominee for the Depositary. The Company has fixed the close of
business of September 17, 1998, as the record date for the Exchange Offer for
purposes of determining the persons to whom this Prospectus and the Letter of
Transmittal will be mailed initially.
Holders of Outstanding Notes do not have any appraisal or dissenters'
rights under the General Corporation Law of Delaware or the Indenture in
connection with the Exchange Offer. The Company intends to conduct the Exchange
Offer in accordance with the applicable requirements of the Exchange Act and the
rules and regulations of the Commission thereunder, including Rule 14e-1
thereunder.
21
<PAGE> 28
The Company shall be deemed to have accepted validly tendered Outstanding
Notes when, as, and if the Company has given oral or written notice thereof to
the Exchange Agent. The Exchange Agent will act as agent for the tendering
Holders for the purpose of receiving the Exchange Notes from the Company.
If any tendered Outstanding Notes are not accepted for exchange because of
an invalid tender, the occurrence of certain other events set forth herein or
otherwise, the certificates for any such unaccepted Outstanding Notes will be
returned, without expense, to the tendering Holder thereof as promptly as
practicable after the Expiration Date.
Holders who tender Outstanding Notes in the Exchange Offer will not be
required to pay brokerage commissions or fees or, subject to the instructions in
the Letter of Transmittal, transfer taxes with respect to the exchange of
Outstanding Notes pursuant to the Exchange Offer. The Company will pay all
charges and expenses, other than transfer taxes in certain circumstances, in
connection with the Exchange Offer. See "-- Fees and Expenses."
INTEREST ON THE EXCHANGE NOTES
Interest on the Exchange Notes will accrue at a rate of 10 7/8% per annum
and will be payable semi-annually in arrears on January 1 and July 1 of each
year, commencing January 1, 1999. Interest on the Exchange Notes will accrue
from the most recent date to which interest has been paid on the Outstanding
Notes or, if no interest has been paid, from the date of original issuance of
the Outstanding Notes.
PROCEDURES FOR TENDERING
Only a Holder of Outstanding Notes may tender such Outstanding Notes in the
Exchange Offer. To tender in the Exchange Offer, a Holder must complete, sign,
and date the Letter of Transmittal, or a facsimile thereof, have the signatures
thereon guaranteed if required by the Letter of Transmittal and mail or
otherwise deliver such Letter of Transmittal or such facsimile, together with
the Outstanding Notes and any other required documents, to the Exchange Agent
prior to 5:00 p.m., E.D.T., on the Expiration Date. The Company is not asking
any Holder for a proxy, and no Holder is requested to send the Company a proxy.
To be tendered effectively, the Outstanding Notes, Letter of Transmittal, and
other required documents must be received by the Exchange Agent at the address
set forth below under "-- Exchange Agent" prior to 5:00 p.m., E.D.T., on the
Expiration Date. Delivery of the Outstanding Notes may be made by book-entry
transfer in accordance with the procedures described below. Confirmation of such
book-entry transfer must be received by the Exchange Agent prior to the
Expiration Date.
By executing the Letter of Transmittal, each Holder will make to the
Company the representations set forth below in the second paragraph under the
heading "-- Resale of Exchange Notes."
The tender by a Holder and the acceptance thereof by the Company will
constitute agreement between such Holder and the Company in accordance with the
terms and subject to the conditions set forth herein and in the Letter of
Transmittal.
THE METHOD OF DELIVERY OF OUTSTANDING NOTES AND THE LETTER OF TRANSMITTAL
AND ALL OTHER REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT THE ELECTION AND
RISK OF THE HOLDER. INSTEAD OF DELIVERY BY MAIL, IT IS RECOMMENDED THAT HOLDERS
USE AN OVERNIGHT OR HAND DELIVERY SERVICE. IN ALL CASES, SUFFICIENT TIME SHOULD
BE ALLOWED TO ASSURE DELIVERY TO THE EXCHANGE AGENT BEFORE THE EXPIRATION DATE.
NO LETTER OF TRANSMITTAL OR OUTSTANDING NOTES SHOULD BE SENT TO THE COMPANY.
HOLDERS MAY REQUEST THEIR RESPECTIVE BROKERS, DEALERS, COMMERCIAL BANKS, TRUST
COMPANIES, OR NOMINEES TO EFFECT THE ABOVE TRANSACTIONS FOR SUCH HOLDERS.
Any beneficial owner whose Outstanding Notes are registered in the name of
a broker, dealer, commercial bank, trust company, or other nominee and who
wishes to tender should contact the registered Holder promptly and instruct such
registered Holder to tender on such beneficial owner's behalf.
22
<PAGE> 29
Signatures on the Letter of Transmittal or a notice of withdrawal, as the
case may be, must be guaranteed by an Eligible Institution (as defined below)
unless the Outstanding Notes tendered pursuant thereto are tendered (i) by a
registered Holder who has not completed the box entitled "Special Delivery
Instructions" on the Letter of Transmittal or (ii) for the account of an
Eligible Institution. In the event that signatures on a Letter of Transmittal or
a notice of withdrawal, as the case may be, are required to be guaranteed, such
guarantee must be by a member firm of a registered national securities exchange
or of the National Association of Securities Dealers, Inc., a commercial bank or
trust company having an office or correspondent in the United States or an
"eligible guarantor institution" within the meaning of Rule 17Ad-15 under the
Exchange Act (an "Eligible Institution").
If the Letter of Transmittal is signed by a person other than the
registered holder of any Outstanding Notes listed therein, such Outstanding
Notes must be endorsed or accompanied by a properly completed bond power, signed
by such registered holder as such registered holder's name appears on such
Outstanding Notes with the signature thereon guaranteed by an Eligible
Institution.
If the Letter of Transmittal or any Outstanding Notes or bond powers are
signed by trustees, executors, administrators, guardians, attorneys-in-fact,
officers of corporations, or others acting in a fiduciary or representative
capacity, such persons should so indicate when signing, and unless waived by the
Company, evidence satisfactory to the Company of their authority to so act must
be submitted with the Letter of Transmittal.
The Company understands that the Exchange Agent will make a request
promptly after the date of this Prospectus to establish accounts with respect to
the Exchange Notes at the Depositary (the "Book-Entry Transfer Facility") for
the purpose of facilitating the Exchange Offer, and subject to the establishment
thereof, any financial institution that is a participant in the Book-Entry
Transfer Facility's system may make book-entry delivery of the Outstanding Notes
by causing such Book-Entry Transfer Facility to transfer such Outstanding Notes
into the Exchange Agent's account with respect to the Outstanding Notes in
accordance with the Book-Entry Transfer Facility's procedures for such transfer.
Although delivery of the Outstanding Notes may be effected through book-entry
transfer into the Exchange Agent's account at the Book-Entry Transfer Facility,
an appropriate Letter of Transmittal properly completed and duly executed with
any required signature guarantee and all other required documents must in each
case be transmitted to and received or confirmed by the Exchange Agent at its
address set forth below on or prior to the Expiration Date, or, if the
guaranteed delivery procedures described below are complied with, within the
time period provided under such procedures; provided, however, that a
participant in the Book-Entry Transfer Facility's book-entry system may, in
accordance with the Book-Entry Transfer Facility's Automated Tender Offer
Program procedures and in lieu of physical delivery to the Exchange Agent of a
Letter of Transmittal, electronically acknowledge its receipt of, and agreement
to be bound by, the terms of the Letter of Transmittal. Delivery of documents to
the Book-Entry Transfer Facility does not constitute delivery to the Exchange
Agent.
All questions as to the validity, form, eligibility (including time of
receipt), acceptance, and withdrawal of tendered Outstanding Notes will be
determined by the Company in its sole discretion, which determination will be
final and binding. The Company reserves the absolute right to reject any and all
Outstanding Notes not properly tendered or any Outstanding Notes the Company's
acceptance of which would, in the opinion of counsel for the Company, be
unlawful. The Company also reserves the right to waive any defects,
irregularities, or conditions of tender as to particular Outstanding Notes. The
Company's interpretation of the terms and conditions of the Exchange Offer
(including the instructions in the Letter of Transmittal) will be final and
binding on all parties. Unless waived, any defects or irregularities in
connection with tenders of Outstanding Notes must be cured within such time as
the Company shall determine. Although the Company intends to notify Holders of
defects or irregularities with respect to tenders of Outstanding Notes, neither
the Company, the Exchange Agent nor any other person shall incur any liability
for failure to give such notification. Tenders of Outstanding Notes will not be
deemed to have been made until such defects or irregularities have been cured or
waived. Any Outstanding Notes received by the Exchange Agent that are not
properly tendered and as to which the defects or irregularities have not been
cured or waived will be returned by the Exchange Agent to the tendering Holders,
unless otherwise provided in the Letter of Transmittal, as soon as practicable
following the Expiration Date.
23
<PAGE> 30
Each broker-dealer that receives Exchange Notes for its own account in
exchange for Outstanding Notes, where such Outstanding Notes were acquired by
such broker-dealer as a result of market-making activities or other trading
activities, must acknowledge that it will deliver a prospectus in connection
with any resale of such Exchange Notes. See "Plan of Distribution."
GUARANTEED DELIVERY PROCEDURES
Holders who wish to tender their Outstanding Notes and (i) whose
Outstanding Notes are not immediately available, (ii) who cannot deliver their
Outstanding Notes, the Letter of Transmittal, or any other required documents to
the Exchange Agent, or (iii) who cannot complete the procedures for book-entry
transfer, prior to the Expiration Date, may effect a tender if:
(a) the tender is made through an Eligible Institution;
(b) prior to the Expiration Date, the Exchange Agent receives from
such Eligible Institution a properly completed and duly executed Notice of
Guaranteed Delivery (by facsimile transmission, mail or hand delivery)
setting forth the name and address of the Holder, the certificate number(s)
of such Outstanding Notes, and the principal amount of Outstanding Notes
tendered, stating that the tender is being made thereby and guaranteeing
that, within five Nasdaq Stock Market trading days after the Expiration
Date, the Letter of Transmittal (or facsimile thereof), together with the
certificate(s) representing the Outstanding Notes (or a confirmation of
book-entry transfer of such Outstanding Notes into the Exchange Agent's
account at the Book-Entry Transfer Facility), and any other documents
required by the Letter of Transmittal, will be deposited by the Eligible
Institution with the Exchange Agent; and
(c) such properly completed and executed Letter of Transmittal (or
facsimile thereof), as well as the certificate(s) representing all tendered
Outstanding Notes in proper form for transfer (or a confirmation of
book-entry transfer of such Outstanding Notes into the Exchange Agent's
account at the Book-Entry Transfer Facility), and all other documents
required by the Letter of Transmittal, are received by the Exchange Agent
within five Nasdaq Stock Market trading days after the Expiration Date.
Upon request to the Exchange Agent, a Notice of Guaranteed Delivery will be
sent to Holders who wish to tender their Outstanding Notes according to the
guaranteed delivery procedures set forth above.
WITHDRAWAL OF TENDERS
Except as otherwise provided herein, tenders of Outstanding Notes may be
withdrawn at any time prior to 5:00 p.m., E.D.T., on the Expiration Date.
To withdraw a tender of Outstanding Notes in the Exchange Offer, a written
or facsimile transmission notice of withdrawal must be received by the Exchange
Agent at its address set forth herein prior to 5:00 p.m., E.D.T., on the
Expiration Date. Any such notice of withdrawal must (i) specify the name of the
person having deposited the Outstanding Notes to be withdrawn (the "Depositor"),
(ii) identify the Outstanding Notes to be withdrawn (including the certificate
number(s) and principal amount of such Outstanding Notes, or, in the case of
Outstanding Notes transferred by book-entry transfer, the name and number of the
account at the Book-Entry Transfer Facility to be credited), (iii) be signed by
the Holder in the same manner as the original signature on the Letter of
Transmittal by which such Outstanding Notes were tendered (including any
required signature guarantees) or be accompanied by documents of transfer
sufficient to have the Trustee with respect to the Outstanding Notes register
the transfer of such Outstanding Notes into the name of the person withdrawing
the tender, (iv) specify the name in which any such Outstanding Notes are to be
registered, if different from that of the Depositor, and (v) if applicable
because the Outstanding Notes have been tendered pursuant to book-entry
procedures, specify the name and number of the participant's account at the
Book-Entry Transfer Facility to be credited, if different from that of the
Depositor. All questions as to the validity, form, and eligibility (including
time of receipt) of such notices will be determined by the Company, whose
determination shall be final and binding on all parties. Any Outstanding Notes
so withdrawn will be deemed not to have been validly tendered for purposes of
the Exchange Offer and no Exchange Notes will be
24
<PAGE> 31
issued with respect thereto unless the Outstanding Notes so withdrawn are
validly retendered. Any Outstanding Notes which have been tendered but which are
not accepted for exchange, will be returned to the Holder thereof without cost
to such Holder as soon as practicable after withdrawal, rejection of tender, or
termination of the Exchange Offer. Properly withdrawn Outstanding Notes may be
retendered by following one of the procedures described above under "--
Procedures for Tendering" at any time prior to the Expiration Date.
EXCHANGE AGENT
The State Street Bank and Trust Company of California, N.A., has been
appointed as Exchange Agent for the Exchange Offer. Questions and requests for
assistance, requests for additional copies of this Prospectus or of the Letter
of Transmittal and requests for Notice of Guaranteed Delivery should be directed
to the Exchange Agent addressed as follows:
<TABLE>
<S> <C>
State Street Bank and Trust Company of California,
N.A. By Facsimile: (213) 362-7357
633 West Fifth Street, 12th floor Confirm by Telephone: (213) 362-7300
Los Angeles, California 90071
Attention: Corporate Trust Administration
</TABLE>
FEES AND EXPENSES
The expenses of soliciting tenders pursuant to the Exchange Offer will be
borne by the Company. The principal solicitation is being made by mail; however,
additional solicitation may be made by telegraph, telephone, facsimile, or in
person by officers and regular employees of the Company and its affiliates.
The Company has not retained any dealer-manager in connection with the
Exchange Offer and will not make any payments to brokers or others soliciting
acceptances of the Exchange Offer. The Company, however, will pay the Exchange
Agent reasonable and customary fees for its services and registration expenses,
including fees and expenses of the Trustee, filing fees, blue sky fees, and
printing and distribution expenses.
The Company will pay all transfer taxes, if any, applicable to the exchange
of the Outstanding Notes pursuant to the Exchange Offer. If, however,
certificates representing the Exchange Notes or the Outstanding Notes for the
principal amounts not tendered or accepted for exchange are to be delivered to,
or are to be issued in the name of, any person other than the person signing the
Letter of Transmittal, or if a transfer tax is imposed for any reason other than
the exchange of the Outstanding Notes pursuant to the Exchange Offer, then the
amount of any such transfer taxes (whether imposed on the registered holder or
any other person) will be payable by the tendering Holder.
ACCOUNTING TREATMENT
The Exchange Notes will be recorded at the same carrying value as the
Outstanding Notes, which is face value, less a discount, as reflected in the
Company's accounting records on the Exchange Date. Accordingly, no gain or loss
for accounting purposes will be recognized. The expenses of the Exchange Offer
will be amortized over the term of the Exchange Notes.
RESALE OF EXCHANGE NOTES
Based on an interpretation by the staff of the Commission set forth in
no-action letters issued to third parties, the Company believes that Exchange
Notes issued pursuant to the Exchange Offer in exchange for Outstanding Notes
may be offered for resale, resold, and otherwise transferred by any holder of
such Exchange Notes (other than any such holder which is an "affiliate" of the
Company within the meaning of Rule 405 under the Securities Act) without
compliance with the registration and prospectus delivery provisions of the
Securities Act, provided that such Exchange Notes are acquired in the ordinary
course of such holder's business and such holder does not intend to participate
and has no arrangement or understanding with any person to participate in the
distribution of such Exchange Notes. Any holder who tenders in the Exchange
25
<PAGE> 32
Offer with the intention to participate, or for the purpose of participating, in
a distribution of the Exchange Notes may not rely on the position of the staff
of the Commission enunciated in Exxon Capital Holdings Corporation and Morgan
Stanley & Co., Incorporated, or similar no-action letters, but rather must
comply with the registration and prospectus delivery requirements of the
Securities Act in connection with any resale transaction. In addition, any such
resale transaction should be covered by an effective registration statement
containing the selling security holders information required by Item 507 of
Regulation S-K of the Securities Act. Each broker-dealer that receives Exchange
Notes for its own account in exchange for Outstanding Notes, where such
Outstanding Notes were acquired by such broker-dealer as a result of market-
making activities or other trading activities, must acknowledge that it will
deliver a prospectus in connection with any resale of such Exchange Notes. See
"Plan of Distribution."
By tendering in the Exchange Offer, each Holder will represent to the
Company that, among other things, (i) the Exchange Notes acquired pursuant to
the Exchange Offer are being obtained in the ordinary course of business of the
person receiving such Exchange Notes, whether or not such person is a Holder,
(ii) neither the Holder nor any such other person is engaged in or intends to
engage in, or has an arrangement or understanding with any person to participate
in the distribution of such Exchange Notes, and (iii) the Holder and such other
person acknowledge that if they participate in the Exchange Offer for the
purpose of distributing the Exchange Notes (a) they must, in the absence of an
exemption therefrom, comply with the registration and prospectus delivery
requirements of the Securities Act in connection with any resale of the Exchange
Notes and cannot rely on the no-action letters referenced above and (b) failure
to comply with such requirements in such instance could result in such Holder
incurring liability under the Securities Act for which such Holder is not
indemnified by the Company. Further, by tendering in the Exchange Offer, each
Holder that may be deemed an "affiliate" (as defined under Rule 405 of the
Securities Act) of the Company will represent to the Company that such Holder
understands and acknowledges that the Exchange Notes may not be offered for
resale, resold, or otherwise transferred by that Holder without registration
under the Securities Act or an exemption therefrom.
As set forth above, affiliates of the Company are not entitled to rely on
the foregoing interpretations of the staff of the Commission with respect to
resales of the Exchange Notes without compliance with the registration and
prospectus delivery requirements of the Securities Act.
SHELF REGISTRATION STATEMENT
If the Company is not permitted to consummate the Exchange Offer because
the Exchange Offer is not permitted by any applicable law or applicable
interpretation of the Commission or the staff of the Commission, the Company and
the Guarantors have agreed to file with the Commission and use their best
efforts to have declared effective and keep continuously effective for up to two
years a registration statement that would allow resales of Outstanding Notes
owned by such holders.
OTHER
Participation in the Exchange Offer is voluntary and holders should
carefully consider whether to accept. Holders of the Outstanding Notes are urged
to consult their financial and tax advisors in making their own decision on what
action to take.
The Company may in the future seek to acquire untendered Outstanding Notes
in open market or privately negotiated transactions, through subsequent exchange
offers or otherwise. The Company, however, has no present plans to acquire any
Outstanding Notes that are not tendered in the Exchange Offer or to file a
registration statement to permit resales of any untendered Outstanding Notes.
26
<PAGE> 33
USE OF PROCEEDS
This Exchange Offer is intended to satisfy certain of the Company's
obligations under the Purchase Agreement and the Registration Rights Agreement
with respect to the Outstanding Notes. The Company will not receive any cash
proceeds from the issuance of the Exchange Notes offered hereby. In
consideration for issuing the Exchange Notes contemplated in this Prospectus,
the Company will receive Outstanding Notes in like principal amount, the form
and terms of which are substantially similar to the form and terms of the
Exchange Notes, except as otherwise described herein. The Outstanding Notes
surrendered in exchange for Exchange Notes will be retired and canceled and
cannot be reissued. Accordingly, issuance of the Exchange Notes will not result
in any increase or decrease in the indebtedness of the Company.
27
<PAGE> 34
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 STC and European Touch II contained elsewhere in this
Prospectus. In November 1996, Styling Technology Corporation commenced
operations with an initial public offering and the simultaneous acquisition of
four businesses. Styling Technology Corporation has acquired seven other
businesses since November 1996. The unaudited pro forma consolidated financial
information reflects the results of the Company (which includes all of the
Company's acquisitions, including the Recent Acquisitions, other than the
acquisition of a controlling interest in Framesi USA). 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 Initial 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, other than the acquisition of a controlling interest in Framesi
USA) as if each acquisition, the Initial 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 Consolidated Statements
of Operations may not be indicative of actual results that would have been
achieved if the Initial 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 Initial Offering, the application of net proceeds therefrom, and the
acquisitions described above.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1998
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
RECENT ACQUISITIONS(a)
--------------------------------
EUROPEAN EUROPEAN PRO FORMA
STC(A) PRO FINISH TOUCH II TOUCH ADJUSTMENTS PRO FORMA
------- ---------- -------- -------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Net sales............................ $35,299 $2,723 $4,152 $2,420 $ -- $44,594
Cost of sales........................ 15,492 1,388 1,615 776 -- 19,271
------- ------ ------ ------ ------- -------
Profit Margin........................ 19,807 1,335 2,537 1,644 -- 25,323
Selling, general, and administrative
expenses........................... 11,909 1,023 765 991 (209)(b) 14,479
------- ------ ------ ------ ------- -------
Income from operations............... 7,898 312 1,772 653 209 10,844
Interest (expense) income............ (2,628) -- 61 -- (3,051)(c) (5,618)
------- ------ ------ ------ ------- -------
Income before extraordinary item and
taxes.............................. 5,270 312 1,833 653 (2,842) 5,226
Provision for income taxes........... 2,266 86 -- (128)(d) 2,224
------- ------ ------ ------ ------- -------
Income before extraordinary item..... 3,004 226 1,833 653 (2,714) 3,002
Extraordinary item, net of tax
benefit............................ (1,091) -- -- -- -- (1,091)
------- ------ ------ ------ ------- -------
Net income........................... $ 1,913 $ 226 $1,833 $ 653 $(2,714) $ 1,911
======= ====== ====== ====== ======= =======
Diluted weighted average shares
outstanding........................ 4,356
=======
Diluted Earnings Per Share
Income before extraordinary item.......................................................... $ 0.69
Extraordinary item, net of tax benefit.................................................... (0.25)
-------
Net income................................................................................ $ 0.44
=======
</TABLE>
28
<PAGE> 35
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
RECENT ACQUISITIONS(a)
--------------------------------
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 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
Income before extraordinary item.............................................................................. $ 0.97
Extraordinary item, net....................................................................................... --
--------
Net income.................................................................................................... $ 0.97
========
</TABLE>
29
<PAGE> 36
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA
(a) For the year ended December 31, 1997, includes the results of ABBA from
June 1997 and Clean + Easy/ One Touch from December 1997. The recent
acquisitions columns for the year ended December 31, 1997 include the
results of operations of Pro Finish, European Touch II, and European Touch
for the period from January 1, 1997 to December 31, 1997. For the six
months ended June 30, 1998, includes the results of Pro Finish from May
1998 and European Touch II and European Touch from June 1998. The recent
acquisitions columns for the six months ended June 30, 1998 include the
results of operations of Pro Finish, European Touch II, and European Touch
for the period from January 1, 1998 through the date of acquisition.
(b) Reflects the net impact in selling, general, and administrative expenses of
an aggregate of (i) approximately $617,000 and $2.3 million for the six
months ended June 30, 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 $408,000 and $1.9 million for the six months ended June 30,
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 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, and JDS acquisitions, which is not
deductible for income tax reporting purposes.
(e) Reflects 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.
30
<PAGE> 37
SELECTED HISTORICAL AND PRO FORMA CONSOLIDATED FINANCIAL DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The Unaudited Pro Forma Consolidated Statement of Operations Data for the
years ended December 31, 1997, and the six months ended June 30, 1997 and 1998
is derived from the historical financial statements of STC, and the historical
financial statements of the businesses acquired in the Recent Acquisitions,
other than the acquisition of a controlling interest in Framesi USA. Certain of
these historical financial statements have been audited by Arthur Andersen LLP
and are included elsewhere in this Prospectus. The Unaudited Pro Forma
Consolidated Statement of Operations Data reflects the Initial 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, other than the acquisition of a controlling interest in Framesi
USA) as if the Initial Offering, the application of the net proceeds therefrom,
and each of the acquisitions occurred at the beginning of each period presented
(including certain adjustments to the historical financial statements that are
more fully described in the notes to the Unaudited Pro Forma Consolidated
Financial Data contained elsewhere in this Prospectus). The Unaudited Pro Forma
Consolidated Statement of Operations Data referred to above may not be
indicative of actual results that would have been achieved if the Initial
Offering, the application of the net proceeds therefrom, and the acquisitions
had occurred on the dates indicated or of 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 Initial Offering
and the application of the net proceeds therefrom, and the acquisitions
described above. The table also presents certain historical actual consolidated
financial information. The consolidated statement of operations data for the
period from November 27, 1996 to December 31, 1996 and for the year ended
December 31, 1997 are derived from the consolidated financial statements of the
Company, which have been audited by Arthur Andersen LLP, independent public
accountants, as indicated in their report included elsewhere herein. The
unaudited consolidated financial information as of June 30, 1998 and for the six
months ended June 30, 1997 and 1998, are derived from the Company's unaudited
interim consolidated financial statements but, in the opinion of management,
reflect all adjustments, consisting of only normal recurring adjustments.
Included also in the historical financial data below is financial information
for the four initial companies, which were acquired by the Company. Concurrently
with its initial public offering in November, 1996, the Company acquired four
businesses, and commenced operations. Selected historical financial data is
provided for these four businesses: Gena Laboratories, Inc. ("Gena"), Body
Drench, a division of Designs by Norvell, Inc. ("Body Drench"), JDS
Manufacturing Co., Inc. ("JDS"), and Kotchammer Investments, Inc. ("KII"). The
historical financial information for Gena and Body Drench for each of the three
years in the periods ending February 29, 1996 and December 31, 1995,
respectively, was derived from their financial statements, which have been
audited by Arthur Andersen LLP and appear elsewhere in this Prospectus
statement. The historical financial information for JDS for each of the two
years in the period ended September 30, 1995 was derived from its financial
statements which have been audited by Arthur Andersen LLP and appear elsewhere
in this Prospectus. The historical financial information for KII for the year
ended December 31, 1995 was derived from their financial statements, which have
been audited by Arthur Andersen LLP and appear elsewhere in this registration
statement. The historical financial information for Gena, Body Drench, JDS, and
KII as of and for the six-and nine-month periods ended August 31, 1996, June 30,
1996, June 30, 1996, and June 30, 1996, respectively, and for the six- and
nine-month periods ended August 31, 1995, June 30, 1995, June 30, 1995, and June
30, 1995, respectively, was derived from their unaudited financial statements
appearing elsewhere in this Prospectus. The historical financial information for
earlier periods for Gena, Body Drench, JDS, and KII not specifically referenced
above, was derived from each company's unaudited financial statements not
included in this Prospectus. The Selected Consolidated Historical and Pro Forma
Data provided below should be read in conjunction with "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and the
historical Consolidated Financial Statements and notes thereto of STC and
European Touch II appearing elsewhere in this Prospectus.
31
<PAGE> 38
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED JUNE 30,
DECEMBER 31, ------------------
1997 1997 1998
------------ ------- -------
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA -- COMPANY PRO FORMA:
Net sales................................................ $84,935 $41,243 $44,594
Gross profit(1).......................................... 47,057 23,483 25,323
Selling, general, and administrative expenses(2)......... 29,417 15,364 14,479
Income from operations(3)................................ 18,440 8,119 10,844
Income before extraordinary item and income taxes........ 7,205 2,501 5,226
Net income(4)............................................ 3,991 1,313 1,911
Diluted earnings per share............................... .97 .32 .44
Diluted weighted average shares outstanding.............. 4,113 4,124 4,356
</TABLE>
<TABLE>
<CAPTION>
NOVEMBER 27, SIX MONTHS ENDED
1996 TO YEAR ENDED JUNE 30,
DECEMBER 31, DECEMBER 31, ------------------
1996 1997 1997 1998
------------ ------------ ------- -------
<S> <C> <C> <C> <C>
ACTUAL CONSOLIDATED STATEMENT OF OPERATIONS
DATA:
Net sales................................... $1,083 $38,108 $14,916 $35,299
Cost of sales............................... 571 16,756 6,480 15,492
------ ------- ------- -------
Gross profit................................ 512 21,352 8,436 19,807
Selling, general, and administrative
expenses................................. 737 12,201 4,731 11,909
------ ------- ------- -------
Income (loss) from operations............... $ (225) $ 9,151 $ 3,705 $ 7,898
====== ======= ======= =======
Income (loss) before extraordinary item..... $ (151) $ 4,207 $ 2,085 $ 3,004
Extraordinary item, net of tax benefit...... -- (1,377) -- (1,091)
------ ------- ------- -------
Net income (loss)........................... $ (151) $ 2,830 $ 2,085 $ 1,913
====== ======= ======= =======
OTHER DATA:
Ratio of earnings to fixed charges(5)....... -- 4.0x 21.3x 3.0x
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED FEBRUARY 28, AUGUST 31,
-------------------------------------------- -----------------
1992 1993 1994 1995 1996 1995 1996
------ ------ ------ ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA --
GENA:
Net sales.................... $5,906 $6,537 $6,426 $ 7,524 $ 8,384 $4,336 $4,705
Gross profit................. 2,642 2,868 3,146 3,360 3,565 2,039 2,160
Selling, general, and
administrative expenses... 2,416 2,570 2,744 2,964 3,033 1,573 1,454
Income from operations....... 226 298 402 396 532 466 706
Net income................... 180 204 278 232 317 279 442
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
-------------------------------------------- -----------------
1991 1992 1993 1994 1995 1995 1996
------ ------ ------ ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA --
BODY DRENCH(6):
Net sales.................... $5,111 $6,234 $6,653 $11,138 $11,871 $8,250 $6,586
Gross profit................. 2,567 2,667 2,614 4,796 5,444 3,686 3,121
Selling, general, and
administrative expenses... 1,827 2,285 2,055 4,076 4,883 2,971 2,402
Income from operations....... 740 382 559 720 561 714 719
Net income................... 740 382 328 446 294 416 440
</TABLE>
32
<PAGE> 39
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEARS ENDED SEPTEMBER 30, JUNE 30,
-------------------------------------------- ---------------
1991 1992 1993 1994 1995 1995 1996
------ ------ ------ ------- ------- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA --
JDS:
Net sales.................... $3,843 $3,819 $3,799 $ 3,578 $ 3,368 $2,592 $2,339
Gross profit................. 2,172 2,149 2,054 2,114 2,019 1,561 1,389
Selling, general, and
administrative expenses... 2,071 2,191 2,092 2,170 2,046 1,549 1,393
Income (loss) from
operations................ 101 (42) (38) (56) (26) 12 (4)
Net income (loss)............ 16 (20) (29) (16) 9 23 (3)
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
-------------------------------------------- -----------------
1991 1992 1993 1994 1995 1995 1996
------ ------ ------ ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA --
KII:
Net sales.................... -- -- $ 102 $ 1,999 $ 1,558 $ 777 $ 736
Gross profit................. -- -- 60 1,014 846 405 393
Selling, general, and
administrative expenses... -- -- 87 1,040 891 476 329
Income (loss) from
operations................ -- -- (27) (26) (45) (71) 64
Net income (loss)............ -- -- (32) (104) (135) (117) 25
</TABLE>
<TABLE>
<CAPTION>
STYLING GENA BODY DRENCH JDS KII
AS OF AS OF AS OF AS OF AS OF
MARCH 31, 1998 AUGUST 31, 1996 JUNE 30, 1996(7) JUNE 30, 1996 JUNE 30, 1996
-------------- --------------- ---------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital............ $13,238 $2,315 $ 329 $333 $ 345
Total assets............... 94,286 3,975 4,221 728 622
Long-term debt, including
current maturities...... 53,843 291 -- 432 610
Total stockholders'
equity.................. 30,057 3,065 582 27 (200)
</TABLE>
<TABLE>
<CAPTION>
AS OF
JUNE 30,
1998
--------
ACTUAL
--------
<S> <C>
UNAUDITED CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents................................. $ 11,657
Working capital........................................... 37,987
Total assets.............................................. 143,594
Long-term debt, including current maturities.............. 102,208
Total stockholders' equity................................ 30,678
</TABLE>
- ---------------
(1) Reflects the adjustment to cost of sales related to a reduction of
third-party manufacturing costs negotiated in connection with the Company's
acquisitions of ABBA and the Clean + Easy/One Touch product lines, and
realized following the closing of such acquisitions, for the year ended
December 31, 1997, and the six months ended June 30, 1997, of approximately
$3.4 million and $1.8 million, respectively. No adjustment is included for
the six months ended June 30, 1998 as the actual operations for these
divisions are included in the operations of STC for this period.
(2) Reflects the net impact in selling, general, and administrative expenses of
an aggregate of (i) approximately $2.3 million, $800,000, and $617,000 for
the year ended December 31, 1997, and the six months ended June 30, 1997 and
1998, respectively, to reflect the elimination of salaries and benefits of
specific individuals not continuing with the combined companies, and (ii)
approximately $1.9 million, $1.1 million, and $408,000 for the year ended
December 31, 1997, and the six months ended June 30, 1997 and 1998,
respectively, to reflect the additional amortization of goodwill associated
with each acquisition.
(3) Represents cash interest expense on the Notes plus amortization of related
financing costs.
(4) Reflects adjustment to the income tax provision based on applying the
statutory income tax rates of each company, adjusted for goodwill
amortization from the acquisitions of ABBA, Gena, and JDS, which is not
deductible for income tax reporting purposes. Also includes an adjustment to
remove the extraordinary item for the year ended December 31, 1997.
(5) The ratio of earnings to fixed charges has been calculated by dividing
income before income taxes and fixed charges by fixed charges. Fixed charges
for this purpose include interest expense, amortization of deferred
financing costs and one-third of operating lease payments (the portion
deemed to be representative of the interest factor).
(6) Body Drench has historically operated as a division of another company.
Total stockholders' equity data represents the total company's owners' net
investment in the division to be acquired by Styling.
33
<PAGE> 40
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
"Selected Consolidated Financial Data," "Unaudited Pro Forma Consolidated
Financial Data," and the Consolidated Financial Statements of STC and notes
thereto, which are contained elsewhere in this Offering Memorandum.
INTRODUCTION
The Company develops, produces, and markets professional salon products,
including hair care, nail care, and skin and body care products as well as salon
appliances and sundries. The Company sells its products primarily to salon
product and tanning supply distributors, beauty supply outlets, and salon chains
and, to a lesser extent, directly to spas, resorts, health and country clubs,
and hair, nail, and tanning salons throughout the United States as well as in
Canada, Europe, Latin America, Australia, and Asia. The Company offers a
diversified line of well-established, brand-name professional salon products.
The Company was founded in June 1995 and commenced operations on November
26, 1996. On that date, simultaneous with the consummation of an initial public
offering, the Company acquired four professional salon products businesses (the
"Acquired Businesses), Gena, Body Drench, IDS and KII. In March 1997, the
Company acquired a line of premium tanning products from Creative Laboratories,
Inc. marketed under the "Suntopia" brand name. In June 1997, the Company
acquired ABBA, a producer and marketer of an aromatherapy-based line of hair
products, for $20.0 million. In December 1997, the Company acquired the Clean +
Easy and One Touch product lines of Inverness Corporation and Inverness (UK)
Limited, consisting of salon and retail hair removal appliances and products
marketed under the Clean + Easy and One Touch brand names, for $20.0 million. In
May 1998, the Company completed the Pro Finish Acquisition for $5.0 million. The
Company acquired European Touch and European Touch II for $25.0 million
concurrently with the consummation of the Initial Offering. In August 1998, the
Company acquired a controlling interest in Framesi USA for $30.0 million.
Framesi USA holds exclusive license rights for the sale in the United States and
most of Latin America of Framesi(R) hair color products along with its
complementary Biogenol(R) line of shampoos, conditioners, and styling products.
Except for the historical information contained herein, the discussion in
this registration statement contains or may contain forward-looking statements
that involve risks and uncertainties. The Company's actual results could differ
materially from those discussed here. Factors that could cause or contribute to
such differences include, but are not limited to, those factors discussed under
"Risk Factors." Historical results are not necessarily indicative of operating
results for any future period.
RESULTS OF OPERATIONS -- STYLING TECHNOLOGY CORPORATION
SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO THREE MONTHS ENDED JUNE 30, 1997
The Company earned net income of $1.6 million, or $0.36 per diluted share,
for the three months ended June 30, 1998 before a non-cash extraordinary charge
related to the refinancing discussed below, as compared to net income of $1.0
million, or $0.25 per diluted share, for the corresponding period during 1997.
After the extraordinary item, net income for the three months ended June 30,
1998 was $474,000, or $0.11 per diluted share. For the six months ended June 30,
1998, the Company earned net income of $3.0 million, or $0.69 per diluted share,
before the extraordinary item compared to net income of $2.1 million, or $0.51
per diluted share, for the corresponding period during 1997. After the
extraordinary item, net income for the six months ended June 30, 1998 was $1.9
million, or $0.44 per diluted share. The Company attributes the improvement in
net income during the three months ended June 30, 1998 primarily to the
contributions of brands acquired subsequent to June 1, 1997 (ABBA, Clean + Easy
/ One Touch, Pro Finish and the European Touch companies), as well as to growth
in the Company's existing operations.
34
<PAGE> 41
Net Sales
Net sales amounted to $19.1 million for the three months ended June 30,
1998, compared to net sales of $7.4 million for the three months ended June 30,
1997. Net sales amounted to $35.3 million for the six months ended June 30,
1998, compared to net sales of $14.9 million for the six months ended June 30,
1998. The $11.7 million, or 156%, increase in sales for the quarter ended June
30, 1998 compared to the quarter ended June 30, 1997 was due primarily to the
additions of ABBA and Clean + Easy / One Touch, acquired in June and December,
1997, respectively. Sales growth was also attributable to strong internal growth
in the Company's existing brands, which was in excess of 10% on a consolidated
basis during the quarter ended June 30, 1998 for brands managed by the Company
for more than one year. In particular, the Company's ABBA brand experienced
significant sales growth as compared to 1997 due to favorable changes in its
exclusive distribution network, which resulted in a shift to distributors with
stronger salon distribution capabilities. The Company's Gena brand experienced
strong sales growth as compared to the same period in 1997 primarily as a result
of new packaging introduced during 1998 for its line of pedicure products. In
addition, Styling Research experienced significant sales growth due primarily to
improvements in brand management personnel.
Cost of Sales
Cost of sales amounted to $8.4 million, or 44% as a percentage of net
sales, for the three months ended June 30, 1998, compared to $3.2 million, or
44% as a percentage of net sales, for the three months ended March 31, 1997.
Cost of sales amounted to $15.5 million, or 44% as a percentage of net sales,
for the six months ended June 30, 1998, compared to $6.5 million, or 43% as a
percentage of net sales, for the six months ended June 30, 1997. As a result of
the foregoing, the Company realized gross profit for the three months ended June
30, 1998 of $10.6 million, or 56%, compared to $4.2 million, or 56%, realized by
the Company during the corresponding period in 1997. For the six months ended
June 30, 1998, the Company realized gross profit of $19.8 million, or 56%,
compared to $8.4 million, or 57%, for the corresponding period in 1997. The
Company's ability to sustain this favorable gross margin percentage is
attributable primarily to maintaining the cost of goods levels negotiated with
third-party suppliers during 1997. In addition, gross margins associated with
the ABBA and Clean + Easy / One Touch brands, after renegotiation of pricing
with third-party manufacturers for ABBA and cost savings from the shift from
domestic to offshore manufacturing for the Clean + Easy / One Touch hair removal
appliances, were generally consistent with the consolidated gross margin of the
Company's existing brands.
Selling, General, and Administrative Expenses
Selling, general, and administrative expenses were $6.5 million for the
three months ended June 30, 1998 compared to $2.3 million for the three months
ended June 30, 1997. Selling, general, and administrative expenses were $11.9
million for the six months ended June 30, 1998 compared to $4.7 million for the
six months ended June 30, 1997. The increase in selling, general, and
administrative expenses was due primarily to expenses added as result of the
ABBA and Clean + Easy / One Touch acquisitions as well as increased selling,
general, and administrative expenses incurred to strengthen the Company's
infrastructure to support its acquisition and growth strategy. Selling, general,
and administrative expenses, as a percentage of net sales, increased to 34% of
net sales for the three months ended June 30, 1998 compared to 31% of net sales
for the three months ended June 30, 1997 as the Company controlled increases in
selling, general, and administrative expenses at levels commensurate with
increases in sales, partially offset by planned increases in expenses to support
growth, as discussed above. Selling, general, and administrative expenses, as a
percentage of net sales, were 34% for the six months ended June 30, 1998 as
compared with 32% for the six months ended June 30, 1997.
Extraordinary Item
A portion of the proceeds from the Offering discussed under "Liquidity and
Capital Resources" below was used to repay the Previous Credit Facility. The
Company reported an extraordinary, non-cash charge of
35
<PAGE> 42
approximately $1.1 million, net of taxes, or $0.25 per diluted share, related to
unamortized financing costs associated with the Previous Credit Facility.
Provision for Income Taxes
The provision for income taxes for the three months ended June 30, 1998
amounted to $1.2 million, which represents an effective tax rate of
approximately 43%, compared with a provision of $713,000, which represents an
effective tax rate of approximately 41% for the three months ended June 30,
1997. The provision for income taxes for the six months ended June 30, 1998
amounted to $2.3 million, which represents an effective tax rate of
approximately 43%, compared with a provision of $1.4 million, which represents
an effective tax rate of approximately 41%, for the six months ended June 30,
1998. The higher effective tax rate for the three and six months ended June 30,
1998 is attributable primarily to the income tax effect of goodwill associated
with the ABBA acquisition, which is not deductible for income tax purposes.
Income from Operations and Earnings Before Interest, Taxes, Depreciation &
Amortization (EBITDA)
Income from operations was $4.1 million for the three months ended June 30,
1998, compared to $1.9 million for the three months ended June 30, 1997. Income
from operation was $7.9 million for the six months ended June 30, 1998, compared
to $3.7 million for the six months ended June 30, 1997. Earnings before
interest, taxes, depreciation, and amortization (EBITDA) was $5.0 million for
the three months ended June 30, 1998, compared to $2.2 million for the three
months ended June 30, 1997. Earnings before interest, taxes, depreciation, and
amortization (EBITDA) was $10.0 million for the six months ended June 30, 1998,
compared to $4.3 million for the six months ended June 30, 1997. During the
quarter ended June 30, 1998, the Company completed the acquisitions of Pro
Finish and the European Touch companies. On a pro forma basis, if these
acquisitions had taken place on January 1, 1998, EBITDA would have been $6.5
million for the three months ended June 30, 1998 and $12.7 million for the six
months ended June 30, 1998. EBITDA is not intended to represent net cash
provided by operating activities as defined by generally accepted accounting
principles and should not be considered as an alternative to net income as an
indicator of operating performance or to net cash provided by operating
activities as a measure of liquidity. The Company believes EBITDA is a measure
commonly reported and widely used by analysts, investors, and other interested
parties who monitor business performance. Accordingly, this information has been
disclosed herein to permit a more complete comparative analysis of the Company's
operating performance.
RESULTS OF OPERATIONS -- STYLING TECHNOLOGY CORPORATION
YEAR ENDED DECEMBER 31, 1997
Net Sales
Net sales amounted to $38.1 million for the year ended December 31, 1997
compared to combined net sales for the Acquired Businesses of $23.0 million for
the year ended December 31, 1996. The $15.1 million, or 65.7%, increase in sales
was partly the result of increased sales of STC's Body Drench and Gena product
lines as compared to the sales achieved by the individual Acquired Businesses in
the same period during 1996. In addition, net sales for the year ended December
31, 1997 include the operating results of ABBA from June 26, 1997 to December
31, 1997 and the operating results of Clean + Easy/One Touch from December 1,
1997 to December 31, 1997.
Cost of Sales
Cost of sales amounted to $16.8 million, or 44% as a percentage of net
sales, for the year ended December 31, 1997. Cost of sales as a percentage of
net sales substantially decreased from the 53% reported for the period from
November 27, 1996 to December 31, 1996, a percentage which was consistent with
the combined cost of sales as a percentage of net sales incurred by the Acquired
Businesses prior to their acquisition by STC. The Company anticipates using the
opportunities created by each of its acquisitions in seeking to reduce cost of
sales as a percentage of net sales in future periods by eliminating duplicative
direct costs as well as negotiating lower manufacturing and raw materials costs
with suppliers.
36
<PAGE> 43
Gross Profit
As a result of the foregoing, STC realized gross profit for the year ended
December 31, 1997 of $21.4 million, or 56% as a percentage of net sales. This
improvement in gross margin percentage over that reported by the individual
Acquired Businesses prior to their acquisition is attributable primarily to the
negotiation of reduced product costs in December 1996 with the primary supplier
of STC's Body Drench product line and the consolidation of warehousing and
production functions of the Gena, Alpha 9, and Omni product lines at STC's
Duncanville, Texas facility. STC has also achieved substantial reductions in
cost of goods through negotiation with third party suppliers to ABBA and Clean +
Easy/One Touch.
Selling, General, and Administrative Expenses
Selling, general, and administrative expenses were $12.2 million, or 32% as
a percentage of net sales, for the year ended December 31, 1997, which
represents a significant improvement over such expenses incurred by the
individual business acquired prior to their acquisition by STC. This improvement
in selling, general, and administrative expenses as a percentage of net sales in
primarily attributable to the elimination of duplicative management and other
personnel, duplicative selling and distribution costs, the consolidation of
certain accounting, human resources, and other administrative functions of the
Acquired Businesses, and subsequent acquisitions, and is partially offset by
non-cash goodwill amortization resulting from acquisitions and increased costs
of operating as a public company.
Extraordinary Item
In connection with the acquisition of the Clean + Easy/One Touch product
lines discussed above, STC entered into the Existing Credit Facility, as
discussed under "Liquidity and Capital Resources" below. The Existing Credit
Facility replaced the previous credit facility negotiated in connection with the
acquisition of ABBA. STC reported an extraordinary, non-cash charge of
approximately $1.4 million, net of income taxes, or $0.33 per diluted share,
related to the write-off of unamortized financing costs associated with its
previous credit facility.
Net Income
STC earned net income of $4.2 million, or $1.02 per diluted share, for the
year ended December 31, 1997 before the extraordinary item discussed above.
After the extraordinary item, net income for the year ended December 31, 1997
was $2.8 million, or $0.69 per diluted share. These results mark significant
improvement over the operating results of the Acquired Businesses prior to their
acquisition. STC attributes the improvement in net income during the year ended
December 31, 1997 primarily to the successful implementation of a key component
of its business strategy, the enhancement of operating efficiencies of the
Acquired Businesses, and subsequent acquisitions. Prior year financial
information for the Acquired Businesses presented and discussed herein excludes
the operating results of ABBA and the Clean + Easy/One Touch and Suntopia
product lines, which were acquired during 1997.
Income from Operations and Earnings Before Interest, Taxes, Depreciation
and Amortization (EBITDA)
Income from operations was $9.2 million for the year ended December 31,
1997. EBITDA was approximately $11.0 million for the year ended December 31,
1997. EBITDA is not intended to represent cash flows from operations as defined
by GAAP and should not be considered as (i) an alternative to net income, (ii)
an indicator of the Company's operating performance, or (iii) a measure of
liquidity. The Company believes EBITDA is a measure commonly reported and widely
used by analysts, investors, and other interested parties that monitor
performance of companies that employ a consolidation or "roll-up" strategy.
Accordingly, this information has been disclosed herein to permit a more
complete comparative analysis of the Company's operating performance relative to
other consolidators.
37
<PAGE> 44
RESULTS OF OPERATIONS -- STYLING TECHNOLOGY CORPORATION
PERIOD FROM NOVEMBER 27, 1996 TO DECEMBER 31, 1996
Net Sales
Net sales amounted to approximately $1.1 million for the period from
November 27, 1996 to December 31, 1996. The level of sales during this period is
not indicative of anticipated future sales levels or historical sales of the
Acquired Businesses, as STC's primary focus during this period was the
consolidation of the Acquired Businesses.
Cost of Sales
Cost of sales was approximately $600,000 for the period from November 27,
1996 to December 31, 1996. Cost of sales as a percentage of net sales was 53%
for this period, which is consistent with the combined cost of sales as a
percentage of net sales incurred by the Acquired Businesses, prior to their
acquisition.
Gross Profit
As a result of the foregoing, gross profit amounted to approximately
$500,000 for the period from November 27, 1996 to December 31, 1996.
Selling, General, and Administrative Expenses
Selling, general, and administrative expenses were approximately $700,000
for the period from November 27, 1996 to December 31, 1996, which is generally
consistent with the level of selling, general, and administrative expenses
incurred by the Acquired Businesses on a combined basis, prior to their
acquisition. During this period, STC was focused primarily on the process of
integrating the operations of the Acquired Businesses.
Net Loss
Net loss for STC was approximately $200,000 for the period from November
27, 1996 to December 31, 1996.
RESULTS OF OPERATIONS -- GENA
SIX MONTHS ENDED AUGUST 31, 1996 COMPARED TO SIX MONTHS ENDED AUGUST 31, 1995
Net Sales
Net sales increased 8.5% to $4.7 million in the six months ended August 31,
1996 from $4.3 million in the six months ended August 31, 1995. The increase in
net sales was attributable to an increase in sales volume generated by
promotional efforts, primarily through price discounts. The increase in sales
was also attributable to the increased sales of the paraffin spa equipment and
products.
Cost of Sales
Cost of sales, as a percentage of net sales, increased to 54.1% in the six
months ended August 31, 1996 as compared with 53.0% in the six months ended
August 31, 1995. The increase was primarily attributable to increased costs for
certain raw materials associated with production of the paraffin spa equipment.
Gross Profit
Gross profit increased 5.9% to $2.2 million in the six months ended August
31, 1996 from $2.0 million for the six months ended August 31, 1995.
38
<PAGE> 45
Selling, General, and Administrative Expenses
Selling, general, and administrative expenses decreased 7.6% to $1.5
million in the six months ended August 31, 1996 from $1.6 million in the six
months ended August 31, 1995. The decrease was primarily attributable to a
reduction of the Gena's advertising costs related to trade publications and
other promotional services. In addition, Gena's expenses associated with
education and trade show efforts decreased in the six months ended August 31,
1996.
Net Income
Net income increased 58.4% to $0.4 million in the six months ended August
31, 1996 from $0.3 million in the six months ended August 31, 1995.
TWELVE MONTHS ENDED FEBRUARY 29, 1996 COMPARED TO TWELVE MONTHS ENDED FEBRUARY
28, 1995
Net Sales
Net sales increased 11.4% to $8.4 million in the 12 months ended February
29, 1996 from $7.5 million in the 12 months ended February 28, 1995. The
increase in net sales was attributable to growth in sales of existing products,
which consisted primarily of increased acceptance of the paraffin spa product
line that was introduced in February 1993 and the continued sales growth for the
MRX product line that was acquired in September 1994.
Cost of Sales
Cost of sales, as a percentage of net sales, increased to 57.5% in the 12
months ended February 29, 1996 as compared with 55.3% in the 12 months ended
February 28, 1995. The increase was attributable to additional costs incurred to
produce the new paraffin spa equipment, which has a higher cost of sales, as a
percentage of net sales, at approximately 64.0%. Additionally, cost of sales, as
a percentage of net sales, on the new MRX product line, introduced in September
1994, was approximately 60.0%, which was also higher than Gena's other product
lines.
Gross Profit
As a result of the foregoing, gross profit increased 6.1% to $3.6 million
in the 12 months ended February 29, 1996 from $3.4 million in the 12 months
ended February 28, 1995.
Selling, General, and Administrative Expenses
Selling, general, and administrative expenses remained relatively constant
at $3.0 million in the 12 months ended February 29, 1996 and 1995. The slight
increase in selling, general, and administrative expenses was attributable to an
increase in selling and promotional costs primarily related to increased sales
of the paraffin spa product. Additionally, Gena was offering greater promotional
incentives to generate additional sales resulting in increased selling costs.
The above increases were partially offset by reduced travel expenses and smaller
management bonuses than had been paid in the previous period.
Net Income
Net income increased 36.6% to $0.3 million in the 12 months ended February
29, 1996 from $0.2 million in the 12 months ended February 28, 1995.
TWELVE MONTHS ENDED FEBRUARY 28, 1995 COMPARED TO TWELVE MONTHS ENDED FEBRUARY
28, 1994
Net Sales
Net sales increased 17.1% to $7.5 million in the 12 months ended February
28, 1995 from $6.4 million in the 12 months ended February 28, 1994. The
increase was primarily a result of increased sales of Gena's paraffin spa
product line which had been introduced in February 1993, and the acquisition of
Design Classic(TM)
39
<PAGE> 46
in February 1994, a manufacturer of fiberglass nail products. Gena also acquired
the MRX product line, an all-purpose antiseptic and hydrating lotion, in
September 1994 and began to ship substantial quantities in fiscal 1995. Total
sales related to the Design Classic and MRX product lines were approximately
$1.0 million in 1995.
Cost of Sales
Cost of sales, as a percentage of net sales, increased to 55.3% in the 12
months ended February 28, 1995 as compared with 51.0% in the 12 months ended
February 28, 1994 as a result of additional labor, machine retooling and
material costs incurred to produce the new paraffin spa product, which has lower
gross margins than Gena's other products. In addition, Gena incurred certain
one-time packaging and other costs to integrate their newly acquired Design
Classic product line. Gena also experienced an increase in certain raw materials
costs.
Gross Profit
As a result of the foregoing, gross profit increased 6.8% to $3.4 million
in the 12 months ended February 28, 1995 from $3.1 million in the 12 months
ended February 28, 1994.
Selling, General, and Administrative Expenses
Selling, general, and administrative expenses increased 8.0% to $3.0
million in the 12 months ended February 28, 1995 from $2.7 million in the 12
months ended February 28, 1994 as a result of the increase in selling and
promotional costs related to the introduction and promotion of the paraffin spa
product line. In addition, Gena incurred an increase in costs related to the
acquisition of Design Classic, which includes amortization of intangible assets,
and increased personnel costs required to support the new product.
Net Income
Net income decreased 16.5% to $0.2 million in the 12 months ended February
28, 1995 from $0.3 million in the 12 months ended February 28, 1994.
RESULTS OF OPERATIONS -- BODY DRENCH
SIX MONTHS ENDED JUNE 30, 1996 COMPARED TO SIX MONTHS ENDED JUNE 30, 1995
Net Sales
Net sales for the six months ended June 30, 1996 decreased 20.2% to $6.6
million compared to $8.2 million for the six months ended June 30, 1995. The
decrease in net sales during the first six months of 1995 was primarily related
to difficulty in obtaining inventory from third party manufacturers in the six
months ended June 30, 1996 due to cash flow difficulties experienced by Body
Drench's parent. This caused Body Drench to forego potential sales due to its
inability to deliver product to customers in time for the Spring 1996 tanning
season. The Contemporary product line is comprised of various lotions and creams
to be used in conjunction with the indoor tanning process. Sales of the
Contemporary product line, which was introduced in October 1994, declined in the
first six months of 1996, and was partially offset by the increased sales of its
new product releases Tan FX and Tan EX and the Body Bath lotion product. Upon
completion of the Acquisitions and implementation of the Company's strategy (see
"Business -- Strategy"), management believes that the decline in sales will not
represent a continuing material trend.
Cost of Sales
Cost of sales, as a percentage of net sales, decreased to 52.6% for the six
months ended June 30, 1996 as compared with 55.3% for the six months ended June
30, 1995. This decrease was due primarily to a greater percentage of net sales
in the 1996 period relating to the Tan FX and Tan EX products, which carried
lower production and packaging costs as compared to the Contemporary product
line.
40
<PAGE> 47
Gross Profit
As a result of the foregoing, gross profit decreased 15.3% to $3.1 million
in the six months ended June 30, 1996 from $3.7 million in the six months ended
June 30, 1995.
Selling, General, and Administrative Expenses
Selling, general, and administrative expenses decreased 19.2% to $2.4
million for the six months ended June 30, 1996 compared to $3.0 million for the
six months ended June 30, 1995. The decrease was attributable primarily to a
decrease in advertising related expenses in salaries and commissions, as Body
Drench did not introduce as many new products in 1996 and eliminated several
sales and administrative positions.
Net Income
Net income remained relatively constant at $0.4 million in the six months
ended June 30, 1996 and 1995.
TWELVE MONTHS ENDED DECEMBER 31, 1995 COMPARED TO TWELVE MONTHS ENDED DECEMBER
31, 1994
Net Sales
Net sales in 1995 increased 6.6% to $11.9 million compared to $11.1 million
in 1994. The increase in net sales was due to the release of the new
Contemporary product line introduced in October 1994. During 1995, Body Drench
realized a full year of Contemporary sales as compared to only a partial year in
1994. The increase in net sales was also impacted by the release of the Tan FX
and Tan EX products, and the Contemporary products introduced in the fourth
quarter of 1995.
Cost of Sales
Cost of sales, as a percentage of net sales, decreased to 54.1% for the 12
months ended December 31, 1995 as compared with 56.9% for the 12 months ended
December 31, 1994. This decrease was due primarily to the introduction of the
Contemporary product line during late 1994 which carried a lower raw material
cost in relation to net sales as compared to products sold during 1995.
Gross Profit
As a result of the foregoing, gross profit increased 13.5% to $5.4 million
in the 12 months ended December 31, 1995 from $4.8 million in the 12 months
ended December 31, 1994.
Selling, General, and Administrative Expenses
Selling, general, and administrative expenses increased 19.8% to $4.9
million in 1995 compared to $4.1 million in 1994. The increase was attributable
to the continued increase of shipping costs in proportion to sales levels due to
the growing number of backorders from the Contemporary product line. Backorders
resulted primarily from the Body Drench's inability to produce sufficient
product to meet customer orders due to cash flow shortages at DBN and Body
Drench. Additionally, advertising expense increased by approximately 1.0% of net
sales as a result of the heavy promotional efforts in various magazines,
catalogs and brochures with the release of the new Contemporary product line.
Body Drench also incurred higher personnel costs through the addition of several
marketing and sales professionals.
Net Income
Net income decreased 34.1% to $0.3 million in the 12 months ended December
31, 1995 compared to $0.4 million in the 12 months ended December 31, 1994.
41
<PAGE> 48
TWELVE MONTHS ENDED DECEMBER 31, 1994 COMPARED TO TWELVE MONTHS ENDED DECEMBER
31, 1993
Net Sales
Net sales increased 67.4% to $11.1 million in the 12 months ended December
31, 1994 compared to $6.7 million in the 12 months ended December 31, 1993. The
increase in net sales was attributable to management's decision to expand the
distribution network to include several beauty supply distributors. This
expansion of distribution channels included establishing a dedicated sales force
to promote Body Drench's products to the tanning and beauty industry. In
addition, Body Drench introduced the Contemporary product line in October 1994.
Cost of Sales
Cost of sales, as a percentage of net sales, decreased to 56.9% for the 12
months ended December 31, 1994 as compared with 60.7% for the 12 months ended
December 31, 1993. This decrease was due primarily to lower purchasing costs as
a result of the higher volume of purchases during 1994. In addition, Body Drench
incurred lower overhead and labor costs as a percentage of revenues, as a result
of increased production efficiencies due to higher utilization of pre-packaged,
ready to ship products.
Gross Profit
As a result of the foregoing, gross profit increased 83.5% to $4.8 million
in the 12 months ended December 31, 1994 from $2.6 million in the 12 months
ended December 31, 1993.
Selling, General, and Administrative Expenses
Selling, general, and administrative expenses increased 98.3% to $4.1
million in 1994 compared to $2.1 million in 1993. The increase in selling,
general, and administrative expenses related to additional sales and
administrative positions to support the corresponding increase in sales. In
addition, Body Drench incurred significant up front costs of promotional
literature, including new catalogs, brochures and price sheets, related to the
introduction of the Contemporary product line introduced in October 1994. Body
Drench also incurred a higher level of freight charges in proportion to sales
levels due to significant number of backorders, resulting from inventory
shortages, which caused additional shipment costs to customers.
Net Income
Net income increased 36.0% to $0.4 million in 1994 compared to $0.3 million
in 1993.
RESULTS OF OPERATIONS -- JDS
NINE MONTHS ENDED JUNE 30, 1996 COMPARED TO NINE MONTHS ENDED JUNE 30, 1995
Net Sales
Net sales decreased 9.8% to $2.3 million for the nine months ended June 30,
1996 compared to $2.6 million for the nine months ended June 30, 1995. The
decrease was caused by a decline in its customer base as a result of the
acquisition of several JDS' customers by a large beauty supply company that is
not a customer of JDS. Upon completion of the Acquisitions and implementation of
the Company's strategy (see "Business -- Strategy"), management believes that
the decline in sales will not represent a continuing material trend.
Cost of Sales
Cost of sales, as a percentage of net sales, increased slightly to 40.6% in
the nine months ended June 30, 1996 as compared with 39.8% in the nine months
ended June 30, 1995. This increase was due to significant costs incurred for raw
materials as a result of the introduction of a new product.
42
<PAGE> 49
Gross Profit
As a result of the foregoing, gross profit decreased 11.0% to $1.4 million
in the nine months ended June 30, 1996 from $1.6 million in the nine months
ended June 30, 1995.
Selling, General, and Administrative Expenses
Selling, general, and administrative expenses decreased 10.1% to $1.4
million in the nine months ended June 30, 1996 from $1.5 million in the nine
months ended June 30, 1995. The decrease related primarily to the elimination of
warehouse personnel, as a result of JDS' effort to reduce overhead costs.
Net Income (Loss)
Net loss was ($3,094) in the nine months ended June 30, 1996 compared to
net income of $23,275 in the nine months ended June 30, 1995.
TWELVE MONTHS ENDED SEPTEMBER 30, 1995 COMPARED TO TWELVE MONTHS ENDED
SEPTEMBER 30, 1994
Net Sales
Net sales decreased 5.9% to $3.4 million for the 12 months ended September
30, 1995 compared to $3.6 million for the 12 months ended September 30, 1994.
The decrease was primarily a result of increased competition from several new
products in the market that impacted JDS' market share. Upon completion of the
Acquisitions and implementation of the Company's strategy (see
"Business -- Strategy"), management believes that the decline in sales will not
represent a continuing material trend.
Cost of Sales
Cost of sales, as a percentage of net sales, decreased to 40.1% in the 12
months ended September 30, 1995 as compared with 40.9% in the 12 months ended
September 30, 1994. The increase was a result of obtaining more favorable
freight terms with its shipping contractors.
Gross Profit
As a result of the foregoing, gross profit decreased 4.5% to $2.0 million
in the 12 months ended September 30, 1995 from $2.1 million in the 12 months
ended September 30, 1994.
Selling, General, and Administrative Expenses
Selling, general, and administrative expenses decreased 5.7% to $2.0
million for the 12 months ended September 30, 1995 compared to $2.2 million for
the 12 months ended September 30, 1994. The decrease was primarily a result of a
decrease in promotional costs, as no new products were introduced during 1995,
and a decrease in management salaries resulting from an effort to reduce
overhead costs.
Net Income (Loss)
Net income was $8,574 in the 12 months ended September 30, 1995 compared to
a net loss of ($16,494) in the 12 months ended September 30, 1994.
TWELVE MONTHS ENDED SEPTEMBER 30, 1994 COMPARED TO TWELVE MONTHS ENDED
SEPTEMBER 30, 1993
Net Sales
Net sales decreased 5.8% to $3.6 million for the 12 months ended September
30, 1994 compared to $3.8 million for the 12 months ended September 30, 1993.
The decrease was primarily a result of a decrease in JDS' customer base as a
result of several of their customers ceasing operations. The largest of these
companies comprised approximately $100,000 of JDS' sales in 1993.
43
<PAGE> 50
Cost of Sales
Cost of sales, as a percentage of net sales, decreased to 40.9% in the 12
months ended September 30, 1994 as compared with 45.9% in the 12 months ended
September 30, 1993. The decrease was primarily a result of more favorable
purchasing terms achieved due to a change in its raw materials source.
Gross Profit
Gross profit increased 2.9% from $2.0 million for the 12 months ended
September 30, 1993 to $2.1 million for the twelve months ended September 30,
1994.
Selling, General, and Administrative Expenses
Selling, general, and administrative expenses increased 3.7% to $2.2
million in the 12 months ended September 30, 1994 compared to $2.1 million in
the 12 months ended September 30, 1993. The increase was partly a result of an
increase in promotional costs associated with the introduction of a new brand of
nail enhancement products. The remaining increase resulted primarily from the
addition of a new regional manager and a new sales incentive program.
Net Loss
Net loss decreased 43.1% to $16,494 in the 12 months ended September 30,
1994 compared to $29,000 in the 12 months ended September 30, 1993.
RESULTS OF OPERATIONS -- KII
SIX MONTHS ENDED JUNE 30, 1996 COMPARED TO SIX MONTHS ENDED JUNE 30, 1995
Net Sales
Net sales decreased 5.3% to $0.7 million in the six months ended June 30,
1996 compared to $0.8 million in the six months ended June 30, 1995. The
decrease in net sales was primarily attributable to a reduction in the customer
base and decreased promotional efforts.
Cost of Sales
Cost of sales, as a percentage of net sales, decreased to 46.6% in the six
months ended June 30, 1996 as compared with 47.9% in the six months ended June
30, 1995. This decrease was due primarily to a continued increase in purchasing
costs related to KII's international freight costs.
Gross Profit
Gross profits remained relatively constant at $0.4 million for the six
months ended June 30, 1995 and 1996.
Selling, General, and Administrative Expenses
Selling, general, and administrative expenses decreased 30.9% to $0.3
million in the six months ended June 30, 1996 compared to $0.5 million in the
six months ended June 30, 1995. The decrease in selling, general, and
administrative expenses was primarily attributable to a reduction in commission
expenses related to the decrease in sales as well as lower promotional costs.
Net Income (Loss)
Net income was $24,765 in the six months ended June 30, 1996 compared to a
net loss of ($116,610) in the six months ended June 30, 1995.
44
<PAGE> 51
TWELVE MONTHS ENDED DECEMBER 31, 1995 COMPARED TO TWELVE MONTHS ENDED DECEMBER
31, 1994
Net Sales
Net sales in the 12 months ended December 31, 1995 decreased 22.1% to $1.6
million compared to $2.0 million in the 12 months ended December 31, 1994. As
part of its overall strategy, KII acquired a division of Redken in December
1993. During 1994, Redken reduced its customer base by 17 distributors, which
had a direct impact on sales for KII. Upon completion of the Acquisitions and
implementation of the Company's strategy (see "Business -- Strategy"),
management believes that the decline in sales will not represent a continuing
material trend.
Cost of Sales
Cost of sales, as a percentage of net sales, increased to 45.7% in the 12
months ended December 31, 1995 as compared with 49.3% in the 12 months ended
December 31, 1994. The increase was primarily attributable to increased freight
and duty costs associated with international purchases.
Gross Profit
As a result of the foregoing, gross profit decreased 16.6% to $0.8 million
in the 12 months ended December 31, 1995 from $1.0 million in the 12 months
ended December 31, 1994.
Selling, General, and Administrative Expenses
Selling, general, and administrative expenses decreased 14.3% to $0.9
million in the 12 months ended December 31, 1995 compared to $1.0 million in the
12 months ended December 31, 1994. The decrease in selling, general, and
administrative expenses was attributable to a decrease in salaries and
commissions through the elimination of several sales positions.
Net Loss
Net loss increased to $134,919 in the 12 months ended December 31, 1995
from $72,000 in the 12 months ended December 31, 1994.
QUARTERLY FINANCIAL INFORMATION AND SEASONALITY
<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30,
1997 1997 1997 1997 1998 1998
--------- -------- ------------- ------------ --------- --------
<S> <C> <C> <C> <C> <C> <C>
Net sales........................ $ 7,479 $ 7,437 $10,669 $12,523 $16,225 $19,074
Gross profit..................... 4,245 4,191 5,802 7,114 9,183 10,624
Selling, general, and
administrative................. (2,398) (2,333) (3,574) (3,896) (5,395) (6,514)
Income from operations........... 1,847 1,858 2,228 3,218 3,788 4,110
Income before extraordinary
item........................... 1,054 1,031 828 1,294 1,439 1,565
Extraordinary item, net.......... -- -- -- (1,377) -- (1,091)
Net income (loss)................ 1,054 1,031 828 (83) 1,439 474
Diluted EPS before extraordinary
item........................... $ 0.26 $ 0.25 $ 0.20 $ 0.31 $ 0.34 0.36
Diluted EPS after extraordinary
item........................... 0.26 0.25 0.20 (0.02) 0.34 0.11
</TABLE>
The Company has experienced moderate seasonality in quarterly operating
results due mainly to the effect of the indoor tanning season (generally
December through June) on the operating results of the Body Drench and Suntopia
product lines. The Company expects the seasonal effect of Body Drench and
Suntopia sales to lessen over time as the Company continues its acquisition
strategy.
45
<PAGE> 52
LIQUIDITY AND CAPITAL RESOURCES
During the six months ended June 30, 1998, internal sales growth resulted
in an increase in the Company's investment in accounts receivable of $3.7
million. In order to support continued sales growth, the Company increased its
investment in inventory by $1.6 million. The Company also used cash from
operations to achieve a net reduction in accounts payable and accrued
liabilities of $2.8 million. The reduction of accounts payable and accrued
liabilities during the period relates primarily to the payment of liabilities
assumed in the Clean + Easy / One Touch acquisition as well as related accrued
acquisition and financing costs. As a result of these factors, which offset net
income of $1.9 million and noncash expenditures of $1.9 million, the Company
recorded net cash used in operations of $4.5 million for the six months ended
June 30, 1998.
The Company repaid $825,000 of term loan amortization under its Previous
Credit Facility and utilized net proceeds of $10.3 million from its line of
credit to finance acquisitions and working capital requirements during the six
months ended June 30, 1998. In June 1998, the Company completed the Offering.
The senior subordinated notes due 2008 were priced at 10 7/8% and were sold
pursuant to Rule 144A. The proceeds of the Offering were used to finance the
purchase price and related costs of acquiring all of the issued and outstanding
capital stock of the European Touch companies as well as to repay all amounts
outstanding under the Previous Credit Facility. As a result, net cash provided
by financing activities for the quarter amounted to $46.2 million and, along
with cash on hand, was utilized to fund net cash used in investing activities of
$33.1 million as well as operating cash requirements as discussed above.
As a result of the foregoing, the Company's working capital position
increased to $38.0 million at June 30, 1998 from $13.9 million at December 31,
1997.
In connection with the Offering, the Company entered into a five-year,
$50.0 million senior credit facility (the Credit Facility) with a group of banks
for whom NationsBank, N.A. and Bank of Boston, N.A. acted as co-agents. The
Credit Facility consists of two separate loans: a $25.0 million acquisition term
loan and a $25.0 million revolving line of credit. The interest on the Credit
Facility is paid quarterly and the interest rate is determined by the base rate
(the Base Rate) as defined in the credit agreement. The Base Rate is equal to
the higher of (a) the sum of (i) 0.50% plus (ii) the Federal Funds Rate on such
day plus (iii) the Applicable Base Rate Margin or (b) the sum of (i) the Prime
Rate on such day plus (ii) the Applicable Base Rate Margin. Principal payments
on the acquisition term loan are paid quarterly beginning in March 2000.
Principal payments on the revolving line of credit are due on the maturity date.
The acquisition term loan and the revolving line of credit mature in June 2003.
The revolving line of credit will be used for working capital purposes. The
Company has the option to convert the interest rates relating to any of the
loans to LIBOR plus 150 to 250 basis points. As of June 30, 1998, there were no
amounts outstanding under the Credit Facility. In August 1998, the Company
borrowed $25.0 million under the acquisition term loan to fund the acquisition
of a controlling interest in Framesi USA. See "Prospectus Summary -- Recent
Acquisitions."
In connection with the Credit Facility, the Company maintains certain
interest rate protection instruments. As of June 30, 1998, the Company has
entered into interest rate swap and interest rate cap agreements to reduce the
impact of changes in interest rates.
The Company's line of credit, current cash resources, and cash from
operations are expected to be sufficient to fund the Company's capital needs
during the next twelve months at its current level of operations, apart from
capital needs resulting from acquisitions. However, the Company may be required
to obtain additional capital to fund its planned growth. The Company plans to
pursue strategic acquisitions to capitalize on the substantial fragmentation and
growth potential existing in the professional salon products industry. The
Company intends to fund its future capital needs through a combination of
current cash resources, cash from operations, bank financing, seller notes
payable, issuance of common stock, and additional public or private debt or
equity financing. The availability of such capital resources cannot be assured
and is dependent upon prevailing market conditions, interest rates, and the
financial condition of the Company. See "Risk Factors -- Leverage."
46
<PAGE> 53
YEAR 2000 COMPLIANCE
Many currently installed computer systems and software products are coded
to accept only two-digit entries in the date code field. Beginning in the year
2000, these date code fields will need to accept four-digit entries to
distinguish 21st century dates from 20th century dates. As a result, computer
systems and software used by many companies may need to be upgraded to comply
with such "Year 2000" requirements. Significant uncertainty exists concerning
the potential effects associated with such compliance. The Company has assessed
and continues to assess the impact the Year 2000 issue will have on its
reporting and operating systems. The Company is addressing the Year 2000 issue
by upgrading to a new release of its key operating and financial software
system, which will be Year 2000 compliant. The Company will test the new system
for Year 2000 compliance when the system is upgraded. In addition, during 1998
the Company intends to assess the impact any Year 2000 compliance problems
suffered by its customers, third-party contract manufacturers, and suppliers may
have on the Company. Although the Company does not anticipate that the Year 2000
issue will have a significant impact on its business, any significant Year 2000
compliance problem of any of the Company, its customers, or its third-party
contract manufacturers or suppliers could have a material adverse effect on the
Company's business, financial condition, and results of operations.
47
<PAGE> 54
BUSINESS
The Company is a leading developer, producer, and marketer of a wide array
of professional salon products, addressing all salon product categories,
including hair care, nail care, and skin and body care products, as well as
salon appliances and sundries. Through strategic acquisitions, the Company has
acquired well-recognized brand names, a strong distribution network, established
marketing and salon industry education programs, and significant production and
sourcing capabilities. For the 12 months ended June 30, 1998, on a pro forma
consolidated basis, the Company generated net sales and EBITDA of $88.3 million
and $25.5 million, respectively.
The Company believes it is the only company that develops, produces, and
markets products in each category of the professional salon products industry
and that its ability to offer customers a "one-stop shop" for brand-name
professional salon products creates a competitive advantage. The Company
currently sells more than 550 products under 17 principal brand names, including
ABBA Pure and Natural Hair Care products, Biogenol hair care products, Body
Drench skin and body care products, Clean + Easy hair removal products, Framesi
hair care products, Gena nail and pedicure products, Kizmit acrylic nail
enhancements, Revivanail nail treatments, and Roffler hair care products. In the
United States, the Company markets its product lines through professional salon
industry distribution channels to more than 2,500 customers, consisting
primarily of salon product and tanning supply distributors (which resell to
beauty and tanning salons), beauty supply outlets, and salon chains. The Company
also markets its products directly to more than 3,000 spas, resorts, and health
and country clubs through its in-house sales force. Internationally, the Company
sells its products primarily through international salon product distributors.
INDUSTRY OVERVIEW
Professional salon products consist of hair care, nail care, and skin and
body care products as well as salon appliances and sundries that are used by
salon professionals in rendering salon services to their clients. Many
professional salon products also are retailed to clients and other customers of
salons, resorts, spas, health and country clubs, and beauty supply outlets,
typically upon the advice of a salon professional who recommends products to
address the client's individual needs.
Professional hair care products include shampoo, conditioner, styling gel,
glaze, mousse, hair spray, permanent, hair relaxer, and hair color products.
Professional nail care products include fiberglass and acrylic nail enhancement
solutions applied by the salon professional in rendering the nail service and
the accessories used by the professional to apply the solutions; natural nail
care and pedicure solutions and accessories; and polishes. Skin and body care
products include body lotions, tanning products, cosmetics, skin moisturizers,
hair removal and depilatory products, and other personal care products (such as
shaving creams and antiperspirants) used by salon professionals in rendering
salon services (such as facials, manicures, pedicures, leg and body waxing,
paraffin therapy, aromatherapy, and thermo-therapy) or available for use by
patrons of tanning salons, spas, resorts, and health and country clubs.
Professional salon appliances and sundries include hair dryers, curling irons,
brushes, furniture, and salonwear (such as capes).
The professional salon products industry has grown significantly during the
last several years. According to industry sources, professional salon industry
revenue (which includes revenue from salon services and the sale of salon
products) for 1996 was approximately $40 billion in the United States and $80
billion worldwide, having grown approximately 10% from the prior year. Industry
sources estimate that there are approximately 127 million client visits to
salons each month and that there are more than 200,000 beauty salons and 1.8
million licensed cosmetologists in the United States. Professional salon
products companies sell their products primarily to regional, full-service salon
product distributors that resell products from multiple manufacturers to salons
and salon professionals. The Company estimates that sales to distributors
represent more than 85% of revenue for professional salon product companies. The
professional salon products industry is highly fragmented. Of the approximately
700 companies selling professional salon products in the United States, most
generate less than $10 million in sales and focus on a single product category.
For example, most companies offering professional salon hair care products do
not also offer nail or skin care products.
48
<PAGE> 55
Professional salon products have two end consumers: the salon professional
who uses them in the performance of salon services and the salon client who
purchases them for personal use. The Company believes salons typically generate
between 10% and 30% of their revenue from retail sales of professional salon
products. As the users and "prescribers" of professional salon products, salon
professionals typically select products on the basis of performance rather than
price. As a result, suppliers of professional salon products focus on educating
distributors and salon professionals on the uses and benefits of their products
and on industry trends. Because these products are "prescribed" by salon
professionals and are sold primarily in connection with the rendering of a
service, professional salon products typically foster strong brand loyalty and
exhibit relative price insensitivity. Consequently, professional salon products
generally command substantially higher profit margins than mass-marketed beauty
products.
BUSINESS STRENGTHS
The Company believes that the following business strengths provide it with
a competitive advantage in the professional salon products industry:
- Premier Brand Names. The Company offers a variety of well-known brands
in all professional salon product categories, including ABBA Pure and
Natural Hair Care, Alpha 9, Biogenol, Body Drench, Clean + Easy, Cosmic,
European Touch, Framesi, Gena, Kizmit, Omni P.O. Professionals Only, One
Touch, Pro Finish, Revivanail, Roffler, SRC, and Suntopia. The Company
believes that the strength of its brand names is based on the reputation
of its products for quality among salon professionals, the performance of
its products, and its focused commitment to the needs of salon
professionals and their clientele. Because of the importance of proven
product performance to salon professionals, they remain extremely loyal
to their favorite brands. The Company's portfolio of well-recognized
brands is a significant driver of sales to distributors, beauty supply
outlets, and salon chains.
- Breadth of Product Offerings. The Company believes that it currently is
the only producer of professional salon products with offerings across
all salon product categories. As the Company has expanded its product
offerings, it has begun to provide distributors, beauty supply outlets,
and salon chains with an increasingly larger percentage of the products
they require to service the needs of salons and salon professionals. The
Company believes the breadth of its product offerings provides it with a
significant competitive advantage by allowing its distributors to
purchase more products from fewer vendors and by enabling the Company to
cross-market its brands and offer tailored lines of products to
distributors, beauty supply outlets, and salon chains. This "one-stop
shop" approach also serves to strengthen the relationship between the
Company and its customers.
- Strong Distribution Network. The Company has established relationships
with top salon product distributors, beauty supply outlets, and salon
chains. Unlike consumer products companies that sell a large percentage
of their products through a concentrated retailer base, the Company sells
its products into highly fragmented distribution channels of more than
2,500 distributors, beauty supply outlets, and salon chains in the United
States and internationally and to more than 3,000 spas, resorts, and
health and country clubs through its in-house sales force. This extensive
distribution network creates a strong base from which the Company can
pursue additional business through cross-marketing of its current and
future brands and new product introductions. The breadth of its
distribution network also enables the Company to penetrate every major
geographical market in the United States and to expand its international
business.
- History of Successful Acquisitions. Since November 1996, the Company has
acquired and successfully integrated seven professional salon products
businesses, not including the Recent Acquisitions. The Company has
integrated acquired distribution channels into its existing operations;
integrated purchasing, production, and marketing efforts; and
consolidated accounting, human resources, and other back office
functions. Acquisitions have been a major factor in enabling the Company
to increase its net sales to $88.3 million, on a pro forma basis for the
latest 12 months (including the Recent Acquisitions), while achieving
significant margin improvement. The Company is developing an
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operating platform to allow it to support an increasing range of
professional salon products as it continues to acquire additional
companies and product lines.
- Favorable Cost Structure. Professional salon products typically command
higher margins and exhibit relative price insensitivity when compared to
their mass-market counterparts. The Company believes that it has been
able to achieve operating margins that exceed industry averages. These
improved operating margins result from the Company's success in utilizing
its increased purchasing power to achieve cost savings; integrating
sourcing and distribution capabilities; eliminating duplicative
facilities, personnel, and administrative functions; and consolidating
sales and marketing and product development, where appropriate. The
Company also is taking advantage of the highly competitive third-party
manufacturing environment to reduce production costs. Pro forma gross
margins improved from 52.4% in 1996 to 56.3% in 1997, and pro forma
EBITDA margins improved from 17.6% in 1996 to 27.0% in 1997.
- Experienced Management Team. The Company has an experienced management
team with significant industry experience. Sam Leopold, the Company's
Chief Executive Officer, has more than 12 years of experience in the
professional salon products industry, including as the owner of a chain
of mall-based retail salons. Other members of the Company's senior
management team have, on average, over 12 years of experience in the
consumer and salon products industry, particularly in the areas of sales,
marketing, and operations. Mr. Leopold beneficially owns approximately
25% of the Company's Common Stock, and each other member of the Company's
senior management team has an equity stake in the Company.
STRATEGY
The Company's objective is to be the leading professional salon products
company in the United States and internationally. In order to achieve this
objective, the Company is pursuing a strategy of continued growth through
acquisitions and internal business expansion. Key elements of this strategy
include the following:
Acquisition Strategy
The Company seeks to acquire professional salon product businesses
possessing complementary salon products with well-recognized brand names and
strong distribution networks and to capitalize on the substantial fragmentation
and growth potential existing in the professional salon products industry. The
Company believes that there are many attractive acquisition candidates in the
professional salon products industry, primarily as a result of the highly
fragmented nature of the industry and the desire of owners for exit strategies.
The Company maintains a disciplined approach to acquisitions and evaluates each
potential acquisition based on the following acquisition goals:
- Continue to Acquire Leading Brands. The Company plans to continue its
strategy of acquiring leading brand names that complement its portfolio
of brands and command strong customer loyalty. By following this
strategy, the Company plans to solidify its position as a leading
supplier of professional salon products and further enhance its
relationships with distributors. Additionally, well-known and
well-respected professional brands are able to command consistently
higher prices than mass-marketed retail brands and lesser known or
respected professional brands.
- Diversify and Strengthen Product Offerings. The Company intends to
acquire companies and product lines that diversify and strengthen its
portfolio of salon products. In this regard, the Company seeks to acquire
complementary products that will enable it to offer multiple brands in
each salon product category and a broader range of products addressing
the various niches within these categories. The Company believes that
this approach will enable it to offer distributors and beauty supply
outlets, which typically carry multiple brands in each category, a more
complete "one-stop shop" for the majority of their salon products.
- Strengthen Distribution Network. The Company intends to acquire
companies and product lines that strengthen its relationships with
domestic and international distributors. By acquiring companies with
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strong distribution, the Company will be in a position to increase sales
by introducing its existing products into new distribution channels and
newly acquired or developed products into existing distribution channels.
- Continue to Pursue Acquisitions at Attractive Cash Flow Multiples. The
Company plans to continue to pursue acquisition candidates at attractive
cash flow multiples. To achieve this goal, the Company evaluates each
acquisition candidate's historical operating results and future earnings
potential, the size and anticipated growth of the market it serves, and
its relative position in that market. The Company seeks to acquire
companies and product lines at acquisition multiples of typically three
to six times adjusted EBITDA.
Internal Growth Strategy
The Company intends to increase revenue and improve margins within its
existing product lines. Elements of its internal growth strategy include the
following:
- Leverage Well-Established Distribution Channels. The Company intends to
leverage its distribution channels by providing distributors with an
increasingly comprehensive array of products. Through management's
existing relationships and those of acquired companies, the Company has
developed and integrated an increasingly extensive distribution network.
The Company believes that offering a growing array of well-known brands
in all salon product categories will further enhance its position as a
key supplier to many of its customers.
- Capitalize on Brand Name Recognition; Line Extensions. The Company
believes the strong brand name recognition of its product lines lends
itself to line extension. For example, ABBA, one of the top brands in the
aromatherapy segment of the hair care category, recently introduced its
Botanical High line of volume therapy hair care products. The Company
believes that the loyalty of salons and salon professionals to strong
brands generally makes them receptive to line extensions that capitalize
on the credibility of those brands. Strong brand names also provide the
Company the opportunity to cross-market established and developing brands
and products.
- Expand Distribution to Salon Chains. The Company is aggressively
targeting sales directly to salon chains, which the Company believes are
underserved by distributors and other salon product companies. The
Company believes that its increasingly diverse product offerings will
enable it to offer salon chains the benefits of one-stop shopping,
centralized single-source ordering, tailored promotional programs, and
dedicated customer service. The Company has formed a sales and marketing
team focused exclusively on further penetrating this underserved segment
of the salon product market.
- Expand Distribution of Existing Products Internationally. The Company
believes significant opportunities exist to increase sales and profits
through the expansion of the international distribution of its products.
Currently, the U.S. market for professional salon products represents
approximately 50% of the worldwide market. In contrast, only
approximately 15% of the Company's pro forma 1997 net sales was generated
outside of the United States. In the past year, the Company has expanded
its international distribution to 38 countries. The Company will continue
to focus on introducing its products into its recently expanded
international distribution channels, which provide access to most
international beauty markets.
- Enhance Operational Efficiencies of Acquired Businesses. To date, the
Company has successfully integrated seven acquired businesses. Following
each acquisition, the Company has enhanced operational efficiency by (i)
eliminating duplicative administrative functions, thereby lowering
overhead expenses, (ii) expanding distribution channels, and (iii) adding
and disseminating further market and product knowledge throughout the
Company's operations. The Company believes that the continued realization
of operational efficiencies will enhance internal growth and
profitability.
- Capitalize on Lifestyle Trends. The Company intends to continue to
capitalize on current lifestyle trends that are favorable to the
professional salon industry. Growing consumer focus on healthy living and
personal indulgences will continue to fuel expansion in the salon/spa
industry, as the demand for
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services such as body treatments and massages increases. Additionally,
the aging of the baby boomers (those born between 1945 and 1964) is
expected to benefit the salon industry.
PRODUCTS
The Company offers products in all salon product categories. The Company
sells more than 600 professional salon hair care, natural nail care and nail
enhancement products, skin and body care products, and salon accessories and
sundries, representing approximately 1,500 stock keeping units ("SKUs"). The
Company believes that the strength of its brand names is based on the reputation
of its products for quality among salon professionals, the performance of its
products, and its focused commitment to the needs of salon professionals and
their clientele. The Company believes these brand names are widely recognized by
salon product distributors and salon professionals and their clients as
high-quality, effective products.
The table below sets forth a description of the Company's principal
products, the brand names under which the products are sold, and the Company's
estimate of approximate percentage of such products sold for professional salon
use and retailed to salon and customers.
<TABLE>
<CAPTION>
% RETAIL
% SALON SALES BY
PRODUCT CATEGORY PRODUCT DESCRIPTION BRAND NAMES USE(1) SALONS(1)
---------------- ------------------- ----------- ------- ---------
<S> <C> <C> <C> <C>
Hair Care Shampoo, conditioner, hair ABBA, Biogenol, Body Drench, 55% 45%
color, and styling and Framesi, Gena, Roffler
finishing aids
Nail Care Natural nail care products, Alpha 9, Cosmic, European 70 30
acrylic and fiberglass nail Touch, Gena, Kizmit, Omni, Pro
enhancement products, nail Finish, Revivanail
treatments, nail polish,
light-bonded nail systems, and
manicure and pedicure solutions
and accessories
Skin and Body Care Moisturizing lotion, indoor and Body Drench, Clean + Easy, 35 65
outdoor tanning products, Gena, One Touch, Suntopia
personal care products,
paraffin waxes, thermo-therapy
treatments, and hair removal
systems and depilatory products
Salon Appliances and Hairdryers, curling irons, European Touch, Maiko, SRC 100 0
Sundries salon footspas, salon pedicure
equipment, salon furniture, and
salonwear (capes/aprons)
</TABLE>
- ---------------
(1) Company estimates
Hair Care Products
The Company offers a variety of hair care products at various price points
under the ABBA, Biogenol, Body Drench, Framesi, Gena and Roffler brands. The
ABBA line, which is marketed under the ABBA Pure and Natural trademark, consists
of highly concentrated, high-quality products. The ABBA line consists of 100%
vegan, aromatherapy inspired, herbal hair care products, using botanical
ingredients. The ABBA line includes shampoo, conditioner, gel, and hair spray
made using a blend of herbal therapy botanicals, tri-molecular proteins,
panthenol, and neutral henna designed to produce fuller, thicker, and shinier
hair. The product line features a new addition, the Botanical High line of
volume therapy hair products. The Company's Framesi product line features
premium quality hair color products marketed exclusively for use in salons. The
Company also markets a complimentary line of shampoos, conditioners, and styling
aids specifically formulated for color-treated hair under the Biogenol brand
name. The Roffler line includes high quality, salon-distributed shampoos,
conditioners, and styling aids that target primarily males between the ages of
18-40. ABBA, Biogenol, Framesi, and Roffler products are used widely throughout
the hair care industry and generate significant salon retail sales.
Under the Gena brand name, the Company offers a line of tea-tree oil hair
care products with anesthetic qualities designed to relieve dry, itching scalp.
In addition, the Company markets hair care products as a part of its Body Drench
line of personal care products, primarily to spas, resorts, and health and
country clubs.
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Nail Care Products
The Company believes that it has the most complete and diverse line of
branded products in the nail care category for salon professionals. The
Company's nail care product offerings consist of products designed to support
the various salon services performed by nail technicians, including manicure,
pedicure, acrylic and fiberglass nail enhancement, natural nail treatments, and
nail polishes. Most nail care companies encourage distributors to purchase their
entire product line in order to buy any of their nail care products. The
Company, however, offers a number of top-selling products across all segments of
the nail category, permitting its customers to select and purchase individual
SKUs from among multiple brands, including Alpha 9, European Touch, Gena,
Kizmit, Pro Finish, and Revivanail. The Company, for example, offers
distributors and salon chains the ability to purchase the Company's Revivanail
nail treatments and Alpha 9 acrylic nail enhancement products without having to
purchase the full line of Revivanail or Alpha 9 products.
The Company's Alpha 9, European Touch, Kizmit, and Omni acrylic
professional nail enhancement products consist of complete lines of liquids,
powders, tips, files, and other implements and treatments necessary for the
professional nail technician to complete the acrylic nail enhancement process.
The Gena line of natural nail care products features Warm-O-Lotion(TM), a
collagen-enriched manicure lotion that is prominently featured in salons
throughout the United States. The Gena line also includes professional pedicure
products, such as Pedi Soft(R), a collagen-enriched conditioning lotion; Pedi
Care(TM) dry skin lotion; and Pedi Soak(R) foot bath. The Gena product line also
includes paraffin therapy products, such as Paraffin Springs Therapy Spa(TM), a
paraffin bath for conditioning heat therapy treatments; the Healthy Hoof(TM)
nail and skin treatment line to strengthen, moisturize, and condition nails and
cuticles; and MRX(TM) antiseptics and lotions for use by salon professionals.
The Company offers base coats, top coats, nail glues, and cuticle lotions
under its European Touch and Pro Finish brands. The Pro Finish line of nail care
products also features a light bonded nail system that seals the nail
enhancement under UV lighting.
The Company's European Touch brand features nail treatment products, such
as Revivanail and Theracreme(R). The Company offers a three-step nail overlay
system that offers simplicity, speed, and strength.
Skin and Body Care
The Company believes that it is the largest supplier of skin and body care
and tanning products to the salon industry. The Company sells a broad range of
professional skin and body care and tanning products, including moisturizers,
lotions, depilatories, and hair removal products, under its Body Drench, Clean +
Easy, One Touch, and Suntopia brands.
Body Drench professional skin care products include moisturizing lotions
and body baths supplemented with Vitamins A and E and botanical extracts for
moisture retention and skin rejuvenation, alpha hydroxy acids for natural skin
exfoliation, and Unitrienol T-27 for skin elasticity. Body Drench indoor tanning
products, which utilize the Carboplex(TM) delivery system, replace moisture lost
during tanning and promote faster, darker tanning results. The Company also
offers outdoor tan care and sun protection products under the Body Drench name.
The Suntopia line of exclusively distributed professional tanning products
includes various tanning creams and lotions, enriched shower gels, a moisture
replenishing lotion, and a tan enhancing product. Suntopia products, which are
made using an exotic blend of botanicals and forested extracts, are designed to
promote and maintain a long-lasting tan. The Suntopia line complements the Body
Drench line by targeting a younger market.
Clean + Easy and One Touch brands include patented professional hair
removal products. The Clean + Easy brand serves the professional salon market
with an extensive line of hair removal products and related sundries used by
salon professionals. The Clean + Easy Roll-On Wax System is one of the Company's
top selling hair removal products. The One Touch line serves the retail consumer
in the personal care market. One Touch products include roll-on waxers,
depilatories, and electrolysis products.
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Salon Appliances and Sundries
The Company sells salon appliances and sundries, including hairstyling
appliances, salonwear, and spa chairs. The SRC line of professional curling
irons and blow dryers are recognized within the salon industry as the finest
quality in salon appliances. The appliances are designed for high usage and
durability and feature quick startup and recovery capabilities. All SRC
professional curling irons are backed by the industry's only three-year
warranty. The Company's Maiko(TM) salonwear line features capes and aprons for
the stylist and the stylist's clientele.
The Company also sells various salon equipment products, such as whirlpool
footspas, salon chairs designed for clients and technicians, manicure and
pedicure tables and footrests, and portable salon accessory carts. These
products are sold under the European Touch name and are intended to capitalize
on the growing trend among salons to offer services beyond the basic salon
services.
PRODUCT DEVELOPMENT
The Company seeks to leverage the significant brand-name recognition of its
existing product lines by introducing new products and formulations under its
core brand names. The Company believes that its diverse product offerings
provide it with greater capacity and know-how to develop, test, and market new
products in each of its product lines, including the expanded application of
proprietary technologies. The Company contracts with third-party manufacturers
to develop new formulations that meet the Company's specifications and quality
standards. The Company has not incurred and does not expect to incur significant
capital expenditures in connection with its product development efforts. The
Company's management, working together with its sales and marketing and product
development personnel, continuously monitor shifts in the salon industry to
identify new product opportunities. Feedback from salon professionals and the
Company's educators also play a significant role in product development. The
Company believes the experience of its key managers, their relationships within
the industry, and the Company's product line orientation enable it to quickly
recognize and respond to salon innovations and industry trends.
MARKETING
The Company sells its professional salon products and appliances primarily
through professional salon industry distribution channels to salon product and
tanning supply distributors, salon chains, and beauty supply outlets, and to a
lesser extent, directly to spas, resorts, and health and country clubs
throughout the United States and in Canada, Europe, Latin America, Australia,
and Asia. The Company believes that its strategy of marketing its salon products
exclusively for use in or resale by the salon industry complements the
professional image of the Company's products and fosters a high degree of
loyalty by distributors of professional salon products.
The Company's sales and marketing efforts focus on educating salon
professionals and salon product distributors regarding the high quality and
performance benefits of the Company's products as well as the latest trends and
developments in the salon industry. The Company's marketing program includes
participation in salon industry trade shows, at which salon product
manufacturers exhibit and sell their products to wholesale salon product
distributors; several annual domestic and international salon professionals
trade shows; and numerous professional salon distributor-sponsored shows, at
which products, styles, and techniques are demonstrated to salon professionals.
The Company's marketing program emphasizes customer education through regular
in-the-field product demonstrations for salon professionals, usually in
conjunction with the distributors' sales and marketing efforts. In addition, the
Company's products are advertised in trade and distributor publications and
promoted in national magazines, such as Glamour, Good Housekeeping, InStyle,
McCall's, Mirabella, and Self. The Company also produces educational videos and
literature for distribution to distributors and salon professionals.
SALES AND DISTRIBUTION
The Company believes that it has strong relationships in each of the
professional salon distribution channels, including exclusive and open channels.
Products sold through exclusive channels are available to a
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limited number of distributors in each region, while those sold through open
channels are available to all distributors. The ABBA line of hair care products
is sold on an exclusive basis to approximately 45 salon product distributors and
salon chains throughout the United States, Canada, and Australia through seven
regional sales managers and a strong educational support team. The Company's
hair color and hair care products marketed under the Framesi, Biogenol, and
Roffler brand names are sold on an exclusive basis to 50 salon product
distributors throughout the United States and Latin America through eight
regional sales managers and its in-house educational support team. The Company's
nail care product lines are sold nationally and internationally to approximately
1,000 salon product distributors by an internal sales force of nine marketing
representatives and approximately 75 independent manufacturers' representatives.
This distribution base includes Sally, the largest wholesale supplier of
professional supply products with more than 1,900 supply stores worldwide. Body
Drench product lines are sold throughout the United States and in Canada,
Europe, Latin America, and Australia. Body Drench products are sold to
approximately 85 salon product distributors, 75 tanning supply distributors, and
directly to more than 3,000 spas, resorts, and health and country clubs by a
sales force of seven marketing representatives, telemarketers, and field sales
personnel as well as by approximately 25 independent manufacturer
representatives. SRC salon appliances and salonwear are sold nationally on an
exclusive basis to more than 50 salon product distributors, 14 beauty schools,
and six salon chains by a sales force of two employees and approximately 30
manufacturer representatives. Clean + Easy products are sold to approximately
1,000 customers through a sales manager and approximately 25 manufacturer
representatives. One Touch products are sold to approximately 400 customers by
two sales managers and approximately 25 manufacturer representatives. Together,
Clean + Easy and One Touch products are sold internationally to approximately
100 customers by a director of international sales. The Company's European Touch
II pedicure spa products are sold to approximately 700 salon product
distributors and three salon chains through an internal sales force of six
marketing representatives. See "Risk Factors -- Dependence on Major Customers."
PRODUCTION
The Company has developed relationships with third parties to manufacture
most of its products. Certain of the Company's hair removal appliances are
manufactured by two manufacturers in China. Although the Company generally does
not have long-term contracts with its manufacturers, the Company owns most of
the formulations, tools, and molds utilized in the manufacturing processes of
its products and believes it could substitute other manufacturers if necessary.
See "Risk Factors -- Dependence on Third Parties for Manufacturing" and "Risk
Factors -- Risk of International Operations."
The principal production operations of the Company are limited primarily to
solvents and waxes for the Company's Gena line of nail care and pedicure
products and certain wax products for the Company's Clean + Easy and One Touch
product lines. The Company produces solvents and waxes for its Gena line at its
30,000 square foot facility in Duncanville, Texas, near Dallas. The production
area in the Duncanville facility consists of approximately 6,000 square feet of
space and includes formula compounding areas, multiple manual and fully
automated liquid filling lines, and packaging facilities. The compounding or
mixing department utilizes a combination of manual and fully automated batch
processing systems. The Company maintains an inventory of raw materials and
packaging materials as well as certain finished goods in its on-site warehouses
that comprise a total of approximately 20,000 square feet.
The Company produces certain of its Clean + Easy and One Touch depilatory
products at its 32,000 square foot facility in Fair Lawn, New Jersey. The 8,600
square foot manufacturing area in the Company's Fair Lawn facility is devoted to
the production of wax and the packaging of a variety of hair removal appliances
for domestic and export markets. The wax production area consists of automatic
and manual batching and filling operations. Raw materials and work-in-process
inventories are maintained in a 10,000 square foot warehouse, while finished
goods are maintained in the 5,000 square foot shipping and receiving area.
The Company produces its Biogenol and Roffler hair care products, including
shampoos, conditioners, and styling aids in its approximately 47,000 square foot
facility in Corapolis, Pennsylvania. In addition, the
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Company assembles and upholsters its European Touch II salon furniture and
appliances in its 15,000 square foot manufacturing and warehousing facility in
Butler, Wisconsin.
Raw materials used to produce the Company's professional salon products
(other than salon appliances and sundries) include water, alcohol, mineral and
natural oils, fragrances, other chemicals, and a wide variety of packaging
materials and compounds including containers, such as cardboard boxes and
plastic containers, container caps, tops, valves and labels, all of which it
purchases from outside sources. The principal raw materials and packaging
components for the Company's products are available from numerous domestic and
international suppliers. Although the Company itself does not purchase the raw
materials used to manufacture the majority of its products, it is potentially
subject to variations in the prices it pays its third-party manufacturers for
products depending on their costs for raw materials. While the industry from
time to time has experienced raw material cost increases, the Company believes
it will be able to purchase its requirements at competitive prices. To date,
increases in raw material costs have not had a material effect on the Company's
operating results.
The Company continually monitors the quality of its products. The Company
also carries product liability insurance at levels it believes to be adequate.
COMPETITION
The Company's products compete directly against professional salon and
other similar products sold through distributors of professional salon products
and professional salons. The Company competes on the basis of product
recognition, quality, performance, distribution, and price. The Company's
principal competitors in the professional salon hair care products market
include Nexxus Products Co., Paul Mitchell Systems, Matrix, and Redken. The
Company's competitors in the professional salon nail care market include
Creative Nail Design, Inc., OPI Products Inc., Star Nail Products, Inc., and
Backscratchers, Inc. The Company's largest competitors in the professional salon
skin and body care products market include California Suncare, Inc., Supre Inc.,
Swedish Beauty Manufacturing, Inc., Australian Gold, Inc., American
International, Inc., and Divi International. The Company's largest competitors
in the professional salon appliances and sundries market are Helen of Troy
Limited, Belson Products (a division of Windmere Corporation), Conair
Corporation, Cricket Brush Company (a division of West Coast Beauty Supply Co.),
Andre (a division of Fromm International, Inc.), and Betty Dain Creations, Inc.
In addition, the Company's professional salon products compete indirectly
against hair care, nail care, and skin and body care products as well as salon
appliances and sundries sold through a variety of non-salon retail channels,
including department stores, mall-based specialty stores and, to a lesser
extent, mass merchants, drugstores, supermarkets, telemarketing programs,
television "infomercials," and catalogs. See "Risk Factors -- Competition."
INTELLECTUAL PROPERTY
The Company has registered, or has pending registration applications for
its principal trademarks and trade names in the United States and in foreign
countries. Principal trademarks and trade names of the Company include ABBA Pure
and Natural Hair Care, Alpha 9, Biogenol, Body Drench, Clean + Easy, Cosmic,
European Touch, Gena, Kizmit, Omni P.O. Professionals Only, One Touch, Pro
Finish, Revivanail, Roffler, SRC, and Suntopia. The Company believes its
position in the marketplace depends to a significant extent upon the goodwill
engendered by its trademarks and trade names and, therefore, considers trademark
protection to be important to its business. The Company will seek to register
significant trademarks and trade names in other foreign countries as it enters
these markets.
While the Company currently holds certain patents, the Company does not
consider any single patent to be material to the conduct of its business. The
Company relies primarily on trade secret protection for its proprietary
information. See "Risk Factors -- Intellectual Property."
GOVERNMENT REGULATION
Certain of the Company's advertising and product labeling practices are
subject to regulation by the FTC, and certain of its professional salon product
production practices are subject to regulation by the FDA as well
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as by various other federal, state, and local regulatory authorities. Compliance
with federal, state, and local laws and regulations has not had a material
adverse effect on the Company to date. Nonetheless, federal, state, and local
regulations in the United States that are designed to protect consumers have
had, and can be expected to have, an increasing influence on product claims,
production methods, product content, labeling, and packaging. In addition, any
expansion by the Company of its operations to produce professional salon
products that include over-the-counter drug ingredients (such as certain sun
screen ingredients) would result in the Company becoming subject to additional
FDA regulations as well as a higher degree of inspection and greater burden of
regulatory compliance than currently exist.
The operations of the Company subject it to federal, state, and local
governmental regulations related to the use, storage, discharge, and disposal of
hazardous chemicals. The failure by the Company to comply with current or future
environmental regulations could result in the imposition of fines on the
Company, suspension of production, or a cessation of operations. Compliance with
such regulations could require the Company to acquire costly equipment or to
incur other significant expenses. Any failure by the Company to control the use,
or adequately restrict the discharge, of hazardous substances could subject it
to future liabilities. The Company believes that it is in substantial compliance
with applicable federal, state, and local rules and regulations governing the
discharge of hazardous materials into the environment. There are no significant
capital expenditures for environmental control matters anticipated in the
current year or expected in the near future. See "Risk Factors -- Regulation and
Potential Claims."
EMPLOYEES
At August 31, 1998, STC employed 293 persons, consisting of 110
administrative employees, 134 warehouse and production employees, and 49 sales
and marketing employees. Framesi USA, a subsidiary of the Company, is a party to
a collective bargaining agreement relating to certain production employees. The
Company believes that its relations with its employees are good.
PROPERTIES
The Company owns an administrative, production, and warehousing facility in
Duncanville, Texas, near Dallas. The 20,000 square foot facility includes an
approximately 4,000 square foot administrative area, a 6,000 square foot
production area, and a 10,000 square foot warehousing area. The Company believes
the facility is well maintained and adequate for its needs. The Company also
leases additional warehouse space in Duncanville, Texas; production,
administrative, and warehouse space in Fair Lawn, New Jersey, Butler, Wisconsin,
Corapolis, Pennsylvania; and the United Kingdom; administrative space in
Scottsdale, Arizona, Lebanon, Tennessee, and Costa Mesa, California; as well as
the Company's principal executive offices in Phoenix, Arizona.
LITIGATION
The Company is, and may in the future be, party to litigation arising in
the ordinary course of its business. The Company does not consider any current
claims to be material to its business, financial condition, or operating
results. There can be no assurance that the Company's insurance coverage will be
adequate to cover all liabilities occurring out of any claims that may be
instituted in the future or that any future claims that are not covered by
insurance will not have an adverse effect on the Company's business, financial
condition, or operating results.
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MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS, AND KEY EMPLOYEES
The following table sets forth certain information regarding the directors,
executive officers, and key employees of the Company.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Sam L. Leopold............................ 44 Chairman of the Board, President, and
Chief Executive Officer
Richard R. Ross........................... 31 Executive Vice President, Chief
Financial Officer, Treasurer, and
Director
N. Bruce Cowgill.......................... 47 Executive Vice President -- Operations
Michael L. Kaplan......................... 29 Executive Vice President, General
Counsel, and Secretary
James V. Henrietta........................ 53 Executive Vice President -- Sales and
Marketing
Karen L. Terwilleger...................... 49 Director of Operations
J. Timothy Montrose....................... 32 Corporate Controller
James A. Brooks........................... 68 Director
Peter W. Burg............................. 43 Director
Michael H. Feinstein...................... 62 Director
Sylvan Schefler........................... 60 Director
</TABLE>
SAM L. LEOPOLD, a founder of the Company, has served as its Chairman of the
Board and Chief Executive Officer of the Company since the Company's
incorporation in June 1995 and as President of the Company since February 1998.
Mr. Leopold owns and previously served as President and Chairman of Beauty
Boutique International, which was founded in 1990 and operates three retail
salons in Arizona. Mr. Leopold is not involved with the day-to-day operations of
Beauty Boutique International, although Beauty Boutique International purchases
products from the Company in the ordinary course of business. From 1986 to 1991,
Mr. Leopold served as Executive Vice President of Consumer Beauty Supply, Inc.
(dba Beauty Express), a mall-based retail chain of beauty salons. During that
time, Mr. Leopold was responsible for day-to-day operations and oversaw the
growth and development of Beauty Express from less than 20 retail salons to more
than 50 retail salons. From 1989 to 1991, Mr. Leopold served as President of
Avanti International, Inc. developing a line of hair care products.
RICHARD R. ROSS has served as Chief Financial Officer, and Treasurer of the
Company since April 1997 and as Executive Vice President and a director of the
Company since May 1998. Mr. Ross served in the audit and business advisory group
of Arthur Andersen LLP from June 1989 to April 1997, most recently in the
position of Manager. In his capacity at Arthur Andersen LLP, Mr. Ross worked
with the Company from its inception in June 1995, as well as with other
acquisition-oriented public companies, until joining the Company in April 1997.
Mr. Ross is a certified public accountant.
N. BRUCE COWGILL has served as Executive Vice President -- Operations of
the Company since July 1998. Mr. Cowgill served as Vice President, North
American Sales of Sebastian International, a professional hair care company,
from August 1995 to July 1998. In 1989, Mr. Cowgill founded Environmental
Solutions Labs, a consulting firm serving health and beauty aid manufacturers
and served as President until 1995. Mr. Cowgill served as President and Chief
Executive Officer of State Supply Warehouse Co., a beauty supply distributor,
from December 1986 to April 1989. From July 1978 to August 1983, he served as
Vice President, Global Marketing, Education, Advertising and International Sales
of Redken Laboratories.
MICHAEL L. KAPLAN has served as Executive Vice President, General Counsel
and Secretary of the Company since July 1998. Mr. Kaplan was an attorney with
the Phoenix-based law firm of O'Connor, Cavanagh, Anderson, Killingsworth &
Beshears, P.A. from September 1995 to June 1998, where he specialized in
mergers, acquisitions, and corporate finance and represented
acquisition-oriented public
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<PAGE> 65
companies, including the Company. Mr. Kaplan also was an attorney with Fennemore
Craig, P.C. from September 1993 to August 1995.
JAMES V. HENRIETTA has served as Executive Vice President -- Sales and
Marketing of the Company since February 1998. From January 1996 to February
1998, Mr. Henrietta served as a Regional Director for Zotos International
("Zotos"), a hair care company in the professional salon products industry. Mr.
Henrietta served as a Regional Director for Helene Curtis from May 1994 until
its sale to Zotos in January 1996. From 1991 to 1994, Mr. Henrietta founded and
served as President of JVH, an investment/consulting business. From 1980 to
1991, Mr. Henrietta served as President of the Paris Ace Beauty Supply Company.
During that time, Mr. Henrietta facilitated the company's sales growth from $5
million in annual revenues to over $21 million by opening or acquiring over 43
beauty supply stores.
KAREN L. TERWILLEGER has served as Director of Operations of the Company
since November 1997. Ms. Terwilleger served as Manager of Non-Inventory
Procurement and Manager of Contract Manufacturing Operations at The Dial
Corporation from September 1995 to February 1997. Ms. Terwilleger served as
Manager of Purchasing, Contract Manufacturing, and Packaging Development at
Benckiser Consumer Products, Inc. from June 1988 to September 1995. Ms.
Terwilleger served as Senior Purchasing Manager for Playtex, Inc. from 1987 to
1988; as Director of Manufacturing for Columbia Products, Inc. from 1985 to
1987; and as Assistant Plant Manager for Oral-B Laboratories, Inc. from 1984 to
1985. Ms. Terwilleger served in various capacities for Bristol-Myers, Co. and
its Clairol, Inc. subsidiary from 1978 to 1984.
J. TIMOTHY MONTROSE has served as Corporate Controller of the Company since
May 1997 and has been employed by the Company since December 1996. From November
1995 to December 1996, Mr. Montrose served as the Accounting Manager for
Cellular World Corporation, a retail chain of wireless communication products
stores. From April 1993 to November 1995, Mr. Montrose served as Senior
Accountant with the Dallas Stars Hockey Club of the National Hockey League and
was actively involved in the club's transition from Minneapolis to Dallas.
JAMES A. BROOKS has served as a director of the Company since September
1996. Mr. Brooks has been President of Signe Inc., a management consulting firm
for major consumer product companies and a variety of salon industry companies,
since founding the company in December 1984. Mr. Brooks served as Senior Vice
President of Sales and Marketing of Lamaur, Inc. from 1983 to 1984, at that time
a publicly traded company listed on the New York Stock Exchange and a leading
domestic producer and marketer of a broad range of hair care products. Mr.
Brooks served as Senior Vice President of Sales and Marketing of Redken
Laboratories, Inc. from 1977 to 1983.
PETER W. BURG has served as a director of the Company since February 1997.
Mr. Burg has been a director and shareholder in the law firm of Burg & Eldrege,
P.C. (and its predecessor Burg & Aspinwall, P.C.) since October 1984.
MICHAEL H. FEINSTEIN has served as a director of the Company since June
1997. Mr. Feinstein has served as President and Chief Executive Officer of
Automated Solution, Inc., an Arizona company since July, 1998. Mr. Feinstein has
served as a consultant to Samoth Capital Corporation, a publicly owned real
estate company, from April 1998 to , 1998. Mr. Feinstein served as Senior
Vice President and Chief Financial Officer of Monaco Finance, Inc., a publicly
held specialty finance company, from July 1995 to April 1998. From September
1993 to June 1995, Mr. Feinstein served initially as Executive Vice President
and subsequently as acting President and Chief Executive Officer of American
Southwest Financial Corporation, which engaged in the securitization and
administration of mortgage-backed bonds and certificates. From January 1983
through September 1993, Mr. Feinstein served in various senior management
positions, including, at different times, Chief Financial Officer, Treasurer,
Chief Operating Officer, and Executive and Senior Vice President of Asset
Investors Corporation, a New York Stock Exchange-listed REIT, and MDC Holdings
Inc., a New York Stock Exchange-listed national homebuilder. Prior to 1983, Mr.
Feinstein was a partner in the public accounting firm now known as Deloitte &
Touche.
SYLVAN SCHEFLER has served as a director of the Company since November
1996. Mr. Schefler has been Chairman of Maxima Group, LLC, a merchant banking
firm, since September 1997, and a partner of Crystal
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<PAGE> 66
Asset Management Group, Ltd., a merchant banking firm, since 1990. Mr. Schefler
served as Vice Chairman of Prime Charter Ltd., an investment banking firm and
one of the representatives of the underwriters of the Company's initial public
offering, from 1995 to April 1997. Mr. Schefler served as Chairman of the
Investment Banking Division and as a member of the Executive Committee of Prime
Charter Ltd. from September 1994 to April 1997. Previously, Mr. Schefler was
Chief Executive Officer of Hampshire Securities Corporation, an investment
banking firm, from 1990 to 1992. Mr. Schefler previously served in various
capacities with Drexel Burnham Lambert Incorporated for over 30 years, including
as a member of its Executive Committee and Board of Directors. Mr. Schefler has
served as a director of GSE Systems, Inc., a supplier of software systems for
manufacturing industries, since August 1995.
The Company has agreed that, for a period of three years from its initial
public offering in November 1996, the representatives of the underwriters of the
Company's initial public offering (the "Representatives") will have the right to
send a representative to observe each meeting of the Company's Board of
Directors, or in lieu of such observer, the Representatives may elect to require
the Company to use its best efforts to elect Sylvan Schefler, formerly Vice
Chairman of Prime Charter Ltd., or another mutually acceptable designee, to the
Company's Board of Directors for such three-year period. Mr. Schefler serves as
a member of the Company's Board of Directors.
Directors hold office until their successors have been elected and
qualified. Officers serve at the pleasure of the Board of Directors. There are
no family relationships among any of the directors or officers of the Company.
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<PAGE> 67
CERTAIN INDEBTEDNESS
NEW CREDIT FACILITY
In connection with the Initial Offering, the Company repaid all amounts
outstanding under its previous credit facility, and that credit facility was
terminated. The Company entered into a $50.0 million New Credit Facility with
NationsBank, N.A., and BankBoston, N.A., as agents. The New Credit Facility
consists of a revolving credit facility in a principal amount of $25.0 million
and an acquisition facility in a principal amount of $25.0 million. The
revolving credit facility includes a sub-limit of up to $7.5 million for letters
of credit. As of September 1, 1998, the Company has borrowed approximately $25.0
million under the acquisition facility. The following is a summary description
of the principal terms of the New Credit Facility and is subject to, and
qualified in its entirety by, reference to the definitive agreement.
All obligations of the Company are unconditionally and irrevocably
guaranteed jointly and severally by each of the Company's domestic subsidiaries.
Indebtedness under the New Credit Facility will be secured by a first priority
security interest in (i) all of the capital stock of each of the Company's
domestic subsidiaries, (ii) 65% of the capital stock of each foreign subsidiary,
and (iii) all domestic assets of the Company and its subsidiaries.
The proceeds of the New Credit Facility will be available for working
capital, capital expenditures, acquisitions, and general corporate purposes of
the Company and its subsidiaries. Loans under the acquisition facility will be
available in multiple draws from the closing through December 31, 1999 only for
the purpose of making permitted acquisitions.
Interest Rates. The New Credit Facility bears interest at rates per annum
equal to, at the option of the Company, either (i) the LIBOR interbank rate plus
the applicable margin or (ii) the base rate plus the applicable margin.
Maturity. The New Credit Facility will mature on June 30, 2003.
Mandatory Repayments. Mandatory repayments must be made from the net
proceeds of an issuance or incurrence of certain indebtedness, the net proceeds
from the sale of equity, and from the proceeds of certain sales or dispositions
of certain assets.
Optional Prepayments. Loans may be prepaid and commitments may be reduced
at the Company's option in minimum amounts to be agreed upon.
Covenants. The New Credit Facility contains certain covenants applicable
to, and other requirements of, the Company and its subsidiaries. The covenants
include, among other things, delivery of financial statements and other reports;
notices of default, material litigation, and material governmental, and
environmental proceedings; payment of taxes; maintenance of insurance;
limitation on liens; limitations on mergers, consolidations, and sales of
assets; limitations on incurrence of debt; limitations on dividends and stock
redemptions and the redemption and/or prepayment of other debt; limitations on
investments; limitation on transactions with affiliates; and limitation on
capital expenditures and acquisitions. The New Credit Facility requires the
Company to meet certain financial covenants, including minimum fixed charge
coverage and maximum leverage ratios.
Events of Default. The New Credit Facility specifies certain customary
events of default, including nonpayment of principal; interest, fees, or other
amounts; violation of covenants; inaccuracy of representations and warranties;
cross-default to other material agreements and indebtedness; bankruptcy;
material judgments; ERISA violations; actual or asserted invalidity by the
borrower or any of the borrower's subsidiaries of any loan documents or security
interests; or changes in control.
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<PAGE> 68
DESCRIPTION OF THE EXCHANGE NOTES
GENERAL
The Outstanding Notes were, and the Exchange Notes will be, issued pursuant
to an Indenture dated as of June 23, 1998 (the "Indenture") between the Company,
the Guarantors, and State Street Bank and Trust Company of California, N.A., as
trustee (the "Trustee"). The terms of the Exchange Notes are identical in all
material respects to the Outstanding Notes, except that the Exchange Notes have
been registered under the Securities Act and, therefore, will not bear legends
restricting their transfer.
The terms of the Notes include those stated in the Indenture and those made
part of the Indenture by reference to the Trust Indenture Act of 1939 (the
"Trust Indenture Act"). The Notes are subject to all such terms, and Holders of
Notes are referred to the Indenture and the Trust Indenture Act for a statement
thereof. The following summary of the material provisions of the Indenture does
not purport to be complete and is qualified in its entirety by reference to the
Indenture, including the definitions therein of certain terms used below. Copies
of the Indenture and Registration Rights Agreement are available as set forth
below under "-- Additional Information." The definitions of certain terms used
in the following summary are set forth below under "-- Certain Definitions." For
purposes of this summary, the term "Company" refers only to Styling Technology
Corporation, a Delaware corporation, and not to any of its Subsidiaries.
The Exchange Notes will be general unsecured obligations of the Company and
will be subordinated in right of payment to all current and future Senior Debt.
As of March 31, 1998, on a pro forma basis, the Company would have had no Senior
Debt outstanding. Any borrowings under the New Credit Facility will be Senior
Debt. The Indenture will permit the incurrence of additional Senior Debt in the
future.
As of the date of the Indenture, all of the Company's Subsidiaries will be
Restricted Subsidiaries. However, under certain circumstances, the Company will
be able to designate current or future Subsidiaries as Unrestricted
Subsidiaries. Unrestricted Subsidiaries will not be subject to many of the
restrictive covenants set forth in the Indenture.
PRINCIPAL, MATURITY, AND INTEREST
The Exchange Notes will be limited in aggregate principal amount to $100.0
million and will mature on July 1, 2008. Interest on the Exchange Notes will
accrue at the rate of 10 7/8% per annum and will be payable semi-annually in
arrears on January 1 and July 1, commencing on January 1, 1999, to Holders of
record of Exchange Notes on the immediately preceding December 15 and June 15,
respectively. The Indenture provides for the issuance of up to an additional
$25.0 million aggregate principal amount of additional notes having identical
terms and conditions as the Notes (the "Additional Notes"), subject to
compliance with the covenants contained in the Indenture. As of the date of this
Prospectus, however, the Company does not anticipate issuing Additional Notes.
For purposes of this "Description of the Exchange Notes," any reference to the
Notes does not include any Additional Notes.
Interest on the Exchange Notes will accrue from the most recent date to
which interest has been paid or, if no interest has been paid, from the date of
original issuance. Interest will be computed on the basis of a 360-day year
comprised of twelve 30-day months. Principal, premium, if any, and interest on
the Exchange Notes will be payable at the office or agency of the Company
maintained for such purpose within the City and State of New York or, at the
option of the Company, payment of interest may be made by check mailed to the
Holders of the Exchange Notes at their respective addresses set forth in the
register of Holders of Exchange Notes; provided that all payments of principal,
premium, or interest with respect to Exchange Notes the Holders of which have
given wire transfer instructions to the Company will be required to be made by
wire transfer of immediately available funds to the accounts specified by the
Holders thereof. Until otherwise designated by the Company, the Company's office
or agency in New York will be the office of the Trustee maintained for such
purpose. The Exchange Notes will be issued in denominations of $1,000 and
integral multiples thereof.
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<PAGE> 69
SUBORDINATION
The payment of principal of, premium, if any, and interest on the Exchange
Notes will be subordinated in right of payment, as set forth in the Indenture,
to the prior payment in full of all Senior Debt, whether outstanding on the date
of the Indenture or thereafter incurred, and senior or pari passu in right of
payment, as set forth in the Indenture, to the prior payment in full of all
subordinated Debt of the Company, whether outstanding on the date of the
Indenture or thereafter incurred.
Upon any distribution to creditors of the Company in a liquidation or
dissolution of the Company or in a bankruptcy, reorganization, insolvency,
receivership, or similar proceeding relating to the Company or its property, an
assignment for the benefit of creditors, or any marshalling of the Company's
assets and liabilities, the holders of Senior Debt will be entitled to receive
payment in full of all Obligations due in respect of such Senior Debt (including
interest after the commencement of any such proceeding at the rate specified in
the applicable Senior Debt) before the Holders of Exchange Notes will be
entitled to receive any payment with respect to the Exchange Notes, and until
all Obligations with respect to Senior Debt are paid in full, any distribution
to which the Holders of Exchange Notes would be entitled shall be made to the
holders of Senior Debt (except that Holders of Exchange Notes may receive and
retain Permitted Junior Securities and payments made from the trust described
under "-- Legal Defeasance and Covenant Defeasance").
The Company also may not make any payment upon or in respect of the
Exchange Notes (except in Permitted Junior Securities or from the trust
described under "-- Legal Defeasance and Covenant Defeasance") if (i) a default
in the payment of the principal of, premium, if any, or interest on Designated
Senior Debt occurs and is continuing beyond any applicable period of grace or
(ii) any other default occurs and is continuing with respect to Designated
Senior Debt that permits holders of the Designated Senior Debt as to which such
default relates to accelerate its maturity and the Trustee receives a notice of
such default (a "Payment Blockage Notice") from the Company or the holders of
any Designated Senior Debt. Payments on the Exchange Notes may and shall be
resumed (a) in the case of a payment default, upon the date on which such
default is cured or waived and (b) in case of a nonpayment default, the earlier
of the date on which such nonpayment default is cured or waived or 179 days
after the date on which the applicable Payment Blockage Notice is received,
unless the maturity of any Designated Senior Debt has been accelerated and not
repaid. No new period of payment blockage may be commenced unless and until (i)
360 days have elapsed since the effectiveness of the immediately prior Payment
Blockage Notice and (ii) all scheduled payments of principal, premium, if any,
and interest on the Exchange Notes that have come due have been paid in full in
cash. No nonpayment default that existed or was continuing on the date of
delivery of any Payment Blockage Notice to the Trustee shall be, or be made, the
basis for a subsequent Payment Blockage Notice.
The Indenture will further require that the Company promptly notify holders
of Senior Debt if payment of the Notes is accelerated because of an Event of
Default.
As a result of the subordination provisions described above, in the event
of a liquidation or insolvency, Holders of Exchange Notes may recover less
ratably than creditors of the Company that are holders of Senior Debt. On a pro
forma basis at March 31, 1998, after giving effect to the Offering and the
application of the proceeds therefrom, the Company would have had no Senior Debt
outstanding. Any borrowings under $50.0 million New Credit Facility will be
Senior Debt. The Indenture will limit, subject to certain financial tests, the
amount of additional Debt, including Senior Debt, that the Company and its
Subsidiaries can incur. See "-- Certain Covenants -- Incurrence of Debt and
Issuance of Preferred Stock."
SUBSIDIARY GUARANTEES
The Company's payment obligations under the Exchange Notes will be jointly
and severally guaranteed (the "Subsidiary Guarantees") by the Guarantors. The
Subsidiary Guarantees will be unsecured. The Subsidiary Guarantee of each
Guarantor will be subordinated to the prior payment in full of all Senior Debt
of such Guarantor, and the amounts for which the Guarantors will be liable under
the guarantees issued from time to time with respect to Senior Debt. The
obligations of each Guarantor under its Subsidiary Guarantee will be limited so
as not to constitute a fraudulent conveyance under applicable law. However, see
"Risk Factors -- Fraudulent Conveyance."
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The Indenture provides that no Guarantor may consolidate with or merge with
or into (whether or not such Guarantor is the surviving Person), another Person
whether or not affiliated with such Guarantor unless (i) subject to the
provisions of the following paragraph, the Person formed by or surviving any
such consolidation or merger (if other than such Guarantor) assumes all the
obligations of such Guarantor pursuant to a supplemental indenture in form and
substance reasonably satisfactory to the Trustee, under the Notes, the
Indenture, and the Registration Rights Agreement; and (ii) immediately after
giving effect to such transaction, no Default or Event of Default exists.
The Indenture provides that in the event of a sale or other disposition of
all of the assets of any Guarantor to a third party or an Unrestricted
Subsidiary, by way of merger, consolidation, or otherwise, or a sale or other
disposition of all of the capital stock of any Guarantor or the designation of
such Guarantor as an Unrestricted Subsidiary, then such Guarantor (in the event
of a sale or other disposition, by way of such a merger, consolidation, or
otherwise, of all of the capital stock of such Guarantor, or in the event of
such designation) or the corporation acquiring the property (in the event of a
sale or other disposition of all of the assets of such Guarantor) will be
released and relieved of any obligations under its Subsidiary Guarantee;
provided that the Net Proceeds of such sale or other disposition are applied in
accordance with the applicable provisions of the Indenture. See "-- Repurchase
at Option of Holders -- Asset Sales."
OPTIONAL REDEMPTION
The Notes will not be redeemable at the Company's option prior to July 1,
2003. Thereafter, the Notes will be subject to redemption at any time at the
option of the Company, in whole or in part, upon not less than 30 nor more than
60 days' notice, at the redemption prices (expressed as percentages of principal
amount) set forth below plus accrued and unpaid interest thereon to the
applicable redemption date, if redeemed during the 12-month period beginning on
July 1 of the years indicated below:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
---- ----------
<S> <C>
2003...................................................... 105.4375%
2004...................................................... 103.6250%
2005...................................................... 101.8125%
2006 and thereafter....................................... 100.0000%
</TABLE>
SELECTION AND NOTICE
If less than all of the Notes are to be redeemed at any time, selection of
Notes for redemption will be made by the Trustee in compliance with the
requirements of the principal national securities exchange, if any, on which the
Notes are listed, or, if the Notes are not so listed, on a pro rata basis, by
lot or by such method as the Trustee shall deem fair and appropriate; provided
that no Notes of $1,000 or less shall be redeemed in part. Notices of redemption
shall be mailed by first class mail at least 30 but not more than 60 days before
the redemption date to each Holder of Notes to be redeemed at its registered
address. Notices of redemption may not be conditional. If any Note is to be
redeemed in part only, the notice of redemption that relates to such Note shall
state the portion of the principal amount thereof to be redeemed. An Exchange
Note in principal amount equal to the unredeemed portion thereof will be issued
in the name of the Holder thereof upon cancellation of the original Note. Notes
called for redemption become due on the date fixed for redemption. On and after
the redemption date, interest ceases to accrue on Notes or portions of them
called for redemption.
MANDATORY REDEMPTION
The Company is not required to make mandatory redemption or sinking fund
payments with respect to the Notes.
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<PAGE> 71
REPURCHASE AT THE OPTION OF HOLDERS
Change of Control
Upon the occurrence of a Change of Control, each Holder of Notes will have
the right to require the Company to repurchase all or any part (equal to $1,000
or an integral multiple thereof) of such Holder's Notes pursuant to the offer
described below (the "Change of Control Offer") at an offer price in cash equal
to 101% of the aggregate principal amount thereof, plus accrued and unpaid
interest thereon, if any, to the date of purchase (the "Change of Control
Payment"). Within 30 days following any Change of Control, the Company will mail
a notice to each Holder describing the transaction or transactions that
constitute the Change of Control and offering to repurchase Notes on the date
specified in such notice, which date shall be no earlier than 30 days and no
later than 60 days from the date such notice is mailed (the "Change of Control
Payment Date"), pursuant to the procedures required by the Indenture and
described in such notice. The Company will comply with the requirements of Rule
14e-1 under the Exchange Act and any other securities laws and regulations
thereunder to the extent such laws and regulations are applicable in connection
with the repurchase of the Notes as a result of a Change of Control.
On the Change of Control Payment Date, the Company will, to the extent
lawful, (i) accept for payment all Notes or portions thereof properly tendered
pursuant to the Change of Control Offer, (ii) deposit with the Paying Agent an
amount equal to the Change of Control Payment in respect of all Notes or
portions thereof so tendered, and (iii) deliver or cause to be delivered to the
Trustee the Notes so accepted together with an Officers' Certificate stating the
aggregate principal amount of Notes or portions thereof being purchased by the
Company. The Paying Agent will promptly mail to each Holder of Notes so tendered
the Change of Control Payment for such Notes, and the Trustee will promptly
authenticate and mail (or cause to be transferred by book entry) to each Holder
an Exchange Note equal in principal amount to any unpurchased portion of the
Notes surrendered, if any; provided that each such Exchange Note will be in a
principal amount of $1,000 or an integral multiple thereof. The Indenture will
provide that, prior to complying with the provisions of this covenant, but in
any event within 90 days following a Change of Control, the Company either will
repay all outstanding Senior Debt or obtain the requisite consents, if any,
under all agreements governing outstanding Senior Debt to permit the repurchase
of Notes required by this covenant. The Company will publicly announce the
results of the Change of Control Offer on or as soon as practicable after the
Change of Control Payment Date.
The Change of Control provisions described above will be applicable whether
or not any other provisions of the Indenture are applicable. Except as described
above with respect to a Change of Control, the Indenture does not contain
provisions that permit the Holders of the Notes to require that the Company
repurchase or redeem the Notes in the event of a takeover, recapitalization, or
similar transaction.
The New Credit Facility is expected to provide that certain change of
control events with respect to the Company would constitute a default
thereunder. Any future credit agreements or other agreements relating to Senior
Debt to which the Company or any of its Subsidiaries becomes a party may contain
similar restrictions and provisions. In the event a Change of Control occurs at
a time when the Company is prohibited from purchasing Notes, the Company could
seek the consent of its lenders to the purchase of Notes or could attempt to
refinance the borrowings that contain such prohibition. If the Company does not
obtain such a consent or repay such borrowings, the Company will remain
prohibited from purchasing Notes. In such case, the Company's failure to
purchase tendered Notes would constitute an Event of Default under the Indenture
which would, in turn, constitute a default under the New Credit Facility. In
such circumstances, the subordination provisions in the Indenture would likely
restrict payments to the Holders of Notes.
The Company will not be required to make a Change of Control Offer upon a
Change of Control if a third party makes the Change of Control Offer in the
manner, at the times, and otherwise in compliance with the requirements set
forth in the Indenture applicable to a Change of Control Offer made by the
Company and purchases all Notes validly tendered and not withdrawn under such
Change of Control Offer.
The definition of Change of Control includes a phrase relating to the sale,
lease, transfer, conveyance, or other disposition of "all or substantially all"
of the assets of the Company and its Restricted Subsidiaries,
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<PAGE> 72
taken as a whole. Although there is a developing body of case law interpreting
the phrase "substantially all," there is no precise established definition of
the phrase under applicable law. Accordingly, the ability of a Holder of Notes
to require the Company to repurchase such Notes as a result of a sale, lease,
transfer, conveyance, or other disposition of less than all of the assets of the
Company and its Subsidiaries taken as a whole to another Person or group may be
uncertain.
Asset Sales
The Indenture will provide that the Company will not, and will not permit
any of its Restricted Subsidiaries to, consummate an Asset Sale unless (i) the
Company (or the Restricted Subsidiary, as the case may be) receives
consideration at the time of such Asset Sale at least equal to the fair market
value (evidenced by a resolution of the Board of Directors set forth in an
Officers' Certificate delivered to the Trustee) of the assets or Equity
Interests issued or sold or otherwise disposed of and (ii) at least 80% of the
consideration therefor received by the Company or such Restricted Subsidiary is
in the form of cash or Cash Equivalents; provided that the amount of (x) any
liabilities (as shown on the Company's or such Restricted Subsidiary's most
recent balance sheet) of the Company or any Restricted Subsidiary (other than
contingent liabilities and liabilities that are by their terms subordinated to
the Notes or any guarantee thereof) that are assumed by the transferee of any
such assets pursuant to a customary novation agreement that releases the Company
or such Restricted Subsidiary from further liability and (y) any securities,
notes, or other obligations received by the Company or any such Restricted
Subsidiary from such transferee that are contemporaneously (subject to ordinary
settlement periods) converted by the Company or such Restricted Subsidiary into
cash or Cash Equivalents (to the extent of the cash or Cash Equivalents
received) shall be deemed to be cash or Cash Equivalents for purposes of this
provision.
On or prior to the 365th day following the receipt of any Net Proceeds from
an Asset Sale, the Company (or such Restricted Subsidiary, as the case may be)
may, subject to the provisions of the Indenture described under "-- Certain
Covenants -- Restricted Payments," apply such Net Proceeds, at its option, (a)
to permanently repay and reduce the amounts permitted to be borrowed by the
Company or such Restricted Subsidiary under the terms of any of its Senior Debt,
or (b) to acquire all or substantially all of the assets of, or a majority of
the Voting Stock of, another Permitted Business (provided that such Person
concurrently becomes a Restricted Subsidiary of the Company), or (c) to acquire
other long-term assets that are used or useful in a Permitted Business. Pending
the final application of any such Net Proceeds, the Company (or such Restricted
Subsidiary, as the case may be) may temporarily reduce revolving credit
borrowings or otherwise invest such Net Proceeds in any manner that is not
prohibited by the Indenture. Any Net Proceeds from Asset Sales that are not
applied or invested as provided in the first sentence of this paragraph will be
deemed to constitute "Excess Proceeds". When the aggregate amount of Excess
Proceeds exceeds $5.0 million, the Company will be required to make an offer to
all Holders of Notes and all holders of other Debt that is pari passu with the
Notes containing provisions similar to those set forth in the Indenture with
respect to offers to purchase or redeem with the proceeds of sales of assets (an
"Asset Sale Offer") to repurchase the maximum principal amount of Notes and such
other pari passu Debt that may be purchased out of the aggregate amount of
Excess Proceeds, at an offer price in cash in an amount equal to 100% of the
principal amount thereof, plus accrued and unpaid interest thereon, if any, to
the date of repurchase, in accordance with the procedures set forth in the
Indenture and such other pari passu Debt. To the extent that any Excess Proceeds
remain after consummation of an Asset Sale Offer, the Company (or such
Restricted Subsidiary, as the case may be) may use such Excess Proceeds for any
purpose not otherwise prohibited by the Indenture. If the aggregate principal
amount of Notes and such other pari passu Debt tendered into such Asset Sale
Offer surrendered by Holders thereof exceeds the amount of Excess Proceeds, the
Trustee shall select the Notes and such other pari passu Debt to be purchased on
a pro rata basis. Upon completion of such offer to purchase, the amount of
Excess Proceeds shall be reset at zero.
The Company or any of its Restricted Subsidiaries may engage in
transactions in which assets are transferred in exchange for one or more assets
that are of a type customarily used in a Permitted Business; provided that if
the fair market value of the assets to be transferred by the Company or such
Restricted Subsidiary, plus the fair market value of any other consideration
paid or credited by the Company or such
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Restricted Subsidiary exceeds $1.0 million, such transaction shall require
approval of the Board of Directors of the Company; provided that no such
transaction shall be permitted if the Consolidated Coverage Ratio of the Company
would be reduced after giving effect to such transaction; and provided, further,
that the transferee of such assets shall initially be designated as a Restricted
Subsidiary if such Person becomes a Subsidiary by virtue of such Asset Sale. In
addition, each such transaction shall be valued at an amount equal to all
consideration received by the Company or such Restricted Subsidiary in such
transaction, other than such assets received pursuant to such exchange ("Other
Consideration"), for purposes of determining whether an Asset Sale has occurred.
If the Other Consideration is of an amount and character such that such
transaction constitutes an Asset Sale, then the first two paragraphs of this
"Asset Sales" covenant shall be applicable to any proceeds of such Other
Consideration.
The Company will comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations thereunder to the
extent such laws and regulations are applicable to the repurchase of Notes
pursuant to an Asset Sale Offer. To the extent that the provisions of any
securities laws or regulations conflict with the Asset Sale provisions of the
Indenture, the Company shall comply with the applicable securities laws and
regulations and shall not be deemed to have breached its obligations under the
Asset Sale provisions of the Indenture by virtue thereof.
CERTAIN COVENANTS
Restricted Payments
The Indenture provides that the Company will not, and will not permit any
of its Restricted Subsidiaries to, directly or indirectly (i) declare or pay any
dividend or make any other payment or distribution on account of the Company's
or any of its Restricted Subsidiaries' Equity Interests (including, without
limitation, any payment in connection with any merger or consolidation involving
the Company or any of its Restricted Subsidiaries) or to the direct or indirect
holders of the Company's or any of its Restricted Subsidiaries' Equity Interests
in their capacity as such (other than dividends or distributions payable in
Equity Interests (other than Disqualified Stock) of the Company or to the
Company or a Restricted Subsidiary of the Company); (ii) purchase, redeem, or
otherwise acquire or retire for value (including, without limitation, in
connection with any merger or consolidation involving the Company) any Equity
Interests of the Company or any direct or indirect parent of the Company; (iii)
make any payment on or with respect to, or purchase, redeem, defease, or
otherwise acquire or retire for value any Debt that is pari passu with or
subordinated to the Notes (other than Notes), except a payment of interest or
principal at Stated Maturity; or (iv) make any Restricted Investment (all such
payments and other actions set forth in clauses (i) through (iv) above being
collectively referred to as "Restricted Payments"), unless, at the time of and
after giving effect to such Restricted Payment:
(a) no Default or Event of Default shall have occurred and be
continuing or would occur as a consequence thereof;
(b) the Company would, at the time of such Restricted Payment and
after giving pro forma effect thereto as if such Restricted Payment had
been made at the beginning of the applicable four-quarter period, have been
permitted to incur at least $1.00 of additional Debt pursuant to the
Consolidated Coverage Ratio test set forth in the first paragraph of the
covenant described below under the caption "-- Incurrence of Debt and
Issuance of Preferred Stock"; and
(c) such Restricted Payment, together with the aggregate amount of all
other Restricted Payments made by the Company and its Restricted
Subsidiaries after the date of the Indenture (excluding Restricted Payments
permitted by clauses (ii), (iii), and (iv) of the next succeeding
paragraph), is less than the sum, without duplication, of (i) 50% of the
Consolidated Net Income of the Company for the period (taken as one
accounting period) from the beginning of the first fiscal quarter
commencing after the date of the Indenture to the end of the Company's most
recently ended fiscal quarter for which internal financial statements are
available at the time of such Restricted Payment (or, if such Consolidated
Net Income for such period is a deficit, less 100% of such deficit), plus
(ii) 100% of the aggregate net cash proceeds received by the Company since
the date of the Indenture as a contribution to
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its common equity capital or from the issue or sale of Equity Interests of
the Company (other than Disqualified Stock) or from the issue or sale of
Disqualified Stock or debt securities of the Company that have been
converted into such Equity Interests (other than Equity Interests (or
Disqualified Stock or convertible debt securities) sold to a Subsidiary of
the Company), plus (iii) to the extent that any Restricted Investment that
was made after the date of the Indenture is sold for cash or otherwise
liquidated or repaid for cash, the lesser of (A) the cash return of capital
with respect to such Restricted Investment (less the cost of disposition,
if any) and (B) the initial amount of such Restricted Investment plus, (iv)
in the event an Unrestricted Subsidiary is redesignated as a Restricted
Subsidiary, an amount equal to the lesser of (A) the net book value of
Investments made in such Unrestricted Subsidiary at the time of such
designation and (B) the fair market value of Investments made in such
Unrestricted Subsidiary at the time of such designation.
So long as no Default has occurred and is continuing or would be caused
thereby, the foregoing provisions will not prohibit (i) the payment of any
dividend within 60 days after the date of declaration thereof, if at said date
of declaration such payment would have complied with the provisions of the
Indenture; (ii) the redemption, repurchase, retirement, defeasance, or other
acquisition of any pari passu or subordinated Debt or Equity Interests of the
Company in exchange for, or out of the net cash proceeds of the substantially
concurrent sale (other than to a Restricted Subsidiary of the Company) of, other
Equity Interests of the Company (other than any Disqualified Stock); provided
that the amount of any such net cash proceeds that are utilized for any such
redemption, repurchase, retirement, defeasance, or other acquisition shall be
excluded from clause (c)(ii) of the preceding paragraph; (iii) the defeasance,
redemption, repurchase, or other acquisition of pari passu or subordinated Debt
with the net cash proceeds from an incurrence of Permitted Refinancing Debt; and
(iv) the payment of any dividend by a Restricted Subsidiary of the Company to
the holders of its Equity Interests on a pro rata basis.
The amount of all Restricted Payments (other than cash) shall be the fair
market value on the date of the Restricted Payment of the asset(s) or securities
proposed to be transferred or issued by the Company or such Restricted
Subsidiary, as the case may be, pursuant to the Restricted Payment. The fair
market value of any assets or securities that are required to be valued by this
covenant shall be determined by the Board of Directors whose resolution with
respect thereto shall be delivered to the Trustee, if such fair market value
exceeds $1.0 million and in addition, by a majority of the independent directors
of the Board of Directors if such fair market value exceeds $5.0 million. Not
later than the date of making any Restricted Payment, the Company shall deliver
to the Trustee an Officers' Certificate stating that such Restricted Payment is
permitted and setting forth the basis upon which the calculations required by
the covenant "Restricted Payments" were computed, together with a copy of any
fairness opinion or appraisal required by the Indenture.
The Board of Directors may designate any Restricted Subsidiary to be an
Unrestricted Subsidiary if such designation would not cause a Default. In the
event of any such designation, all outstanding Investments owned by the Company
and its Restricted Subsidiaries in the Subsidiary so designated will be deemed
to be a Restricted Payment made as of the time of such designation and will
reduce the amount available for Restricted Payments under the first paragraph of
this covenant. Such designation will only be permitted if such Restricted
Payment would be permitted at such time and if such Restricted Subsidiary
otherwise meets the definition of an Unrestricted Subsidiary. The Board of
Directors may redesignate any Unrestricted Subsidiary to be a Restricted
Subsidiary if such redesignation would not cause a Default.
Incurrence of Debt and Issuance of Preferred Stock
The Indenture provides that the Company will not, and will not permit any
of its Restricted Subsidiaries to, directly or indirectly, create, incur, issue,
assume, guarantee, or otherwise become directly or indirectly liable,
contingently or otherwise, with respect to (collectively, "incur") any Debt
(including Acquired Debt) and that the Company will not issue any Disqualified
Stock and will not permit any of its Restricted Subsidiaries to issue any shares
of preferred stock; provided, however, that the Company and the Restricted
Subsidiaries may incur Debt (including Acquired Debt), the Company may issue
shares of Disqualified Stock and the Restricted Subsidiaries may issue shares of
Preferred Stock if the Consolidated Coverage Ratio for the Company's most
recently ended four full fiscal quarters for which internal financial statements
are
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available immediately preceding the date on which such additional Debt is
incurred or such Disqualified Stock or Preferred Stock is issued would have been
at least (a) 2.0 to 1.0, if such incurrence or issuance is on or prior to July
1, 2001, and (b) 2.25 to 1.0, if such incurrence or issuance is after July 1,
2001, in each case determined on a pro forma basis (including a pro forma
application of the net proceeds therefrom), as if the additional Debt had been
incurred, or the Disqualified Stock or Preferred Stock had been issued, as the
case may be, at the beginning of such four-quarter period.
The provisions of the first paragraph of this covenant will not apply to
the incurrence of any of the following items of Debt (collectively, "Permitted
Debt") so long as no Default shall have occurred and be continuing or would be
caused thereby:
(i) the incurrence by the Company or the Guarantors of Debt under
Credit Facilities; provided that the aggregate principal amount of all term
Debt of the Company and its Restricted Subsidiaries outstanding under all
Credit Facilities after giving effect to such incurrence does not exceed an
amount equal to $50.0 million less the aggregate amount of all Net Proceeds
of Asset Sales that have been applied by the Company or any of its
Restricted Subsidiaries since the date of the Indenture to permanently
repay and reduce the commitments with respect to Debt under a Credit
Facility pursuant to the covenant described above under the caption
"-- Asset Sales"; and provided, further, that the Company will not permit
any Restricted Subsidiary that has incurred Debt under this clause (i) to
be released or relieved of any obligations under its Subsidiary Guarantee
so long as any such Debt remains outstanding;
(ii) the incurrence by the Company and its Restricted Subsidiaries of
the Existing Debt;
(iii) the incurrence by the Company of Debt represented by the Notes
and the Exchange Notes (in each case, other than Additional Notes) and the
incurrence by the Guarantors of Debt represented by the Subsidiary
Guarantees;
(iv) the incurrence by the Company or any of its Restricted
Subsidiaries of Debt represented by Capital Lease Obligations, mortgage
financings, or purchase money obligations, in each case incurred for the
purpose of financing all or any part of the purchase price or cost of
construction or improvement of property, plant, or equipment used in the
business of the Company or such Restricted Subsidiary, in an aggregate
principal amount not to exceed $5.0 million at any time outstanding;
(v) the incurrence by the Company or any of its Restricted
Subsidiaries of Permitted Refinancing Debt in exchange for, or the net
proceeds of which are used to refund, refinance, or replace Debt (other
than intercompany Debt) that was permitted by the Indenture to be incurred
under the first paragraph hereof or clauses (ii) or (iii) or this clause
(v) of this paragraph;
(vi) the incurrence by the Company or any of its Restricted
Subsidiaries of intercompany Debt between or among the Company and any of
its Wholly Owned Restricted Subsidiaries; provided, however, that (i) if
the Company is the obligor on such Debt, such Debt is expressly
subordinated to the prior payment in full in cash of all Obligations with
respect to the Notes and (ii)(A) any subsequent issuance or transfer of
Equity Interests that results in any such Debt being held by a Person other
than the Company or a Restricted Subsidiary thereof and (B) any sale or
other transfer of any such Debt to a Person that is not either the Company
or a Wholly Owned Restricted Subsidiary thereof shall be deemed, in each
case, to constitute an incurrence of such Debt by the Company or such
Restricted Subsidiary, as the case may be, that was not permitted by this
clause (vi);
(vii) Hedging Obligations consisting of Interest Rate Agreements
entered into in the ordinary course of business and not for the purpose of
speculation; provided, however, that such Interest Rate Agreements do not
increase the Debt of the Company outstanding at any time other than as a
result of fluctuations in interest rates or by reason of fees, indemnities,
and compensation payable thereunder;
(viii) Debt of the Company or any Restricted Subsidiary arising from
agreements providing for indemnification, adjustment of purchase price or
similar obligations, or from guarantees or letters of credit, surety bonds
or performance bonds securing any obligations of the Company or its
Restricted
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Subsidiaries pursuant to such agreements, in any case incurred in
connection with the disposition of any business, assets, or Restricted
Subsidiary of the Company to the extent none of the foregoing results in an
obligation to repay an obligation for money borrowed by any Person and are
limited in aggregate amount to no greater than 10% of the fair market value
of such business, assets, or Restricted Subsidiary so disposed of;
(ix) the guarantee by the Company or any of the Guarantors of Debt of
the Company or a Restricted Subsidiary of the Company that was permitted to
be incurred by another provision of this covenant; and
(x) the incurrence by the Company or any of its Restricted
Subsidiaries of additional Debt in an aggregate principal amount (or
accreted value, as applicable) at any time outstanding, together with all
other Debt of the Company and its Restricted Subsidiaries outstanding at
such time (other than Debt permitted by the first paragraph hereof or by
clauses (i) through (ix) above) does not to exceed $10.0 million.
For purposes of determining compliance with this covenant, in the event
that an item of proposed Debt meets the criteria of more than one of the
categories of Permitted Debt described in clauses (i) through (x) above as of
the date of incurrence thereof, or is entitled to be incurred pursuant to the
first paragraph of this covenant as of the date of incurrence thereof, the
Company shall, in its sole discretion, classify such item of Debt on the date of
its incurrence in any manner that complies with this covenant. Accrual of
interest, accretion, or amortization of original issue discount will not be
deemed to be an incurrence of Debt for purposes of this covenant.
Liens
The Indenture provides that the Company will not, and will not permit any
of its Subsidiaries to, directly or indirectly, create, incur, assume, or suffer
to exist any Lien of any kind securing Debt, Attributable Debt, or trade
payables on any asset now owned or hereafter acquired or any income or profits
therefrom or assign or convey any right to receive income therefrom, except
Permitted Liens, unless all payments due under the Indenture and the Notes are
secured on an equal and ratable basis with the Debt so secured until such time
as such is no longer secured by a Lien; provided that if such Debt is by its
terms expressly subordinated to the Notes or any Subsidiary Guarantee, the Lien
securing such Debt shall be subordinate and junior to the Lien securing the
Notes and the Subsidiary Guarantees with the same relative priority as such
subordinate or junior Debt shall have with respect to the Notes and the
Subsidiary Guarantees.
Dividend and Other Payment Restrictions Affecting Subsidiaries
The Indenture provides that the Company will not, and will not permit any
of its Restricted Subsidiaries to, directly or indirectly, create or otherwise
cause or suffer to exist or become effective any consensual encumbrance or
restriction on the ability of any Restricted Subsidiary to (i)(a) pay dividends
or make any other distributions to the Company or any of its Restricted
Subsidiaries (1) on its Capital Stock or (2) with respect to any other interest
or participation in, or measured by, its profits, or (b) pay any indebtedness
owed to the Company or any of its Restricted Subsidiaries, (ii) make loans or
advances to the Company or any of its Restricted Subsidiaries, or (iii) transfer
any of its properties or assets to the Company or any of its Restricted
Subsidiaries. However, the foregoing restrictions will not apply to encumbrances
or restrictions existing under or by reason of (a) Existing Debt as in effect on
the date of the Indenture, (b) the New Credit Facility as originally executed by
the Company and any amendments, modifications, restatements, renewals,
increases, supplements, refundings, replacements, or refinancings thereof,
provided that such amendments, modifications, restatements, renewals, increases,
supplements, refundings, replacements, or refinancings are no more restrictive,
taken as a whole, with respect to such dividend and other payment restrictions
than those contained in the New Credit Facility as originally executed by the
Company, (c) the Indenture and the Notes, (d) applicable law, (e) customary
non-assignment provisions in licensing agreements or leases entered into in the
ordinary course of business and consistent with past practices, (f) purchase
money obligations for property acquired in the ordinary course of business that
impose restrictions of the nature described in clause
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(iii) above on the property so acquired, (g) any agreement for the sale or other
disposition of a Restricted Subsidiary that restricts distributions by that
Restricted Subsidiary pending its sale or other disposition, (h) Permitted
Refinancing Debt, provided that the restrictions contained in the agreements
governing such Permitted Refinancing Debt are no more restrictive, taken as a
whole, than those contained in the agreements governing the Debt being
refinanced, (i) Liens securing Debt otherwise permitted to be incurred pursuant
to the provisions of the covenant described above under the caption "-- Liens"
that limit the right of the Company or any of its Restricted Subsidiaries to
dispose of the assets subject to such Lien, (j) provisions with respect to the
disposition or distribution of assets or property in joint venture agreements
and other similar agreements entered into in the ordinary course of business,
(k) restrictions on cash or other deposits or net worth imposed by customers
under contracts entered into in the ordinary course of business, (l)
restrictions existing by reason of or under Debt existing on the date of the
Indenture, and (m) any customary restrictions existing under any agreement
entered into with respect to the sale or disposition of all or substantially all
the Equity Interests or assets of a Restricted Subsidiary, provided that the
disposition or sale is governed by the restrictions described under "Repurchase
at the Option of Holders."
Merger, Consolidation, or Sale of Assets
The Indenture provides that the Company may not, directly or indirectly,
consolidate or merge with or into (whether or not the Company is the surviving
corporation), or sell, assign, transfer, convey, or otherwise dispose of all or
substantially all of its properties or assets, in one or more related
transactions, to another Person unless (i) the Company is the surviving
corporation or the Person formed by or surviving any such consolidation or
merger (if other than the Company) or to which such sale, assignment, transfer,
conveyance, or other disposition shall have been made is a corporation organized
or existing under the laws of the United States, any state thereof or the
District of Columbia; (ii) the Person formed by or surviving any such
consolidation or merger (if other than the Company) or the Person to which such
sale, assignment, transfer, conveyance or other disposition shall have been made
assumes all the obligations of the Company under the Registration Rights
Agreement, the Notes, and the Indenture pursuant to a supplemental indenture in
a form reasonably satisfactory to the Trustee; (iii) immediately after such
transaction no Default or Event of Default exists; and (iv) except in the case
of a merger of the Company with or into a Wholly Owned Restricted Subsidiary of
the Company, the Company or the Person formed by or surviving any such
consolidation or merger (if other than the Company), or to which such sale,
assignment, transfer, conveyance, or other disposition shall have been made
will, immediately after such transaction after giving pro forma effect thereto
and any related financing transactions as if the same had occurred at the
beginning of the applicable four-quarter period, be permitted to incur at least
$1.00 of additional Debt pursuant to the Consolidated Coverage Ratio test set
forth in the first paragraph of the covenant described above under the caption
"-- Incurrence of Debt and Issuance of Preferred Stock." The Indenture also
provides that the Company may not, directly or indirectly, lease all or
substantially all of its properties or assets, in one or more related
transactions, to any other Person. The provisions of this covenant will not be
applicable to a sale, assignment, transfer, conveyance, or other disposition of
assets between or among the Company and its Wholly Owned Restricted
Subsidiaries.
Transactions with Affiliates
The Indenture provides that the Company will not, and will not permit any
of its Restricted Subsidiaries to, make any payment to, or sell, lease,
transfer, or otherwise dispose of any of its properties or assets to, or
purchase any property or assets from, or enter into or make or amend any
transaction, contract, agreement, understanding, loan, advance, or guarantee
with, or for the benefit of, any Affiliate (each of the foregoing, an "Affiliate
Transaction"), unless (i) such Affiliate Transaction is on terms that are no
less favorable to the Company or the relevant Restricted Subsidiary than those
that would have been obtained in a comparable transaction by the Company or such
Restricted Subsidiary with an unrelated Person and (ii) the Company delivers to
the Trustee (a) with respect to any Affiliate Transaction or series of related
Affiliate Transactions involving aggregate consideration in excess of $1.0
million, a resolution of the Board of Directors set forth in an Officers'
Certificate certifying that such Affiliate Transaction complies with clause (i)
above and that such Affiliate Transaction has been approved by a majority of the
disinterested members of the Board of Directors and (b) with respect to any
Affiliate Transaction or series of related Affiliate Transactions involving
aggregate
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consideration in excess of $5.0 million, an opinion as to the fairness to the
Holders of such Affiliate Transaction from a financial point of view issued by
an accounting, appraisal, or investment banking firm of national standing.
Notwithstanding the foregoing, the following items shall not be deemed to be
Affiliate Transactions: (i) the entering into and performance of obligations
under any employment agreement entered into by the Company or any of its
Restricted Subsidiaries in the ordinary course of business and consistent with
the past practice of the Company or such Restricted Subsidiary, (ii)
transactions between or among the Company and/or its Restricted Subsidiaries,
(iii) payment of reasonable directors fees to Persons who are not otherwise
Affiliates of the Company, (iv) any sale or other issuance of Equity Interests
(other than Disqualified Stock) of the Company, and (v) Restricted Payments that
are permitted by the provisions of the Indenture described above under the
caption "-- Restricted Payments."
Sale and Leaseback Transactions
The Indenture provides that the Company will not, and will not permit any
of its Restricted Subsidiaries to, enter into any sale and leaseback
transaction; provided that the Company or any of its Restricted Subsidiaries may
enter into a sale and leaseback transaction if (i) the Company or such
Restricted Subsidiary, as applicable, could have (a) incurred Debt in an amount
equal to the Attributable Debt relating to such sale and leaseback transaction
pursuant to the Consolidated Coverage Ratio test set forth in the first
paragraph of the covenant described above under the caption "-- Incurrence of
Additional Debt and Issuance of Preferred Stock" and (b) incurred a Lien to
secure such Debt pursuant to the covenant described above under the caption
"-- Liens," (ii) the consideration received in connection with such sale and
leaseback transaction is at least equal to the fair market value (as determined
in good faith by the Board of Directors and set forth in an Officers'
Certificate delivered to the Trustee) of the property that is the subject of
such sale and leaseback transaction, and (iii) the transfer of assets in such
sale and leaseback transaction is permitted by, and the Company applies the
proceeds of such transaction in compliance with, the covenant described above
under the caption "-- Repurchase at the Option of Holders -- Asset Sales."
Limitation on Capital Stock of Restricted Subsidiaries
The Company will not sell any shares of Capital Stock of a Restricted
Subsidiary, and will not permit any Restricted Subsidiary, directly or
indirectly, to issue or sell any shares of its Capital Stock except: (i) to the
Company or a Wholly Owned Restricted Subsidiary or (ii) (A) in compliance with
the covenant described under "Asset Sales" if, immediately after giving effect
to such issuance or sale, such Restricted Subsidiary would continue to be a
Restricted Subsidiary or (B) if, immediately after giving effect to such
issuance or sale, such Restricted Subsidiary would no longer be a Restricted
Subsidiary and the Investment of the Company in such Person after giving effect
to such issuance or sale would have been permitted to be made under the covenant
described under "-- Restricted Payments" as if made on the date of such issuance
or sale. Notwithstanding the foregoing, (i) the Company may sell all of the
Capital Stock of a Subsidiary as long as the Company is in compliance with the
terms of the covenant described under "-- Repurchase at the Option of
Holders -- Asset Sales" and (ii) the Company and its Restricted Subsidiaries may
issue directors' qualifying shares or shares issued to be held by foreign
nationals (in each case to the extent mandated by applicable law).
Limitation on the Sale or Issuance of Preferred Stock of Restricted
Subsidiaries
The Company will not sell any shares of Preferred Stock of any Restricted
Subsidiary and will not permit any Restricted Subsidiary, directly or
indirectly, to issue or sell any shares of its Preferred Stock to any Person
(other than to the Company or a Wholly Owned Restricted Subsidiary).
Business Activities
The Company will not, and will not permit any Restricted Subsidiary to,
engage in any business other than Permitted Businesses, except to such extent as
would not be material to the Company and its Subsidiaries taken as a whole.
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Payments for Consent
The Indenture provides that neither the Company nor any of its Subsidiaries
will, directly or indirectly, pay or cause to be paid any consideration, whether
by way of interest, fee or otherwise, to any Holder of any Notes for or as an
inducement to any consent, waiver, or amendment of any of the terms or
provisions of the Indenture or the Notes unless such consideration is offered to
be paid or is paid to all Holders of the Notes that consent, waive, or agree to
amend in the time frame set forth in the solicitation documents relating to such
consent, waiver, or agreement.
No Senior Subordinated Debt
The Indenture provides that (i) the Company will not incur, create, issue,
assume, guarantee, or otherwise become liable for any Debt that is subordinate
or junior in right of payment to any Senior Debt and senior in any respect in
right of payment to the Notes, and (ii) no Guarantor will incur, create, issue,
assume, guarantee, or otherwise become liable for any Debt that is subordinate
or junior in right of payment to any Senior Debt of such Guarantor and senior in
any respect in right of payment to the Subsidiary Guarantees.
Reports
The Indenture provides that, whether or not required by the rules and
regulations of the Commission, so long as any Notes are outstanding, the Company
will furnish to the Holders of Notes (i) all quarterly and annual financial
information that would be required to be contained in a filing with the
Commission on Forms 10-Q and 10-K if the Company were required to file such
Forms, including a "Management's Discussion and Analysis of Financial Condition
and Results of Operations" that describes the financial condition and results of
operations of the Company and its consolidated Subsidiaries (showing in
reasonable detail, either on the face of the financial statements or in the
footnotes thereto and in Management's Discussion and Analysis of Financial
Condition and Results of Operations, the financial condition and results of
operations of the Company and its Restricted Subsidiaries separate from the
financial condition and results of operations of the Unrestricted Subsidiaries
of the Company) and, with respect to the annual information only, a report
thereon by the Company's certified independent accountants and (ii) all current
reports that would be required to be filed with the Commission on Form 8-K if
the Company were required to file such reports, in each case within the time
periods specified in the Commission's rules and regulations. In addition,
following the consummation of the exchange offer contemplated by the
Registration Rights Agreement, whether or not required by the rules and
regulations of the Commission, the Company will file a copy of all such
information and reports with the Commission for public availability within the
time periods specified in the Commission's rules and regulations (unless the
Commission will not accept such a filing) and make such information available to
securities analysts and prospective investors upon request. In addition, the
Company and the Guarantors have agreed that, for so long as any Notes remain
outstanding, they will furnish to the Holders and to securities analysts and
prospective investors, upon their request, the information required to be
delivered pursuant to Rule 144A(d)(4) under the Securities Act.
Additional Subsidiary Guarantees
The Indenture provides that (i) the Company will not permit any of its
Restricted Subsidiaries that is not a Subsidiary Guarantor to guarantee or
secure through the granting of Liens the payment of any Debt of the Company or
any Guarantor and (ii) the Company will not and will not permit any of its
Restricted Subsidiaries to pledge any intercompany notes representing
obligations of any of its Restricted Subsidiaries, to secure the payment of any
Debt of the Company or any Guarantor, in each case unless such Subsidiary, the
Company and the Trustee execute and deliver a supplemental indenture evidencing
such Subsidiary's Subsidiary Guarantee (providing for the unconditionally
guarantee by such Restricted Subsidiary, on a senior subordinated basis, of the
Notes).
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EVENTS OF DEFAULT AND REMEDIES
The Indenture provides that each of the following constitutes an Event of
Default: (i) default for 30 days in the payment when due of interest (including
any Additional Interest) on the Notes (whether or not prohibited by the
subordination provisions of the Indenture); (ii) default in payment when due of
the principal of or premium, if any, on the Notes (whether or not prohibited by
the subordination provisions of the Indenture); (iii) failure by the Company or
any of its Restricted Subsidiaries to comply with the provisions described under
the captions "-- Repurchase at the Option of Holders -- Change of Control,"
"-- Repurchase at the Option of Holders -- Asset Sales," "-- Certain
Covenants -- Restricted Payments," "-- Certain Covenants -- Merger,
Consolidation, or Sale of Assets," or "-- Certain Covenants -- Incurrence of
Debt and Issuance of Preferred Stock"; (iv) failure by the Company or any of its
Restricted Subsidiaries for 60 days after notice to comply with any of its other
agreements in the Indenture or the Notes; (v) default under any mortgage,
indenture or instrument under which there may be issued or by which there may be
secured or evidenced any Debt for money borrowed by the Company or any of its
Restricted Subsidiaries (or the payment of which is guaranteed by the Company or
any of its Restricted Subsidiaries) whether such Debt or guarantee now exists,
or is created after the date of the Indenture, which default (a) is caused by a
failure to pay principal of or premium, if any, or interest on such Debt prior
to the expiration of the grace period provided in such Debt on the date of such
default (a "Payment Default") or (b) results in the acceleration of such Debt
prior to its express maturity and, in each case, the principal amount of any
such Debt, together with the principal amount of any other such Debt under which
there has been a Payment Default or the maturity of which has been so
accelerated, aggregates $5.0 million or more; (vi) failure by the Company or any
of its Restricted Subsidiaries to pay final judgments aggregating in excess of
$5.0 million, which judgments are not paid, discharged or stayed for a period of
60 days; (vii) except as permitted by the Indenture, any Subsidiary Guarantee
shall be held in any judicial proceeding to be unenforceable or invalid or shall
cease for any reason to be in full force and effect or any Guarantor, or any
Person acting on behalf of any Guarantor, shall deny or disaffirm its
obligations under its Subsidiary Guarantee; and (viii) certain events of
bankruptcy or insolvency with respect to the Company or any of its Restricted
Subsidiaries.
If any Event of Default occurs and is continuing, the Trustee or the
Holders of at least 25% in principal amount of the then outstanding Notes may
declare all the Notes to be due and payable immediately. Notwithstanding the
foregoing, in the case of an Event of Default arising from certain events of
bankruptcy or insolvency, with respect to the Company, any Significant
Subsidiary or any group of Subsidiaries that, taken together, would constitute a
Significant Subsidiary, all outstanding Notes will become due and payable
without further action or notice. Holders of the Notes may not enforce the
Indenture or the Notes except as provided in the Indenture. Subject to certain
limitations, Holders of a majority in principal amount of the then outstanding
Notes may direct the Trustee in its exercise of any trust or power. The Trustee
may withhold from Holders of the Notes notice of any continuing Default or Event
of Default (except a Default or Event of Default relating to the payment of
principal or interest) if it determines that withholding notice is in their
interest.
In the case of any Event of Default occurring by reason of any willful
action (or inaction) taken (or not taken) by or on behalf of the Company with
the intention of avoiding payment of the premium that the Company would have had
to pay if the Company then had elected to redeem the Notes pursuant to the
optional redemption provisions of the Indenture, an equivalent premium shall
also become and be immediately due and payable to the extent permitted by law
upon the acceleration of the Notes. If an Event of Default occurs prior to July
1, 2003 by reason of any willful action (or inaction) taken (or not taken) by or
on behalf of the Company with the intention of avoiding the prohibition on
redemption of the Notes prior to July 1, 2003, then the premium specified in the
Indenture shall also become immediately due and payable to the extent permitted
by law upon the acceleration of the Notes.
The Holders of a majority in aggregate principal amount of the Notes then
outstanding by notice to the Trustee may on behalf of the Holders of all of the
Notes waive any existing Default or Event of Default and its consequences under
the Indenture except a continuing Default or Event of Default in the payment of
interest on, or the principal of, the Notes.
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The Company is required to deliver to the Trustee annually a statement
regarding compliance with the Indenture, and the Company is required upon
becoming aware of any Default or Event of Default, to deliver to the Trustee a
statement specifying such Default or Event of Default.
NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES, AND STOCKHOLDERS
No director, officer, employee, incorporator, or stockholder of the Company
or any of its Subsidiaries, as such, shall have any liability for any
obligations of the Company or any of its Subsidiaries under the Notes, the
Subsidiary Guarantees, the Indenture or for any claim based on, in respect of,
or by reason of, such obligations or their creation. Each Holder of Notes by
accepting a Note waives and releases all such liability. The waiver and release
are part of the consideration for issuance of the Notes. Such waiver may not be
effective to waive liabilities under the federal securities laws and it is the
view of the Commission that such a waiver is against public policy.
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
The Company may, at its option and at any time, elect to have all of its
obligations discharged with respect to the outstanding Notes and the Guarantors'
obligations discharged with respect to the Subsidiary Guarantees ("Legal
Defeasance"), except for (i) the rights of Holders of outstanding Notes to
receive payments in respect of the principal of, premium, if any, and interest
on such Notes when such payments are due from the trust referred to below, (ii)
the Company's obligations with respect to the Notes concerning issuing temporary
Notes, registration of Notes, mutilated, destroyed, lost or stolen Notes and the
maintenance of an office or agency for payment and money for security payments
held in trust, (iii) the rights, powers, trusts, duties, and immunities of the
Trustee, and the Company's obligations in connection therewith, and (iv) the
Legal Defeasance provisions of the Indenture. In addition, the Company and its
Subsidiaries may, at its option and at any time, elect to have the obligations
of the Company released with respect to certain covenants that are described in
the Indenture ("Covenant Defeasance") and thereafter any omission to comply with
such obligations shall not constitute a Default or Event of Default with respect
to the Notes or the Subsidiary Guarantees. In the event Covenant Defeasance
occurs, certain events (not including non-payment, bankruptcy, receivership,
rehabilitation, and insolvency events) described under "Events of Default" will
no longer constitute an Event of Default with respect to the Notes or the
Subsidiary Guarantees.
In order to exercise either Legal Defeasance or Covenant Defeasance, (i)
the Company must irrevocably deposit with the Trustee, in trust, for the benefit
of the Holders of the Notes, cash in U.S. dollars, non-callable Government
Securities, or a combination thereof, in such amounts as will be sufficient, in
the opinion of a nationally recognized firm of independent public accountants,
to pay the principal of, premium, if any, and interest on the outstanding Notes
on the stated maturity or on the applicable redemption date, as the case may be,
and the Company must specify whether the Notes are being defeased to maturity or
to a particular redemption date; (ii) in the case of Legal Defeasance, the
Company shall have delivered to the Trustee an opinion of counsel in the United
States reasonably acceptable to the Trustee confirming that (A) the Company has
received from, or there has been published by, the Internal Revenue Service a
ruling or (B) since the date of the Indenture, there has been a change in the
applicable federal income tax law, in either case to the effect that, and based
thereon such opinion of counsel shall confirm that, the Holders of the
outstanding Notes will not recognize income, gain, or loss for federal income
tax purposes as a result of such Legal Defeasance and will be subject to federal
income tax on the same amounts, in the same manner and at the same times as
would have been the case if such Legal Defeasance had not occurred; (iii) in the
case of Covenant Defeasance, the Company shall have delivered to the Trustee an
opinion of counsel in the United States reasonably acceptable to the Trustee
confirming that the Holders of the outstanding Notes will not recognize income,
gain, or loss for federal income tax purposes as a result of such Covenant
Defeasance and will be subject to federal income tax on the same amounts, in the
same manner and at the same times as would have been the case if such Covenant
Defeasance had not occurred; (iv) no Default or Event of Default shall have
occurred and be continuing on the date of such deposit (other than a Default or
Event of Default resulting from the borrowing of funds to be applied to such
deposit) or insofar as Events of Default from bankruptcy or insolvency events
are concerned, at any time in the period ending on the 91st day after the date
of deposit; (v) such Legal Defeasance or Covenant Defeasance will not result in
a breach or violation of, or
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constitute a default under any material agreement or instrument (other than the
Indenture) to which the Company or any of its Subsidiaries is a party or by
which the Company or any of its Subsidiaries is bound; (vi) the Company must
have delivered to the Trustee an opinion of counsel to the effect that after the
91st day following the deposit, the trust funds will not be subject to the
effect of any applicable bankruptcy, insolvency, reorganization, or similar laws
affecting creditors' rights generally; (vii) the Company must deliver to the
Trustee an Officers' Certificate stating that the deposit was not made by the
Company with the intent of preferring the Holders of Notes over the other
creditors of the Company with the intent of defeating, hindering, delaying, or
defrauding creditors of the Company or others; and (viii) the Company must
deliver to the Trustee an Officers' Certificate and an opinion of counsel, each
stating that all conditions precedent provided for relating to the Legal
Defeasance or the Covenant Defeasance have been complied with.
TRANSFER AND EXCHANGE
A Holder may transfer or exchange Notes in accordance with the Indenture.
The Registrar and the Trustee may require a Holder, among other things, to
furnish appropriate endorsements and transfer documents and the Company may
require a Holder to pay any taxes and fees required by law or permitted by the
Indenture. The Company is not required to transfer or exchange any Note selected
for redemption. Also, the Company is not required to transfer or exchange any
Note for a period of 15 days before a selection of Notes to be redeemed.
The registered Holder of a Note will be treated as the owner of it for all
purposes.
AMENDMENT, SUPPLEMENT, AND WAIVER
Except as provided in the next two succeeding paragraphs, the Indenture or
the Notes may be amended or supplemented with the consent of the Holders of at
least a majority in principal amount of the Notes then outstanding (including,
without limitation, consents obtained in connection with a purchase of, or
tender offer or exchange offer for, Notes), and any existing default or
compliance with any provision of the Indenture or the Notes may be waived with
the consent of the Holders of a majority in principal amount of the then
outstanding Notes (including, without limitation, consents obtained in
connection with a purchase of, or tender offer or exchange offer for, Notes).
Without the consent of each Holder affected, an amendment or waiver may not
(with respect to any Notes held by a non-consenting Holder): (i) reduce the
principal amount of Notes whose Holders must consent to an amendment,
supplement, or waiver, (ii) reduce the principal of or change the fixed maturity
of any Note or alter the provisions with respect to the redemption of the Notes
(other than provisions relating to the covenants described above under the
caption "-- Repurchase at the Option of Holders"), (iii) reduce the rate of or
change the time for payment of interest on any Note, (iv) waive a Default or
Event of Default in the payment of principal of or premium, if any, or interest
on the Notes (except a rescission of acceleration of the Notes by the Holders of
at least a majority in aggregate principal amount of the Notes and a waiver of
the payment default that resulted from such acceleration), (v) make any Note
payable in money other than that stated in the Notes, (vi) make any change in
the provisions of the Indenture relating to waivers of past Defaults or the
rights of Holders of Notes to receive payments of principal of or premium, if
any, or interest on the Notes, (vii) waive a redemption payment with respect to
any Note (other than a payment required by one of the covenants described above
under the caption "-- Repurchase at the Option of Holders"), or (viii) make any
change in the foregoing amendment and waiver provisions. In addition, any
amendment to the provisions of Article 10 of the Indenture (which relate to
subordination) will require the consent of the Holders of at least 66 2/3% in
aggregate principal amount of the Notes then outstanding if such amendment would
adversely affect the rights of Holders of Notes.
Notwithstanding the foregoing, without the consent of any Holder of Notes,
the Company and the Trustee may amend or supplement the Indenture or the Notes
to cure any ambiguity, defect or inconsistency, to provide for uncertificated
Notes in addition to or in place of certificated Notes, to provide for the
assumption of the Company's obligations to Holders of Notes in the case of a
merger or consolidation or sale of all or substantially all of the Company's
assets, to make any change that would provide any additional rights
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or benefits to the Holders of Notes or that does not adversely affect the legal
rights under the Indenture of any such Holder, or to comply with requirements of
the Commission in order to effect or maintain the qualification of the Indenture
under the Trust Indenture Act.
CONCERNING THE TRUSTEE
The Indenture contains certain limitations on the rights of the Trustee,
should it become a creditor of the Company, to obtain payment of claims in
certain cases, or to realize on certain property received in respect of any such
claim as security or otherwise. The Trustee will be permitted to engage in other
transactions; however, if it acquires any conflicting interest it must eliminate
such conflict within 90 days, apply to the Commission for permission to continue
or resign.
The Holders of a majority in principal amount of the then outstanding Notes
will have the right to direct the time, method, and place of conducting any
proceeding for exercising any remedy available to the Trustee, subject to
certain exceptions. The Indenture provides that in case an Event of Default
shall occur (which shall not be cured), the Trustee will be required, in the
exercise of its power, to use the degree of care of a prudent man in the conduct
of his own affairs. Subject to such provisions, the Trustee will be under no
obligation to exercise any of its rights or powers under the Indenture at the
request of any Holder of Notes, unless such Holder shall have offered to the
Trustee security and indemnity satisfactory to it against any loss, liability,
or expense.
ADDITIONAL INFORMATION
Anyone who receives this Prospectus may obtain a copy of the Indenture and
Registration Rights Agreement without charge by writing to Styling Technology
Corporation, 2390 East Camelback Road, Suite 435, Phoenix, Arizona 85016,
Attention: Chief Financial Officer.
BOOK-ENTRY, DELIVERY, AND FORM
The Exchange Notes initially will be issued in the form of one Global
Exchange Note (the "Global Exchange Note"). The Global Exchange Note will be
deposited on the Exchange Date with the Depositary and registered in the name of
Cede & Co., as nominee of the Depositary (the "Global Exchange Note Holder").
Except as set forth below, the Global Exchange Note may be transferred, in whole
and not in part, only to another nominee of the Depositary or to a successor of
the Depositary or its nominee.
The Company expects that, pursuant to procedures established by the
Depositary, (i) upon deposit of the Global Exchange Note, the Depositary will
credit on its internal system the principal amounts of the Exchange Notes of the
individual beneficial interests represented by such Global Exchange Note to the
respective accounts of exchanging holders who have accounts with the Depositary
and (ii) ownership of such interest in the Global Exchange Note will be shown
on, and the transfer of ownership thereof will be effected only through, records
maintained by the Depositary (with respect to the interests of the Depositary's
Participants), the Depositary's Participants and the Depositary's Indirect
Participants. Prospective purchasers are advised that the laws of some states
require that certain persons take physical delivery in definitive form of
securities that they own. Consequently, the ability to transfer Exchange Notes
evidenced by the Global Exchange Note will be limited to such extent.
So long as the Global Exchange Note Holder is the registered owner of any
Exchange Notes, the Global Exchange Note Holder will be considered the sole
holder under the Indenture of any Exchange Notes evidenced by the Global
Exchange Note. Beneficial owners of Exchange Notes evidenced by the Global
Exchange Note will not be considered the owners or holders thereof under the
Indenture for any purpose, including with respect to the giving of any
directions, instructions or approvals to the Trustee thereunder. Neither the
Company nor the Trustee will have any responsibility or liability for any aspect
of the records of the Depositary or for maintaining, supervising or reviewing
any records of the Depositary relating to the Exchange Notes.
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Payments in respect of the principal of and premium, and interest, on any
Exchange Notes registered in the name of the Global Exchange Note Holder on the
applicable record date will be payable by the Trustee to or at the direction of
the Global Exchange Note Holder in its capacity as the registered holder under
the Indenture. Under the terms of the Indenture, the Company and the Trustee may
treat the persons in whose names Exchange Notes, including the Global Exchange
Note, are registered as the owners thereof for the purpose of receiving such
payments. Consequently, neither the Company nor the Trustee has or will have any
responsibility or liability for the payment of such amounts to beneficial owners
of Exchange Notes. The Company believes, however, that it is currently the
policy of the Depositary to immediately credit the accounts of the relevant
Participants with such payments, in amounts proportionate to their respective
holdings of beneficial interests in the relevant security as shown on the
records of the Depositary. Payments by the Depositary's Participants and the
Depositary's Indirect Participants to the beneficial owners of Exchange Notes
will be governed by standing instructions and customary practice and will be the
responsibility of the Depositary's Participants or the Depositary's Indirect
Participants.
DTC has advised the Company that DTC is a limited-purpose trust company
created to hold securities for its participating organizations (collectively,
the "Participants") and to facilitate the clearance and settlement of
transactions in those securities between Participants through electronic
book-entry changes in accounts of its Participants. The Participants include
securities brokers and dealers (including the Initial Purchasers), banks, trust
companies, clearing corporations and certain other organizations. Access to
DTC's system is also available to other entities such as banks, brokers, dealers
and trust companies that clear through or maintain a custodial relationship with
a Participant, either directly or indirectly (collectively, the "Indirect
Participants"). Persons who are not Participants may beneficially own securities
held by or on behalf of DTC only through the Participants or the Indirect
Participants. The ownership interests in, and transfers of ownership interests
in, each security held by or on behalf of DTC are recorded on the records of the
Participants and Indirect Participants.
CERTIFICATED SECURITIES
Subject to certain conditions, any person having a beneficial interest in a
Global Exchange Note may, upon request to the Trustee, exchange such beneficial
interest for Exchange Notes in the form of Certificated Securities. Upon any
such issuance, the Trustee is required to register such Certificated Securities
in the name of, and cause the same to be delivered to, such person or persons
(or the nominee of any thereof). In addition, if (i) the Company notifies the
Trustee in writing that the Depositary is no longer willing or able to act as a
depositary and the Company is unable to locate a qualified successor within 90
days or (ii) the Company, at its option, notifies the Trustee in writing that it
elects to cause the issuance of Exchange Notes in the form of Certificated
Securities under the Indenture, then, upon surrender by the Global Exchange Note
Holder of the Global Exchange Note, Exchange Notes in such form will be issued
to each person that the Global Exchange Note Holder and the Depositary identify
as being the beneficial owner of the related Exchange Notes.
Neither the Company nor the Trustee will be liable for any delay by the
Global Exchange Note Holder or the Depositary in identifying the beneficial
owners of Exchange Notes and the Company and the Trustee may conclusively rely
on, and will be protected in relying on, instructions from the Global Exchange
Note Holder or the Depositary for all purposes.
SAME DAY SETTLEMENT AND PAYMENT
The Indenture requires that payments in respect of the Notes represented by
the Global Exchange Notes (including principal, premium, if any, and interest)
be made by wire transfer of immediately available funds to the accounts
specified by the Global Exchange Note Holder. With respect to Notes in
certificated form, the Company will make all payments of principal, premium, if
any, and interest by wire transfer of immediately available funds to the
accounts specified by the Holders thereof or, if no such account is specified,
by mailing a check to each such Holder's registered address. The Exchange Notes
represented by the Global Exchange Notes are expected to be eligible to trade in
the Depositary's Same-Day Funds Settlement System, and any permitted secondary
market trading activity in such Exchange Notes will, therefore, be required by
the
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Depositary to be settled in immediately available funds. The Company expects
that secondary trading in any certificated Notes will also be settled in
immediately available funds.
REGISTRATION RIGHTS; ADDITIONAL INTEREST
The Company, the Guarantors, and the Initial Purchasers entered into the
Registration Rights Agreement in connection with the issuance of the Outstanding
Notes. Pursuant to the Registration Rights Agreement, the Company and the
Guarantors agreed to file with the Commission the Exchange Offer Registration
Statement on the appropriate form under the Securities Act with respect to the
Exchange Notes. If (i) the Company and the Guarantors are not required to file
the Exchange Offer Registration Statement or permitted to consummate the
Exchange Offer because the Exchange Offer is not permitted by applicable law or
Commission policy or (ii) any Holder of Transfer Restricted Securities notifies
the Company prior to the 20th day following consummation of the Exchange Offer
that (A) it is prohibited by law or Commission policy from participating in the
Exchange Offer or (B) that it may not resell the Exchange Notes acquired by it
in the Exchange Offer to the public without delivering a prospectus and the
prospectus contained in the Exchange Offer Registration Statement is not
appropriate or available for such resales or (C) that it is a broker-dealer and
owns Notes acquired directly from the Company or an affiliate of the Company,
the Company will file with the Commission a shelf registration statement
pursuant to Rule 415 under the Securities Act (the "Shelf Registration
Statement") to cover resales of the Notes by the Holders thereof who satisfy
certain conditions relating to the provision of information in connection with
the Shelf Registration Statement. The Company and the Guarantors will use their
best efforts to cause the applicable registration statement to be declared
effective as promptly as possible by the Commission. For purposes of the
foregoing, "Transfer Restricted Securities" means each Note until (i) the date
on which such Note has been exchanged by a person other than a broker-dealer for
an Exchange Note in the Exchange Offer, (ii) following the exchange by a
broker-dealer in the Exchange Offer of a Note for an Exchange Note, the date on
which such Exchange Note is sold to a purchaser who receives from such
broker-dealer on or prior to the date of such sale a copy of the prospectus
contained in the Exchange Offer Registration Statement, (iii) the date on which
such Note has been effectively registered under the Securities Act and disposed
of in accordance with the Shelf Registration Statement, or (iv) the date on
which such Note is distributed to the public pursuant to Rule 144 under the
Securities Act.
The Registration Rights Agreement provides that (i) the Company and the
Guarantors will file an Exchange Offer Registration Statement with the
Commission on or prior to 45 days after the Closing Date, (ii) the Company and
the Guarantors will use their best efforts to have the Exchange Offer
Registration Statement declared effective by the Commission on or prior to 90
days after the Closing Date, (iii) unless the Exchange Offer would not be
permitted by applicable law or Commission policy, the Company and the Guarantors
will commence the Exchange Offer and use their best efforts to issue on or prior
to 30 business days after the date on which the Exchange Offer Registration
Statement was declared effective by the Commission, Exchange Notes in exchange
for all Notes tendered prior thereto in the Exchange Offer, and (iv) if
obligated to file the Shelf Registration Statement, the Company and the
Guarantors will use their best efforts to file the Shelf Registration Statement
with the Commission on or prior to 45 days after such filing obligation arises
and to cause the Shelf Registration to be declared effective by the Commission
on or prior to 90 days after such obligation arises. If (a) the Company and the
Guarantors fail to file any of the Registration Statements required by the
Registration Rights Agreement on or before the date specified for such filing,
(b) any of such Registration Statements is not declared effective by the
Commission on or prior to the date specified for such effectiveness (the
"Effectiveness Target Date"), (c) the Company and the Guarantors fail to
consummate the Exchange Offer within 30 business days of the Effectiveness
Target Date with respect to the Exchange Offer Registration Statement, or (d)
the Shelf Registration Statement or the Exchange Offer Registration Statement is
declared effective but thereafter ceases to be effective or usable in connection
with resales of Transfer Restricted Securities during the periods specified in
the Registration Rights Agreement (each such event referred to in clauses (a)
through (d) above a "Registration Default"), then interest ("Additional
Interest") will accrue on the Notes (in addition to the stated interest on the
Notes) from and including the date on which any such Registration Default shall
occur to but excluding the date on which all Registration Defaults have been
cured. Additional Interest will accrue at a rate of 0.50% per annum over the
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rate at which interest is then otherwise accruing during the 90-day period
immediately following the occurrence of any Registration Default and shall
increase by 0.25% per annum at the end of each subsequent 90-day period, but in
no event shall such Additional Interest exceed 2.00% per annum. Additional
Interest will be payable in cash, semiannually in arrears on each January 1 and
July 1, regardless of whether any such date is otherwise an Interest Payment
Date. All references herein and in the Indenture to "interest" on the Notes
shall be deemed to include any Additional Interest that may become payable
thereon according to the provisions of this paragraph.
Holders of Notes will be required to make certain representations to the
Company (as described in the Registration Rights Agreement) in order to
participate in the Exchange Offer and will be required to deliver certain
information to be used in connection with the Shelf Registration Statement and
to provide comments on the Shelf Registration Statement within the time periods
set forth in the Registration Rights Agreement in order to have their Notes
included in the Shelf Registration Statement. Holders of Notes will also be
required to suspend their use of the prospectus included in the Shelf
Registration Statement under certain circumstances upon receipt of written
notice to that effect from the Company.
CERTAIN DEFINITIONS
Set forth below are certain defined terms used in the Indenture. Reference
is made to the Indenture for a full disclosure of all such terms, as well as any
other capitalized terms used herein for which no definition is provided.
"Acquired Debt" means, with respect to any specified Person, (i) Debt
of any other Person existing at the time such other Person is merged with
or into or becomes a Subsidiary of such specified Person, including,
without limitation, Debt incurred in connection with, or in contemplation
of, such other Person merging with or into or becoming a Subsidiary of such
specified Person, and (ii) Debt secured by a Lien encumbering any asset
acquired by such specified Person.
"Affiliate" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For purposes of this definition,
"control" (including, with correlative meanings, the terms "controlling,"
"controlled by," and "under common control with"), as used with respect to
any Person, shall mean the possession, directly or indirectly, of the power
to direct or cause the direction of the management or policies of such
Person, whether through the ownership of voting securities, by agreement or
otherwise; provided that beneficial ownership of 10% or more of the Voting
Stock of a Person shall be deemed to be control.
"Asset Sale" means (i) the sale, lease, conveyance, or other
disposition of any assets or rights (including, without limitation, by way
of a sale and leaseback) other than sales of inventory in the ordinary
course of business consistent with past practices (provided that the sale,
conveyance, or other disposition of all or substantially all of the assets
of the Company and its Restricted Subsidiaries taken as a whole will be
governed by the provisions of the Indenture described above under the
caption "-- Repurchase at the Option of Holders -- Change of Control"
and/or the provisions described above under the caption "-- Certain
Covenants -- Merger, Consolidation, or Sale of Assets" and not by the
provisions of the Asset Sale covenant), and (ii) the issue by any
Restricted Subsidiary of the Company of any Equity Interests of such
Restricted Subsidiary and the sale by the Company or any of its Restricted
Subsidiaries of any Equity Interest of any of the Company's Subsidiaries,
in the case of either clause (i) or (ii), whether in a single transaction
or a series of related transactions (a) that have a fair market value in
excess of $1.0 million or (b) for net proceeds in excess of $1.0 million.
Notwithstanding the foregoing, the following items shall not be deemed to
be Asset Sales: (i) a transfer of assets by the Company to a Wholly Owned
Restricted Subsidiary or by a Wholly Owned Restricted Subsidiary to the
Company or to another Wholly Owned Restricted Subsidiary, (ii) an issuance
of Equity Interests by a Wholly Owned Restricted Subsidiary to the Company
or to another Wholly Owned Restricted Subsidiary, (iii) a Restricted
Payment that is permitted by the covenant described above under the caption
"-- Certain Covenants -- Restricted Payments," (iv) the issuance by the
Company of shares of its Capital Stock, (v) sale or other disposition of
cash or Cash Equivalents, (vi) the sale or disposition of
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damaged, worn out, or other obsolete personal property in the ordinary
course of business, (vii) the surrender or waiver of contract rights or the
settlement, release or surrender of contract, tort, or other claims of any
kind, (viii) the granting of Liens not prohibited by the Indenture, or (ix)
the execution and performance of contracts to provide manufacturing and
other services, including in connection with Asset Sales.
"Attributable Debt" in respect of a sale and leaseback transaction
means, at the time of determination, the present value (discounted at the
rate of interest implicit in such transaction, determined in accordance
with GAAP) of the obligation of the lessee for net rental payments (after
excluding all amounts required to be paid on account of maintenance and
repairs, insurance, taxes, utilities, and other similar expenses payable by
the lessee pursuant to the terms of the lease) during the remaining term of
the lease included in such sale and leaseback transaction (including any
period for which such lease has been extended or may, at the option of the
lessee, be extended) or until the earliest date on which the lessee may
terminate such lease without penalty or upon payment of a penalty (in which
case the rental payments shall include such penalty).
"Capital Lease Obligation" means, at the time any determination
thereof is to be made, the amount of the liability in respect of a capital
lease that would at such time be required to be capitalized on a balance
sheet in accordance with GAAP.
"Capital Stock" means (i) in the case of a corporation, corporate
stock, (ii) in the case of an association or business entity, any and all
shares, interests, participations, rights, or other equivalents (however
designated) of corporate stock, (iii) in the case of a partnership or
limited liability company, partnership or membership interests (whether
general or limited), and (iv) any other interest or participation that
confers on a Person the right to receive a share of the profits and losses
of, or distributions of assets of, the issuing Person.
"Cash Equivalents" means (i) United States dollars, (ii) securities
issued or directly and fully guaranteed or insured by the United States
government or any agency or instrumentality thereof (provided that the full
faith and credit of the United States is pledged in support thereof) having
maturities of not more than six months from the date of acquisition, (iii)
certificates of deposit and eurodollar time deposits with maturities of six
months or less from the date of acquisition, bankers' acceptances with
maturities not exceeding six months, and overnight bank deposits, in each
case with any domestic commercial bank having capital and surplus in excess
of $500 million and a Thompson Bank Watch Rating of "B" or better, (iv)
repurchase obligations with a term of not more than seven days for
underlying securities of the types described in clauses (ii) and (iii)
above entered into with any financial institution meeting the
qualifications specified in clause (iii) above, (v) commercial paper having
the highest rating obtainable from Moody's Investors Service, Inc. or
Standard & Poor's Corporation and in each case maturing within six months
after the date of acquisition, and (vi) money market funds at least 95% of
the assets of which constitute Cash Equivalents of the kinds described in
clauses (i)-(v) of this definition.
"Change of Control" means the occurrence of any of the following: (i)
the sale, transfer, conveyance, or other disposition (other than by way of
merger or consolidation), in one or a series of related transactions, of
all or substantially all of the assets of the Company and its Restricted
Subsidiaries, taken as a whole to any "person" (as such term is used in
Section 13(d)(3) of the Exchange Act) other than to a Principal or a
Related Party of a Principal (as defined below), (ii) the adoption of a
plan relating to the liquidation or dissolution of the Company, (iii) the
consummation of any transaction (including, without limitation, any merger
or consolidation) the result of which is that any "person" (as defined
above), other than the Principals and their Related Parties, becomes the
"beneficial owner" (as such term is defined in Rule 13d-3 and Rule 13d-5
under the Exchange Act, except that in calculating the beneficial ownership
of any particular "person," such "person" shall be deemed to have
beneficial ownership of all securities that such person has the right to
acquire, whether such right is currently exercisable or is exercisable only
upon the occurrence of a subsequent condition), directly or indirectly, of
more than 50% of the Voting Stock of the Company (measured by voting power
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rather than number of shares), (iv) the first day on which a majority of
the members of the Board of Directors of the Company are not Continuing
Directors, or (v) the Company consolidates with, or merges with or into,
any Person, or any Person consolidates with, or merges with or into, the
Company, in any such event pursuant to a transaction in which any of the
outstanding Voting Stock of the Company is converted into or exchanged for
cash, securities or other property, other than any such transaction where
the Voting Stock of the Company outstanding immediately prior to such
transaction is converted into or exchanged for Voting Stock (other than
Disqualified Stock) of the surviving or transferee Person constituting a
majority of the outstanding shares of such Voting Stock of such surviving
or transferee Person (immediately after giving effect to such issuance).
"Common Stock" means the common stock, par value $0.0001 per share, of
the Company.
"Consolidated Coverage Ratio" as of any date of determination means
the ratio of (i) the aggregate amount of Operating Cash Flow for the period
of the most recent four consecutive fiscal quarters ending at least 45 days
(or, if less, the number of days after the end of such fiscal quarter as
the consolidated financial statements of the Company shall be available)
prior to the date of such determination to (ii) Consolidated Interest
Expense for such four fiscal quarters; provided, however, that (1) if the
Company or any Restricted Subsidiary has incurred any Debt since the
beginning of such period that remains outstanding on such date of
determination or if the transaction giving rise to the need to calculate
the Consolidated Coverage Ratio is an incurrence of Debt, or both,
Operating Cash Flow and Consolidated Interest Expense for such period shall
be calculated after giving effect on a pro forma basis to such Debt as if
such Debt had been incurred on the first day of such period (except that,
in the case of Debt used to finance working capital needs incurred under a
revolving credit or similar arrangement, the amount thereof shall be deemed
to be the average daily balance of such Debt during such four-fiscal-
quarter period), (2) if since the beginning of such period the Company or
any Restricted Subsidiary shall have made any Asset Sale, the Operating
Cash Flow for such period shall be reduced by an amount equal to the
Operating Cash Flow (if positive) directly attributable to the assets which
are the subject of such Asset Sale for such period, or increased by an
amount equal to the Operating Cash Flow (if negative) directly attributable
thereto for such period, and Consolidated Interest Expense directly
attributable to any Debt of the Company or any Restricted Subsidiary
repaid, repurchased, defeased, assumed by a third person (to the extent the
Company and its Restricted Subsidiaries are no longer liable for such Debt)
or otherwise discharged with respect to the Company and its continuing
Restricted Subsidiaries in connection with such Asset Sale for such period
(or, if the Capital Stock of any Restricted Subsidiary is sold, the
Consolidated Interest Expense for such period directly attributable to the
Debt of such Restricted Subsidiary to the extent the Company and its
continuing Restricted Subsidiaries are no longer liable for such Debt after
such sale), (3) if since the beginning of such period the Company shall
have consummated a Public Equity Offering, Consolidated Interest Expense
for such period shall be reduced by an amount equal to the Consolidated
Interest Expense directly attributable to any Debt of the Company or any
Restricted Subsidiary repaid, repurchased, defeased or otherwise discharged
with respect to the Company and its Restricted Subsidiaries in connection
with such Public Equity Offering for such period, (4) if since the
beginning of such period the Company or any Restricted Subsidiary (by
merger or otherwise) shall have made an Investment in any Restricted
Subsidiary (or any Person which becomes a Restricted Subsidiary) or an
acquisition of assets, which acquisition constitutes all or substantially
all of an operating unit of a business, including any such Investment or
acquisition occurring in connection with a transaction requiring a
calculation to be made hereunder, Operating Cash Flow and Consolidated
Interest Expense for such period shall be calculated after giving pro forma
effect thereto (including the incurrence of any Debt) as if such Investment
or acquisition occurred on the first day of such period and (5) if since
the beginning of such period any Person (that subsequently became a
Restricted Subsidiary or was merged with or into the Company or any
Restricted Subsidiary since the beginning of such period) shall have made
any Asset Sale, any Investment or acquisition of assets that would have
required an adjustment pursuant to clause (3) or (4) above if made by the
Company or a Restricted Subsidiary during such period, Operating Cash Flow
and Consolidated Interest Expense for such period shall be calculated after
giving pro forma effect thereto as if such Asset Sale, Investment or
acquisition occurred on the first day of such period. If any Debt bears a
floating rate of interest and is
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being given pro forma effect, the interest of such Debt shall be calculated
as if the rate in effect on the date of determination had been the
applicable rate for the entire period (taking into account any Interest
Rate Agreement applicable to such Debt if such Interest Rate Agreement has
a remaining term in excess of 12 months).
"Consolidated Interest Expense" means, for any period, the total
interest expense of the Company and its consolidated Restricted
Subsidiaries, plus, to the extent not included in such total interest
expense, and to the extent incurred by the Company or its Restricted
Subsidiaries, (i) interest expense attributable to Capital Lease
Obligations, (ii) amortization of debt discount, (iii) capitalized
interest, (iv) non-cash interest expenses, (v) commissions, discounts and
other fees and charges owed with respect to letters of credit and bankers'
acceptance financing, (vi) net costs associated with Hedging Obligations
(including amortization of fees), (vii) Preferred Stock dividends in
respect of all Preferred Stock held by Persons other than the Company or a
Wholly Owned Subsidiary, and (viii) interest actually paid on any Debt of
any other Person that is guaranteed by the Company or any Restricted
Subsidiary.
"Consolidated Net Income" means, for any period, the net income of the
Company and its consolidated Subsidiaries; provided, however, that there
shall not be included in such Consolidated Net Income: (i) any net income
(or loss) of any Person if such Person is not the Company or a Restricted
Subsidiary, except that, subject to the exclusion contained in clause (iv)
below, the Company's equity in the net income of any such Person for such
period shall be included in such Consolidated Net Income up to the
aggregate amount of cash actually distributed by such Person during such
period to the Company or a Restricted Subsidiary as a dividend or other
distribution (subject, in the case of a dividend or other distribution paid
to a Restricted Subsidiary, to the limitations contained in clause (iii)
below); (ii) for purposes of clause (c)(i) of the first paragraph of the
covenant described under "Certain Covenants -- Restricted Payments" only,
any net income (or loss) of any Person acquired by the Company or a
Subsidiary in a pooling of interests transaction for any period prior to
the date of such acquisition; (iii) any net income of any Restricted
Subsidiary if such Restricted Subsidiary is subject to restrictions,
directly or indirectly, on the payment of dividends or the making of
distributions by such Restricted Subsidiary, directly or indirectly, to the
Company, except that (A) subject to the exclusion contained in clause (iv)
below, the Company's equity in the net income of any such Restricted
Subsidiary for such period shall be included in such Consolidated Net
Income up to the aggregate amount of cash that could have been distributed
by such Restricted Subsidiary consistent with such restriction during such
period to the Company or another as a dividend or other distribution
(subject, in the case of a dividend or other distribution paid to another
Restricted Subsidiary, to the limitation contained in this clause) and (B)
the Company's equity in a net loss of any such Restricted Subsidiary for
such period shall be included in determining such Consolidated Net Income;
(iv) any gain (or loss) realized upon the sale or other disposition of any
assets of the Company, or its consolidated Subsidiaries (including pursuant
to any sale-and-leaseback arrangement) which is not sold or otherwise
disposed of in the ordinary course of business and any gain (or loss)
realized upon the sale or other disposition of any Capital Stock of any
Person; (v) extraordinary gains or losses; and (vi) the cumulative effect
of a change in accounting principles.
"Continuing Directors" means, as of any date of determination, any
member of the Board of Directors of the Company who (i) was a member of
such Board of Directors on the date of the Indenture or (ii) was nominated
for election or elected to such Board of Directors with the approval of a
majority of the Continuing Directors who were members of such Board at the
time of such nomination or election.
"Credit Facilities" means, with respect to the Company, one or more
debt facilities (including, without limitation, the New Credit Facility) or
commercial paper facilities, in each case with banks or other institutional
lenders providing for revolving credit loans, term loans, receivables
financing (including through the sale of receivables to such lenders or to
special purpose entities formed to borrow from such lenders against such
receivables) or letters of credit, in each case, as amended, restated,
modified, renewed, refunded, replaced, or refinanced in whole or in part
from time to time. Debt under Credit Facilities outstanding on the date on
which Notes are first issued and authenticated under the Indenture
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shall be deemed to have been incurred on such date in reliance on the
exception provided by clause (i) of the definition of Permitted Debt.
"Debt" means, with respect to any Person, any indebtedness of such
Person, whether or not contingent, in respect of borrowed money or
evidenced by bonds, notes, debentures or similar instruments or letters of
credit (or reimbursement agreements in respect thereof) or banker's
acceptances or representing Capital Lease Obligations or the balance
deferred and unpaid of the purchase price of any property or representing
any Hedging Obligations, except any such balance that constitutes an
accrued expense or trade payable, if and to the extent any of the foregoing
(other than letters of credit and Hedging Obligations) would appear as a
liability upon a balance sheet of such Person prepared in accordance with
GAAP, as well as all Debt of others secured by a Lien on any asset of such
Person (whether or not such Debt is assumed by such Person) and, to the
extent not otherwise included, the guarantee by such Person of any
indebtedness of any other Person. The amount of any Debt outstanding as of
any date shall be (i) the accreted value thereof, in the case of any Debt
issued with original issue discount, and (ii) the principal amount thereof,
together with any interest thereon that is more than 30 days past due, in
the case of any other Debt. Guarantees of Debt otherwise included in the
determination of such amount shall not also be included in the foregoing
definition of "Debt."
"Default" means any event that is, or with the passage of time or the
giving of notice or both would be, an Event of Default.
"Designated Senior Debt" means (i) any Debt outstanding under the New
Credit Facility and (ii) any other Senior Debt permitted under the
Indenture the principal amount of which is $25.0 million or more and that
has been designated by the Company as "Designated Senior Debt."
"Disqualified Stock" means any Capital Stock that, by its terms (or by
the terms of any security into which it is convertible, or for which it is
exchangeable, in each case at the option of the holder thereof), or upon
the happening of any event, matures or is mandatorily redeemable, pursuant
to a sinking fund obligation or otherwise, or redeemable at the option of
the Holder thereof, in whole or in part, on or prior to the date that is 91
days after the date on which the Notes mature; provided, however, that any
Capital Stock that would constitute Disqualified Stock solely because the
holders thereof have the right to require the Company to repurchase such
Capital Stock upon the occurrence of a Change of Control or an Asset Sale
shall not constitute Disqualified Stock if the terms of such Capital Stock
provide that the Company may not repurchase or redeem any such Capital
Stock pursuant to such provisions unless such repurchase or redemption
complies with the covenant described above under the caption "-- Certain
Covenants -- Restricted Payments."
"Equity Interests" means Capital Stock and all warrants, options or
other rights to acquire Capital Stock (but excluding any debt security that
is convertible into, or exchangeable for, Capital Stock).
"Existing Debt" means Debt of the Company and its Subsidiaries in
existence on the date of the Indenture, until such amounts are repaid.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the
American Institute of Certified Public Accountants and statements and
pronouncements of the Financial Accounting Standards Board or in such other
statements by such other entity as have been approved by a significant
segment of the accounting profession, which are in effect on the date of
the Indenture.
"guarantee" means a guarantee (other than by endorsement of negotiable
instruments for collection in the ordinary course of business), direct or
indirect, in any manner (including, without limitation, by way of a pledge
of assets or through letters of credit or reimbursement agreements in
respect thereof), of all or any part of any Debt.
"Guarantors" means (i) each of the Company's direct or indirect
domestic Restricted Subsidiaries as of the date of the Indenture and (ii)
any other direct or indirect domestic Restricted Subsidiary that
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executes a Subsidiary Guarantee in accordance with the provisions of the
Indenture, and their respective successors and assigns.
"Hedging Obligations" means, with respect to any Person, the
obligations of such Person under (i) interest rate swap agreements,
interest rate cap agreements, and interest rate collar agreements and (ii)
other agreements or arrangements designed to protect such Person against
fluctuations in interest rates.
"Interest Rate Agreement" means any interest rate swap agreement,
interest rate cap agreement or other financial agreement or arrangement
designed to protect the Company or any Restricted Subsidiary against
fluctuations in interest rates.
"Investments" means, with respect to any Person, all investments by
such Person in other Persons (including Affiliates) in the forms of direct
or indirect loans (including guarantees of Debt or other obligations),
advances or capital contributions (excluding commission, travel and similar
advances to officers and employees made in the ordinary course of
business), purchases or other acquisitions for consideration of Debt,
Equity Interests, or other securities, together with all items that are or
would be classified as investments on a balance sheet prepared in
accordance with GAAP. If the Company or any Subsidiary of the Company sells
or otherwise disposes of any Equity Interests of any direct or indirect
Subsidiary of the Company such that, after giving effect to any such sale
or disposition, such Person is no longer a Subsidiary of the Company, the
Company shall be deemed to have made an Investment on the date of any such
sale or disposition equal to the fair market value of the Equity Interests
of such Subsidiary not sold or disposed of in an amount determined as
provided in the penultimate paragraph of the covenant described above under
the caption "-- Certain Covenants -- Restricted Payments."
"Lien" means, with respect to any asset, any mortgage, lien, pledge,
charge, security interest, or encumbrance of any kind in respect of such
asset, whether or not filed, recorded or otherwise perfected under
applicable law (including any conditional sale or other title retention
agreement, any lease in the nature thereof, any option or other agreement
to sell or give a security interest in and any filing of or agreement to
give any financing statement under the Uniform Commercial Code (or
equivalent statutes) of any jurisdiction).
"Net Proceeds" means the aggregate cash proceeds received by the
Company or any of its Restricted Subsidiaries in respect of any Asset Sale
(including, without limitation, any cash received upon the sale or other
disposition of any non-cash consideration received in any Asset Sale), net
of (i) the direct costs relating to such Asset Sale (including, without
limitation, legal, accounting and investment banking fees, sales
commissions, title and other reasonable fees, costs and expenses consistent
with past practices and related to such Asset Sale) and any relocation
expenses incurred as a result thereof, (ii) taxes paid or payable as a
result thereof (after taking into account any available tax credits or
deductions and any tax sharing arrangements), (iii) amounts required to be
applied to the repayment of Debt (other than Debt incurred under a Credit
Facility) secured by a Lien on the asset or assets that were the subject of
such Asset Sale and any reserve for adjustment in respect of the sale price
of such asset or assets established in accordance with GAAP, and (iv)
deduction of appropriate amounts to be provided by the Company or a
Restricted Subsidiary as a reserve, in accordance with GAAP, against any
liabilities associated with the assets disposed in such Asset Sale and
retained by the Company or a Restricted Subsidiary after such Asset Sale
including, without limitation, pension and other post employment benefit
liabilities and liabilities related to environmental matters or against
indemnification obligations associated with the assets disposed of in such
Asset Sale.
"New Credit Facility" means that certain Credit Facility to be entered
into among the Company and domestic subsidiaries of the Company and
NationsBank, N.A., as administrative and collateral agent, and the other
financial institutions a party thereto, as such agreement in whole or in
part may be, in one or more agreements with one or more bank lending
groups, amended, renewed, extended, substituted, refinanced, restructured,
replaced, supplemented or otherwise modified, in whole or in part, from
time to time.
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"Non-Recourse Debt" means Debt (i) as to which neither the Company nor
any of its Restricted Subsidiaries (a) provides credit support of any kind
(including any undertaking, agreement or instrument that would constitute
Debt), (b) is directly or indirectly liable (as a guarantor or otherwise),
or (c) constitutes the lender; and (ii) no default with respect to which
(including any rights that the holders thereof may have to take enforcement
action against an Unrestricted Subsidiary) would permit (upon notice, lapse
of time or both) any holder of any other Debt (other than the Notes being
offered hereby) of the Company or any of its Restricted Subsidiaries to
declare a default on such other Debt or cause the payment thereof to be
accelerated or payable prior to its stated maturity; and (iii) as to which
the lenders have been notified in writing that they will not have any
recourse to the stock or assets of the Company or any of its Restricted
Subsidiaries.
"Obligations" means any principal, interest, penalties, fees,
indemnifications, reimbursements, damages and other liabilities payable
under the documentation governing any Debt.
"Operating Cash Flow" means for any Person and for any period, the sum
of Consolidated Net Income plus (A) Consolidated Interest Expense, plus (B)
the following to the extent deducted in calculating such Consolidated Net
Income, without duplication: (i) income tax expense, (ii) depreciation
expense, (iii) amortization expense, (iv) all other non-cash items reducing
Consolidated Net Income (other than items that will require cash payments
and for which an accrual or reserve is, or is required by GAAP to be made),
and (v) transaction fees and related expenses incurred in connection with a
business combination accounted for as a pooling of interest transaction for
accounting purposes. Notwithstanding the foregoing, the provision for taxes
based on the income or profits of, and the depreciation and amortization
of, a Subsidiary of the Company shall be added to Consolidated Net Income
to compute Operating Cash Flow only to the extent (and in the same
proportion) that the net income of such Subsidiary was included in
calculating Consolidated Net Income.
"Permitted Business" means the business conducted by the Company and
its Restricted Subsidiaries on the date of the Indenture and all businesses
reasonably related thereto (as determined in good faith by the Board of
Directors of the Company).
"Permitted Investments" means (a) any Investment in the Company or in
any Restricted Subsidiary of the Company that is a Guarantor; (b) any
Investment in Cash Equivalents; (c) any Investment by the Company or any
Subsidiary of the Company in another Person, if as a result of such
Investment (x) such other Person becomes a Restricted Subsidiary of the
Company that is a Subsidiary Guarantor, (y) such other Person becomes a
Restricted Subsidiary of the Company that is not a Subsidiary Guarantor
but, at the time of such Investment, is not subject to a consensual
encumbrance or consensual restriction that would be prohibited by the
covenant described under "-- Certain Covenants -- Dividend and Other
Payment Restrictions Affecting Subsidiaries," without regard to the
exception described in clauses (i), (ii), or (iii) thereunder, or (z) such
other Person is merged, consolidated or amalgamated with or into, or
transfers or conveys substantially all of its assets to, or is liquidated
into, the Company or a Restricted Subsidiary of the Company that, at the
time of such Investment, either is a Subsidiary Guarantor or is not subject
to a consensual encumbrance or consensual restriction that would be
prohibited by the covenant described under "-- Certain
Covenants -- Dividend and Other Payment Restrictions Affecting
Subsidiaries," without regard to the exception described in clauses (i),
(ii), or (iii) thereunder; (d) any Investment made as a result of the
receipt of non-cash consideration from an Asset Sale that was made pursuant
to and in compliance with the covenant described above under the caption
"-- Repurchase at the Option of Holders -- Asset Sales"; (e) any
acquisition of assets solely in exchange for the issuance of Equity
Interests (other than Disqualified Stock) of the Company; (f) Investments
represented by accounts receivable created or acquired in the ordinary
course of business; (g) loans or advances to employees, officers, or
directors not to exceed $1.0 million outstanding at any one time; (h)
Investments under or pursuant to Hedging Obligations consisting of Interest
Rate Agreements entered into in the ordinary course of business and not for
the purpose of speculation; (i) Investments in the Notes otherwise
permitted under the Indenture; (j) the repurchase, redemption, retirement,
or repayment of up to $2.0 million of Debt of the Company incurred as
deferred financing costs in connection with the Company's purchase of Gena
Laboratories, Inc. and outstanding as of the date of the Indenture; and (k)
Investments
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in Persons engaged in a Permitted Business; provided, however, that the
aggregate amount of all such Investments described in this clause (k) shall
not exceed at any one time outstanding 7.5% of the consolidated total
assets of the Company as reflected on the most recent balance sheet
delivered by the Company to the Trustee pursuant to the requirements of the
Indenture.
"Permitted Junior Securities" means Equity Interests in the Company or
debt securities that are subordinated to all Senior Debt (and any debt
securities issued in exchange for Senior Debt) to substantially the same
extent as, or to a greater extent than, the Notes are subordinated to
Senior Debt pursuant to Article 10 of the Indenture.
"Permitted Liens" means (i) Liens securing Debt and other Obligations
under Credit Facilities that were permitted by the terms of the Indenture
to be incurred; (ii) Liens in favor of the Company; (iii) Liens on property
of a Person existing at the time such Person is merged with or into or
consolidated with the Company or any Subsidiary of the Company; provided
that such Liens were in existence prior to the contemplation of such merger
or consolidation and do not extend to any assets other than those of the
Person merged into or consolidated with the Company; (iv) Liens on property
existing at the time of acquisition thereof by the Company or any
Subsidiary of the Company, provided that such Liens were in existence prior
to the contemplation of such acquisition; (v) Liens to secure the
performance of statutory obligations, surety or appeal bonds, performance
bonds, or other obligations of a like nature incurred in the ordinary
course of business; (vi) Liens to secure Debt (including Capital Lease
Obligations) permitted by clause (iv) of the second paragraph of the
covenant entitled "Incurrence of Debt and Issuance of Preferred Stock"
covering only the assets acquired with such Debt; (vii) Liens existing on
the date of the Indenture; (viii) Liens for taxes, assessments or
governmental charges or claims that are not yet delinquent or that are
being contested in good faith by appropriate proceedings promptly
instituted and diligently concluded, provided that any reserve or other
appropriate provision as shall be required in conformity with GAAP shall
have been made therefor; (ix) Liens incurred in the ordinary course of
business of the Company or any Subsidiary of the Company with respect to
obligations that do not exceed $5.0 million at any one time outstanding and
that (a) are not incurred in connection with the borrowing of money or the
obtaining of advances or credit (other than trade credit in the ordinary
course of business) and (b) do not in the aggregate materially detract from
the value of the property or materially impair the use thereof in the
operation of business by the Company or such Subsidiary; (x) Liens on
assets of the Company securing Senior Debt of the Company that was
permitted to be incurred by the terms of the Indenture and Liens on assets
of Guarantors to secure Senior Debt of such Guarantors that was permitted
by the Indenture to be incurred; (xi) Liens on assets of Unrestricted
Subsidiaries that secure Non-Recourse Debt of Unrestricted Subsidiaries;
(xii) Liens on any insurance policies arising out of borrowings against the
cash surrender value of such insurance policies held by the Company,
provided that such Liens do not exceed the amount of Debt and are secured
only by the cash surrender value of such insurance policies; and (xiii)
Liens in connection with sale and leaseback transactions otherwise
permitted by the Indenture.
"Permitted Refinancing Debt" means any Debt of the Company or any of
its Restricted Subsidiaries issued in exchange for, or the net proceeds of
which are used to extend, refinance, renew, replace, defease, or refund
other Debt of the Company or any of its Restricted Subsidiaries (other than
intercompany Debt); provided that: (i) the principal amount (or accreted
value, if applicable) of such Permitted Refinancing Debt does not exceed
the principal amount of (or accreted value, if applicable), plus accrued
interest on, the Debt so extended, refinanced, renewed, replaced, defeased,
or refunded (plus the amount of reasonable expenses incurred in connection
therewith); (ii) such Permitted Refinancing Debt has a final maturity date
later than the final maturity date of, and has a Weighted Average Life to
Maturity equal to or greater than the Weighted Average Life to Maturity of,
the Debt being extended, refinanced, renewed, replaced, defeased, or
refunded; (iii) if the Debt being extended, refinanced, renewed, replaced,
defeased or refunded is subordinated in right of payment to the Notes, such
Permitted Refinancing Debt has a final maturity date later than the final
maturity date of, and is subordinated in right of payment to, the Notes on
terms at least as favorable to the Holders of Notes as those contained in
the documentation governing the Debt being extended, refinanced, renewed,
replaced, defeased, or refunded; and (iv) such
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Debt is incurred either by the Company or by the Restricted Subsidiary who
is the obligor on the Debt being extended, refinanced, renewed, replaced,
defeased, or refunded.
"Person" means any individual, corporation, partnership, limited
liability company or partnership, joint venture, association, joint-stock
company, trust, unincorporated organization, or government (including any
agency or instrumentality thereof).
"Preferred Stock" as applied to the Capital Stock of any corporation,
means Capital Stock of any class or classes (however designated) which is
preferred as to the payment of dividends, or as to the distribution of
assets upon any voluntary or involuntary liquidation or dissolution of such
corporation, over shares of Capital Stock of any other class of such
corporation.
"Principal" means Sam L. Leopold.
"Public Equity Offering" means an underwritten offering of Common
Stock with gross proceeds to the Company of at least $20.0 million pursuant
to a registration statement that has been declared effective by the
Commission pursuant to the Securities Act (other than registration
statement on Form S-8 or otherwise relating to equity securities issuable
under any employee benefit plan of the Company).
"Related Party" with respect to the Principal means (A) any
controlling stockholder, 80% (or more) owned Subsidiary, or spouse or
immediate family member (in the case of an individual) of such Principal or
(B) any trust, corporation, partnership, or other entity, the
beneficiaries, stockholders, partners, owners, or Persons beneficially
holding an 80% or more controlling interest of which consist of such
Principal and/or such other Persons referred to in the immediately
preceding clause (A).
"Restricted Investment" means an Investment other than a Permitted
Investment.
"Restricted Subsidiary" of a Person means any Subsidiary of the
referent Person that is not an Unrestricted Subsidiary.
"Senior Debt" means (i) all Debt outstanding under Credit Facilities
and all Hedging Obligations with respect thereto, (ii) any other Debt
permitted to be incurred by the Company under the terms of the Indenture,
unless the instrument under which such Debt is incurred expressly provides
that it is on a parity with or subordinated in right of payment to the
Notes and (iii) all Obligations with respect to the foregoing.
Notwithstanding anything to the contrary in the foregoing, Senior Debt will
not include (w) any liability for federal, state, local, or other taxes
owed or owing by the Company, (x) any Debt of the Company to any of its
Subsidiaries or other Affiliates, (y) any trade payables, or (z) any Debt
that is incurred in violation of the Indenture.
"Significant Subsidiary" means any Subsidiary that would be a
"significant subsidiary" as defined in Article 1, Rule 1-02 of Regulation
S-X, promulgated pursuant to the Securities Act, as such Regulation is in
effect on the date hereof.
"Stated Maturity" means, with respect to any installment of interest
or principal on any series of Debt, the date on which such payment of
interest or principal was scheduled to be paid in the original
documentation governing such Debt, and shall not include any contingent
obligations to repay, redeem, or repurchase any such interest or principal
prior to the date originally scheduled for the payment thereof.
"Subsidiary" means, with respect to any Person, (i) any corporation,
association or other business entity of which more than 50% of the total
voting power of shares of Capital Stock entitled (without regard to the
occurrence of any contingency) to vote in the election of directors,
managers, or trustees thereof is at the time owned or controlled, directly
or indirectly, by such Person or one or more of the other Subsidiaries of
that Person (or a combination thereof) and (ii) any partnership (a) the
sole general partner or the managing general partner of which is such
Person or a Subsidiary of such Person or (b) the only general partners of
which are such Person or of one or more Subsidiaries of such Person (or any
combination thereof). For purposes of this "Description of Notes," when no
referent Person is specifically identified, "Subsidiary" shall be deemed to
refer to a Subsidiary of the Company.
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"Unrestricted Subsidiary" means (i) any Subsidiary of the Company that
is designated by the Board of Directors as an Unrestricted Subsidiary
pursuant to a Board Resolution; but only to the extent that such
Subsidiary: (a) has no Debt other than Non-Recourse Debt; (b) is not party
to any agreement, contract, arrangement or understanding with the Company
or any Restricted Subsidiary of the Company unless the terms of any such
agreement, contract, arrangement or understanding are no less favorable to
the Company or such Restricted Subsidiary than those that might be obtained
at the time from Persons who are not Affiliates of the Company; (c) is a
Person with respect to which neither the Company nor any of its Restricted
Subsidiaries has any direct or indirect obligation (x) to subscribe for
additional Equity Interests or (y) to maintain or preserve such Person's
financial condition or to cause such Person to achieve any specified levels
of operating results; (d) has not guaranteed or otherwise directly or
indirectly provided credit support for any Debt of the Company or any of
its Restricted Subsidiaries; and (e) has at least one director on its board
of directors that is not a director or executive officer of the Company or
any of its Restricted Subsidiaries and has at least one executive officer
that is not a director or executive officer of the Company or any of its
Restricted Subsidiaries. Any such designation by the Board of Directors
shall be evidenced to the Trustee by filing with the Trustee a certified
copy of the Board Resolution giving effect to such designation and an
Officers' Certificate certifying that such designation complied with the
foregoing conditions and was permitted by the covenant described above
under the caption "Certain Covenants -- Restricted Payments." If, at any
time, any Unrestricted Subsidiary would fail to meet the foregoing
requirements as an Unrestricted Subsidiary, it shall thereafter cease to be
an Unrestricted Subsidiary for purposes of the Indenture and any Debt of
such Subsidiary shall be deemed to be incurred by a Restricted Subsidiary
of the Company as of such date (and, if such Debt is not permitted to be
incurred as of such date under the covenant described under the caption
"-- Certain Covenants -- Incurrence of Debt and Issuance of Preferred
Stock," the Company shall be in default of such covenant). The Board of
Directors of the Company may at any time designate any Unrestricted
Subsidiary to be a Restricted Subsidiary; provided that such designation
shall be deemed to be an incurrence of Debt by a Restricted Subsidiary of
the Company of any outstanding Debt of such Unrestricted Subsidiary and
such designation shall only be permitted if (i) such Debt is permitted
under the covenant described under the caption "-- Certain
Covenants -- Incurrence of Debt and Issuance of Preferred Stock,"
calculated on a pro forma basis as if such designation had occurred at the
beginning of the four-quarter reference period, and (ii) no Default or
Event of Default would be in existence following such designation.
"Voting Stock" of any Person as of any date means the Capital Stock of
such Person that is at the time entitled to vote in the election of the
Board of Directors of such Person.
"Weighted Average Life to Maturity" means, when applied to any Debt at
any date, the number of years obtained by dividing (i) the sum of the
products obtained by multiplying (a) the amount of each then remaining
installment, sinking fund, serial maturity or other required payments of
principal, including payment at final maturity, in respect thereof, by (b)
the number of years (calculated to the nearest one-twelfth) that will
elapse between such date and the making of such payment, by (ii) the then
outstanding principal amount of such Debt.
"Wholly Owned Restricted Subsidiary" of any Person means a Restricted
Subsidiary of such Person all of the outstanding Capital Stock or other
ownership interests of which (other than directors' qualifying shares or
foreign national shares, in each case to the extent mandated by law) shall
at the time be owned by such Person or by one or more Wholly Owned
Restricted Subsidiaries of such Person and one or more Wholly Owned
Restricted Subsidiaries of such Person.
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CERTAIN INCOME TAX CONSIDERATIONS
The following is a summary of certain United States federal income tax
consequences resulting from the acquisition, ownership, and disposition of the
Exchange Notes that may be relevant to a holder acquiring one or more of such
Exchange Notes in exchange for Outstanding Notes acquired for cash at original
issuance. The following summary is of a general nature only and is not intended
to be, and should not be construed to be, legal or tax advice to any prospective
investor and no representation with respect to the tax consequences of any
particular investor is made.
The legal conclusions expressed in this summary are based upon current
provisions of the Internal Revenue Code of 1986, as amended (the "Code"),
applicable Treasury regulations ("Regulations"), judicial authority, and
administrative rulings and practice, all as in effect as of the date of this
Prospectus, and all of which are subject to change, either prospectively or
retroactively. There can be no assurance that the Internal Revenue Service (the
"Service") will not take a contrary view, and no rulings from the Service have
been or will be sought with respect to any matter involving the tax aspects of
the purchase, ownership, or exchange or other disposition of the Exchange Notes.
Legislative, judicial, or administrative changes or interpretations may be
forthcoming that could alter or modify the statements and conclusions set forth
herein.
This summary deals only with persons who will hold the Exchange Notes as
capital assets within the meaning of Section 1221 of the Code, and does not
address tax considerations applicable to investors who may be subject to special
tax rules, such as financial institutions, tax-exempt organizations, insurance
companies, dealers in securities or currencies, persons who hold Exchange Notes
as part of a "hedge," "straddle" or "conversion transaction" for tax purposes,
and persons who have a "functional currency" other than the U.S. dollar.
In addition, the description generally does not consider the effect of any
applicable foreign, state, local, or other tax laws or estate or gift tax
considerations.
PERSONS CONSIDERING THE ACQUISITION OF THE EXCHANGE NOTES SHOULD CONSULT
THEIR OWN TAX ADVISORS CONCERNING THE APPLICATION OF U.S. FEDERAL INCOME TAX
LAWS, AS WELL AS THE LAWS OF ANY STATE, LOCAL, OR FOREIGN TAXING JURISDICTION,
TO THEIR PARTICULAR SITUATIONS AND THE POSSIBLE EFFECT OF CHANGES IN U.S.
FEDERAL OR OTHER TAX LAWS.
U.S. HOLDERS
The following discussion is limited to the United States federal income tax
consequences relevant to a holder of the Exchange Notes that is a U.S. Holder.
The term "U.S. Holder" refers to a person that is classified for U.S. federal
tax purposes as a U.S. person. For this purpose, a U.S. person includes (i) a
current or, in certain circumstances, former citizen or resident of the United
States, (ii) a corporation, limited liability company, partnership, or other
business entity created or organized under the laws of the United States or of
any state or political subdivision thereof (unless, in the case of a partnership
or limited liability company, the Treasury provides otherwise by Regulations),
(iii) an estate whose income is includable in gross income for U.S. federal
income tax purposes regardless of its source, (iv) a trust if (A) a U.S. court
is able to exercise primary supervision over the administration of the trust and
(B) one or more U.S. persons have authority to control all substantial decisions
of the trust, or (v) a person whose worldwide income or gain is otherwise
subject to U.S. federal income taxation on a net basis.
The Exchange Offer. Pursuant to Regulations, the exchange of Outstanding
Notes for Exchange Notes pursuant to the Exchange Offer should not constitute a
significant modification of the terms of the Outstanding Notes and, accordingly,
such exchange should be treated as a "non-event" for federal income tax
purposes. Therefore, such exchange should have no federal income tax
consequences to U.S. Holders of Outstanding Notes who exchange such notes for
Exchange Notes, the holding period of an Exchange Note should include the
holding period of the Outstanding Note for which it was exchanged, the basis of
an Exchange Note should be the same as the basis of the Outstanding Note for
which it was exchanged, and each U.S. Holder of Exchange Notes should continue
to be required to include interest on the
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Outstanding Notes in its gross income in accordance with its method of
accounting for federal income tax purposes.
Payment of Interest and Additional Interest. Stated interest on an
Exchange Note generally will be includable in the income of a U.S. Holder as
ordinary income at the time such interest is received or accrued, in accordance
with such U.S. Holder's method of accounting for United States federal income
tax purposes. The Company will be obligated to pay Additional Interest amounts
in the event of a Registration Default (as defined). See "Description of the
Exchange Notes -- Registration Rights; Additional Interest." Under the
Regulations, certain contingent payments on debt instruments must be accrued
into gross income by a holder (regardless of such holder's method of
accounting). However, any payment subject to a remote or incidental contingency
(i.e., there is a remote likelihood that the contingency will occur or the
potential amount of the contingent payment is insignificant relative to the
total expected amount of remaining payments) is not treated as a contingent
payment and is ignored until payment, if any, is actually made. The Company
believes that the Additional Interest payments resulting from a Registration
Default are subject to a remote or incidental contingency. Accordingly, the
Company intends to take the position that a U.S. Holder of a Note should report
any Additional Interest payments resulting from a Registration Default as
ordinary income in accordance with such holder's method of accounting for United
States federal income tax purposes. The Service, however, may take a different
position, which could affect the timing of both a U.S. Holder's income and the
Company's deduction with respect to such Additional Interest.
Original Issue Discount. If the Notes are not issued at a discount or are
deemed to be issued with no discount because such discount is de minimis, a U.S.
Holder will include in income as ordinary interest income the gross amount of
interest paid or payable in respect of the Notes as provided above in
"-- Payment of Interest and Additional Interest." Original issue discount
("OID") will be considered de minimis and, thus, will be treated as zero
discount if the OID is less than one-fourth ( 1/4) of one percent of the stated
redemption price at maturity, multiplied by the number of complete years to
maturity. The Company expects that the Notes will not have OID.
Market Discount. The resale of Notes may be affected by the "market
discount" provisions of the Code. For this purpose, the market discount on a
Note generally will be equal to the amount, if any, by which the stated
redemption price at maturity of the Note immediately after its acquisition
exceeds the U.S. Holder's tax basis in the Note. Subject to a de minimis
exception, these provisions generally require a U.S. Holder of a Note acquired
at a market discount to treat as ordinary income any gain recognized on the
disposition of such Note to the extent of the "accrued market discount" on such
Note at the time of disposition, unless the U.S. Holder elects to include
accrued market discount in income currently. In general, market discount on a
Note will be treated as accruing on a straight-line basis over the term of such
Note, or, at the election of the U.S. Holder, under a constant yield method. A
U.S. Holder of a Note acquired at a market discount who does not elect to
include accrued market discount in income currently may be required to defer the
deduction of a portion of the interest on any indebtedness incurred or
maintained to purchase or carry the Note until the Note is disposed of in a
taxable transaction.
Sale, Exchange, or Retirement of Notes. Upon the sale, exchange,
redemption, retirement, or other disposition of a Note, other than the exchange
of a Note for an Exchange Note (see "-- The Exchange Offer" above), a U.S.
Holder of a Note generally will recognize gain or loss in an amount equal to the
difference between the amount of cash and the fair market value of any property
received on the sale, exchange, or retirement of the Note (other than in respect
of accrued and unpaid interest on the Note, which amounts are treated as
ordinary interest income) and such U.S. Holder's adjusted tax basis in the Note.
Such gain or loss will be capital gain or loss, except to the extent of any
accrued market discount (see "-- Market Discount" above). In general, the
maximum tax rate for noncorporate taxpayers on long-term capital gains is 20%
with respect to capital assets (including the Notes), but only if they have been
held for more than 12 months at the time of disposition.
Backup Withholding and Information Reporting. In general, information
reporting requirements will apply to interest payments on the Notes made to U.S.
Holders other than certain exempt recipients (such as corporations) and to
proceeds realized by such U.S. Holders on dispositions of Notes. A 31% backup
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withholding tax will apply to such amounts if the U.S. Holder (i) fails to
furnish its taxpayer identification number ("TIN"), which, for an individual, is
generally his social security number, within a reasonable time after request
therefor, (ii) furnishes an incorrect TIN, (iii) fails to report properly
interest or dividend income, or (iv) fails, under certain circumstances, to
provide a certified statement, signed under penalty of perjury, that the TIN
provided is its correct number and that it is not subject to backup withholding.
A U.S. Holder's failure to provide a correct TIN may also subject the holder to
Service penalties. The Company will also institute backup withholding if
instructed to do so by the Service. Any amount withheld from a payment to a U.S.
Holder under the backup withholding rules is allowable as a credit against such
U.S. Holder's federal income tax liability or may be refunded, provided that the
requisite procedures are followed. U.S. Holders of Notes should consult their
tax advisors as to their qualification for exemption from backup withholding and
the procedure for obtaining such an exemption.
NON-U.S. HOLDERS
This Section summarizes certain U.S. federal tax consequences of the
ownership and disposition of Notes by "Non-U.S. Holders." The term "Non-U.S.
Holder" refers to a person that is not classified for U.S. federal tax purposes
as a "United States person," as defined in "-- U.S. Holders" above.
Interest on Notes. In general, a Non-U.S. Holder will not be subject to
U.S. federal income tax or regular withholding tax with respect to interest
received or accrued on the Notes so long as (a) such interest is not effectively
connected with the conduct of a trade or business within the United States (or,
if an income tax treaty applies, is attributable to a United States permanent
establishment) of the Non-U.S. Holder, (b) the Non-U.S. Holder does not actually
or constructively own 10% or more of the total combined voting power of all
classes of stock of the Company entitled to vote, (c) the Non-U.S. Holder is not
(A) a controlled foreign corporation for U.S. federal income tax purposes that
is related to the Company actually or constructively through stock ownership, or
(B) a bank that received the Note on an extension of credit made pursuant to a
loan agreement entered into in the ordinary course of its trade or business and
(d) either (i) the beneficial owner of the Note certifies to the Company or its
agent, under penalties of perjury, that it is not a U.S. Holder and provides its
name and address on U.S. Treasury Form W-8 (or on a suitable substitute form) or
(ii) the Note is held by a securities clearing organization, bank, or other
financial institution that holds customers' securities in the ordinary course of
its trade or business (a "financial institution") on behalf of such Non-U.S.
Holder and such financial institution certifies under penalties of perjury that
such a Form W-8 (or suitable substitute form) has been received from the
beneficial owner by it or by a financial institution between it and the
beneficial owner and furnishes the payor with a copy thereof. Except as provided
in the following paragraph, a Non-U.S. Holder that cannot satisfy the foregoing
requirements will be subject to U.S. federal income tax withholding at a rate of
30% (or lower treaty rate).
If interest received on the Notes by a Non-U.S. Holder is effectively
connected to the conduct by such Non-U.S. Holder of a trade or business within
the United States (or, if an income tax treaty applies, is attributable to a
United States permanent establishment of the Non-U.S. Holder), such interest
will be subject to U.S. federal income tax on a net basis at the rates
applicable to U.S. persons generally (and, with respect to corporate Non-U.S.
Holders under certain circumstances, may also be subject to a 30% branch profits
tax). If payments are subject to U.S. federal income tax on a net basis in
accordance with the rules described in the preceding sentence, such payments
will not be subject to U.S. withholding tax so long as the Non-U.S. Holder
provides the Company or its paying agent with a properly executed Form 4224.
Gain on Disposition of Notes. Non-U.S. Holders generally will not be
subject to U.S. federal income taxation on gain recognized on a disposition of
Notes so long as (i) the gain is not effectively connected with the conduct by
the Non-U.S. Holder of a trade or business within the United States (or, if an
income tax treaty applies, is attributable to a United States permanent
establishment of the Non-U.S. Holder) and (ii) in the case of a Non-U.S. Holder
who is an individual, either such Non-U.S. Holder is not present in the United
States for 183 days or more in the taxable year of disposition or such Non-U.S.
Holder does not have a "tax home" (within the meaning of section 911(d)(3) of
the Code) in the United States.
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U.S. Estate Tax. Notes owned or treated as owned by an individual who is
not a citizen or resident (as specially defined for U.S. federal estate tax
purposes) of the United States at the time of death ("Nonresident Decedent")
will not be includable in the Nonresident Decedent's gross estate for U.S.
federal estate tax purposes as a result of the Nonresident Decedent's death,
provided that, at the time of death, the Nonresident Decedent does not own,
actually or constructively, 10% or more of the total combined voting power of
all classes of stock of the Company and payments with respect to such Notes
would not have been effectively connected with the conduct of a trade or
business in the United States by the Nonresident Decedent. A Nonresident
Decedent's estate may be subject to U.S. federal estate tax on property
includable in the estate for U.S. federal estate tax purposes.
U.S. Information Reporting Requirements and Backup Withholding. Generally,
payments of interest, OID, premium or principal on the Notes to Non-U.S. Holders
will not be subject to information reporting or backup withholding if the
Non-U.S. Holder complies with the certification requirements set forth in clause
(d) under "-- Interest on Notes" above.
Non-U.S. Holders will not be subject to information reporting or backup
withholding with respect to the payment of proceeds from the disposition of
Notes, effected by, to or through the foreign office of a broker; provided,
however, that if the broker is a U.S. person or a U.S.-related person,
information reporting will apply unless the broker has documentary evidence in
its records as to the Non-U.S. Holder's foreign status (and has not actual
knowledge to the contrary), or the Non-U.S. Holder certifies as to its non-U.S.
status under penalty of perjury or otherwise establishes an exemption. Backup
withholding will not apply to payments made through a foreign office of a broker
that is a U.S. person or a U.S. related person (absent actual knowledge that the
payee is a U.S. person). For these purposes, a "U.S. related person" is (i) a
controlled foreign corporation for U.S. federal income tax purposes or (ii) a
foreign person 50% or more of whose gross income from all sources for the
three-year period ending with the close of its taxable year preceding the
payment (or for such part of the period that the broker has been in existence)
is derived from the activities that are effectively connected with the conduct
of a U.S. trade or business.
The payment of the proceeds from the disposition of a Note to or through
the U.S. office of any U.S. or foreign broker will be subject to information
reporting and possibly backup withholding unless the Non-U.S. Holder of the Note
certifies as to its foreign status under penalties of perjury or otherwise
establishes an exemption, provided that the broker does not have actual
knowledge that the Non-U.S. Holder is a U.S. person or that the conditions of
any other exemption are not, in fact, satisfied. The payment of the proceeds
from the disposition of a Note to or through a non-U.S. office of a non-U.S.
broker that is not a U.S. related person will not be subject to information or
backup withholding.
Amounts withheld under the backup withholding rules do not constitute a
separate U.S. federal income tax. Rather, amounts withheld under the backup
withholding rules from a payments to a Non-U.S. Holder will be allowed as a
credit against such Non-U.S. Holder's U.S. federal income tax liability, if any,
and any amounts withheld in excess of such Non-U.S. Holder's U.S. federal income
tax liability will be refunded, provided that the requisite procedures are
followed.
Prospective Final Regulations. On October 7, 1997, new Regulations ("New
Regulations") were issued that modify the requirements imposed on a Non-U.S.
Holder and certain intermediaries for establishing the recipient's status as a
Non-U.S. Holder eligible for exception from or reduction in U.S. withholding tax
and backup withholding described above. The New Regulations generally are
effective for payments made after December 31, 1999, subject to certain
transition rules. (However, new Temporary Regulations, effective for returns
relating to taxable years for which the due date for filing returns (without
extensions) is after December 15, 1997, require some Non-U.S. Holders to satisfy
certain residency requirements when claiming the benefits of an applicable
income tax treaty.) In general, the New Regulations do not significantly alter
the substantive withholding and information reporting requirements but rather
unify current certification procedures and forms and clarify reliance standards.
In addition the New Regulations impose more stringent conditions on the ability
of financial intermediaries acting for Non-U.S. Holders to provide
certifications on behalf of Non-U.S. Holders, which may include entering into an
agreement with the Service to audit certain documentation with respect to such
certifications. Non-U.S. Holders should consult their own tax advisors to
determine the effects of the application of the New Regulations to their
particular circumstances.
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PLAN OF DISTRIBUTION
Each broker-dealer that receives Exchange Notes for its own account
pursuant to the Exchange Offer must acknowledge that it will deliver a
prospectus in connection with any resale of such Exchange Notes. The Prospectus,
as it may be amended or supplemented from time to time, may be used by a
broker-dealer in connection with resales of Exchange Notes received in exchange
for Outstanding Notes where such Outstanding Notes were acquired as a result of
market-making activities or other trading activities. The Company has agreed
that, for a period of 180 days after the Expiration Date, it will make this
Prospectus, as amended or supplemented, available to any broker-dealer for use
in connection with such resale. In addition, until 25 days after the Expiration
Date, all dealers effecting transactions in the Exchange Notes may be required
to deliver a prospectus.
The Company will not receive any proceeds from any sale of Exchange Notes
by broker-dealers. Exchange Notes received by broker-dealers for their own
account pursuant to the Exchange Offer may be sold from time to time in one or
more transactions in the over-the-counter market, in negotiated transactions,
through the writing of options on the Exchange Notes or a combination of such
methods of resale, at market prices prevailing at the time of resale, at prices
related to such prevailing market prices or negotiated prices. Any such resale
may be made directly to purchasers or to or through brokers or dealers who may
receive compensation in the form of commissions or concessions from any such
broker-dealer or the purchasers of any such Exchange Notes. Any broker-dealer
that resells Exchange Notes that were received by it for its own account
pursuant to the Exchange Offer and any broker or dealer that participates in a
distribution of such Exchange Notes may be deemed to be an "underwriter" within
the meaning of the Securities Act and any profit on any such resale of Exchange
Notes and any commission or concessions received by any such persons may be
deemed to be underwriting compensation under the Securities Act. The Letter of
Transmittal states that, by acknowledging that it will deliver and by delivering
a Prospectus, a broker-dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act.
For a period of 180 days after the Expiration Date, the Company will
promptly send additional copies of this Prospectus and any amendment or
supplement to this Prospectus to any broker-dealer that requests such documents
in the Letter of Transmittal. The Company has agreed to pay all expenses
incident to the Exchange Offer (including the expenses of one counsel for the
Holders of the Notes) other than commissions or concessions of any brokers or
dealers and will indemnify the Holders of the Notes (including any broker-
dealers) against certain liabilities, including liabilities under the Securities
Act.
LEGAL MATTERS
Certain legal matters will be passed upon for the Company by O'Connor,
Cavanagh, Anderson, Killingsworth & Beshears, a professional association,
Phoenix, Arizona.
EXPERTS
The audited financial statements included in this Registration Statement
have been audited by Arthur Andersen LLP, independent public accountants, as
indicated in their reports with respect thereto, and are included herein in
reliance upon the authority of said firm as experts in giving said reports.
94
<PAGE> 101
STYLING TECHNOLOGY CORPORATION AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
STYLING TECHNOLOGY CORPORATION
Report of Independent Public Accountants.................... F-3
Consolidated Balance Sheets................................. F-4
Consolidated Statements of Operations....................... F-5
Consolidated Statements of Stockholders' Equity............. F-6
Consolidated Statements of Cash Flows....................... F-7
Notes to Consolidated Financial Statements.................. F-8
GENA LABORATORIES, INC.
Report of Independent Public Accountants.................... F-20
Balance Sheets.............................................. F-21
Statements of Operations.................................... F-22
Statements of Stockholders' Equity.......................... F-23
Statements of Cash Flows.................................... F-24
Notes to Financial Statements............................... F-25
BODY DRENCH (A DIVISION OF DESIGNS BY NORVELL, INC.)
Report of Independent Public Accountants.................... F-31
Balance Sheets.............................................. F-32
Statements of Operations.................................... F-33
Statements of Changes in Owner's Investment................. F-34
Statements of Cash Flows.................................... F-35
Notes to Financial Statements............................... F-36
JDS MANUFACTURING CO., INC.
Report of Independent Public Accountants.................... F-39
Balance Sheets.............................................. F-40
Statements of Operations.................................... F-41
Statements of Stockholders' Equity.......................... F-42
Statements of Cash Flows.................................... F-43
Notes to Financial Statements............................... F-44
KOTCHAMMER INVESTMENTS, INC.
Report of Independent Public Accountants.................... F-47
Balance Sheet............................................... F-48
Statements of Operations.................................... F-49
Statements of Stockholders' Deficit......................... F-50
Statements of Cash Flows.................................... F-51
Notes to Financial Statements............................... F-52
</TABLE>
F-1
<PAGE> 102
<TABLE>
<S> <C>
U.K. ABBA PRODUCTS, INC.
Report of Independent Public Accountants.................... F-55
Balance Sheets.............................................. F-56
Statements of Operations.................................... F-57
Statements of Stockholders' Equity.......................... F-58
Statements of Cash Flows.................................... F-59
Notes to Financial Statements............................... F-60
INVERNESS CORPORATION AND INVERNESS (UK) LIMITED
Report of Independent Public Accountants.................... F-65
Statement of Net Assets of Certain Product Lines............ F-66
Statement of Operating Revenues and Expenses................ F-67
Notes to Financial Statements............................... F-68
EUROPEAN TOUCH, LTD. II
Report of Independent Public Accountants.................... F-72
Balance Sheets.............................................. F-73
Statements of Operations.................................... F-74
Statements of Stockholders' Equity.......................... F-75
Statements of Cash Flows.................................... F-76
Notes to Financial Statements............................... F-77
</TABLE>
F-2
<PAGE> 103
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
Styling Technology Corporation:
We have audited the accompanying consolidated balance sheets of STYLING
TECHNOLOGY CORPORATION, a Delaware corporation, and subsidiaries (the
"Company"), as of December 31, 1996 and 1997, and the related consolidated
statements of operations and cash flows for the period from November 27, 1996
(commencement of operations) to December 31, 1996 and for the year ended
December 31, 1997, and the related consolidated statements of stockholders'
equity for the period from June 30, 1995 to December 31, 1995 and the years
ended December 31, 1996 and 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 audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of the Company as of December
31, 1996, and 1997, and the results of its operations and its cash flows for the
period from November 27, 1996 to December 31, 1996 and for the year ended
December 31, 1997, in conformity with generally accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP
Phoenix, Arizona,
February 19, 1998.
F-3
<PAGE> 104
STYLING TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------- JUNE 30,
1996 1997 1998
----------- ----------- ------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents...................... $ 4,491,000 $ 3,063,000 $ 11,657,000
Accounts receivable, net....................... 1,640,000 14,296,000 21,051,000
Inventory...................................... 2,635,000 10,951,000 16,267,000
Prepaid expenses and other current assets...... 292,000 2,120,000 1,416,000
----------- ----------- ------------
Total current assets................... 9,058,000 30,430,000 50,391,000
PROPERTY AND EQUIPMENT, net...................... 1,125,000 2,640,000 4,003,000
GOODWILL, net.................................... 21,831,000 56,506,000 83,523,000
OTHER ASSETS..................................... 220,000 2,913,000 5,677,000
----------- ----------- ------------
$32,234,000 $92,489,000 $143,594,000
=========== =========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable............................... $ 3,000,000 $ 7,065,000 $ 6,677,000
Accrued liabilities............................ 1,516,000 3,832,000 3,063,000
Current portion of long-term debt and other.... 83,000 5,647,000 2,664,000
----------- ----------- ------------
Total current liabilities.............. 4,599,000 16,544,000 12,404,000
----------- ----------- ------------
LONG-TERM DEBT AND OTHER, less current portion... 2,316,000 47,377,000 100,512,000
----------- ----------- ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $.0001 par value, 1,000,000
shares authorized........................... -- -- --
Common stock, $.0001 par value, 10,000,000
shares authorized; 4,757,000 shares issued;
3,949,000 shares outstanding at December 31,
1996 and 1997; 4,857,000 shares issued;
4,049,000 shares outstanding at June 30,
1998........................................ 1,000 1,000 1,000
Additional paid-in capital..................... 27,456,000 27,875,000 28,072,000
Retained earnings (deficit).................... (338,000) 2,492,000 4,405,000
Treasury stock................................. (1,800,000) (1,800,000) (1,800,000)
----------- ----------- ------------
Total stockholders' equity............. 25,319,000 28,568,000 30,678,000
----------- ----------- ------------
$32,234,000 $92,489,000 $143,594,000
=========== =========== ============
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-4
<PAGE> 105
STYLING TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE PERIOD FROM
NOVEMBER 27, 1996 SIX MONTHS ENDED
(COMMENCEMENT JUNE 30,
OF OPERATIONS) TO YEAR ENDED -------------------------
DECEMBER 31, 1996 DECEMBER 31, 1997 1997 1998
------------------- ----------------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
NET SALES........................... $1,083,000 $38,108,000 $14,916,000 $35,299,000
COST OF SALES....................... 571,000 16,756,000 6,480,000 15,492,000
---------- ----------- ----------- -----------
Gross profit.............. 512,000 21,352,000 8,436,000 19,807,000
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES.......................... 737,000 12,201,000 4,731,000 11,909,000
---------- ----------- ----------- -----------
Income (loss) from
operations.............. (225,000) 9,151,000 3,705,000 7,898,000
INTEREST EXPENSE AND OTHER INCOME,
net............................... 2,000 (1,847,000) 174,000 2,628,000
---------- ----------- ----------- -----------
INCOME (LOSS) BEFORE EXTRAORDINARY
ITEM AND INCOME TAXES............. (223,000) 7,304,000 3,531,000 5,270,000
PROVISION FOR (BENEFIT FROM) INCOME
TAXES............................. (72,000) 3,097,000 1,446,000 2,266,000
---------- ----------- ----------- -----------
INCOME (LOSS) BEFORE EXTRAORDINARY
ITEM.............................. (151,000) 4,207,000 2,085,000 3,004,000
EXTRAORDINARY ITEM, net of tax
benefit of $882,000 during the
year ended December 31, 1997...... -- (1,377,000) -- 1,091,000
---------- ----------- ----------- -----------
NET INCOME (LOSS)................... $ (151,000) $ 2,830,000 $ 2,085,000 $ 1,913,000
========== =========== =========== ===========
BASIC EARNINGS (LOSS) PER SHARE:
Income (loss) before extraordinary
item........................... $ (0.04) $ 1.07 $ 0.53 $ 0.75
Extraordinary item, net........... -- (0.35) -- (0.27)
---------- ----------- ----------- -----------
Net income (loss)................. $ (0.04) $ 0.72 $ 0.53 $ 0.48
========== =========== =========== ===========
Weighted average shares........... 3,770,000 3,949,000 3,949,000 4,006,000
========== =========== =========== ===========
DILUTED EARNINGS (LOSS) PER SHARE:
Income (loss) before extraordinary
item........................... $ (0.04) $ 1.02 $ 0.51 $ 0.69
Extraordinary item, net........... -- (0.33) -- (0.25)
---------- ----------- ----------- -----------
Net income (loss)................. $ (0.04) $ 0.69 $ 0.51 $ 0.44
========== =========== =========== ===========
Weighted average shares........... 3,770,000 4,113,000 4,116,000 4,356,000
========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE> 106
STYLING TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK
-------------------- ADDITIONAL RETAINED TOTAL
SHARES COMMON PAID-IN EARNINGS TREASURY STOCKHOLDERS'
OUTSTANDING STOCK CAPITAL (DEFICIT) STOCK EQUITY
----------- ------ ----------- ---------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, June 30, 1995
(inception)....................... -- $ -- $ -- $ -- $ -- $ --
Issuance of common stock.......... 1,616,000 1,000 -- -- -- 1,000
--------- ------ ----------- ---------- ----------- -----------
BALANCE, December 31, 1995.......... 1,616,000 1,000 -- -- -- 1,000
Issuance of common stock and
warrants....................... 20,000 -- 179,000 (187,000) -- (8,000)
Issuance of common stock and
warrants in initial public
offering, net of offering costs
of approximately $1,351,000.... 3,116,000 -- 27,227,000 -- -- 27,227,000
Issuance of common stock in KII
acquisition.................... 5,000 -- 50,000 -- -- 50,000
Purchase of 808,000 shares of
treasury stock................. (808,000) -- -- -- (1,800,000) (1,800,000)
Net loss for the period from
November 27, 1996 (commencement
of operations) to December 31,
1996........................... -- -- -- (151,000) -- (151,000)
--------- ------ ----------- ---------- ----------- -----------
BALANCE, December 31, 1996.......... 3,949,000 1,000 27,456,000 (338,000) (1,800,000) 25,319,000
Issuance of warrants.............. -- -- 419,000 -- -- 419,000
Net income........................ -- -- -- 2,830,000 -- 2,830,000
--------- ------ ----------- ---------- ----------- -----------
BALANCE, December 31, 1997.......... 3,949,000 1,000 27,875,000 2,492,000 (1,800,000) 28,568,000
Exercise of Stock Options
(unaudited).................... 100,000 -- 197,000 -- -- 197,000
Net Income (unaudited)............ -- -- -- 1,913,000 1,913,000
--------- ------ ----------- ---------- ----------- -----------
BALANCE, June 30, 1998 (unaudited).. 4,049,000 $1,000 $28,072,000 $4,405,000 $(1,800,000) $30,678,000
========= ====== =========== ========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE> 107
STYLING TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE
PERIOD
FROM
NOVEMBER 27, SIX MONTHS ENDED
1996 TO JUNE 30,
DECEMBER 31, DECEMBER 31, ---------------------------
1996 1997 1997 1998
------------ ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)............................... $ (151,000) $ 2,830,000 $ 2,085,000 $ 1,913,000
Adjustments to reconcile net income (loss) to
net cash used in operating activities --
Depreciation and amortization................. 97,000 1,846,000 578,000 1,856,000
Interest accretion to note payable............ -- 174,000 85,000 87,000
Changes in assets and liabilities --
Accounts receivable, net...................... 532,000 (7,405,000) (2,829,000) (3,665,000)
Inventory..................................... (21,000) (2,992,000) 40,000 (1,551,000)
Prepaid expenses and other assets............. (34,000) (353,000) (161,000) (363,000)
Accounts payable and accrued liabilities...... (788,000) 3,520,000 (1,635,000) (2,796,000)
------------ ------------ ------------ ------------
Net cash used in operating activities.... (365,000) (2,380,000) (1,837,000) (4,519,000)
------------ ------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of acquired businesses, net of cash
acquired...................................... (20,523,000) (45,150,000) (21,816,000) (31,469,000)
Purchases of property and equipment............. (46,000) (582,000) (160,000) (668,000)
Change in investments, long-term receivables and
other......................................... -- -- -- (957,000)
------------ ------------ ------------ ------------
Net cash used in investing activities.... (20,569,000) (45,732,000) (21,976,000) (33,094,000)
------------ ------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock, net of
offering and acquisition costs................ 27,225,000 -- -- --
Proceeds from issuance of long-term debt, net of
financing costs............................... -- 71,633,000 -- --
Payments on long-term debt...................... -- (24,949,000) -- --
Purchase of treasury stock...................... (1,800,000) -- -- --
Proceeds from bond offering, net of financing
costs......................................... -- -- -- 96,400,000
Proceeds from Credit facility, net of financing
costs......................................... -- -- 21,454,000 10,265,000
Exercise of stock options....................... -- -- -- 197,000
Repayment of notes payable and credit
facility...................................... -- -- (454,000) (60,655,000)
------------ ------------ ------------ ------------
Net cash provided by financing
activities............................. 25,425,000 46,684,000 21,000,000 46,207,000
------------ ------------ ------------ ------------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS..................................... 4,491,000 (1,428,000) (2,813,000) 8,594,000
CASH AND CASH EQUIVALENTS, beginning of period.... -- 4,491,000 4,492,000 3,063,000
------------ ------------ ------------ ------------
CASH AND CASH EQUIVALENTS, end of period.......... $ 4,491,000 $ 3,063,000 $ 1,679,000 $ 11,657,000
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
<PAGE> 108
STYLING TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) FORMATION OF THE COMPANY:
Initial Public Offering and Acquired Businesses
Styling Technology Corporation ("Styling") was formed in June 1995. From
June 1995 through November 26, 1996, Styling conducted no operations and its
only activities related to negotiating acquisitions and related financing.
During November 1996, Styling completed an initial public offering (the
"Offering") of 3,116,000 shares of its common stock. Simultaneously with the
consummation of the Offering, Styling acquired in separate transactions four
businesses that develop, produce, and market professional salon products. Prior
to the Offering, the Company effected a 0.808-for-1 reverse stock split on all
its outstanding common stock. As a result, all share amounts were adjusted to
give effect to the split, including the option terms as discussed herein.
Upon consummation of the Offering, Styling acquired all of the outstanding
stock of Gena Laboratories, Inc. ("Gena") and JDS Manufacturing Co., Inc.
("JDS") and certain assets and liabilities of the Body Drench Division of
Designs by Norvell, Inc. ("Body Drench") and Kotchammer Investments, Inc.
("KII") (collectively, the "Acquired Businesses"). The cost of the Acquired
Businesses, including direct acquisition costs, was approximately $22.9 million.
The combined purchase price was funded with approximately $20.8 million in cash
from the net proceeds of the Offering, and approximately $2.1 million of seller
carryback financing and issuance of common stock. The acquisitions were
accounted for using the purchase method of accounting. The purchase price was
allocated based on the fair market value of the assets and liabilities acquired.
Approximately $5.2 million was allocated to current assets, approximately $1.1
million to property and equipment, approximately $5.0 million to current
liabilities, and approximately $0.3 million to long-term debt. Approximately
$21.9 million of the purchase price represents costs in excess of fair values
acquired, and was recorded as goodwill.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
Styling (which includes the Body Drench division, KII, Suntopia and the Clean
and Easy/One Touch product lines) and the Gena, JDS, U.K. ABBA Products, Inc.
("ABBA") and Styling Technology (UK) Limited subsidiaries (collectively, the
"Subsidiaries"). The Company's accompanying consolidated financial statements
include the operations of Styling and Subsidiaries (collectively, the
"Company"). All significant intercompany transactions have been eliminated in
consolidation. Financial information and transactions with Styling Technology
(UK) Limited are reported in accordance with Statement of Financial Accounting
Standards ("SFAS") No. 52, Foreign Currency Translation.
Cash Equivalents
All highly liquid investments purchased with original maturities of three
months or less are considered to be cash equivalents.
Concentrations of Credit Risk
Financial instruments which potentially subject the Company to
concentrations of credit risk consist of cash and cash equivalents and trade
receivables. In management's opinion, the Company places its cash and cash
equivalents in high quality credit institutions. The Company establishes an
allowance for doubtful accounts based upon factors surrounding the credit risk
of specific customers, historical trends and other information.
F-8
<PAGE> 109
STYLING TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Reclassifications
Certain amounts as of December 31, 1996 and for the period from November
27, 1996 to December 31, 1996 have been reclassified to conform with fiscal year
1997 presentation.
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,
-------------------------
1996 1997
---------- -----------
<S> <C> <C>
Raw materials and work-in-process.................. $1,325,000 $ 2,594,000
Finished goods..................................... 1,310,000 8,357,000
---------- -----------
$2,635,000 $10,951,000
========== ===========
</TABLE>
Property and Equipment
Property and equipment are recorded at cost and depreciation on property
and equipment is provided using the straightline method over their estimated
useful lives.
Expenditures for major renewals and betterments are capitalized, while
expenditures for maintenance and repairs, which do not improve assets or extend
their useful lives are charged to expense as incurred.
Goodwill
Goodwill is the cost in excess of fair value of net tangible assets of
acquired businesses and is amortized using the straight-line method over 25
years. The Company continually evaluates whether events and circumstances have
occurred subsequent to its acquisition that indicate the remaining estimated
useful life of goodwill may warrant revision or that the remaining balance of
goodwill may not be recoverable. When factors indicate that goodwill should be
evaluated for possible impairment, the Company uses an estimate of the
undiscounted future cash flows over the remaining life of the goodwill in
measuring whether the goodwill is recoverable. Accumulated amortization at
December 31, 1996 and 1997 was approximately $86,000 and $1.4 million,
respectively.
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. Actual results could differ from those estimates.
Fair Value of Financial Instruments
The Company's financial instruments include cash, accounts receivable,
long-term debt and letters of credit. The estimated fair value amounts have been
determined by the Company at December 31, 1996 and at December 31, 1997, using
available market information and valuation methodologies described below. The
carrying values of cash and cash equivalents and accounts receivable approximate
fair values due to the
F-9
<PAGE> 110
STYLING TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
short-term maturities of these instruments. The carrying amount on the long-term
debt is estimated to approximate fair value as the actual interest rates are
consistent with rates estimated to be currently available for debt with similar
terms and remaining maturities. The carrying amount of the letters of credit
reflects fair value as the related fees are competitively determined in the
marketplace.
Revenue Recognition
The Company recognizes revenue from sales at the time product is shipped.
The allowance for doubtful accounts at December 31, 1996 and 1997 was
approximately $427,000 and $1.0 million, respectively.
Income Taxes
The Company provides for income taxes using the asset and liability method.
Under this method, deferred income tax assets and liabilities are recognized for
the expected future income tax consequences, based on enacted tax laws, of
temporary differences between the financial statement carrying amounts and the
tax bases of assets and liabilities and carryforwards. This method requires
recognition of deferred tax assets for the expected future tax effects of all
deductible temporary differences, loss carryforwards and tax credit
carryforwards. Deferred tax assets are then reduced, if deemed necessary, by a
valuation allowance for the amount of any tax benefits which, more likely than
not based on current circumstances, are not expected to be realized.
Other Assets
Other assets consist primarily of deferred financing costs associated with
the Company completing various financings transactions (see Note 5). These costs
are capitalized as incurred and amortized over the related debt into interest
expense and other income in the accompanying consolidated statements of
operations.
Recently Issued Accounting Standards
In June 1997, the Financial Accounting Standards Board (FASB) issued SFAS
No. 130, Reporting Comprehensive Income. SFAS No. 130 establishes standards for
reporting and display of comprehensive income and its components (revenues,
gains, and losses) in a full set of general-purpose financial statements. SFAS
No. 130 requires that all items that are required to be recognized under
accounting standards as components of comprehensive income be reported in a
financial statement that is displayed with the same prominence as other
financial statements. This statement is effective for fiscal years beginning
after December 15, 1997. In management's opinion, the adoption of SFAS No. 130
will not have a material impact on the Company's financial position or results
of operations.
In June 1997, the FASB issued SFAS No. 131, Disclosures About Segments of
an Enterprise and Related Information, which supersedes SFAS No. 14, Financial
Reporting for Segments of a Business Enterprise. SFAS No. 131 establishes
standards for the way that public business enterprises report information about
operating segments in annual financial statements and requires that those
enterprises report selected information about operating segments in interim
financial reports issued to stockholders. It also establishes standards for
related disclosures about products and services, geographic areas, and major
customers. This statement is effective for financial statements for periods
beginning after December 15, 1997. In management's opinion, the adoption of SFAS
No. 131 will not have a material impact on the Company's financial position or
results of operations.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities. The Statement establishes
F-10
<PAGE> 111
STYLING TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
accounting and reporting standards requiring that every derivative instrument
(including certain derivative instruments embedded in other contracts) be
recorded in the balance sheet as either an asset or liability measured at its
fair value. The Statement requires that changes in the derivative's fair value
be recognized currently in earnings unless specific hedge accounting criteria
are met. Special accounting for qualifying hedges allows a derivative's gains
and losses to offset related results on the hedged item in the income statement,
and requires that a company must formally document, designate, and assess the
effectiveness of transactions that receive hedge accounting. Statement 133 is
effective for fiscal years beginning after June 15, 1999. A company may also
implement the Statement as of the beginning of any fiscal quarter after issuance
(that is, fiscal quarters beginning June 16, 1998 and thereafter). Statement 133
cannot be applied retroactively. Statement 133 must be applied to (a) derivative
instruments and (b) certain derivative instruments embedded in hybrid contracts
that were issued, acquired, or substantively modified after December 31, 1997
(and, at the company's election, before January 1, 1998). The Company is
currently evaluating the impact of the new statement on its financial position
and results of operations.
Unaudited Interim Financial Data
The unaudited interim financial data as of June 30, 1998 and for the six
months ended June 30, 1997 and 1998 includes all adjustments, consisting only of
normal recurring adjustments, necessary for a fair presentation of the results
for the interim periods. Operating results and cash flows for the six months
ended June 30, 1997 and 1998 are not necessarily indicative of the results that
will be achieved for the full year.
Supplemental Cash Flow Information
For the year ended December 31, 1997, the Company paid approximately $1.7
million and $1.2 million for income taxes and interest, respectively. No amounts
were paid for income taxes or interest for the period from November 27, 1996 to
December 31, 1996.
Earnings (Loss) Per Share
In February 1997, the FASB issued SFAS No. 128, Earnings Per Share, which
supersedes Accounting Principles Board Opinion No. 15. SFAS No. 128 modifies the
calculation of primary and fully diluted earnings per share (EPS) and replaces
them with basic and diluted EPS. SFAS No. 128 is effective for financial
statements for both interim and annual periods presented after December 15,
1997, and as a result, all prior-period EPS data presented herein has been
restated.
F-11
<PAGE> 112
STYLING TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A reconciliation of the numerators and denominators of the basic and
diluted EPS computations for the period from November 27, 1996 to December 31,
1996 and the year ended December 31, 1997, is as follows:
<TABLE>
<CAPTION>
1996 1997
------------------------------------ -----------------------------------
EFFECT OF EFFECT OF
STOCK STOCK
OPTIONS OPTIONS
BASIC AND DILUTED BASIC AND DILUTED
EPS WARRANTS EPS EPS WARRANTS EPS
---------- ---------- ---------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Income (loss) before
extraordinary item
(numerator)................. $ (151,000) -- $ (151,000) $4,207,000 -- $4,207,000
Extraordinary item, net
(numerator)................. -- -- -- 1,377,000 -- 1,377,000
---------- ---------- ---------- ---------- ------- ----------
Net income (loss)
(numerator)................. $ (151,000) -- $ (151,000) $2,830,000 -- $2,830,000
========== ========== ========== ========== ======= ==========
Shares (denominator).......... 3,770,000 -- 3,770,000 3,949,000 164,000 4,113,000
========== ========== ========== ========== ======= ==========
Per share amount -- income
(loss) before extraordinary
item........................ $ (0.04) $ (0.04) $ 1.07 $ 1.02
Per share
amount -- extraordinary
item, net................... -- -- (0.35) (0.33)
---------- ---------- ---------- ----------
Per share amount -- net income
(loss)...................... $ (0.04) $ (0.04) $ 0.72 $ 0.69
========== ========== ========== ==========
</TABLE>
For the period from November 27, 1996 to December 31, 1996, no common stock
equivalents were considered in the EPS calculations as their effect was
antidilutive. For purposes of applying the treasury stock method, the Company
has assumed that it will fully utilize tax deductions arising from the assumed
exercise of non-qualified stock options.
(3) 1997 BUSINESS COMBINATIONS:
During March 1997, the Company acquired inventory and other assets of the
Utopia product line of high-end tanning products from Creative Laboratories,
Inc. for approximately $350,000 in cash.
On June 25, 1997, the Company acquired all of the issued and outstanding
common stock of ABBA, which produces a proprietary line of aromatherapy-based
professional hair care products. The Company paid a purchase price of
approximately $20 million in cash for the ABBA common stock. In connection with
the ABBA acquisition, the Company also negotiated approximately $1.1 million in
facilitation fees, payable over three years, to certain former shareholders of
ABBA for pre-closing efforts to facilitate completion of the acquisition (see
Note 5). The ABBA acquisition is accounted for under the purchase method of
accounting. The purchase price was allocated to assets and liabilities based on
their estimated fair values as of the date of acquisition. The cost in excess of
fair values was approximately $20.1 million and is recorded as goodwill in the
accompanying consolidated balance sheets.
On December 10, 1997, the Company acquired certain assets and assumed
certain liabilities of Inverness Corporation and Inverness (UK) Limited
(collectively "Inverness"). Inverness produces salon and retail hair removal
apparatus and products under the brand names "One Touch" and "Clean + Easy." The
Company paid a purchase price consisting of (i) $16.5 million in cash; and (ii)
an additional $3.5 million in cash held in escrow pending release contingent
upon the successful transition of the manufacture of certain hair removal
appliances to offshore manufacturing. The Inverness acquisition is accounted for
under the purchase method of accounting. The purchase price was allocated to
assets and liabilities based on their estimated fair values as of the date of
acquisition. The cost in excess of fair values was approximately $13.4 million
and is recorded as goodwill in the accompanying consolidated balance sheets. The
amounts of assets acquired and liabilities assumed in the Inverness acquisitions
were based on the preliminary fair values as of the date of acquisition, and may
be revised at a later date.
F-12
<PAGE> 113
STYLING TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following assets were acquired and liabilities assumed at the closing
date of the three acquisitions described above:
<TABLE>
<S> <C>
Accounts receivable......................................... $ 5,251,000
Inventory................................................... 5,324,000
Other assets................................................ 1,475,000
Property and equipment...................................... 1,316,000
Accounts payable and accrued liabilities.................... (2,861,000)
------------
Net assets acquired......................................... 10,505,000
Cash paid at closing for purchase price and acquisition
costs..................................................... 45,150,000
------------
Goodwill.................................................... $ 34,645,000
============
</TABLE>
Pro Forma Results of Operations
The following unaudited pro forma summary includes the combined results of
operations of the Company, the Acquired Businesses, and the Utopia, ABBA and
Inverness acquisitions, as if all such acquisitions had occurred at the
beginning of 1996 and 1997 after giving effect to certain pro forma adjustments.
These pro forma adjustments include only the effect of goodwill amortization,
interest expense that would have been incurred to finance a portion of the
purchase of the acquisitions, and the estimated related income tax effects. The
pro forma financial data is for informational purposes only, and is not
necessarily indicative of the results of operations had the acquisitions
occurred at the beginning of 1996 and 1997 and is not necessarily indicative of
future operating results.
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1996 1997
----------- -----------
(UNAUDITED)
<S> <C> <C>
Net sales......................................... $51,374,000 $62,752,000
Net income (loss)................................. (1,639,000) 2,447,000
Income (loss) per diluted share................... (0.43) 0.59
</TABLE>
(4) PROPERTY AND EQUIPMENT:
Property and equipment consist of the following at December 31:
<TABLE>
<CAPTION>
USEFUL DECEMBER 31,
LIVES ------------------------
(YEARS) 1996 1997
------- ---------- ----------
<S> <C> <C> <C>
Land....................................... -- $ 150,000 $ 150,000
Building and leasehold improvements........ 7-40 567,000 594,000
Machinery and equipment.................... 3-7 274,000 1,559,000
Furniture and fixtures..................... 7 65,000 375,000
Computers, vehicles and other.............. 3-5 80,000 356,000
---------- ----------
1,136,000 3,034,000
Less -- accumulated depreciation........... (11,000) (394,000)
---------- ----------
$1,125,000 $2,640,000
========== ==========
</TABLE>
The Company recorded approximately $11,000 and $383,000 in depreciation
expense for the period from November 27, 1996 to December 31, 1996 and the year
ended December 31, 1997, respectively, which is included in selling, general and
administrative expenses in the accompanying consolidated statements of
operations.
F-13
<PAGE> 114
STYLING TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(5) LONG-TERM DEBT AND OTHER:
Long-term debt and other consists of the following at December 31:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1996 1997
---------- -----------
<S> <C> <C>
Senior credit facility, collateralized by substantially all
the assets of the Company, maturing through December 31,
2004..................................................... $ -- $50,000,000
Gena Note, imputed interest at 10%, secured by 225,000
shares of contingently issuable common stock held in
escrow and an outstanding letter of credit for $500,000,
maturing November 26, 1998............................... 1,667,000 1,841,000
Unsecured notes payable related to the acquisition of JDS,
bearing interest from 8% to 10%, due quarterly, maturing
November 26, 1998........................................ 283,000 283,000
Note payable related to the acquisition of KII, repaid
during 1997.............................................. 140,000 --
Note payable, repaid during 1997........................... 309,000 --
Facilitation fee payable (see Note 3)...................... -- 900,000
---------- -----------
2,399,000 53,024,000
Less: current portion...................................... (83,000) (5,647,000)
---------- -----------
$2,316,000 $47,377,000
========== ===========
</TABLE>
Aggregate future maturities of long-term debt and other are as follows at
December 31, 1997:
<TABLE>
<S> <C>
1998.................................................... $ 5,647,000
1999.................................................... 4,797,000
2000.................................................... 5,480,000
2001.................................................... 6,300,000
2002.................................................... 7,300,000
Thereafter.............................................. 23,500,000
-----------
$53,024,000
===========
</TABLE>
Senior Credit Facilities
In June 1997, in connection with the ABBA acquisition, the Company entered
into a six year, $28 million credit facility ("Old Credit Facility") with a
group of banks with Credit Agricole Indosuez ("Indosuez") acting as agent. The
Old Credit Facility consisted of three separate loans: a $13 million term A
loan, a $10 million term B loan, and a $5 million revolving line of credit.
In December 1997, in connection with the acquisition of Inverness, the
Company extinguished the Old Credit Facility and entered into a new credit
facility ("New Credit Facility"). The New Credit Facility is a seven-year, $75
million credit facility with a new group of banks with Indosuez acting as agent.
The New Credit Facility consists of four separate loans: (i) a $25 million term
A loan ("Term A Loan"), (ii) a $25 million term B loan ("Term B Loan"), (iii) a
$12.5 million acquisition term loan, and (iv) a $12.5 million revolving line of
credit. In connection with the extinguishment of the Old Credit Facility, the
Company took an extraordinary non-cash charge of approximately $1.4 million, net
of income taxes, related to the write-off of unamortized financing costs.
The Company may utilize the acquisition term loan in connection with
funding future acquisitions. These future acquisitions would require the Company
to meet certain pro forma financial ratios. Upon such
F-14
<PAGE> 115
STYLING TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
financing, the acquisition term loan will convert proportionately into Term A
and Term B Loans based on the respective principal outstanding on the Term A and
Term B Loans at that time.
The interest rate on the New Credit Facility is paid quarterly and
determined by the base rate (the "Base Rate"), as defined. The Base Rate is
equal to the higher of (i) the Federal Funds Rate plus 0.5%, or (ii) the
Indosuez prime lending rate. The Term A Loan bears interest at the Base Rate
plus 1.0%, and matures on December 31, 2002. The Term B Loan bears interest at
the Base Rate plus 1.5% and matures on December 31, 2004. The revolving line of
credit bears interest at the Base Rate plus 1.0%, and expires on December 31,
2002. The revolving line of credit will be used for working capital purposes.
The Company may, at its option after January 9, 1998, convert the interest
rates relating to any of the loans to a LIBOR rate. Should the Company exercise
this option, the Term A Loan will bear interest at the LIBOR rate plus 2.5%; the
Term B Loan will bear interest at the LIBOR rate plus 3.0%; and the revolving
line of credit will bear interest at the LIBOR rate plus 2.5%.
The New Credit Facility contains certain provisions that, among other
things, will require the Company to comply with certain financial ratio
requirements and will limit the ability of the Company to make certain capital
expenditures, to incur certain additional indebtedness, to sell assets, or to
declare dividends. In addition, the New Credit Facility requires the Company to
enter into certain interest rate protection instruments. As of December 31,
1997, the Company had not yet entered into any interest rate protection
transactions.
(6) STOCKHOLDERS' EQUITY:
Treasury Stock
In October 1996, the Company entered into a stock repurchase agreement with
a founder, pursuant to which the founder agreed to sell approximately 808,000
shares of Company's common stock to the Company for $1.8 million, payable upon
consummation of the Offering. Accordingly, upon consummation of the Offering,
the founder was no longer a stockholder of the Company.
Initial Public Offering
In November 1996, the Company completed the Offering of approximately 2.9
million shares of its common stock with an issue price of $10.00 per share.
During December 1996, the Company's underwriters exercised an over allotment
option, resulting in the issuance of approximately 216,000 additional shares.
Net proceeds from the Offering and over allotment option amounted to
approximately $27,226,000. In connection with the Offering, the Company issued
203,000 five year warrants to its underwriters with an exercise price of $12.00
per share.
Warrants
In connection with the Old Credit Facility, the Company issued 160,000 five
year warrants to lenders with exercise prices between $10.18 and $11.38 per
share. These warrants have been recorded at fair value as additional paid-in
capital in the accompanying December 31, 1997 consolidated balance sheet.
In connection with the consummation of the Acquired Businesses and the
Offering, the Company issued warrants to purchase 20,000 shares of common stock
with an exercise price of $12.50 per share.
Stock Options
At the initial capitalization of the Company, 162,000 stock options to
purchase shares of the common stock of the Company were issued to an officer
with an exercise price of $0.10 per share. Subsequent to December 31, 1997,
approximately 72,000 stock options were cancelled in connection with the
officer's retirement.
F-15
<PAGE> 116
STYLING TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
During 1996, the Company adopted the 1996 Stock Option Plan (the "Plan"),
which provides for the grant of incentive and nonqualified stock options to
acquire common stock of the Company to key personnel and directors of the
Company.
A summary of the status of all the Company's stock options at December 31,
1996 and 1997, and changes during the periods ended is presented in the
following table:
<TABLE>
<CAPTION>
1996 1997
-------------------- --------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Outstanding at beginning of year.......... 162,000 $ .10 250,000 $ 3.58
Granted................................. 88,000 10.00 430,000 10.57
Exercised............................... -- -- -- --
Canceled................................ -- -- (131,000) 10.60
-------- ------ -------- ------
Outstanding at end of year................ 250,000 $ 3.58 549,000 $ 7.38
======== ====== ======== ======
Exercisable at end of year................ 18,000 $10.00 136,000 $ 9.71
======== ====== ======== ======
Weighted average fair value per share of
options granted......................... $ 5.65 $ 4.13
======== ========
</TABLE>
Options outstanding at December 31, 1997 have exercise prices between $0.10
and $11.38. 162,000 options have exercise prices of $0.10 with a remaining
average contractual life of 7.5 years, with cliff vesting after four years.
387,000 options have exercise prices between $9.25 and $11.38 with a remaining
average contractual life of 9.4 years, with vesting between one and five years.
The following pro forma disclosures of net income (loss) are made assuming
the Company had accounted for the stock options pursuant to the provision of
SFAS No. 123, Accounting for Stock-Based Compensation.
<TABLE>
<CAPTION>
FOR THE PERIOD
FROM
NOVEMBER 27,
1996
(COMMENCEMENT
OF OPERATIONS) TO
DECEMBER 31, DECEMBER 31,
1996 1997
----------------- ------------
<S> <C> <C>
Income (loss) before extraordinary item
As reported........................................... $(151,000) $ 4,207,000
Pro forma............................................. (226,000) 3,876,000
Diluted EPS -- as reported............................ (0.04) 1.02
Diluted EPS -- pro forma.............................. (0.06) 0.94
Extraordinary item, net
As reported........................................... -- (1,337,000)
Diluted EPS -- as reported............................ -- (0.33)
Net income (loss)
As reported........................................... (151,000) 2,830,000
Pro forma............................................. (226,000) 2,539,000
Diluted EPS -- as reported............................ (0.04) 0.69
Diluted EPS -- pro forma.............................. (0.06) 0.62
</TABLE>
The fair value of each option is estimated on the date of grant using the
Black-Scholes options pricing model with the following weighted average
assumptions used for grants in 1996; risk-free interest rates of
F-16
<PAGE> 117
STYLING TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5.85%, expected lives of 3.8 years; and a volatility factor of 60%. The weighted
average assumptions used for grants in 1997 were as follows: risk-free interest
rates of 5.99% to 6.62%, expected lives of two to six years; and a volatility
factor of 38.59%. The dividend yield assumed is zero for both 1996 and 1997.
(7) INCOME TAXES:
The provision for (benefit from) income taxes for the periods ended
December 31, 1996 and 1997, consists of the following:
<TABLE>
<CAPTION>
1996 1997
-------- ----------
<S> <C> <C>
Current expense...................................... $ -- $3,146,000
Deferred benefit..................................... (72,000) (49,000)
-------- ----------
Net income tax expense (benefit)..................... $(72,000) $3,097,000
======== ==========
</TABLE>
The components of the deferred tax accounts as of December 31, 1996 and
1997, consists of the following:
<TABLE>
<CAPTION>
1996 1997
--------- ---------
<S> <C> <C>
Current deferred tax assets
Tax effect of net operating loss carryforward... $ 86,000 $ --
Reserves and other accruals..................... 84,000 232,000
Inventory capitalization........................ -- 222,000
Other........................................... 38,000 8,000
--------- ---------
Total deferred tax assets............................ 208,000 462,000
--------- ---------
Non-current deferred tax liabilities
Accelerated tax depreciation and amortization... 16,000 162,000
--------- ---------
Net deferred tax asset............................... $ 192,000 $ 300,000
========= =========
</TABLE>
A reconciliation of the U.S. federal statutory income tax rate to the
Company's income (loss) before extraordinary item effective tax rate is as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------
1996 1997
---- ----
<S> <C> <C>
Statutory federal rate...................................... (34)% 34%
Effect of state taxes....................................... (5) 4
Nondeductible amortization of goodwill...................... 8 4
Other....................................................... (1) --
--- ---
(32)% 42%
=== ===
</TABLE>
The net operating loss deferred tax asset of approximately $86,000
originating in the year ended December 31, 1996, was completely utilized as of
December 31, 1997.
(8) RELATED PARTY INFORMATION:
During 1996, certain founders advanced approximately $112,500 to the
Company to fund various Offering and acquisition costs, all of which was repaid
during the year.
A member of the Company's Board of Directors serves as President of a
consulting firm which was paid a $150,000 fee in connection with the ABBA
acquisition.
F-17
<PAGE> 118
STYLING TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A member of the Company's Board of Directors is a partner in a law firm
that represents the Company in certain legal matters. The total fees paid to the
firm during 1997 were approximately $8,000.
A member of the Company's Board of Directors is a partner in a merchant
banking firm which provided services to the Company related to obtaining
financing and completing certain acquisitions. During 1997, this firm earned
$1,120,000 for these services.
A former member of the Company's Board of Directors serves as a consultant
to the Company. He was paid consulting fees and reimbursement of out of pocket
expenses of approximately $213,000 during the period in which he served as a
Director for the Company.
The Company's Chief Executive Officer owns a salon chain which is a
customer of the Company. Sales to these stores from all divisions were
approximately $153,000 during 1997. The total accounts receivable balance as of
December 31, 1997, from these stores was approximately $96,000.
(9) COMMITMENTS AND CONTINGENCIES:
Legal Matters
The Company is party to certain legal matters arising in the ordinary
course of its business. In management's opinion, as of December 31, 1997, the
expected outcome of such matters will not have a material impact on the
Company's financial position or results of operations.
Operating Leases
The Company leases certain equipment and office and warehouse space under
noncancelable operating leases. Rent expense related to these lease agreements
totaled approximately $12,000 for the period November 27, 1996 (commencement of
operations) to December 31, 1996. Rent expense for the year ended December 31,
1997, was approximately $313,000.
Future lease payments under noncancelable operating leases are as follows:
<TABLE>
<CAPTION>
YEARS ENDING
DECEMBER 31,
------------
<S> <C>
1998................................................. $ 768,000
1999................................................. 760,000
2000................................................. 740,000
2001................................................. 482,000
2002................................................. 415,000
Thereafter........................................... 202,000
----------
$3,367,000
==========
</TABLE>
Retirement Plans
Two of the Company's divisions had 401(k) plans in place at the time of
their acquisition. The first of these plans allows contributions of up to 18% of
compensation for eligible employees. The Company may match up to 25% of the
employee's contribution up to a maximum of 4% of the employee's compensation.
The Company made payments to this 401(k) Plan for approximately $5,000 during
1997. Any full-time employee who has been with that division of the Company for
at least three months may enroll during a semiannual enrollment period.
The second plan allows contributions of up to 20% of compensation for
eligible employees. The Company may match up to 50% of the employee's
contribution up to a maximum of 6% of compensation. The Company
F-18
<PAGE> 119
STYLING TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
made payments to this 401(k) plan in the sum of $13,000 during 1997. Any
full-time employee who has been with that division of the Company for at least
one year may enroll during a semi-annual enrollment period.
(10) CUSTOMER AND VENDOR CONCENTRATION:
Sales to a major U.S. beauty supply chain as a percentage of total net
sales approximated 25% for the period November 27, 1996 to December 31, 1996.
During 1997, this customer accounted for approximately 13% of the total net
sales of the Company. The unaudited pro forma concentration of this single
customer would represent 9% of total net sales for the year ended December 31,
1997, assuming the ABBA and Inverness acquisitions had occurred on January 1,
1997.
As part of the Company's strategy, the Company uses third parties to
manufacture the majority of the Company's products. One of these third party
suppliers accounted for approximately 15% of the total cost of sales for the
year ended December 31, 1997.
(11) EVENTS SUBSEQUENT TO AUDITOR'S REPORT:
In June 1998, the Company acquired European Touch Co. and two related
companies (collectively "European Touch") and European Touch, Ltd. II ("European
Touch II"). European Touch is a developer, producer, and marketer of
professional nail enhancement and treatment products and European Touch II is a
developer, producer, and marketer of salon pedicure equipment. These companies
were purchased for approximately $25.0 million and financed by the placement of
$100.0 million 10 7/8% Senior Subordinated Notes due 2008 ("Notes"). The
remaining $75.0 million under the Notes was used to payoff existing indebtedness
and for general working capital purposes. In addition, the Company obtained a
$50.0 million line of credit ("Line of Credit") with a bank in connection with
the placement of the Notes.
In August 1998, the Company acquired a controlling interest in Ft. Pitt
Acquisition, Inc. and its 90% owned subsidiary, Ft. Pitt-Framesi, Ltd.
(together, "Framesi USA"). Framesi USA hold exclusive license rights for the
sale in the United States and most of Latin America of Framesi hair color
products along with its complimentary Biogenol line of shampoos, conditioners,
and styling products. The Company paid approximately $30.0 million for the Ft.
Pitt Acquisition, Inc. stock, in the form of cash and seller carryback
financing. Approximately $25.0 million from the Line of Credit was used to
finance the $30.0 million purchase price.
F-19
<PAGE> 120
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Styling Technology Corporation:
We have audited the accompanying balance sheets of GENA LABORATORIES, INC.
as of February 28, 1995 and February 29, 1996, and the related statements of
operations, stockholders' equity, and cash flows for each of the three years in
the period ended February 29, 1996, and for the period March 1, 1996 to November
26, 1996. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Gena Laboratories, Inc. as
of February 28, 1995 and February 29, 1996, and the results of its operations
and its cash flows for each of the three years in the period ended February 29,
1996 and for the period March 1, 1996 to November 26, 1996, in conformity with
generally accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP
Phoenix, Arizona,
March 21, 1997.
F-20
<PAGE> 121
GENA LABORATORIES, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
FEBRUARY 28, FEBRUARY 29,
1995 1996
------------ ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 390,325 $ 250,644
Investments............................................... 14,999 46,500
Accounts receivable, net of allowance for doubtful
accounts of $120,347 and $136,093, respectively........ 863,208 965,615
Inventory................................................. 965,335 1,213,688
Deferred tax asset........................................ 99,055 131,790
---------- ----------
Total current assets.............................. 2,332,922 2,608,237
---------- ----------
PROPERTY AND EQUIPMENT, net of accumulated depreciation of
$392,026 and $471,771, respectively....................... 884,638 830,093
DEFERRED TAX ASSET, net of current portion.................. -- 19,870
OTHER ASSETS................................................ 346,866 256,770
---------- ----------
$3,564,426 $3,714,970
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.......................................... $ 391,381 $ 382,926
Accrued expenses.......................................... 302,808 259,903
Current portion of note payable to related parties........ 32,571 34,929
Current portion of long-term debt......................... 96,056 95,248
---------- ----------
Total current liabilities......................... 822,816 773,006
---------- ----------
NOTE PAYABLE TO RELATED PARTIES, less current portion....... 342,464 307,358
---------- ----------
LONG-TERM DEBT, net of current portion...................... 124,186 11,518
---------- ----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, $5 par value, 2,000 shares authorized,
issued and outstanding................................. 10,000 10,000
Additional paid-in capital................................ 88,303 88,303
Unrealized holding loss on investment..................... (35,303) (3,802)
Retained earnings......................................... 2,211,960 2,528,587
---------- ----------
Total stockholders' equity........................ 2,274,960 2,623,088
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.................. $3,564,426 $3,714,970
========== ==========
</TABLE>
The accompanying notes to financial statements are an integral part of these
balance sheets.
F-21
<PAGE> 122
GENA LABORATORIES, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE YEARS ENDED MARCH 1, 1996
------------------------------------------ TO
FEBRUARY 28, FEBRUARY 28, FEBRUARY 29, NOVEMBER 26,
1994 1995 1996 1996
------------ ------------ ------------ --------------
<S> <C> <C> <C> <C>
NET SALES...................................... $6,426,416 $7,523,751 $8,384,092 $6,707,727
COST OF SALES.................................. 3,280,046 4,163,395 4,818,786 3,900,347
---------- ---------- ---------- ----------
GROSS PROFIT................................... 3,146,370 3,360,356 3,565,306 2,807,380
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES... 2,744,363 2,963,926 3,033,409 1,983,650
---------- ---------- ---------- ----------
INCOME FROM OPERATIONS......................... 402,007 396,430 531,897 823,730
OTHER INCOME AND (EXPENSE), net................ 35,092 (35,282) (30,480) 2,225
---------- ---------- ---------- ----------
INCOME BEFORE PROVISION FOR INCOME TAXES....... 437,099 361,148 501,417 825,955
PROVISION FOR INCOME TAXES..................... 158,613 129,606 184,790 297,344
---------- ---------- ---------- ----------
NET INCOME..................................... $ 278,486 $ 231,542 $ 316,627 $ 528,611
========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-22
<PAGE> 123
GENA LABORATORIES, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
----------------- PAID-IN RETAINED STOCKHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS EQUITY
------ ------- ---------- ---------- -------------
<S> <C> <C> <C> <C> <C>
BALANCE AT FEBRUARY 28, 1993......... 2,000 $10,000 $88,303 $1,687,828 $1,786,131
Net income......................... -- -- -- 278,486 278,486
Net change in unrealized holding
loss............................ -- -- -- 1,006 1,006
----- ------- ------- ---------- ----------
BALANCE AT FEBRUARY 28, 1994......... 2,000 10,000 88,303 1,967,320 2,065,623
Net income......................... -- -- -- 231,542 231,542
Net change in unrealized holding
loss............................ -- -- -- (22,205) (22,205)
----- ------- ------- ---------- ----------
BALANCE AT FEBRUARY 28, 1995......... 2,000 10,000 88,303 2,176,657 2,274,960
Net income......................... -- -- -- 316,627 316,627
Net change in unrealized holding
loss............................ -- -- -- 31,501 31,501
----- ------- ------- ---------- ----------
BALANCE AT FEBRUARY 29, 1996......... 2,000 10,000 88,303 2,524,785 2,623,088
Net income for the period March 1,
1996 to November 26, 1996....... -- -- -- 528,611 528,611
Distributions to stockholders...... -- -- -- (513,000) (513,000)
----- ------- ------- ---------- ----------
BALANCE AT NOVEMBER 26, 1996......... 2,000 $10,000 $88,303 $2,540,396 $2,638,699
===== ======= ======= ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-23
<PAGE> 124
GENA LABORATORIES, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE YEARS ENDED MARCH 1, 1996
-------------------------------------------- TO
FEBRUARY 28, FEBRUARY 28, FEBRUARY 29, NOVEMBER 26,
1994 1995 1996 1996
------------ ------------ ------------ --------------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.............................. $ 278,486 $ 231,542 $ 316,627 $ 528,611
Adjustments to reconcile net income to
net cash used in operating
activities --
Depreciation and amortization........ 114,021 155,185 168,685 37,939
Loss on sale of securities on fixed
assets............................. -- 32,513 -- --
Decrease (increase) in accounts
receivable......................... 38,647 (157,714) (102,407) 90,671
Decrease (increase) in inventory..... (14,638) (118,638) (248,353) (24,975)
Decrease (increase) in other
assets............................. 80,863 (30,814) (51,449) (228,444)
(Decrease) increase in accounts
payable and accrued liabilities.... (122,813) 210,426 (51,360) 14,157
--------- --------- --------- ---------
Net cash provided by (used in)
operating activities.......... 374,566 322,500 31,743 417,959
--------- --------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures.................... (331,996) (23,648) (25,200) (11,886)
Cost incurred to acquire new
businesses........................... (180,213) (140,000) -- --
Proceeds from sale of investments....... -- -- -- 46,500
--------- --------- --------- ---------
Net cash provided by (used in)
investing activities.......... (512,209) (163,648) (25,200) 34,614
--------- --------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from (payments of) long-term
debt, net............................ 178,585 (136,668) (146,224) (137,098)
Distributions to stockholders........... -- -- -- (513,000)
--------- --------- --------- ---------
Net cash provided by (used in)
financing activities.......... 178,585 (136,668) (146,224) (650,098)
--------- --------- --------- ---------
NET INCREASE (DECREASE) IN CASH........... 40,942 22,184 (139,681) (197,525)
CASH AND CASH EQUIVALENTS, beginning of
period.................................. 327,199 368,141 390,325 250,644
--------- --------- --------- ---------
CASH AND CASH EQUIVALENTS, end of
period.................................. $ 368,141 $ 390,325 $ 250,644 $ 53,119
========= ========= ========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Interest paid........................... $ 8,325 $ 54,401 $ 43,259 $ 23,871
========= ========= ========= =========
Income taxes paid....................... $ 137,580 $ 127,609 $ 232,417 $ 195,860
========= ========= ========= =========
FIXED ASSETS AND NEW BUSINESSES ACQUIRED
THROUGH FINANCING TRANSACTIONS.......... $ 528,449 $ 24,911 $ -- $ --
========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-24
<PAGE> 125
GENA LABORATORIES, INC.
NOTES TO FINANCIAL STATEMENTS
(1) ORGANIZATION AND BASIS OF PRESENTATION:
Acquisition and Basis of Presentation
Effective November 26, 1996, shareholders of Gena Laboratories, Inc. (the
Company) sold all of its outstanding stock to Styling Technology Corporation for
consideration of approximately $9,700,000. These financial statements present
the historical financial position and results of operations of the acquired
business for periods prescribed by applicable rules of the Securities and
Exchange Commission.
Organization and Nature of Operations
The Company was incorporated in 1930 to manufacture nail care and personal
care products. In 1979, the current owners purchased the Company and focused the
operation on professional salon care with an emphasis on nail products. The
Company is now a recognized quality manufacturer and distributor of professional
beauty products worldwide, and offers an extensive line of nail, skin and hair
care products as well as pedicure and other specialty beauty products and
accessories. Principally, its products are sold through wholesale distributors
of professional beauty products, hair and nail salons and professional beauty
supply outlets worldwide.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Cash and Cash Equivalents
All highly liquid investments purchased with original maturities of three
months or less are considered to be cash equivalents.
Investments
The Company considers all its investments as available for sale and
accordingly, recognizes any unrealized holding gains and losses as a separate
component of stockholders' equity, in accordance with SFAS No. 115, Accounting
for Certain Investments in Debt and Equity Securities.
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.
Inventories consist of the following:
<TABLE>
<CAPTION>
FEBRUARY 28, FEBRUARY 29,
1995 1996
------------ ------------
<S> <C> <C>
Raw materials and work-in-process................... $675,735 $ 849,582
Finished goods...................................... 289,600 364,106
-------- ----------
$965,335 $1,213,688
======== ==========
</TABLE>
Property and Equipment
Property and equipment are recorded at cost and depreciation on property
and equipment is provided using the straight-line method over the estimated
useful lives of the assets.
Expenditures for major renewals and betterments are capitalized, while
expenditures for maintenance and repairs, which do not improve assets or extend
their useful lives are charged to expense as incurred. For the years ended
February 28, 1994 and 1995, February 29, 1996, and for the period March 1, 1996
to
F-25
<PAGE> 126
GENA LABORATORIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
November 26, 1996, maintenance and repair expenses charged to cost of operations
were approximately $26,000, $47,000, $23,000 and $32,245, respectively.
Concentration of Credit Risk
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of temporary cash investments
and trade receivables. The Company places its temporary cash investments in high
credit quality institutions. Concentrations of credit risk with respect to trade
receivables are described in Note 6. The Company establishes an allowance for
doubtful accounts based upon factors surrounding the credit risk of specific
customers, historical trends and other information.
Fair Value of Financial Instruments
The carrying values of cash and cash equivalents, receivables, accounts
payable and accrued expenses approximate fair values due to the short-term
maturities of these instruments. The carrying amount on the long-term debt is
estimated to approximate fair value as the actual interest rates are consistent
with rates estimated to be currently available for debt with similar terms and
remaining maturities.
Revenue Recognition
The Company recognizes revenue from sales at the time product is shipped.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Final settlement amounts could differ from those estimates.
(3) OTHER ASSETS:
Other assets consist primarily of goodwill, which represents the excess of
consideration paid over the fair market values of identifiable net assets
acquired. The goodwill is being amortized on a straight-line basis over 25
years. The Company has also recorded other intangible assets, which include
noncompete, consulting and trademark agreements, related to acquisitions of
various beauty companies. Such assets are being amortized on a straight-line
basis, over a period of 3 to 25 years. Accumulated amortization on such
intangibles was $349,423 and $433,070 as of February 28, 1995 and February 29,
1996.
F-26
<PAGE> 127
GENA LABORATORIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(4) PROPERTY AND EQUIPMENT:
Property and equipment consist of the following:
<TABLE>
<CAPTION>
FEBRUARY 28, FEBRUARY 29,
1995 1996
------------ ------------
<S> <C> <C>
Land................................................ $ 150,000 $ 150,000
Factory equipment................................... 407,427 431,832
Computers........................................... 43,030 43,825
Furniture, fixtures and autos....................... 108,875 108,875
Building and leasehold improvements................. 567,332 567,332
---------- ----------
1,276,664 1,301,864
Less: Accumulated depreciation...................... (392,026) (471,771)
---------- ----------
$ 884,638 $ 830,093
========== ==========
</TABLE>
(5) LONG-TERM DEBT:
Long-term debt consists of the following:
<TABLE>
<CAPTION>
FEBRUARY 28, FEBRUARY 29,
1995 1996
------------ ------------
<S> <C> <C>
Unsecured note payable, bearing interest at prime
(8.25% at February 29, 1996), unpaid balance due
by November 1996.................................. $123,529 $ 52,942
Various notes payable, bearing interest from 7.5% to
8.0%, maturing through 1998....................... 96,713 53,824
-------- --------
220,242 106,766
Less: Current maturities............................ (96,056) (95,248)
-------- --------
$124,186 $ 11,518
======== ========
</TABLE>
In 1993, the Company entered into a $250,000 unsecured revolving line of
credit, which bears interest at prime and matures July 1997. As of February 28,
1995 and February 29, 1996, the Company had not drawn on this facility.
Aggregate principal payments on long-term debt are as follows:
<TABLE>
<CAPTION>
YEAR ENDING
FEBRUARY 28,
- ------------
<S> <C>
1997.............................................. $ 95,248
1998.............................................. 11,518
--------
$106,766
========
</TABLE>
(6) MAJOR CUSTOMERS:
The Company's strategy includes providing production and distribution
services to a major U.S. beauty distribution company. Sales to this customer as
a percentage of total sales approximated 31%, 28% and 28% for the years ended
February 28, 1994, 1995 and February 29, 1996, respectively, and 34% for the
period March 1, 1996 to November 26, 1996.
F-27
<PAGE> 128
GENA LABORATORIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(7) INCOME TAXES:
The Company accounts for income taxes using Statement of Financial
Accounting Standards No. 109, Accounting for Income Taxes (SFAS 109). SFAS 109
requires the use of an asset and liability approach in accounting for income
taxes. Deferred tax assets and liabilities are recorded based on the differences
between the financial statement and tax bases of assets and liabilities and the
tax rates in effect when these differences are expected to reverse. These
differences result principally from the recognition of revenues and expenses
using the cash basis of accounting and the use of different depreciation and
amortization methods for income tax reporting.
The components of the income tax provision consist of the following:
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE YEARS ENDED MARCH 1, 1996
-------------------------------------------- TO
FEBRUARY 28, FEBRUARY 28, FEBRUARY 29, NOVEMBER 26,
1994 1995 1996 1996
------------ ------------ ------------ --------------
<S> <C> <C> <C> <C>
Current:
Federal......................... $134,927 $139,468 $208,499 $303,501
State........................... 18,699 19,329 28,896 42,054
-------- -------- -------- --------
153,626 158,797 237,395 345,555
Deferred provision (benefit)...... 4,987 (29,191) (52,605) (48,211)
-------- -------- -------- --------
Provision for income taxes...... $158,613 $129,606 $184,790 $297,344
======== ======== ======== ========
</TABLE>
The components of deferred taxes are as follows:
<TABLE>
<CAPTION>
FEBRUARY 28, FEBRUARY 29,
1995 1996
------------ ------------
<S> <C> <C>
Deferred tax assets:
Inventory reserve......................................... $ 6,707 $ 8,376
Uniform inventory cost capitalization..................... 50,233 62,739
Capital losses in excess of capital gains................. 1,544 10,362
Allowance for doubtful accounts........................... 44,492 50,314
Amortization.............................................. 15,773 38,586
-------- --------
Total gross deferred tax assets................... 118,749 170,377
-------- --------
Deferred tax liabilities:
Depreciation.............................................. (19,694) (18,717)
-------- --------
Total gross deferred tax liabilities.............. (19,694) (18,717)
-------- --------
Net deferred tax asset............................ $ 99,055 $151,660
======== ========
</TABLE>
F-28
<PAGE> 129
GENA LABORATORIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The following is a reconciliation of income taxes provided at the federal
statutory rate with income taxes recorded by the Company:
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE YEARS ENDED MARCH 1, 1996
-------------------------------------------- TO
FEBRUARY 28, FEBRUARY 28, FEBRUARY 29, NOVEMBER 26,
1994 1995 1996 1996
------------ ------------ ------------ --------------
<S> <C> <C> <C> <C>
Tax provision at statutory rate... $148,614 $122,790 $170,482 $280,824
Expense of permanent differences
resulting from the recognition
of interest income and travel
and entertainment expenses, and
the effect of state taxes....... 9,999 6,816 14,308 16,520
-------- -------- -------- --------
Income tax provision.... $158,613 $129,606 $184,790 $297,344
======== ======== ======== ========
</TABLE>
(8) RELATED PARTY TRANSACTIONS:
In the fiscal year ended February 28, 1994, the Company purchased land and
building amounting to $650,000, from a partnership (the Partnership) of which
three of the four partners are shareholders of the Company. The sales price
approximated the book value as recorded by the Partnership. Prior to the
transaction the Company leased this real estate from the Partnership. The
Company acquired the land and building using cash, and financed the remaining
portion with a note due the Partnership. Interest and principal of $5,105 are
payable monthly. The loan bears interest at 7%, and fully matures in 2003.
The total of the related party note payable is as follows:
<TABLE>
<CAPTION>
FEBRUARY 28, FEBRUARY 29,
1995 1996
------------ ------------
<S> <C> <C>
Total shareholder note payable...................... $375,035 $342,287
Less: Current maturities.......................... (32,571) (34,929)
-------- --------
Shareholder note payable, net of current portion.... $342,464 $307,358
======== ========
</TABLE>
Principal maturities related to this loan are as follows:
<TABLE>
<CAPTION>
YEAR ENDING
FEBRUARY 28, TOTAL
------------ --------
<S> <C>
1997.............................................. $ 34,929
1998.............................................. 37,454
1999.............................................. 40,162
2000.............................................. 43,065
2001.............................................. 46,178
Thereafter........................................ 140,499
--------
$342,287
========
</TABLE>
The Company also entered into a lease with the Partnership in 1991, for
approximately 10,000 square feet for storage and production purposes. Lease
expense related to this space totaled approximately $83,049, $44,346, $51,346
and $58,993 for the years ended February 28, 1994 and 1995, February 29, 1996,
and the period March 1, 1996 to November 26, 1996, respectively.
F-29
<PAGE> 130
GENA LABORATORIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(9) COMMITMENTS AND CONTINGENCIES:
In the normal course of business, the Company is named as a defendant in
various litigation matters. In management's opinion, the ultimate resolution of
these matters will not have a material impact on the Company's financial
statements.
Lease commitments related primarily to a warehouse space lease are as
follows:
<TABLE>
<CAPTION>
YEAR ENDING
FEBRUARY 28, TOTAL
------------ --------
<S> <C>
1997.............................................. $ 41,100
1998.............................................. 41,100
1999.............................................. 41,100
2000.............................................. 41,100
2001.............................................. 41,100
Thereafter........................................ 202,500
--------
$408,000
========
</TABLE>
F-30
<PAGE> 131
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Styling Technology Corporation:
We have audited the accompanying balance sheets of BODY DRENCH (a Division
of Designs by Norvell, Inc., a Tennessee corporation) as of December 31, 1994
and 1995, and the related statements of operations, changes in owner's
investment and cash flows for each of the three years in the period ended
December 31, 1995 and for the period January 1, 1996 to November 26, 1996. These
financial statements are the responsibility of the Division's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Body Drench as of December
31, 1994 and 1995, and the results of its operations and its cash flows for each
of the three years then ended and for the period January 1, 1996 to November 26,
1996, in conformity with generally accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP
Phoenix, Arizona,
March 21, 1997.
F-31
<PAGE> 132
BODY DRENCH
(A DIVISION OF DESIGNS BY NORVELL, INC.)
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1994 1995
---------- ----------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Accounts receivable, net of allowance for doubtful
accounts of $89,841
and $58,242, respectively.............................. $1,396,048 $1,234,966
Inventories............................................... 3,052,783 3,078,656
Other current assets...................................... 5,152 150,713
---------- ----------
Total current assets.............................. 4,453,983 4,464,335
---------- ----------
EQUIPMENT, net of accumulated depreciation of $245,424 and
$297,176, respectively.................................... 167,697 316,443
---------- ----------
Total assets...................................... $4,621,680 $4,780,778
========== ==========
LIABILITIES AND OWNER'S INVESTMENT
CURRENT LIABILITIES:
Accounts payable.......................................... $2,550,654 $3,221,337
Bank overdraft............................................ 651,953 274,810
Accrued expenses and other................................ 296,546 257,813
---------- ----------
Total current liabilities......................... 3,499,153 3,753,960
---------- ----------
COMMITMENTS AND CONTINGENCIES (Note 5)
OWNER'S INVESTMENT.......................................... 1,122,527 1,026,818
---------- ----------
Total liabilities and owner's investment.......... $4,621,680 $4,780,778
========== ==========
</TABLE>
The accompanying notes to the financial statements are an integral part of these
balance sheets.
F-32
<PAGE> 133
BODY DRENCH
(A DIVISION OF DESIGNS BY NORVELL, INC.)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE PERIOD
JANUARY 1, 1996
YEARS ENDED DECEMBER 31, TO
---------------------------------------- NOVEMBER 26,
1993 1994 1995 1996
---------- ----------- ----------- ---------------
<S> <C> <C> <C> <C>
NET SALES............................. $6,653,488 $11,138,369 $11,871,171 $9,642,980
COST OF SALES......................... 4,039,843 6,342,770 6,426,775 5,867,104
---------- ----------- ----------- ----------
GROSS PROFIT.......................... 2,613,645 4,795,599 5,444,396 3,775,876
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES............................ 2,054,919 4,075,756 4,883,265 4,004,728
---------- ----------- ----------- ----------
INCOME FROM OPERATIONS................ 558,726 719,843 561,131 (228,852)
---------- ----------- ----------- ----------
INTEREST EXPENSE...................... 30,159 -- 87,585 --
---------- ----------- ----------- ----------
INCOME BEFORE PROVISION FOR INCOME
TAXES............................... 528,567 719,843 473,546 (228,852)
PROVISION (BENEFIT) FOR INCOME
TAXES............................... 200,855 273,540 179,947 (91,541)
---------- ----------- ----------- ----------
NET INCOME (LOSS)..................... $ 327,712 $ 446,303 $ 293,599 $ (137,311)
---------- ----------- ----------- ----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-33
<PAGE> 134
BODY DRENCH
(A DIVISION OF DESIGNS BY NORVELL, INC.)
STATEMENTS OF CHANGES IN OWNER'S INVESTMENT
<TABLE>
<S> <C>
BALANCE, December 31, 1992.................................. $ (127,491)
Net income................................................ 327,712
Net payments to parent.................................... (748,153)
-----------
BALANCE, December 31, 1993.................................. (547,932)
Net income................................................ 446,303
Net receipts from parent.................................. 1,224,156
-----------
BALANCE, December 31, 1994.................................. 1,122,527
Net income................................................ 293,599
Net payments to parent.................................... (389,308)
-----------
BALANCE, December 31, 1995.................................. 1,026,818
Net loss.................................................. (137,311)
Net payments to parent.................................... (1,311,710)
-----------
BALANCE, November 26, 1996.................................. $ (422,203)
===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-34
<PAGE> 135
BODY DRENCH
(A DIVISION OF DESIGNS BY NORVELL, INC.)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE
PERIOD
FOR THE YEARS ENDED JANUARY 1,
DECEMBER 31, 1996 TO
----------------------------------- NOVEMBER 26,
1993 1994 1995 1996
--------- ----------- --------- ------------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)......................... $ 327,712 $ 446,303 $ 293,599 $ (137,311)
Adjustments to reconcile net income (loss)
to net cash used in operating
activities -- Depreciation............. 67,244 36,619 51,752 94,963
Changes in operating assets and
liabilities:
Accounts receivable, net............... (49,548) (1,099,273) 161,082 274,164
Inventories............................ (224,184) (2,024,887) (25,873)
Other, net............................. (5,127) 2,084 (145,561) 1,167,937
Accounts payable....................... 516,725 783,427 670,683 158,304
Accrued expenses....................... 177,767 33,284 (38,733) (258,849)
--------- ----------- --------- -----------
Net cash provided by (used in)
operating activities............ 810,589 (1,822,443) 966,949 1,299,208
--------- ----------- --------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of equipment.................... (62,436) (53,666) (200,498) (12,502)
--------- ----------- --------- -----------
Net cash provided by (used in)
investing activities............ (62,436) (53,666) (200,498) (12,502)
--------- ----------- --------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Bank overdraft............................ -- 651,953 (377,143) 25,004
Net payments to/receipts from parent...... (748,153) 1,224,156 (389,308) (1,311,710)
--------- ----------- --------- -----------
Net cash provided by (used in)
financing activities............ (748,153) 1,876,109 (766,451) (1,286,706)
--------- ----------- --------- -----------
NET CHANGE IN CASH.......................... -- -- -- --
--------- ----------- --------- -----------
CASH, beginning of period................... -- -- -- --
--------- ----------- --------- -----------
CASH, end of period......................... $ -- $ -- $ -- $ --
========= =========== ========= ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-35
<PAGE> 136
BODY DRENCH
(A DIVISION OF DESIGNS BY NORVELL, INC.)
NOTES TO FINANCIAL STATEMENTS
(1) ORGANIZATION AND BASIS OF PRESENTATION:
Acquisition and Basis of Presentation
Effective November 26, 1996, Designs by Norvell, Inc. (Norvell) sold the
assets of its Body Drench Division (the Division) to Styling Technology
Corporation (STC) for consideration of approximately $7,900,000. These financial
statements present the historical financial position and results of operations
of the acquired business for periods prescribed by applicable rules of the
Securities and Exchange Commission.
The accompanying financial statements represent the accounts of the
Division pursuant to the terms of the Asset Purchase Agreement between STC and
Norvell. In addition, interest expense included in the statements of operations
represents allocations of parent company interest, as calculated by Norvell.
Nature and Seasonality of Operations
The Division is engaged in the manufacture and distribution of skin care,
sun care and body care products. Their products are sold to professional hair
and tanning salons, health clubs, beauty supply outlets and retail product based
salons, both domestic and international.
The Division's revenues are seasonal in nature, with the first six months
of the year having the majority of the volume.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Fair Value of Financial Instruments
The carrying values of receivables, accounts payable and accrued expenses
approximate fair values due to the short-term maturities of these instruments.
Concentration of Credit Risk
Financial instruments which potentially subject the Division to
concentrations of credit risk consist principally of trade receivables.
Concentrations of credit risk with respect to trade receivables are limited due
to the number of customers comprising the Division's customer base. The Division
establishes an allowance for doubtful accounts based upon factors surrounding
the credit risk of specific customers, historical trends and other information.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Final settlement amounts could differ from those estimates.
Revenue Recognition
The Division recognizes revenue from sales at the time product is shipped.
Equipment
Equipment is recorded at cost and depreciation on equipment is provided
using the straight-line method over the estimated useful lives of the related
assets.
F-36
<PAGE> 137
BODY DRENCH
(A DIVISION OF DESIGNS BY NORVELL, INC.)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Expenditures for major renewals and betterments are capitalized, while
expenditures for maintenance and repairs, which do not improve assets or extend
their useful lives are charged to expense as incurred. For the three years ended
December 31, 1995 and for the period January 1, 1996 to November 26, 1996,
maintenance and repair expenses charged to cost of operations were approximately
$25,978, $26,117, $30,498 and $6,021, respectively.
Inventory
Inventory is valued at the lower of cost or market. Cost is determined
using the first-in, first-out method.
The components of inventories are summarized as follows:
<TABLE>
<CAPTION>
1994 1995
---------- ----------
<S> <C> <C>
Raw materials and work-in-process................... $1,675,601 $1,583,372
Finished goods...................................... 1,377,182 1,495,284
---------- ----------
$3,052,783 $3,078,656
========== ==========
</TABLE>
(3) PROPERTY AND EQUIPMENT:
Property and equipment consist of the following:
<TABLE>
<CAPTION>
1994 1995
--------- ---------
<S> <C> <C>
Factory equipment.................................... $ 134,880 $ 178,405
Computer equipment................................... 243,647 394,026
Furniture and fixtures............................... 34,594 41,188
--------- ---------
413,121 613,619
Less -- Accumulated depreciation..................... (245,424) (297,176)
--------- ---------
$ 167,697 $ 316,443
========= =========
</TABLE>
(4) INCOME TAXES:
The Division accounts for income taxes using Statement of Financial
Accounting Standards No. 109, Accounting for Income Taxes (SFAS 109). SFAS 109
requires the recording of deferred tax assets and liabilities based on
differences between the financial statement and tax bases of assets and
liabilities and the tax rates in effect when these differences are expected to
reverse. In accordance with SFAS 109, the Division has recorded a provision for
income taxes separately from Norvell.
(5) COMMITMENTS AND CONTINGENCIES:
Leases
The Division leases certain facilities and equipment under operating lease
agreements.
Future minimum payments under noncancelable operating leases with terms in
excess of one year are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------
<S> <C>
1996............................................... $79,455
1997............................................... 50,423
1998............................................... 41,067
1999............................................... 2,333
</TABLE>
F-37
<PAGE> 138
BODY DRENCH
(A DIVISION OF DESIGNS BY NORVELL, INC.)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Rental expense under such operating leases was $52,163, $101,217, $238,746
and $188,761, for the three years ended December 31, 1995, and for the period
January 1, 1996 to November 26, 1996, respectively.
The Division is involved in certain legal proceedings arising in the normal
course of business. In the opinion of management, the Division's potential
exposure under the pending proceedings is adequately provided for in the
accompanying financial statements.
(6) SIGNIFICANT VENDORS:
Two vendors accounted for 69.3%, 67.4%, 53.0% and 53.0% of the Division's
total raw materials purchases from vendors for the years ended December 31,
1993, 1994, 1995 and for the period January 1, 1996 to November 26, 1996,
respectively. Management does not believe that the loss of these vendors would
significantly impact the Division's operations.
F-38
<PAGE> 139
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Styling Technology Corporation:
We have audited the accompanying balance sheets of JDS MANUFACTURING CO.,
INC. (a California corporation) as of September 30, 1995 and 1996, and the
related statements of operations, stockholders' equity, and cash flows for each
of the three years in the period ended September 30, 1996 and for the period
October 1, 1996 to November 26, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of JDS Manufacturing Co., Inc.
as of September 30, 1995 and 1996, and the results of its operations and its
cash flows for each of the three years in the period ended September 30, 1996
and for the period October 1, 1996 to November 26, 1996, in conformity with
generally accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP
Phoenix, Arizona,
March 21, 1997.
F-39
<PAGE> 140
JDS MANUFACTURING CO., INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 30,
1995 1996
------------- -------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash...................................................... $ 57,397 $ 85,260
Accounts receivable, net of allowance for doubtful
accounts of $10,000, and $15,000, respectively......... 329,965 313,405
Inventory................................................. 264,347 209,140
Prepaid expenses.......................................... 11,861 4,716
-------- --------
Total current assets.............................. 663,570 612,521
-------- --------
PROPERTY AND EQUIPMENT, net of accumulated depreciation of
$100,031, and $114,660, respectively...................... 30,292 19,157
OTHER ASSETS................................................ 102,934 136,404
-------- --------
$796,796 $768,082
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.......................................... $196,309 $152,938
Accrued expenses.......................................... 53,740 81,411
-------- --------
Total current liabilities......................... 250,049 234,349
-------- --------
NOTES PAYABLE TO RELATED PARTIES............................ 516,200 434,210
-------- --------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, $10 par value, 10,000 shares authorized,
1,000 shares issued and outstanding.................... 10,000 10,000
Retained earnings......................................... 20,547 89,523
-------- --------
Total stockholders' equity........................ 30,547 99,523
-------- --------
Total liabilities and stockholders' equity........ $796,796 $768,082
======== ========
</TABLE>
The accompanying notes to financial statements are an integral part of these
balance sheets.
F-40
<PAGE> 141
JDS MANUFACTURING CO., INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE PERIOD
OCTOBER 1, 1996
FOR THE YEARS ENDED SEPTEMBER 30, TO
-------------------------------------- NOVEMBER 26,
1994 1995 1996 1996
---------- ---------- ---------- ---------------
<S> <C> <C> <C> <C>
SALES................................... $3,577,779 $3,367,599 $3,113,682 $613,142
COST OF SALES........................... 1,651,965 1,550,155 1,407,128 275,513
---------- ---------- ---------- --------
Gross profit.................. 1,925,814 1,817,444 1,706,554 337,629
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES.............................. 1,981,928 1,843,871 1,614,505 257,784
---------- ---------- ---------- --------
Income (loss) from
operations.................. (56,114) (26,427) 92,049 79,845
OTHER INCOME, net....................... 44,191 41,951 35,272 1,263
---------- ---------- ---------- --------
INCOME (LOSS) BEFORE PROVISION FOR
INCOME TAXES.......................... (11,923) 15,524 127,321 81,108
PROVISION FOR INCOME TAXES.............. 4,571 6,950 58,345 35,688
---------- ---------- ---------- --------
NET INCOME (LOSS)....................... $ (16,494) $ 8,574 $ 68,976 $ 45,420
========== ========== ========== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-41
<PAGE> 142
JDS MANUFACTURING CO., INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK
----------------- RETAINED
SHARES AMOUNT EARNINGS TOTAL
------ ------- -------- --------
<S> <C> <C> <C> <C>
BALANCE, September 30, 1993......................... 1,000 $10,000 $ 28,467 $ 38,467
Net loss.......................................... -- -- (16,494) (16,494)
----- ------- -------- --------
BALANCE, September 30, 1994......................... 1,000 10,000 11,973 21,973
Net income........................................ -- -- 8,574 8,574
----- ------- -------- --------
BALANCE, September 30, 1995......................... 1,000 10,000 20,547 30,547
Net income........................................ -- -- 68,976 68,976
----- ------- -------- --------
BALANCE, September 30, 1996......................... 1,000 10,000 89,523 99,523
Net income, for the period October 1, 1996 to
November 26, 1996.............................. -- -- 45,420 45,420
----- ------- -------- --------
BALANCE, November 26, 1996.......................... 1,000 $10,000 $134,943 $144,943
===== ======= ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-42
<PAGE> 143
JDS MANUFACTURING CO., INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE PERIOD
OCTOBER 1, 1996
FOR THE YEARS ENDED SEPTEMBER 30, TO
----------------------------------- NOVEMBER 26,
1994 1995 1996 1996
--------- --------- --------- ---------------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)......................... $(16,494) $ 8,574 $ 68,976 $ 45,420
Adjustments to reconcile net income (loss)
to net cash used in operating
activities --
Depreciation........................... 18,735 15,661 14,628 1,439
Decrease (increase) in accounts
receivable........................... (4,438) 89,139 16,560 (172,645)
Decrease (increase) in inventory....... 14,441 (34,089) 55,207 47,329
Decrease (increase) in other assets.... (33,786) (35,112) (26,325) (19,756)
Increase (decrease) in accounts payable
and accrued expenses................. 4,263 (47,256) (15,700) 57,480
-------- -------- -------- ---------
Net cash provided by (used in)
operating activities............ (17,279) (3,083) 113,346 (40,733)
-------- -------- -------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures...................... (10,582) (8,203) (3,493) (1,912)
-------- -------- -------- ---------
Net cash used in investing
activities...................... (10,582) (8,203) (3,493) (1,912)
-------- -------- -------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from (payments to) shareholder
notes payable, net..................... 24,012 (5,692) (81,990) (14,748)
-------- -------- -------- ---------
Net cash provided by (used in)
financing activities............ 24,012 (5,692) (81,990) (14,748)
-------- -------- -------- ---------
NET INCREASE (DECREASE) IN CASH............. (3,849) (16,978) 27,863 (57,393)
CASH, beginning of period................... 78,224 74,375 57,397 85,260
-------- -------- -------- ---------
CASH, end of period......................... $ 74,375 $ 57,397 $ 85,260 $ 27,867
======== ======== ======== =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Interest paid.......................... $ 36,134 $ 35,589 $ 39,030 $ --
======== ======== ======== =========
Income taxes paid...................... $ 4,090 $ 4,571 $ 7,000 $ 53,896
======== ======== ======== =========
EXCHANGE OF OTHER ASSET FOR REDUCTION IN
SHAREHOLDER NOTES PAYABLE................. $ -- $ -- $ -- $ 136,404
======== ======== ======== =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-43
<PAGE> 144
JDS MANUFACTURING CO., INC.
NOTES TO FINANCIAL STATEMENTS
(1) ORGANIZATION AND BASIS OF PRESENTATION:
Acquisition and Basis of Presentation
Effective November 26, 1996, shareholders of JDS Manufacturing Co., Inc.
(the Company) sold all of its outstanding stock to Styling Technology
Corporation for consideration of approximately $4,400,000. These financial
statements present the historical financial position and results of operations
of the acquired business for periods prescribed by applicable rules of the
Securities and Exchange Commission.
Organization and Nature of Operations
The Company was incorporated in 1987. Since 1989, the Company has been a
manufacturer and distributor of several extensive lines of high quality,
brand-recognized nail enhancement application products and nail accessories. Its
products are sold throughout the United States, principally to professional
supply outlets, beauty distributors, professional nail salons and professional
manicurists.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Cash and Cash Equivalents
All highly liquid investments purchased with original maturities of three
months or less are considered to be cash equivalents.
Fair Value of Financial Instruments
The carrying values of cash, receivables, accounts payable and accrued
expenses approximate fair values due to the short-term maturities of these
instruments. The carrying amount on the long-term debt is estimated to
approximate fair value as the actual interest rates are consistent with rates
estimated to be currently available for debt with similar terms and remaining
maturities.
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.
Inventories consist of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 30,
1995 1996
------------- -------------
<S> <C> <C>
Raw material and work-in process.................. $ 31,722 $ 25,097
Finished goods.................................... 232,625 184,043
-------- --------
$264,347 $209,140
======== ========
</TABLE>
Property and Equipment
Property and equipment are recorded at cost and depreciation on property
and equipment is provided using the straight-line method over their estimated
useful lives.
Expenditures for major renewals and betterments are capitalized, while
expenditures for maintenance and repairs, which do not improve assets or extend
their useful lives, are charged to expense as incurred. For the years ended
September 30, 1994, 1995, 1996 and for the period October 1, 1996 to November
26, 1996, maintenance and repair expenses charged to cost of operations were
$5,452, $4,507, $2,509 and $598, respectively.
F-44
<PAGE> 145
JDS MANUFACTURING CO., INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Concentration of Credit Risk
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of temporary cash investments
and trade receivables. The Company places its temporary cash investments in high
quality credit institutions. Concentrations of credit risk with respect to trade
receivables are limited due to the number of customers comprising the Company's
customer base. The Company establishes an allowance for doubtful accounts based
upon factors surrounding the credit risk of specific customers, historical
trends and other information.
Revenue Recognition
The Company recognizes revenue from sales at the time product is shipped.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Final settlement amounts could differ from those estimates.
Reclassifications
Certain prior year amounts have been reclassified to conform to the 1996
presentation.
(3) PROPERTY AND EQUIPMENT:
Property and equipment consist of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 30,
1995 1996
------------- -------------
<S> <C> <C>
Furniture and equipment........................... $ 98,490 $ 101,984
Automobiles....................................... 13,976 13,976
Leaseholds and other.............................. 17,857 17,857
--------- ---------
130,323 133,817
Less: accumulated depreciation.................... (100,031) (114,660)
--------- ---------
$ 30,292 $ 19,157
========= =========
</TABLE>
(4) NOTES PAYABLE TO RELATED PARTIES:
As of September 30, 1995 and 1996, the Company had notes payable due to its
two principal shareholders of $516,200 and $434,210, respectively. These notes
originated in October 1994, and bear interest at 8%. Loan advances and
repayments are made at the shareholders' discretion, with the entire balance
becoming due on September 30, 1997. As such, the entire balance is classified as
long-term.
(5) INCOME TAXES:
The Company accounts for income taxes using Statement of Financial
Accounting Standards No. 109 (SFAS 109), Accounting for Income Taxes. SFAS 109
requires the use of an asset and liability approach in accounting for income
taxes. Deferred tax assets and liabilities are recorded based on the differences
between the financial statement and tax bases of assets and liabilities and the
tax rates in effect when these differences
F-45
<PAGE> 146
JDS MANUFACTURING CO., INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
are expected to reverse. These differences, resulting principally from use of
accelerated depreciation methods for income tax reporting, were not material at
the balance sheet dates.
(6) COMMITMENTS AND CONTINGENCIES:
In the normal course of business, the Company is named as a defendant in
various litigation matters. In management's opinion, the ultimate resolution of
these matters will not have a material impact on the Company's financial
statements.
Total future commitments for operating leases are $12,459 through September
30, 1997.
(7) SIGNIFICANT CUSTOMER:
The Company's strategy includes providing nail care and accessories to a
major U.S. beauty distribution company. Sales to this customer as a percentage
of total sales were approximately 11%, 14%, 26% and 26% for September 30, 1994,
1995, 1996 and for the period October 1, 1996 to November 26, 1996,
respectively.
F-46
<PAGE> 147
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Styling Technology Corporation:
We have audited the accompanying balance sheet of KOTCHAMMER INVESTMENTS,
INC. (a California corporation) as of December 31, 1995, and the related
statements of operations, stockholders' equity, and cash flows for the year
ended December 31, 1995, and for the period January 1, 1996 to November 26,
1996. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Kotchammer Investments, Inc.
as of December 31, 1995, and the results of its operations and its cash flows
for the year ended December 31, 1995, and for the period January 1, 1996 to
November 26, 1996, in conformity with generally accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP
Phoenix, Arizona,
March 21, 1997.
F-47
<PAGE> 148
KOTCHAMMER INVESTMENTS, INC.
BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31,
1995
------------
<S> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 96,364
Accounts receivable....................................... 136,971
Inventory, net............................................ 403,730
Prepaid expenses and other................................ 21,799
---------
Total current assets.............................. 658,864
---------
PROPERTY AND EQUIPMENT, net................................. 75,472
OTHER ASSETS................................................ 1,026
---------
$ 735,362
=========
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable.......................................... $ 14,015
Accrued expenses.......................................... 121,183
Line of credit............................................ 215,000
Current portion of notes payable to shareholders.......... 270,000
---------
Total current liabilities......................... 620,198
---------
NOTES PAYABLE TO SHAREHOLDERS, net of current portion....... 340,000
---------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIT:
Common stock, $20 par value, 2,500 shares authorized,
2,500 shares issued and outstanding.................... 50,000
Retained deficit.......................................... (274,836)
---------
Total stockholders' deficit....................... (224,836)
---------
Total liabilities and stockholders' deficit....... $ 735,362
=========
</TABLE>
The accompanying notes to financial statements are an integral part of this
balance sheet.
F-48
<PAGE> 149
KOTCHAMMER INVESTMENTS, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE JANUARY 1, 1996
YEAR ENDED TO
DECEMBER 31, NOVEMBER 26,
1995 1996
------------ ---------------
<S> <C> <C>
NET SALES................................................... $1,557,709 $1,248,460
COST OF SALES............................................... 711,925 585,704
---------- ----------
Gross profit...................................... 845,784 662,756
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES................ 891,146 590,800
---------- ----------
Income (loss) from operations..................... (45,362) 71,956
INTEREST EXPENSE AND OTHER, net............................. (89,557) (74,250)
---------- ----------
NET LOSS.................................................... $ (134,919) $ (2,294)
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-49
<PAGE> 150
KOTCHAMMER INVESTMENTS, INC.
STATEMENTS OF STOCKHOLDERS' DEFICIT
<TABLE>
<CAPTION>
COMMON STOCK TOTAL
----------------- RETAINED STOCKHOLDERS'
SHARES AMOUNT EARNINGS DEFICIT
------ ------- --------- -------------
<S> <C> <C> <C> <C>
BALANCE, December 31, 1994....................... 2,500 $50,000 $(139,917) $ (89,917)
Net loss....................................... -- -- (134,919) (134,919)
----- ------- --------- ---------
BALANCE, December 31,1995........................ 2,500 50,000 (274,836) (224,836)
Net loss....................................... -- -- (2,294) (2,294)
----- ------- --------- ---------
BALANCE, November 26, 1996....................... 2,500 $50,000 $(277,130) $(227,130)
===== ======= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-50
<PAGE> 151
KOTCHAMMER INVESTMENTS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE JANUARY 1, 1996
YEAR ENDED TO
DECEMBER 31, NOVEMBER 26,
1995 1996
------------ ----------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................... $(134,919) $ (2,294)
Adjustments to reconcile net loss to net cash used in
operating activities --
Depreciation.............................................. 23,436 19,203
Decrease (increase) in accounts receivable................ 43,004 (19,111)
Decrease (increase) in inventory.......................... (45,278) 51,566
Decrease in prepaids and other assets..................... 63,372 6,502
Increase (decrease) in accounts payable and accrued
liabilities............................................ (43,234) 89,960
--------- ---------
Net cash provided by (used in) operating
activities...................................... (93,619) 145,826
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures...................................... (17,215) --
--------- ---------
Net cash used in investing activities............. (17,215) --
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from (payments to) shareholder notes payable,
net.................................................... 100,000 --
Proceeds from (payments to) line of credit, net........... (5,000) (215,000)
--------- ---------
Net cash (used in) provided by financing
activities...................................... 95,000 (215,000)
--------- ---------
NET DECREASE IN CASH........................................ (15,834) (69,174)
CASH, beginning of period................................... 112,198 96,364
--------- ---------
CASH, end of period......................................... $ 96,364 $ 27,190
========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid............................................. $ 72,916 $ --
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-51
<PAGE> 152
KOTCHAMMER INVESTMENTS, INC.
NOTES TO FINANCIAL STATEMENTS
(1) ORGANIZATION AND BASIS OF PRESENTATION:
Acquisition and Basis of Presentation
Effective November 26, 1996, shareholders of Kotchammer Investments, Inc.
(the Company) sold its assets to Styling Technology Corporation for
consideration of approximately $639,000. These financial statements present the
historical financial position and results of operations of the acquired business
for periods prescribed by applicable rules of the Securities and Exchange
Commission.
Organization and Nature of Operations
The Company was incorporated in December 1993 to acquire a division of
Redken Laboratories, Inc. The Company distributes and markets professional salon
appliances and salonwear. Its products are sold throughout the United States,
principally to professional supply outlets, beauty distributors, and
professional hair stylists.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Cash and Cash Equivalents
All highly liquid investments purchased with original maturities of three
months or less are considered to be cash equivalents.
Fair Value of Financial Instruments
The carrying values of cash, receivables, accounts payable and accrued
expenses approximate fair values due to the short-term maturities of these
instruments. The carrying amount on the long-term debt is estimated to
approximate fair value as the actual interest rates are consistent with rates
estimated to be currently available for debt with similar terms and remaining
maturities.
Inventory
Inventory consists of finished goods and are 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.
Property and Equipment
Property and equipment are recorded at cost and depreciation on property
and equipment is provided using the straight-line method over their estimated
useful lives.
Concentration of Credit Risk
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of temporary cash investments
and trade receivables. The Company places its temporary cash investments in high
quality credit institutions. Concentrations of credit risk with respect to trade
receivables are limited due to the number of customers comprising the Company's
customer base.
Revenue Recognition
The Company recognizes revenue from sales at the time product is shipped.
F-52
<PAGE> 153
KOTCHAMMER INVESTMENTS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Final settlement amounts could differ from those estimates.
(3) PROPERTY AND EQUIPMENT:
Property and equipment consist of the following:
<TABLE>
<CAPTION>
USEFUL LIFE 1995
----------- --------
<S> <C> <C>
Machinery and equipment............................... 5 years $ 76,803
Furniture and fixtures................................ 7 years 22,458
Computer equipment.................................... 5 years 16,652
--------
115,913
Less -- Accumulated depreciation...................... (40,441)
--------
$ 75,472
========
</TABLE>
(4) LINE OF CREDIT:
At December 31, 1995, the Company had a $220,000 line of credit with a bank
which expired in August of 1996 and carried an interest rate of 9.75%. During
1996, the line of credit was repaid.
(5) NOTES PAYABLE TO SHAREHOLDERS:
Notes payable to shareholders consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1995
------------
<S> <C>
Note payable dated December 8, 1993, interest at a bank's
reference rate plus 1.25% (11% at December 31, 1995),
maturing January 15, 2004................................. $ 120,000
Note payable dated December 8, 1993, interest at a bank's
reference rate plus 1.25% (11% at December 31, 1995),
maturing January 15, 2004................................. 120,000
Note payable dated December 8, 1993, interest at a bank's
reference rate plus 1.25% (11% at December 31, 1995),
maturing January 31, 2004................................. 270,000
Note payable dated May 3, 1995, interest at a bank's
reference rate plus 1.25% (11% at December 31, 1995),
maturing January 31, 2004................................. 70,000
Note payable, dated June 5, 1995, interest at a bank's
reference rate, plus 1.25% (11% at December 31, 1995),
maturing January 31, 2004................................. 30,000
---------
610,000
Less: current maturities.................................... (270,000)
---------
$ 340,000
=========
</TABLE>
As of December 31, 1995, one of the notes payable to shareholders was
classified as current as a result of the Company incurring a technical default
with a certain financial covenant.
F-53
<PAGE> 154
KOTCHAMMER INVESTMENTS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(6) INCOME TAXES:
The Company has elected S Corporation status under Subchapter S of the
Internal Revenue Code. This election results in substantially all U.S. federal
taxable income being taxed to the stockholders. Accordingly, there is no
provision for income taxes reflected in these financial statements for the year
ended December 31, 1995, and for the period January 1, 1996 to November 26,
1996.
(7) COMMITMENTS AND CONTINGENCIES:
In the normal course of business, the Company is named as a defendant in
various litigation matters. In management's opinion, the ultimate resolution of
these matters will not have a material impact on the Company's financial
statements. Total future commitments for operating leases are $45,851 through
July 1997. Rent expense incurred under operating leases was $35,363, and $26,173
for the year ended December 31, 1995 and for the period January 1, 1996 to
November 26, 1996, respectively.
F-54
<PAGE> 155
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of
Styling Technology Corporation:
We have audited the accompanying balance sheets of U.K. ABBA PRODUCTS, INC.
(a California corporation) as of December 31, 1995 and 1996, and the related
statements of operations, stockholders' equity and cash flows for the years then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of U.K. ABBA Products, Inc. as
of December 31, 1995 and 1996, and the results of its operations and its cash
flows for the two years in the period ended December 31, 1996, in conformity
with generally accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP
Phoenix, Arizona,
June 20, 1997.
F-55
<PAGE> 156
U.K. ABBA PRODUCTS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------ MARCH 31,
1995 1996 1997
---------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash................................................. $ 308,020 $ 337,274 $ 475,037
Accounts receivable.................................. 775,858 872,602 1,063,784
Inventory............................................ 1,079,833 1,377,373 1,683,241
Other current assets................................. 302,078 68,938 72,244
---------- ---------- ----------
Total current assets.............................. 2,465,789 2,656,187 3,294,306
PROPERTY AND EQUIPMENT, net............................ 238,230 219,169 216,625
OTHER ASSETS........................................... 10,318 8,818 24,333
---------- ---------- ----------
$2,714,337 $2,884,174 $3,535,264
========== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable..................................... $ 388,676 $ 323,840 $ 857,061
Accrued expenses..................................... 146,819 313,004 284,556
Current portion of note payable and capital lease
obligation........................................ 51,954 86,867 70,247
Income taxes payable................................. 328,654 121,144 209,885
Line of credit....................................... 200,000 100,000 --
---------- ---------- ----------
Total current liabilities......................... 1,116,103 944,855 1,421,749
---------- ---------- ----------
DEFERRED INCOME TAXES.................................. 6,788 16,774 25,774
---------- ---------- ----------
NOTE PAYABLE AND CAPITAL LEASE OBLIGATION, net of
current portion...................................... 86,872 -- --
---------- ---------- ----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, no par value, 200,000 shares
authorized, 118,518 issued and outstanding........ 360,000 360,000 360,000
---------- ---------- ----------
Retained earnings.................................... 1,144,574 1,562,545 1,727,741
---------- ---------- ----------
Total stockholders' equity........................ 1,504,574 1,922,545 2,087,741
---------- ---------- ----------
Total liabilities and stockholders' equity........ $2,714,337 $2,884,174 $3,535,264
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-56
<PAGE> 157
U.K. ABBA PRODUCTS, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED FOR THE THREE MONTHS ENDED
DECEMBER 31, MARCH 31,
------------------------- --------------------------
1995 1996 1996 1997
---------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
NET SALES................................ $9,056,549 $10,603,312 $2,477,101 $3,150,100
COST OF SALES............................ 4,193,992 5,013,178 1,180,306 1,518,524
---------- ----------- ---------- ----------
Gross profit................... 4,862,557 5,590,134 1,296,795 1,631,576
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES............................... 4,182,192 4,880,380 979,204 1,351,127
---------- ----------- ---------- ----------
Income from operations......... 680,365 709,754 317,591 280,449
INTEREST EXPENSE AND OTHER, net.......... 12,453 1,328 3,831 454
---------- ----------- ---------- ----------
INCOME BEFORE PROVISION FOR INCOME
TAXES.................................. 667,912 708,426 313,760 279,995
PROVISION FOR INCOME TAXES............... 267,165 290,455 128,642 114,799
---------- ----------- ---------- ----------
NET INCOME............................... $ 400,747 $ 417,971 $ 185,118 $ 165,196
========== =========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-57
<PAGE> 158
U.K. ABBA PRODUCTS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK TOTAL
------------------- RETAINED STOCKHOLDERS'
SHARES AMOUNT EARNINGS EQUITY
------- -------- ---------- -------------
<S> <C> <C> <C> <C>
BALANCE, December 31, 1994................... 118,518 $360,000 $ 743,827 $1,103,827
Net income................................. -- -- 400,747 400,747
------- -------- ---------- ----------
BALANCE, December 31, 1995................... 118,518 360,000 1,144,574 1,504,574
Net income................................. -- -- 417,971 417,971
------- -------- ---------- ----------
BALANCE, December 31, 1996................... 118,518 360,000 1,562,545 1,922,545
Net income (unaudited)..................... -- -- 165,196 165,196
------- -------- ---------- ----------
BALANCE, March 31, 1997 (unaudited).......... 118,518 $360,000 $1,727,741 $2,087,741
======= ======== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-58
<PAGE> 159
U.K. ABBA PRODUCTS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED FOR THE THREE MONTHS ENDED
DECEMBER 31, MARCH 31,
---------------------- --------------------------
1995 1996 1996 1997
--------- --------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................. $ 400,747 $ 417,971 $ 185,118 $ 165,196
Adjustments to reconcile net income to net
cash provided by operating activities --
Depreciation............................. 40,194 58,590 20,837 14,155
Increase in accounts receivable.......... (36,463) (96,744) (85,595) (191,182)
Increase in inventory.................... (239,437) (297,540) (165,829) (305,868)
(Increase) decrease in other assets...... (281,508) 234,640 249,492 (18,821)
(Decrease) increase in accounts
payable................................ (53,711) (64,836) (887) 533,221
Increase (decrease) in accrued
expenses............................... 143,958 166,185 (5,435) (28,448)
Increase (decrease) in income taxes
payable................................ 65,070 (207,510) 71,142 88,741
Increase in deferred income taxes........ 6,788 9,986 -- 9,000
--------- --------- --------- ---------
Net cash provided by operating
activities........................ 45,638 220,742 268,843 265,994
--------- --------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment......... (80,367) (39,529) (24,655) (11,611)
--------- --------- --------- ---------
Net cash used in investing
activities........................ (80,367) (39,529) (24,655) (11,611)
--------- --------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (payments) under line of
credit................................... 200,000 (100,000) (200,000) (100,000)
Payments of note payable and capital lease
obligation............................... (58,458) (51,959) (16,370) (16,620)
--------- --------- --------- ---------
Net cash provided by (used in)
financing activities.............. 141,542 (151,959) (216,370) (116,620)
--------- --------- --------- ---------
NET INCREASE IN CASH.......................... 106,813 29,254 27,818 137,763
CASH, beginning of period..................... 201,207 308,020 308,020 337,274
--------- --------- --------- ---------
CASH, end of period........................... $ 308,020 $ 337,274 $ 335,838 $ 475,037
========= ========= ========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Interest paid............................... $ 23,926 $ 13,890 $ 5,946 $ 2,914
========= ========= ========= =========
Income taxes paid........................... $ 335,377 $ 497,965 $ 137,642 $ --
========= ========= ========= =========
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
During 1995, the Company assumed a capital lease for property and equipment for $59,284.
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-59
<PAGE> 160
U.K. ABBA PRODUCTS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1996
(1) ORGANIZATION AND BASIS OF PRESENTATION
Organization and Nature of Operations
U.K. ABBA Products, Inc. (the Company), was incorporated in 1988 to
manufacture pure and natural hair care products, using proprietary formulas it
owns, and distribute them exclusively through distributor relationships to
professional hair salons and supply stores. The Company is a provider of hair
care products, specializing in the cleansing, restoring, styling and finishing
aspects of the hair care process. The Company maintains its pure and natural
approach by using botanical formulas, which does not include the use of any
animal ingredients. The Company has approximately 18 different products, and
distributes nationally and internationally throughout the United States, Puerto
Rico and Canada.
Acquisition Agreement
In accordance with the terms of an acquisition agreement (the Agreement)
between Styling Technology Corporation, (STC) and the Company dated June 25,
1997, STC agreed to acquire all of the common stock of the Company.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Inventory
Inventory is stated 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,
------------------------ -----------
1995 1996 1997
---------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Raw materials and work-in-process...... $ 176,398 $ 200,915 $ 180,276
Finished goods......................... 903,435 1,176,458 1,502,965
---------- ---------- ----------
$1,079,833 $1,377,373 $1,683,241
========== ========== ==========
</TABLE>
Property and Equipment
Property and equipment are recorded at cost and depreciation on property
and equipment is provided on the straight-line method over the following
estimated useful lives:
<TABLE>
<CAPTION>
YEARS
-----
<S> <C>
Furniture and fixtures...................................... 7
Office equipment............................................ 3-7
</TABLE>
Expenditures for major renewals and betterments are capitalized, while
expenditures for maintenance and repairs, which are not significant and do not
improve assets or extend their useful lives, are charged to expense as incurred.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of temporary cash investments
and trade receivables. The Company places its cash in high quality credit
institutions. The Company establishes an allowance for doubtful accounts based
upon factors surrounding the credit risk of specific customers, historical
trends and other information.
F-60
<PAGE> 161
U.K. ABBA PRODUCTS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Fair Value of Financial Instruments
The carrying values of cash, receivables, accounts payable, and accrued
expenses approximate fair values due to the short-term maturities of these
instruments. The carrying amounts on the note payable and line of credit are
estimated to approximate fair value as the actual interest rates are consistent
with rates estimated to be currently available for debt with similar terms and
remaining maturities.
Revenue Recognition
The Company recognizes revenue from sales upon shipment of the product.
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. Actual results could differ from those estimates.
Unaudited Interim Financial Information
In management's opinion, the financial statements for the three-month
periods ended March 31, 1996 and 1997, include all adjustments, consisting of
normal recurring adjustments, necessary to present fairly on a basis consistent
with that of the audited data presented herein the Company's financial position
and results of operations as of and for the periods then ended in accordance
with generally accepted accounting principles. Operating results for the
three-month period ended March 31, 1997, are not necessarily indicative of the
results that may be expected for the fiscal year ending December 31, 1997.
(3) PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------- MARCH 31,
1995 1996 1997
-------- --------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Furniture and fixtures................... $157,170 $ 182,803 $ 187,132
Office equipment......................... 178,580 192,476 199,758
-------- --------- ---------
335,750 375,279 386,890
Less-Accumulated depreciation............ (97,520) (156,110) (170,265)
-------- --------- ---------
$238,230 $ 219,169 $ 216,625
======== ========= =========
</TABLE>
F-61
<PAGE> 162
U.K. ABBA PRODUCTS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(4) NOTE PAYABLE AND CAPITAL LEASE OBLIGATION
The note payable and capital lease obligation consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- MARCH 31,
1995 1996 1997
-------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Note payable, interest at prime plus 1.5%
(10.0% and 9.75% at December 31, 1995 and
1996, respectively, and 9.75% (unaudited)
at March 31, 1997), monthly principal and
interest payments until December 1997,
secured by substantially all assets of the
Company................................... $ 86,808 $ 45,138 $ 31,250
Capital lease obligation, payable in monthly
installments of $1,242 until April 2000... 52,018 41,729 38,997
-------- -------- --------
138,826 86,867 70,247
Less -- Current portion..................... (51,954) (86,867) (70,247)
-------- -------- --------
$ 86,872 $ -- $ --
======== ======== ========
</TABLE>
The Company has classified the note payable and capital lease obligation as
current in the accompanying balance sheets at December 31, 1996 and March 31,
1997 as it is the intent of STC to pay off these instruments upon the
consummation of the Acquisition.
(5) LINE OF CREDIT
As of December 31, 1996, the Company has a $700,000 revolving line of
credit (the Old Line of Credit), which bears interest at prime plus 1.0% and
matures April 1997. In April 1997, the Company negotiated a new line of credit
of up to $1,000,000 (unaudited). As of December 31, 1995 and 1996, the Company
had $200,000, and $100,000, respectively, outstanding the Old Line of Credit. As
of March 31, 1997, the Company had not drawn on the Old Line of Credit. The Old
Line of Credit is secured by substantially all the assets of the Company.
(6) INCOME TAXES
The Company accounts for income taxes using Statement of Financial
Accounting Standards No. 109, Accounting for Income Taxes (SFAS 109). SFAS 109
requires the use of an asset and liability approach in accounting for income
taxes. Deferred tax assets and liabilities are recorded based on the differences
between the financial statement and tax bases of assets and liabilities and the
tax rates in effect when these differences are expected to reverse. These
differences result principally from the recognition of reserve expenses for
financial reporting purposes which do not generate current tax deductions, and
the use of different depreciation and inventory capitalization methods for
income tax and financial reporting.
The components of the income tax provision (benefit) consist of the
following:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
-------------------- -----------------------
1995 1996 1996 1997
-------- -------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Current:
Federal............................. $259,138 $255,450 $113,138 $106,686
State............................... 45,731 45,079 19,966 11,613
-------- -------- -------- --------
304,869 300,529 133,104 118,299
Deferred.............................. (37,704) (10,074) (4,462) (3,500)
-------- -------- -------- --------
Provision for income taxes.......... $267,165 $290,455 $128,642 $114,799
======== ======== ======== ========
</TABLE>
F-62
<PAGE> 163
U.K. ABBA PRODUCTS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The components of deferred taxes are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------ MARCH 31,
1995 1996 1997
------- ------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Deferred tax assets:
Uniform inventory cost capitalization............. $32,000 $54,000 $59,500
Other............................................. 15,878 13,938 13,938
------- ------- -------
Total gross deferred tax assets................ 47,878 67,938 73,438
------- ------- -------
Deferred tax liabilities:
Depreciation...................................... 6,788 16,774 25,774
------- ------- -------
Total gross deferred tax liabilities........... 6,788 16,774 25,774
------- ------- -------
Net deferred tax asset.............................. $41,090 $51,164 $47,664
======= ======= =======
</TABLE>
The total gross deferred tax assets are included in other current assets in
the accompanying balance sheets.
The following is a reconciliation of income taxes provided at the federal
statutory rate with income taxes recorded by the Company:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
------------ ------------
1995 1996 1996 1997
---- ---- ---- ----
(UNAUDITED)
<S> <C> <C> <C> <C>
Tax provision at statutory rate.......................... 34% 34% 34% 34%
Expense of permanent differences resulting from the
corporate owned life insurance and travel and
entertainment expenses, and the effect of state
taxes.................................................. 6% 7% 7% 7%
-- -- -- --
Income tax provision................................ 40% 41% 41% 41%
== == == ==
</TABLE>
(7) RELATED PARTY TRANSACTIONS
The Company utilizes third party warehouses for its storage, production and
distribution of its inventory. The Company's minority shareholder is a
shareholder of one of these third party warehouses. In the ordinary course of
business, the Company contracts for the manufacturing of various products with
this warehouse. Management believes these transactions were under terms no less
favorable to the Company than those arranged with other parties. During the
years ended December 31, 1995 and 1996, and the three months ended March 31,
1996 and 1997, the Company paid approximately $2,799,532, $2,741,167, $511,020,
(unaudited) and $674,977 (unaudited) respectively, for storage, production and
distribution services to this third party. The following inventory amounts with
this third party as of December 31, 1995 and 1996, and March 31, 1997, were
$171,539, $189,592, $168,106 (unaudited), respectively.
(8) COMMITMENTS AND CONTINGENCIES
In the normal course of business, the Company is named as a defendant in
various litigation matters. In management's opinion, the ultimate resolution of
these matters will not have a material impact on the Company's financial
statements.
F-63
<PAGE> 164
U.K. ABBA PRODUCTS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Lease commitments relate primarily to the rental of office equipment and
the office building lease. Minimum payments under these noncancelable lease
obligations are as follows for the year ended December 31:
<TABLE>
<S> <C>
1997...................................................... $126,120
1998...................................................... 33,000
1999...................................................... 25,800
2000...................................................... 21,600
--------
$206,520
========
</TABLE>
F-64
<PAGE> 165
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Styling Technology Corporation:
We have audited the accompanying statement of net assets of certain product
lines of Inverness Corporation and Inverness (UK) Limited (collectively, the
Company) as of November 30, 1997, and the related statement of operating
revenues and expenses for the period from January 1, 1997 through November 30,
1997, (see Note 1 for basis of presentation). 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.
The accompanying statement of net assets of certain product lines and the
related statement of operating revenues and expenses have been prepared pursuant
to the asset purchase agreement dated October 31, 1997 and effective December 1,
1997, between Styling Technology Corporation and the Company (Note 1). These
financial statements are not intended to be a complete presentation of the
Company's financial position or results of operations. The statement of net
assets of certain product lines and the related statement of operating revenues
and expenses are presented for the purposes of complying with the financial
statement requirements of the Securities Exchange Commission for acquired or to
be acquired businesses.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the statement of net assets of certain product lines
of the Company as of November 30, 1997, and the related statement of operating
revenues and expenses for the period from January 1, 1997 through November 30,
1997, in conformity with generally accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP
Phoenix, Arizona,
January 21, 1998.
F-65
<PAGE> 166
INVERNESS CORPORATION AND
INVERNESS (UK) LIMITED
STATEMENT OF NET ASSETS OF CERTAIN PRODUCT LINES
NOVEMBER 30, 1997
<TABLE>
<S> <C>
ASSETS
CURRENT ASSETS:
Accounts receivable, net of allowance for uncollectible
accounts of $147,993................................... $4,050,348
Inventory, net (Note 2)................................... 3,378,831
Other current assets...................................... 127,446
----------
Total current assets.............................. 7,556,625
----------
PROPERTY AND EQUIPMENT, net (Note 3)........................ 969,018
OTHER NONCURRENT ASSETS, net (Note 2)....................... 787,878
----------
Total assets...................................... 9,313,521
----------
LIABILITIES
CURRENT LIABILITIES:
Accounts payable.......................................... 819,455
Accrued liabilities....................................... 529,076
----------
Total current liabilities......................... 1,348,531
----------
COMMITMENTS AND CONTINGENCIES (Note 6)
NET ASSETS.................................................. $7,964,990
==========
</TABLE>
The accompanying notes are an integral part of this financial statement.
F-66
<PAGE> 167
INVERNESS CORPORATION AND
INVERNESS (UK) LIMITED
STATEMENT OF OPERATING REVENUES AND EXPENSES
FOR THE PERIOD FROM JANUARY 1, 1997 THROUGH NOVEMBER 30, 1997
<TABLE>
<S> <C>
NET SALES (Note 2).......................................... $18,902,241
COST OF SALES (Note 1)...................................... 11,212,403
-----------
Gross profit........................................... 7,689,838
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES (Note 1)....... 7,311,470
-----------
Income from operations................................. 378,368
-----------
OTHER INCOME AND EXPENSES:
Other income (Note 2)..................................... 358,282
Interest expense (Note 1)................................. (229,921)
-----------
Total other income and expenses, net.............. 128,361
-----------
EXCESS OF REVENUES OVER EXPENSES............................ $ 506,729
===========
</TABLE>
The accompanying notes are an integral part of this financial statement.
F-67
<PAGE> 168
INVERNESS CORPORATION AND INVERNESS (UK) LIMITED
NOTES TO FINANCIAL STATEMENTS
NOVEMBER 30, 1997
(1) ORGANIZATION AND BASIS OF PRESENTATION:
Acquisition Agreement and Basis of Presentation
The accompanying financial statements represent the net assets of certain
product lines of Inverness Corporation and Inverness (UK) Limited to be acquired
(collectively, the Company). These statements are presented to comply with the
financial statement requirements of the Securities Exchange Commission for
acquired or to be acquired businesses.
In accordance with the terms of an asset purchase agreement (the Agreement)
dated October 31, 1997 and effective December 1, 1997, Styling Technology
Corporation agreed to acquire assets of certain product lines of Inverness
Corporation and Inverness (UK) Limited. The assets primarily consist of trade
receivables, inventories, and equipment. The terms also include a purchase price
of $20 million in cash and the assumption of certain liabilities which include
accounts payable, accrued liabilities and operating leases. The accompanying
financial statements represent the accounts of the purchased assets and assumed
liabilities pursuant to the terms of the Agreement.
The Company is a manufacturer and distributor of various personal care
products in the following product lines:
CLEAN AND EASY PROFESSIONAL SALON PRODUCTS -- Roll-on waxing products sold
to professional salons.
ONE TOUCH ELECTROLYSIS, DEPILATORIES AND HOME WAXING -- Battery-operated
electrolysis machines, a variety of roll-on creams and depilatories, cream hair
lighteners, strip wax and heated waxing appliances to be used by consumers at
home. These products are sold to beauty supply stores, drug stores, discount
stores, catalog mailers and showrooms, mass volume retailers and department
stores.
Allocated Expenses
The product lines of the Company have historically been accounted for in
the consolidated financial statements of Inverness Corporation and Inverness
(UK) Limited (hereinafter referred to as Inverness). Inverness' management
prepared these financial statements by allocating certain of the total costs of
Inverness, to product lines acquired, based on the most conservative
methodologies.
Certain overhead items are allocated to cost of sales for these product
lines. Indirect labor and fringe benefit expenses are allocated based on
standard direct labor hours. Rent, real estate taxes, insurance and other common
costs are allocated based on estimated warehouse space occupied.
Certain selling, general and administrative (S,G&A) expenses and interest
expense are allocated to each product line based on the percent of budgeted
S,G&A expense for that product line to Inverness' total S,G&A expense. Budgeted
S,G&A expenses for each product line are allocated based on Inverness' budgeted
net sales to each product line, adjusted for certain specific allocations. S,G&A
expenses consist primarily of sales salaries and commissions, travel and
entertainment, advertising, and shipping expenses.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Inventory
Inventory is stated 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.
F-68
<PAGE> 169
INVERNESS CORPORATION AND INVERNESS (UK) LIMITED
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Inventory, net, consists of the following at November 30, 1997:
<TABLE>
<S> <C>
Raw materials and work-in-process........................... $1,430,441
Finished goods.............................................. 1,948,390
----------
$3,378,831
==========
</TABLE>
Other Noncurrent Assets
Other noncurrent assets consist of trademarks and patents of $436,451 and
$351,427, respectively, net of accumulated amortization. Trademarks and patents
are amortized on a straight-line basis over a 5-year and 17-year period,
respectively. Amortization expense allocated to the product lines for the period
January 1, 1997 through November 30, 1997, for trademarks and patents was
approximately $114,000 and $23,000, respectively.
Revenue Recognition
The Company recognizes revenue from sales upon shipment of the product.
Other Income
The Company recorded a gain from the settlement of an infringement lawsuit
related to a patent for the One Touch Electrolysis and Home Waxing product line.
Income Taxes
Inverness does not allocate income tax expense to the product lines of the
Company. Accordingly, the accompanying statement of operating revenues and
expenses for the period January 1, 1997 through November 30, 1997 does not
include a provision for income taxes.
Principles of Consolidation
The accompanying consolidated financial statements include the product
lines acquired related to Inverness Corporation and Inverness (UK) Limited. All
material intercompany items and transactions have been eliminated in
consolidation. Financial information relating to the product lines within
Inverness (UK) Limited is reported in accordance with Statement of Financial
Accounting Standards No. 52, FOREIGN CURRENCY TRANSLATION.
Use of Estimates
The preparation of financial information in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, and
disclosure of contingent assets and liabilities at the date of the financial
statements. Estimates also effect the reported amounts of revenues and expenses
during the reported periods. Actual results could differ from those estimates.
Fair Value of Financial Instruments
The following disclosure of the estimated fair value of financial
instruments is made in accordance with the requirements of Statement of
Financial Accounting Standards (SFAS) No. 107, DISCLOSURES ABOUT FAIR VALUE OF
FINANCIAL INSTRUMENTS. The Company's Financial Instruments, as defined by SFAS
No. 107, include accounts receivable, accounts payable and accrued liabilities.
The
F-69
<PAGE> 170
INVERNESS CORPORATION AND INVERNESS (UK) LIMITED
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
estimated fair value amounts have been determined by the Company at November 30,
1997, using available market information.
The carrying value of accounts receivable, accounts payable and accrued
liabilities approximates fair value due to the short-term maturities of these
instruments.
(3) PROPERTY AND EQUIPMENT:
Property and equipment consist of the following at November 30, 1997:
<TABLE>
<S> <C>
Furniture and fixtures...................................... $ 169,887
Machinery and equipment..................................... 3,036,530
-----------
3,206,417
Less-accumulated depreciation............................... (2,237,399)
-----------
$ 969,018
===========
</TABLE>
Property and equipment are recorded at cost and depreciation is provided on
the straight-line method over the following estimated useful lives:
<TABLE>
<CAPTION>
YEARS
-----
<S> <C>
Furniture and fixtures...................................... 4-7
Machinery and equipment..................................... 3-20
</TABLE>
Accumulated depreciation has been recorded utilizing an allocation
methodology based on the relative cost of these product lines' property and
equipment in relation to Inverness' balance of property and equipment.
Depreciation expense allocated to the product lines for the period January 1,
1997 through November 30, 1997, was approximately $283,000.
Expenditures for major renewals and betterments are capitalized, while
expenditures for maintenance and repairs, which are not significant and do not
improve assets or extend their useful lives, are charged to expense as incurred.
Repairs and maintenance expense for the period January 1, 1997 through November
30, 1997, was approximately $59,000.
(4) RELATED PARTY TRANSACTIONS:
Inverness leases its primary facility from its majority shareholder under a
noncancelable operating lease expiring in July 1998. Rent expense allocated to
the product lines for the period January 1, 1997 through November 30, 1997, was
approximately $248,000.
In addition, the product lines acquired are part of Inverness Corporation
and Inverness UK Limited, which are both 100% owned by the same shareholder. The
inventory within the Inverness UK Limited product lines is supplied primarily by
Inverness Corporation. For the period from January 1, 1997 through November 30,
1997, sales from Inverness Corporation to Inverness UK Limited were
approximately $1,290,000, all of which were eliminated during consolidation.
(5) CONCENTRATION OF CREDIT RISK:
Sales To Major Customers
During the period January 1, 1997 through November 30, 1997, sales to a
major customer comprised approximately 11% of the Company's revenues. At
November 30, 1997, the amount due from this customer included in accounts
receivable was approximately $1,079,000.
F-70
<PAGE> 171
INVERNESS CORPORATION AND INVERNESS (UK) LIMITED
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Vendor Concentration
The Company purchased approximately 26% of its inventory from two vendors
during period January 1, 1997 through November 30, 1997. At November 30, 1997,
the amounts due to these vendors included in accounts payable was approximately
$13,000.
(6) COMMITMENTS AND CONTINGENCIES:
Leases
The Company has several noncancelable operating leases for facilities and
equipment. The U.S. facility's lease expires in July 1998. The UK facility lease
runs through January 2003. Future minimum payments under these noncancelable
operating leases with terms are as follows:
<TABLE>
<CAPTION>
YEAR ENDING
NOVEMBER 30,
------------
<S> <C>
1998...................................................... $281,532
1999...................................................... 123,954
2000...................................................... 107,865
2001...................................................... 96,233
2002...................................................... 95,310
Thereafter................................................ 23,827
--------
$728,721
========
</TABLE>
Rental expense allocated to the product lines for the period January 1,
1997 through November 30, 1997, was approximately $538,000.
F-71
<PAGE> 172
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
Phoenix, Arizona,
May 1, 1998.
F-72
<PAGE> 173
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.
F-73
<PAGE> 174
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.
F-74
<PAGE> 175
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.
F-75
<PAGE> 176
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.
F-76
<PAGE> 177
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 (the Company) was incorporated in 1985 to
manufacture and distribute whirlpool pedicure spas and accessories. The Company
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 Agreement
In accordance with the terms of a definitive Acquisition Agreement between
Styling Technology Corporation (STC) and European Touch, Ltd. II, Inc. (the
Company), STC agreed to acquire all of the stock of the Company for a purchase
price of $20.1 million. The closing is estimated to take place in the second
quarter of 1998.
(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 the Company to
concentrations of credit risk consist principally of trade receivables.
Concentrations of credit risk with respect to trade receivables are described in
F-77
<PAGE> 178
EUROPEAN TOUCH, LTD. II
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Note 5. The Company establishes an allowance for doubtful accounts based upon
factors surrounding the credit risk of specific customers, historical trends and
other information.
Income Taxes
The Company's stockholders have elected to have the Company 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
The Company 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 the Company'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.
F-78
<PAGE> 179
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 the Company's customers had accounts receivable totaling 45% and 28%
(unaudited) of the Company's total accounts receivable balance as of December
31, 1997 and March 31, 1998, respectively.
(6) RELATED PARTY TRANSACTIONS:
The Company leases its primary facilities from a partnership of which all
partners are stockholders of the Company. 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.
The Company advances certain expenses related to trade shows and computer
services to a company of which two of the three stockholders are stockholders of
the Company. Expenses paid by the Company 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, the Company is named as a defendant in
various litigation matters. In management's opinion, the ultimate resolution of
these matters will not have a material impact on the Company's financial
conditions or results of operations.
F-79
<PAGE> 180
EUROPEAN TOUCH, LTD. II
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Operating Leases
The Company 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
The Company has a defined contribution plan under 401(k) (the Plan) of the
Internal Revenue Code. Employees of the Company 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). The
Company may match up to 25% of the employee's contribution up to a maximum of
6.5% of the employee's compensation. The Company expensed $38,997 related to the
Plan during 1997.
F-80
<PAGE> 181
- ---------------------------------------------------
- ---------------------------------------------------
ALL TENDERED OUTSTANDING NOTES, EXECUTED LETTERS OF TRANSMITTAL, AND OTHER
RELATED DOCUMENTS SHOULD BE DIRECTED TO THE EXCHANGE AGENT. QUESTIONS AND
REQUESTS FOR ASSISTANCE AND REQUESTS FOR ADDITIONAL COPIES OF THE PROSPECTUS,
THE LETTER OF TRANSMITTAL, AND OTHER RELATED DOCUMENTS SHOULD BE ADDRESSED TO
THE EXCHANGE AGENT AS FOLLOWS:
STATE STREET BANK AND TRUST COMPANY OF CALIFORNIA, N.A.
633 WEST FIFTH STREET, 12TH FLOOR
LOS ANGELES, CALIFORNIA 90071
By Facsimile: (213) 362-7357
Confirm by Telephone: (213) 362-7300
(Originals of all documents submitted by facsimile should be sent promptly by
hand, overnight delivery, or registered or certified mail.)
Until 25 days after the Expiration Date, all dealers effecting transactions
in the Exchange Notes, whether or not participating in this distribution, may be
required to deliver a prospectus. This is in addition to the obligation of
dealers to deliver a prospectus when acting as underwriter and with respect to
their unsold allotments or subscriptions.
No dealer, salesperson, or other person has been authorized to give
information or to make any representations other than those contained in this
Prospectus and the accompanying Letter of Transmittal in connection with the
Exchange Offer covered by this Prospectus and the accompanying Letter of
Transmittal, and, if given or made, such information or representations must not
be relied upon as having been authorized by the Company. Neither this Prospectus
nor the accompanying Letter of Transmittal nor both together constitute an offer
to sell, or a solicitation of an offer to buy, any security other than the
Exchange Notes offered hereby, nor does it constitute an offer to sell or a
solicitation of an offer to buy any of the Exchange Notes to anyone or by anyone
in any jurisdiction where, or to any person to whom, it would be unlawful to
make such an offer or solicitation. Neither the delivery of this Prospectus or
the Letter of Transmittal or both together nor any exchange made hereunder
shall, under any circumstances, create any implication that there has been no
change in the affairs of the Company since the date hereof or that information
contained herein is correct as of any time subsequent to the date hereof.
- ---------------------------------------------------
- ---------------------------------------------------
- ---------------------------------------------------
- ---------------------------------------------------
[STYLING TECHNOLOGY LOGO]
$100,000,000
10 7/8% SENIOR SUBORDINATED NOTES
DUE 2008
---------------------
PROSPECTUS
---------------------
----------------------------------
TABLE OF CONTENTS
----------------------------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
Summary............................ 1
Risk Factors....................... 12
The Exchange Offer................. 21
Use of Proceeds.................... 27
Unaudited Pro Forma Consolidated
Financial Data................... 28
Selected Historical and Pro Forma
Consolidated Financial Data...... 31
Management's Discussion and
Analysis of Financial Condition
and Results of Operations........ 34
Business........................... 48
Management......................... 58
Certain Indebtedness............... 61
Description of The Exchange
Notes............................ 62
Certain Income Tax
Considerations................... 90
Plan of Distribution............... 94
Legal Matters...................... 94
Experts............................ 94
</TABLE>
September 17, 1998
- ---------------------------------------------------
- ---------------------------------------------------
<PAGE> 182
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Under Article Eighth of the Company's Certificate of Incorporation (the
"Certificate"), the Company shall indemnify and advance expenses, to the fullest
extent permitted by the Delaware General Corporation Law to each person who is
or was a director, officer or employee of the Company, or who serves or served
any other enterprise or organization at the request of the Company (an
"Indemnitee"). In addition, the Company has adopted provisions in its Bylaws
that require the Company to indemnify its directors, officers, and certain other
representatives of the Company against expenses and certain other liabilities
arising out of their conduct on behalf of the Company to the maximum extent and
under all circumstances permitted by law.
Under Delaware law, to the extent that an Indemnitee is successful on the
merits or otherwise in defense of a suit or proceeding brought against him or
her by reason of the fact that he or she is or was a director, officer or
employee of the Company, or serves or served any other enterprise or
organization at the request of the Company, the Company shall indemnify him or
her against expenses (including attorneys' fees) actually and reasonably
incurred in connection with such action.
An Indemnitee also may be indemnified under Delaware law against expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement if
he or she acted in good faith and in a manner he or she reasonably believed to
be in, or not opposed to, the best interests of the Company, and, with respect
to any criminal action, had no reasonable cause to believe his or her conduct
was unlawful.
An Indemnitee also may be indemnified under Delaware law against expenses
(including attorneys' fees) actually and reasonably incurred in the defense or
settlement of a suit by or in the right of the Company if he or she acted in
good faith and in a manner he or she reasonably believed to be in, or not
opposed to, the best interests of the Company, except that no indemnification
may be made if the Indemnitee is adjudged to be liable to the Company, unless a
court determines that such Indemnitee is entitled to indemnification for such
expenses which the court deems proper.
Also under Delaware law, expenses incurred by an officer or director in
defending a civil or criminal action, suit or proceeding may be paid by the
Company in advance of the final disposition of the suit, action or proceeding
upon receipt of an undertaking by or on behalf of the officer or director to
repay such amount if it is ultimately determined that he or she is not entitled
to be indemnified by the Company. The Company may also advance expenses incurred
by other employees and agents of the Company upon such terms and conditions, if
any, that the Board of Directors of the Company deems appropriate.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to officers, directors or persons controlling the
Company pursuant to Delaware law or the Company's Certificate, the Company has
been informed that in the opinion of the Commission such indemnification is
against public policy as expressed in such Act and is therefore unenforceable.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF EXHIBIT
- ----------- ----------------------
<S> <C>
1.1 Form of Underwriting Agreement(1)
1.2 Purchase Agreement dated as of June 18, 1998, by and among
NationsBanc Montgomery Securities LLC, Friedman, Billings,
Ramsey & Co., Inc., Imperial Bank Capital LLC, the Company,
and certain subsidiaries of the Company, as Guarantors.*
3.1 Certificate of Incorporation of the Registrant(1)
3.2 Certificate of Amendment of Certificate of Incorporation(1)
3.3 Bylaws of the Registrant(1)
</TABLE>
II-1
<PAGE> 183
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF EXHIBIT
- ----------- ----------------------
<S> <C>
4.1 Specimen of Stock Certificate(1)
4.2 Specimen of Redeemable Common Stock Warrant(1)
4.3 Form of Warrant issued to Credit Agricole Indosuez(2)
4.4 Form of Warrant issued to Bank Boston N.A.(3)
4.5 Indenture dated as of June 23, 1998, by and among the
Company, the Guarantors Signatories thereto, and State
Street Bank and Trust Company of California, N.A.*
4.6 Form of Global Notes (included in Exhibit 4.5)
4.7 Registration Rights Agreement dated as of June 23, 1998, by
and among NationsBanc Montgomery Securities LLC, Friedman,
Billings, Ramsey & Co., Inc., and Imperial Bank Capital LLC,
the Company and certain subsidiaries of the Company, as
Guarantors.*
5 Opinion of O'Connor, Cavanagh, Anderson, Killingsworth &
Beshears, P.A.
10.1 Stock Purchase Agreement by and among Registrant and Donald
N. Black, Howard Black, Barbara Black, Robert Black, Don
Cottam, Jim Cottam and the Cottam Family Partnership, L.P.
(shareholders) with respect to Gena Laboratories, Inc.(1)
10.2 Stock Purchase Agreement by and among Registrant and Jack
Sperling and Gary Sperling (Shareholders) with respect to
JDS Manufacturing Co., Inc.(1)
10.3 Asset Purchase Agreement by and among Registrant, Designs by
Norvell, Inc. and Joy Norvell Martin (Stockholder) with
respect to the Body Drench division of Designs by Norvell,
Inc.(1)
10.4 Asset Purchase Agreement by and among Registrant, Kotchammer
Investments, Inc. and the Hammer Family Living Trust, The
Jones Family Trust and Gerald Kotch (Stockholders)(1)
10.5 Employment Agreement between Registrant and Sam L.
Leopold(1)
10.11 1996 Stock Option Plan(1)
10.12 Stock Repurchase Agreement, as amended, between Registrant
and Kenneth S. Bernstein(1)
10.13 Bridge Note(1)
10.15 Exclusive Manufacturing Agreement between the Registrant and
Amole, Incorporated(4)
10.16 Asset Purchase Agreement between the Registrant and Creative
Laboratories, Inc., dated March 17, 1997(5)
10.17 Stock Purchase Agreement dated as of June 25, 1997 among the
Registrant; James Markham; Daniel Genis and Arline Genis,
Co-Trustees of the 1992 Genis Family Revocable Trust dated
February 28, 1992; Arthur Benfield Bush, Arthur Benfield
Bush and Gina L. Bush, Trustees of the Alan and Gina Bush
Charitable Remainder Unitrust #1, dated June 1, 1997; Arthur
Benfield Bush and Gina L. Bush, Trustees of the Alan and
Gina Bush Remainder Unitrust #2, dated June 1, 1997; Yoram
Fishman, Trustee of the Yoram Fishman Living Trust, dated
May 18, 1987, and Yuri Levi, Trustee of the Yoram Fishman
Charitable Remainder Trust dated May 30, 1997.(6)
10.18 Credit Agreement dated as of June 25, 1997 among the
Registrant and Credit Agricole Indosuez, New York branch, as
agent and the lending institutions listed therein.(6)
10.19 Asset Purchase Agreement dated as of October 31, 1997 among
the Registrant, Inverness Corporation, and Inverness (UK)
Limited.(7)
10.20 Transition and Manufacturing Agreement dated as of December
10, 1997 the Registrant and Inverness Corporation.(7)
10.21 Credit Agreement dated as of December 10, 1997 among the
Registrant and Credit Agricole Indosuez, New York branch, as
agent and the lending institutions listed therein.(7)
10.23 Stock Purchase Agreement dated as of June 23, 1998 among the
Company and the former shareholders of European Touch, Ltd.
II(8)
</TABLE>
II-2
<PAGE> 184
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF EXHIBIT
- ----------- ----------------------
<S> <C>
10.24 Credit Agreement dated June 30, 1998 among the Company,
BankBoston, N.A., and NationsBank, N.A.
10.25 Stock Purchase Agreement dated as of August 3, 1998, among
the Company, Kevin T. Weir, Carol M. Weir, and Dennis M.
Katawczik*
12 Computation of Ratio of Earnings to Fixed Charges
21 Subsidiaries of Registrant*
23.1 Consent of Arthur Andersen LLP
23.2 Consent of O'Connor, Cavanagh, Anderson, Killingsworth &
Beshears, P.A. (to be included in its opinion filed as
Exhibit 5)
24 Power of Attorney of Directors and Executive Officers
(included on the Signature Pages of this Registration
Statement)*
25 Statement of Eligibility of Trustee on Form T-1 of State
Street Bank and Trust Company of California, N.A.*
27 Financial Data Schedules
99 Form of Letter of Transmittal and Notice of Guaranteed
Delivery*
</TABLE>
- ---------------
* Previously filed.
(1) Incorporated by reference to the Registration Statement on Form S-1
(Registration No. 333-12469) filed September 20, 1996 and declared effective
November 12, 1996.
(2) Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q
as filed with the Securities and Exchange Commission (the "Commission") on
August 14, 1997.
(3) Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q
as filed with the Commission on November 14, 1997.
(4) Incorporated by reference to the Registrant's Annual Report on Form 10-K as
filed with the Commission on April 10, 1997.
(5) Incorporated by reference to the Registrant's Current Report on Form 8-K as
filed with the Commission on May 14, 1997.
(6) Incorporated by reference to the Registrant's Current Report on Form 8-K as
filed with the Commission on July 10, 1997.
(7) Incorporated by reference to the Registrant's Current Report on Form 8-K as
filed with the Commission on December 24, 1997.
(b) Financial Statements filed as part of this report:
Consolidated Financial Statements and Supplemental Schedules as listed
in the Index to Consolidated Financial Statements on page F-1 of this
report.
(c) Reports on Form 8-K:
The Registrant filed a Current Report on Form 8-K with respect to the
acquisition of the Clean + Easy and One Touch product lines from
Inverness Corporation and Inverness (UK) Limited on December 24, 1997,
as amended by the Form 8-K/A filed on February 23, 1998 and the Form 8-
K/A filed on March 20, 1998.
(d) Financial Statement Schedules
None.
(8) Incorporated by reference to the Registrant's Current Report on Form 8-K as
filed with the Commission on July 8, 1998.
All other schedules have been omitted on the basis of immateriality or
because such schedules are not otherwise applicable.
II-3
<PAGE> 185
ITEM 22. UNDERTAKINGS
(a) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 (and, where applicable, each filing of an employee benefit
plan's annual report pursuant to Section 15(d) of the Securities Exchange Act of
1934) that is incorporated by reference in the registration statement shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
(b) (1) The undersigned registrant hereby undertakes as follows: that prior
to any public reoffering of the securities registered hereunder through use of a
prospectus which is a part of this registration statement, by any person or
party who is deemed to be an underwriter within the meaning of Rule 145(c), the
issuer undertakes that such reoffering prospectus will contain the information
called for by the applicable registration form with respect to reofferings by
persons who may be deemed underwriters, in addition to the information called
for by the other items of the applicable form.
(2) The registrant undertakes that every prospectus: (i) that is filed
pursuant to paragraph (1) immediately preceding, or (ii) that purports to meet
the requirements of Section 10(a)(3) of the Act and is used in connection with
an offering of securities subject to Rule 415, will be filed as a part of an
amendment to the registration statement and will not be used until such
amendment is effective, and that, for purposes of determining any liability
under the Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
(c) Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers and controlling persons of the registrant
pursuant to the foregoing provisions, or otherwise, the registrant has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant, in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question of whether such indemnification by it is against
public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
(d) The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Item 4, 10(b), 11, or 13 of this Form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through the
date of responding to the request.
(e) The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction that was not
the subject of and included in the registration statement when it became
effective.
II-4
<PAGE> 186
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this amendment to registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Phoenix,
State of Arizona, on September 17, 1998.
STYLING TECHNOLOGY CORPORATION
By: /s/ SAM L. LEOPOLD
------------------------------------
Sam L. Leopold, Chairman of the
Board,
President, and Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, this amendment
to registration statement has been signed below by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ SAM L. LEOPOLD Chairman of the Board of September 17, 1998
- --------------------------------------------------- Directors, President, and
Sam L. Leopold Chief Executive Officer
(Principal Executive
Officer)
/s/ RICHARD R. ROSS Chief Financial Officer, Vice September 17, 1998
- --------------------------------------------------- President, Treasurer,
Richard R. Ross Secretary, and Director
(Principal Financial
Officer)
/s/ *JAMES A. BROOKS Director September 17, 1998
- ---------------------------------------------------
James A. Brooks
/s/ *PETER W. BURG Director September 17, 1998
- ---------------------------------------------------
Peter W. Burg
/s/ *MICHAEL H. FEINSTEIN Director September 17, 1998
- ---------------------------------------------------
Michael H. Feinstein
/s/ *SYLVAN SCHEFLER Director September 17, 1998
- ---------------------------------------------------
Sylvan Schefler
*By: /s/ RICHARD R. ROSS
- --------------------------------------------------
Richard R. Ross
Attorney-in-fact
</TABLE>
II-5
<PAGE> 187
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this amendment to registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Scottsdale,
on this 17th day of September, 1998.
BEAUTY PRODUCTS INC.
By: /s/ SAM L. LEOPOLD
------------------------------------
Sam L. Leopold
President
Pursuant to the requirements of the Securities Act of 1933, as amended,
this amendment to registration statement has been signed on September 17, 1998
by the following persons in the capacities indicated.
<TABLE>
<S> <C>
/s/ SAM L. LEOPOLD
- ---------------------------------------------
Sam L. Leopold
President and Director
(Principal Executive Officer)
/s/ RICHARD R. ROSS
- ---------------------------------------------
Richard R. Ross
Secretary and Director
</TABLE>
II-6
<PAGE> 188
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this amendment to registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Scottsdale,
on this 17th day of September, 1998.
COSMETICS INTERNATIONAL INC.
By: /s/ SAM L. LEOPOLD
------------------------------------
Sam L. Leopold
President
Pursuant to the requirements of the Securities Act of 1933, as amended,
this amendment to registration statement has been signed on September 17, 1998
by the following persons in the capacities indicated.
<TABLE>
<S> <C>
/s/ SAM L. LEOPOLD
- ---------------------------------------------
Sam L. Leopold
President and Director
(Principal Executive Officer)
/s/ RICHARD R. ROSS
- ---------------------------------------------
Richard R. Ross
Secretary and Director
</TABLE>
II-7
<PAGE> 189
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this amendment to registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Scottsdale,
on this 17th day of September, 1998.
EUROPEAN TOUCH CO., INCORPORATED
By: /s/ SAM L. LEOPOLD
------------------------------------
Sam L. Leopold
President
Pursuant to the requirements of the Securities Act of 1933, as amended,
this amendment to registration statement has been signed on September 17, 1998
by the following persons in the capacities indicated.
<TABLE>
<S> <C>
/s/ SAM L. LEOPOLD
- -----------------------------------------------------
Sam L. Leopold
President and Director
(Principal Executive Officer)
/s/ RICHARD R. ROSS
- -----------------------------------------------------
Richard R. Ross
Secretary and Director
/s/ *ANNELIE PENN
- -----------------------------------------------------
Annelie Penn
Director
*By: /s/ RICHARD R. ROSS
------------------------------------------------
Richard R. Ross
Attorney-in-fact
</TABLE>
II-8
<PAGE> 190
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this amendment to registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Scottsdale,
on this 17th day of September, 1998.
EUROPEAN TOUCH, LTD II
By: /s/ SAM L. LEOPOLD
------------------------------------
Sam L. Leopold
President
Pursuant to the requirements of the Securities Act of 1933, as amended,
this amendment to registration statement has been signed on September 17, 1998
by the following persons in the capacities indicated.
<TABLE>
<S> <C>
/s/ SAM L. LEOPOLD
- -----------------------------------------------------
Sam L. Leopold
President and Director
(Principal Executive Officer)
/s/ RICHARD R. ROSS
- -----------------------------------------------------
Richard R. Ross
Secretary and Director
/s/ *J. TIMOTHY MONTROSE
- -----------------------------------------------------
J. Timothy Montrose
Director
/s/ *ANNELIE PENN
- -----------------------------------------------------
Annelie Penn
Director
*By: /s/ RICHARD R. ROSS
------------------------------------------------
Richard R. Ross
Attorney-in-Fact
</TABLE>
II-9
<PAGE> 191
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this amendment to registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Scottsdale,
on this 17th day of September, 1998.
GENA LABORATORIES, INC.
By: /s/ SAM L. LEOPOLD
------------------------------------
Sam L. Leopold
President
Pursuant to the requirements of the Securities Act of 1933, as amended,
this amendment to registration statement has been signed on September 17, 1998
by the following persons in the capacities indicated.
<TABLE>
<S> <C>
/s/ SAM L. LEOPOLD
- ---------------------------------------------
Sam L. Leopold
President and Director
(Principal Executive Officer)
</TABLE>
II-10
<PAGE> 192
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this amendment to registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Scottsdale,
on this 17th day of September, 1998.
J.D.S. Manufacturing Co., Inc.
By: /s/ SAM L. LEOPOLD
------------------------------------
Sam L. Leopold
President
Pursuant to the requirements of the Securities Act of 1933, as amended,
this amendment to registration statement has been signed on September 17, 1998
by the following persons in the capacities indicated.
<TABLE>
<S> <C>
/s/ SAM L. LEOPOLD
- ---------------------------------------------
Sam L. Leopold
President and Director (Principal Executive
Officer)
</TABLE>
II-11
<PAGE> 193
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this amendment to registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Scottsdale,
on this 17th day of September, 1998.
U.K. ABBA PRODUCTS, INC.
By: /s/ SAM L. LEOPOLD
------------------------------------
Sam L. Leopold
President
Pursuant to the requirements of the Securities Act of 1933, as amended,
this amendment to registration statement has been signed on September 17, 1998
by the following persons in the capacities indicated.
<TABLE>
<S> <C>
/s/ SAM L. LEOPOLD
- ---------------------------------------------
Sam L. Leopold
President and Director
(Principal Executive Officer)
</TABLE>
II-12
<PAGE> 194
<TABLE>
<CAPTION>
EXHIBIT NO. INDEX TO EXHIBITS
- ----------- -----------------
<S> <C>
1.1 Form of Underwriting Agreement(1)
1.2 Purchase Agreement dated as of June 18, 1998, by and among
NationsBanc Montgomery Securities LLC, Friedman, Billings,
Ramsey & Co., Inc., Imperial Bank Capital LLC, the Company,
and certain subsidiaries of the Company, as Guarantors.*
3.1 Certificate of Incorporation of the Registrant(1)
3.2 Certificate of Amendment of Certificate of Incorporation(1)
3.3 Bylaws of the Registrant(1)
4.1 Specimen of Stock Certificate(1)
4.2 Specimen of Redeemable Common Stock Warrant(1)
4.3 Form of Warrant issued to Credit Agricole Indosuez(2)
4.4 Form of Warrant issued to Bank Boston N.A.(3)
4.5 Indenture dated as of June 23, 1998, by and among the
Company, the Guarantors Signatories thereto, and State
Street Bank and Trust Company of California, N.A.*
4.6 Form of Global Notes (included in Exhibit 4.5)
4.7 Registration Rights Agreement dated as of June 23, 1998, by
and among NationsBanc Montgomery Securities LLC, Friedman,
Billings, Ramsey & Co., Inc., and Imperial Bank Capital LLC,
the Company and certain subsidiaries of the Company, as
Guarantors.*
5 Opinion of O'Connor, Cavanagh, Anderson, Killingsworth &
Beshears, P.A.
10.1 Stock Purchase Agreement by and among Registrant and Donald
N. Black, Howard Black, Barbara Black, Robert Black, Don
Cottam, Jim Cottam and the Cottam Family Partnership, L.P.
(shareholders) with respect to Gena Laboratories, Inc.(1)
10.2 Stock Purchase Agreement by and among Registrant and Jack
Sperling and Gary Sperling (Shareholders) with respect to
JDS Manufacturing Co., Inc.(1)
10.3 Asset Purchase Agreement by and among Registrant, Designs by
Norvell, Inc. and Joy Norvell Martin (Stockholder) with
respect to the Body Drench division of Designs by Norvell,
Inc.(1)
10.4 Asset Purchase Agreement by and among Registrant, Kotchammer
Investments, Inc. and the Hammer Family Living Trust, The
Jones Family Trust and Gerald Kotch (Stockholders)(1)
10.5 Employment Agreement between Registrant and Sam L.
Leopold(1)
10.11 1996 Stock Option Plan(1)
10.12 Stock Repurchase Agreement, as amended, between Registrant
and Kenneth S. Bernstein(1)
10.13 Bridge Note(1)
10.15 Exclusive Manufacturing Agreement between the Registrant and
Amole, Incorporated(4)
10.16 Asset Purchase Agreement between the Registrant and Creative
Laboratories, Inc., dated March 17, 1997(5)
10.17 Stock Purchase Agreement dated as of June 25, 1997 among the
Registrant; James Markham; Daniel Genis and Arline Genis,
Co-Trustees of the 1992 Genis Family Revocable Trust dated
February 28, 1992; Arthur Benfield Bush, Arthur Benfield
Bush and Gina L. Bush, Trustees of the Alan and Gina Bush
Charitable Remainder Unitrust #1, dated June 1, 1997; Arthur
Benfield Bush and Gina L. Bush, Trustees of the Alan and
Gina Bush Remainder Unitrust #2, dated June 1, 1997; Yoram
Fishman, Trustee of the Yoram Fishman Living Trust, dated
May 18, 1987, and Yuri Levi, Trustee of the Yoram Fishman
Charitable Remainder Trust dated May 30, 1997.(6)
10.18 Credit Agreement dated as of June 25, 1997 among the
Registrant and Credit Agricole Indosuez, New York branch, as
agent and the lending institutions listed therein.(6)
10.19 Asset Purchase Agreement dated as of October 31, 1997 among
the Registrant, Inverness Corporation, and Inverness (UK)
Limited.(7)
10.20 Transition and Manufacturing Agreement dated as of December
10, 1997 the Registrant and Inverness Corporation.(7)
</TABLE>
II-13
<PAGE> 195
<TABLE>
<CAPTION>
EXHIBIT NO. INDEX TO EXHIBITS
- ----------- -----------------
<S> <C>
10.21 Credit Agreement dated as of December 10, 1997 among the
Registrant and Credit Agricole Indosuez, New York branch, as
agent and the lending institutions listed therein.(7)
10.23 Stock Purchase Agreement dated as of June 23, 1998 among the
Company and the former shareholders of European Touch, Ltd.
II(8)
10.24 Credit Agreement dated June 30, 1998 among the Company,
BankBoston, N.A., and NationsBank, N.A.
10.25 Stock Purchase Agreement dated as of August 3, 1998, among
the Company, Kevin T. Weir, Carol M. Weir, and Dennis M.
Katawczik*
12 Computation of Ratio of Earnings to Fixed Charges
21 Subsidiaries of Registrant*
23.1 Consent of Arthur Andersen LLP
23.2 Consent of O'Connor, Cavanagh, Anderson, Killingsworth &
Beshears, P.A. (to be included in its opinion filed as
Exhibit 5)
24 Power of Attorney of Directors and Executive Officers
(included on the Signature Pages of this Registration
Statement)*
25 Statement of Eligibility of Trustee on Form T-1 of State
Street Bank and Trust Company of California, N.A.*
27 Financial Data Schedules
99 Form of Letter of Transmittal and Notice of Guaranteed
Delivery*
</TABLE>
- ---------------
* Previously filed.
(1) Incorporated by reference to the Registration Statement on Form S-1
(Registration No. 333-12469) filed September 20, 1996 and declared effective
November 12, 1996.
(2) Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q
as filed with the Securities and Exchange Commission (the "Commission") on
August 14, 1997.
(3) Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q
as filed with the Commission on November 14, 1997.
(4) Incorporated by reference to the Registrant's Annual Report on Form 10-K as
filed with the Commission on April 10, 1997.
(5) Incorporated by reference to the Registrant's Current Report on Form 8-K as
filed with the Commission on May 14, 1997.
(6) Incorporated by reference to the Registrant's Current Report on Form 8-K as
filed with the Commission on July 10, 1997.
(7) Incorporated by reference to the Registrant's Current Report on Form 8-K as
filed with the Commission on December 24, 1997.
(b) Financial Statements filed as part of this report:
Consolidated Financial Statements and Supplemental Schedules as listed
in the Index to Consolidated Financial Statements on page F-1 of this
report.
(c) Reports on Form 8-K:
The Registrant filed a Current Report on Form 8-K with respect to the
acquisition of the Clean + Easy and One Touch product lines from
Inverness Corporation and Inverness (UK) Limited on December 24, 1997,
as amended by the Form 8-K/A filed on February 23, 1998 and the Form 8-
K/A filed on March 20, 1998.
(d) Financial Statement Schedules
None.
(8) Incorporated by reference to the Registrant's Current Report on Form 8-K as
filed with the Commission on July 8, 1998.
All other schedules have been omitted on the basis of immateriality or
because such schedules are not otherwise applicable.
II-14
<PAGE> 1
[O'CONNOR CAVANAGH LETTERHEAD]
September 17, 1998
Styling Technology Corporation
2390 East Camelback Road, Suite 435
Phoenix, Arizona 85016
Gentlemen:
We have acted as counsel for Styling Technology Corporation, a
Delaware corporation (the "Company"), in connection with the proposed offer by
the Company to exchange (the "Exchange Offer") all outstanding 10-7/8% Senior
Subordinated Notes Due 2008 ($100.0 million principal amount outstanding) (the
"Outstanding Notes") for 10-7/8% Senior Subordinated Notes due 2008 ($100.0
million principal amount) (the "Exchange Notes"). The Outstanding Notes have
been, and the Exchange Notes will be, issued pursuant to an Indenture dated as
of June 23, 1998 (the "Indenture"), among the Company, certain of its
subsidiaries (the "Subsidiary Guarantors"), and State Street Bank and Trust
Company of California, N.A., as trustee (the "Trustee"). Unless otherwise
defined herein, capitalized terms used in this opinion shall have the meanings
set forth in the Indenture.
We have examined (i) the Indenture, (ii) the form of Exchange
Notes, which are filed as Exhibit 4.5 to the Registration Statement, (iii) the
Registration Statement on Form S-4 filed by the Company with the Securities and
Exchange Commission, for the registration of the Exchange Notes under the
Securities Act of 1933 (the Registration Statement as amended at the time it
becomes effective being referred to as the "Registration Statement"), and (iv)
such corporate records of the Company, certificates of public officials, and
such other documents as we have deemed necessary or appropriate for the purpose
of this opinion.
For purposes of this opinion, we have assumed (i) the legal
capacity of all natural persons executing the documents examined by us; (ii)
that the documents and signatures examined by us are genuine and authentic;
(iii) the due authorization, execution, and delivery of the Indenture by the
Trustee; (iv) that the Trustee has the requisite power and authority to enter
into the Indenture and to act as trustee thereunder (and is eligible and duly
qualified to act in such capacity); and (v) that the Indenture constitutes the
legal, valid, and binding obligation of the Trustee, enforceable against the
Trustee in accordance with its terms.
<PAGE> 2
O'CONNOR CAVANAGH
Styling Technology Corporation
September 17, 1998
Page 2
On the basis of the foregoing, we express the following opinions:
(a) the Exchange Notes, when duly executed, authenticated, and
exchanged in accordance with the terms of the Indenture entered into among the
Company, the Subsidiary Guarantors, and the Trustee will constitute valid and
binding obligations of the Company, enforceable against the Company in
accordance with their terms and entitled to the benefits of the Indenture,
except that (i) the enforcement thereof may be subject to bankruptcy,
insolvency, moratorium, reorganization, arrangement, fraudulent transfer, or
conveyance and other similar laws now or hereafter in effect relating to
creditors' rights generally, and to general principles of equity and the
discretion of the court before which any proceeding therefor may be brought;
(ii) the remedy of specific performance and injunctive and other forms of
equitable relief are subject to certain equitable defenses and to the discretion
of the court before which any proceeding therefor may be brought; (iii) the
enforceability of provisions imposing penalties, forfeitures, late payment
charges, or an increase in interest rate upon delinquency in payment or the
occurrence of a default may be limited in certain circumstances; (iv) the
enforceability of any provision requiring the payment of attorney's fees may be
subject to a court determination that such fees are reasonable; and (v) any
rights to indemnity or contribution thereunder may be limited by federal or
state securities laws and public policy considerations.
(b) the Guarantees, when issued by the Subsidiary Guarantors
upon the execution, authentication, and exchange of the Exchange Notes, will
each constitute valid and binding obligations of the Subsidiary Guarantors in
accordance with their terms, except that (i) the enforcement thereof may be
subject to bankruptcy, insolvency, moratorium, reorganization, arrangement,
fraudulent transfer, or conveyance and other similar laws now or hereafter in
effect relating to creditors' rights generally, and to general principles of
equity and the discretion of the court before which any proceeding therefor may
be brought; (ii) the remedy of specific performance and injunctive and other
forms of equitable relief are subject to certain equitable defenses and to the
discretion of the court before which any proceeding therefor may be brought;
(iii) the enforceability of provisions imposing penalties, forfeitures, late
payment charges, or an increase in interest rate upon delinquency in payment or
the occurrence of a default may be limited in certain circumstances; (iv) the
enforceability of any provision requiring the payment of attorney's fees may be
subject to a court determination that such fees are reasonable; and (v) any
rights to indemnity or contribution thereunder may be limited by federal or
state securities laws and public policy considerations.
We are members of the Bar of the state of Arizona, and we do not
purport to be experts on, or to express any opinion as to, the laws of any
jurisdiction other than the applicable federal laws of the United States, the
General Corporation Law of the state of Delaware, and the laws of the state of
Arizona. We note that the Indenture states that it is to be governed by the laws
of the state of New York. We are not familiar with the laws of New York and
render no
<PAGE> 3
O'CONNOR CAVANAGH
Styling Technology Corporation
September 17, 1998
Page 3
opinion about them. For the purposes of this opinion, we have assumed
that the Indenture will be governed by the laws of the state of Arizona,
notwithstanding its express terms. We express no opinion about what laws will
actually govern the Indenture. Further, our opinion is based solely upon
existing laws, rules, and regulations, and we undertake no obligation to advise
you of any changes that may be brought to our attention after the date hereof.
We hereby consent to the filing of this opinion as Exhibit 5
to the Registration Statement and to the reference to the firm under "Legal
Matters" in the Prospectus forming a part of the Registration Statement.
Very truly yours,
/s/ O'Connor, Cavanagh, Anderson,
Killingworth & Beshears, P.A.
---------------------------------
O'Connor, Cavanagh, Anderson,
Killingworth & Beshears, P.A.
<PAGE> 1
EXHIBIT 10.24
$50,000,000
CREDIT AGREEMENT
AMONG
STYLING TECHNOLOGY CORPORATION
CERTAIN LENDERS NAMED HEREIN
AND
NATIONSBANK, N.A., AS ADMINISTRATIVE AGENT
AND
BANKBOSTON, N.A., AS DOCUMENTATION AGENT
June 30, 1998
<PAGE> 2
<TABLE>
<CAPTION>
TABLE OF CONTENTS
Page
----
<S> <C> <C>
ARTICLE 1
Definitions
Section 1.1 Defined Terms..........................................................................1
Section 1.2 Amendments and Renewals...............................................................26
Section 1.3 Construction..........................................................................26
ARTICLE 2
Advances
Section 2.1 The Advances..........................................................................27
Section 2.2 Manner of Borrowing and Disbursement..................................................27
Section 2.3 Interest..............................................................................29
Section 2.4 Fees..................................................................................31
Section 2.5 Prepayments...........................................................................31
Section 2.6 Reduction of Revolving Credit Commitment..............................................33
Section 2.7 Non-Receipt of Funds by the Administrative Agent......................................33
Section 2.8 Payment of Principal of Advances......................................................33
Section 2.9 Reimbursement.........................................................................34
Section 2.10 Manner of Payment.....................................................................34
Section 2.11 LIBOR Lending Offices.................................................................35
Section 2.12 Sharing of Payments...................................................................35
Section 2.13 Calculation of LIBOR Rate.............................................................36
Section 2.14 Taxes.................................................................................36
Section 2.15 Letters of Credit.....................................................................40
Section 2.16 Booking Loans.........................................................................45
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</TABLE>
<PAGE> 3
<TABLE>
<CAPTION>
<S> <C> <C>
ARTICLE 3
Conditions Precedent
Section 3.1 Conditions Precedent to the Initial Advances and the Initial Letters of Credit........46
Section 3.2 Conditions Precedent to All Advances and Letters of Credit............................48
Section 3.3 Conditions Precedent to Each Term Loan Advance and Each Revolving
Credit Acquisition Advance............................................................49
Section 3.4 Conditions Precedent to Conversions and Continuations.................................50
ARTICLE 4
Representations and Warranties
Section 4.1 Representations and Warranties........................................................50
Section 4.2 Survival of Representations and Warranties, etc.......................................58
ARTICLE 5
General Covenants
Section 5.1 Preservation of Existence and Similar Matters.........................................59
Section 5.2 Business; Compliance with Applicable Law..............................................59
Section 5.3 Maintenance of Properties.............................................................59
Section 5.4 Accounting Methods and Financial Records..............................................59
Section 5.5 Insurance.............................................................................60
Section 5.6 Payment of Taxes and Claims...........................................................60
Section 5.7 Visits and Inspections................................................................60
Section 5.8 Use of Proceeds.......................................................................61
Section 5.9 Indemnity.............................................................................61
Section 5.10 Environmental Law Compliance..........................................................63
Section 5.11 Further Assurances....................................................................63
Section 5.12 Subsidiaries..........................................................................64
Section 5.13 Year 2000 Compliance..................................................................64
ARTICLE 6
Information Covenants
Section 6.1 Quarterly Financial Statements and Information........................................64
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</TABLE>
<PAGE> 4
<TABLE>
<CAPTION>
<S> <C> <C>
Section 6.2 Annual Financial Statements and Information; Certificate of No Default................65
Section 6.3 Compliance Certificate................................................................65
Section 6.4 Copies of Other Reports and Notices...................................................66
Section 6.5 Notice of Litigation, Default and Other Matters.......................................66
Section 6.6 ERISA Reporting Requirements..........................................................67
ARTICLE 7
Negative Covenants
Section 7.1 Indebtedness..........................................................................68
Section 7.2 Liens.................................................................................69
Section 7.3 Investments...........................................................................70
Section 7.4 Liquidation, Merger...................................................................71
Section 7.5 Sales of Assets.......................................................................71
Section 7.6 Acquisitions..........................................................................71
Section 7.7 Capital Expenditures..................................................................72
Section 7.8 Restricted Payments...................................................................72
Section 7.9 Affiliate Transactions................................................................73
Section 7.10 Compliance with ERISA.................................................................73
Section 7.11 Maximum Leverage Ratio................................................................73
Section 7.12 Minimum Fixed Charge Coverage Ratio...................................................74
Section 7.13 Minimum Net Worth.....................................................................74
Section 7.14 Sale or Discount of Receivables.......................................................74
Section 7.15 Business..............................................................................74
Section 7.16 Sale and Leaseback....................................................................74
- iii -
</TABLE>
<PAGE> 5
<TABLE>
<S> <C> <C>
Section 7.17 Amendment of Organizational Documents.................................................74
Section 7.18 Amendments and Waivers of Subordinated Debt...........................................74
Section 7.19 Indirect Foreign Subsidiaries.........................................................75
Section 7.20 Designated Senior Debt................................................................75
ARTICLE 8
Default
Section 8.1 Events of Default.....................................................................75
Section 8.2 Remedies..............................................................................78
ARTICLE 9
Changes in Circumstances
Section 9.1 LIBOR Basis Determination Inadequate..................................................79
Section 9.2 Illegality............................................................................79
Section 9.3 Increased Costs.......................................................................80
Section 9.4 Effect On Base Rate Advances..........................................................81
Section 9.5 Capital Adequacy......................................................................81
Section 9.6 Replacement Lender....................................................................82
ARTICLE 10
Agreement Among Lenders
Section 10.1 Agreement Among Lenders...............................................................82
Section 10.2 Lender Credit Decision................................................................85
Section 10.3 Benefits of Article...................................................................85
ARTICLE 11
Miscellaneous
Section 11.1 Notices...............................................................................86
Section 11.2 Expenses..............................................................................87
Section 11.3 Waivers...............................................................................87
Section 11.4 Calculation by the Lenders Conclusive and Binding.....................................88
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</TABLE>
<PAGE> 6
<TABLE>
<S> <C> <C>
Section 11.5 Set-Off...............................................................................88
Section 11.6 Assignment............................................................................88
Section 11.7 Counterparts..........................................................................90
Section 11.8 Severability..........................................................................91
Section 11.9 Interest and Charges..................................................................91
Section 11.10 Headings..............................................................................91
Section 11.11 Amendment and Waiver..................................................................91
Section 11.12 Exception to Covenants................................................................92
Section 11.13 No Liability of Issuing Bank..........................................................92
Section 11.14 Confidentiality.......................................................................92
Section 11.15 No Duties of Documentation Agent......................................................93
Section 11.16 Governing Law.........................................................................93
Section 11.17 Waiver of Jury Trial..................................................................94
Section 11.18 Entire Agreement......................................................................94
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</TABLE>
<PAGE> 7
Schedules and Exhibits
Schedule 1.1(a): LIBOR Lending Offices
Schedule 1.1(b): Commitments and Specific Percentages
Schedule 1.1(c): Existing Letters of Credit
Schedule 4.1(a): Subsidiaries, Qualifications and Good Standing
Schedule 4.1(h): Existing Litigation
Schedule 4.1(v): Labor Relations
Schedule 7.1(f): Existing Indebtedness
Schedule 7.2: Existing Liens
Schedule 7.3(c): Existing Investments
Exhibit A: Revolving Credit Note
Exhibit B: Term Loan Note
Exhibit C: General Security Agreement
Exhibit D: Intellectual Property Security Agreement and Assignment
Exhibit E: Compliance Certificate
Exhibit F: Assignment Agreement
Exhibit G: Subsidiary Guaranty
Exhibit H: Notice of Borrowing
Exhibit I: Fee Simple Deed of Trust
Exhibit J: Landlord's Waiver
Exhibit K: Notice of Continuation/Conversion
- vi -
<PAGE> 8
CREDIT AGREEMENT
THIS CREDIT AGREEMENT is dated as of June 30, 1998, among STYLING
TECHNOLOGY CORPORATION, a Delaware corporation (the "Borrower"), the Lenders
from time to time party hereto, BANKBOSTON, N.A., as documentation agent, and
NATIONSBANK, N.A., as administrative agent for the Lenders.
BACKGROUND
The Lenders have been requested to provide the Borrower funds to
finance the ongoing working capital and general corporate requirements of the
Borrower and its Subsidiaries (as hereinafter defined), including but not
limited to Acquisitions (as hereinafter defined) permitted hereunder. The
Lenders have agreed to provide such financing, subject to the terms and
conditions set forth below.
In consideration of the mutual covenants and agreements contained
herein, and other good and valuable consideration hereby acknowledged, the
parties hereto agree as follows:
ARTICLE 1
Definitions
Section 1.1 Defined Terms. For purposes of this Agreement:
"Account" means all of the "accounts" (as that term is defined in
Section 9.106 of the UCC) of the Borrower and its Subsidiaries whether or not
such Account has been earned by performance, whether now existing or existing in
the future, including, without limitation, all (a) accounts receivable,
including, without limitation, all accounts created by or arising from all of
the Borrower's and its Subsidiaries' sales of goods or rendition of services or
licensing or subleasing of any of the Borrower's and its Subsidiaries'
Intellectual Property; (b) unpaid seller's rights (including rescission,
replevin, reclamation and stopping in transit) relating to the foregoing or
arising therefrom; (c) rights to any goods represented by any of the foregoing,
including returned or repossessed goods; (d) reserves and credit balances held
by the Borrower and its Subsidiaries with respect to any such accounts
receivable or any account debtor; (e) guarantees or collateral for any of the
foregoing; and (f) insurance policies or rights relating to any of the
foregoing.
"Acquisition" means any transaction pursuant to which the Borrower or
any of its Subsidiaries, (a) whether by means of a capital contribution or
purchase or other acquisition of stock or other securities or other equity
participation or interest, (i) acquires more than 50% of the equity interest in
any Person pursuant to a solicitation by the Borrower or such Subsidiary of
tenders of
<PAGE> 9
equity securities of such Person, or through one or more negotiated block,
market, private or other transactions, or a combination of any of the foregoing,
(ii) except as permitted by Section 7.3(g) hereof with respect to a newly-formed
corporation and Section 7.4(b) hereof with respect to an existing Subsidiary of
the Borrower, makes any corporation a Subsidiary of the Borrower or such
Subsidiary, or causes any corporation, other than a Subsidiary of the Borrower
or such Subsidiary, to be merged into the Borrower or such Subsidiary (or agrees
to be merged into any other corporation other than a wholly-owned Subsidiary
(excluding directors' qualifying shares) of the Borrower or such Subsidiary), or
(iii) agrees to purchase all or more than 50% of the assets of any Person,
pursuant to a merger, purchase of assets or other reorganization providing for
the delivery or increase to the holders of such Person's then outstanding
securities or other equity interests, in exchange for such securities, or cash
or securities of the Borrower or such Subsidiary, or any combination thereof, or
(b) purchases in one transaction or a series of related transactions all or more
than 50% of the business or assets of any Person or of any operating division of
any Person.
"Acquisition Consideration" means the consideration given by the
Borrower or any of its Subsidiaries for an Acquisition, including but not
limited to the fair market value of any cash, property (other than Capital Stock
issued in respect of the Acquisition), or services given and the amount of any
Indebtedness and lease expense pursuant to Operating Leases (such lease expense
to be in an amount equal to the product of rental expense for the four fiscal
quarters immediately preceding the date of calculation multiplied by eight)
assumed or incurred by the Borrower or any Subsidiary of the Borrower in
connection with such Acquisition.
"Adjusted EBITDA" means, for any period, EBITDA but adjusted to (i)
include the pro forma EBITDA of any assets acquired during such period as if
acquired at the beginning of such period (and adjusted to take into account any
expenses that will be eliminated under the ownership by the Borrower or any of
its Subsidiaries of such assets as reasonably approved by the Administrative
Agent) and (ii) exclude the EBITDA of any assets disposed of during such period
as if disposed of at the beginning of such period.
"Adjusted LIBOR Rate" means, for any LIBOR Advance for any Interest
Period therefor, the rate per annum (rounded upwards, if necessary, to the
nearest 1/100th of 1%) determined by the Administrative Agent to be equal to the
quotient obtained by dividing (a) the LIBOR Rate for such LIBOR Advance for such
Interest Period by (b) 1 minus the Reserve Requirement for such LIBOR Advance
for such Interest Period.
"Administrative Agent" means NationsBank, N.A., a national banking
association, as administrative agent for Lenders, or such successor
administrative agent appointed pursuant to Section 10.1(b) hereof.
"Administrative Agent Fee Letter" has the meaning specified in Section
2.4(b) hereof.
"Advance" means any amount advanced by the Lenders to the Borrower
pursuant to Article 2 hereof on the occasion of any borrowing.
- 2 -
<PAGE> 10
"Affiliate" means, as applied to any Person, any other Person that,
directly or indirectly, through one or more Persons, Controls or is Controlled
By or Under Common Control with, such Person, or in the case of any Lender which
is an investment fund, the investment advisor thereof and any investment fund
having the same investment advisor.
"Agreement" means this Credit Agreement, as amended, modified,
supplemented or restated from time to time.
"Agreement Date" means the date of this Agreement.
"Applicable Base Rate Margin" means the following per annum
percentages, applicable in the following situations:
<TABLE>
<S> <C>
Applicability
(a) Initial Pricing Period 0.750%
(b) Subsequent Pricing Period
(1) The Leverage Ratio is greater than or equal 1.000%
to 4.50 to 1
(2) The Leverage Ratio is less than 4.50 to 1 0.750%
but greater than or equal to 4.00 to 1
(3) The Leverage Ratio is less than 4.00 to 1 0.500%
but greater than or equal to 3.50 to 1
(4) The Leverage Ratio is less than 3.50 to 1 0.250%
but greater than or equal to 3.00 to 1
(5) The Leverage Ratio is less than 3.00 to 1 0.000%
</TABLE>
During the Subsequent Pricing Period, the Applicable Base Rate Margin payable by
the Borrower on the Base Rate Advances outstanding hereunder shall be subject to
reduction or increase, as applicable and as set forth in the table above, on a
quarterly basis according to the performance of the Borrower as tested by using
the Leverage Ratio calculated as of the end of each fiscal quarter; provided,
that each adjustment in the Applicable Base Rate Margin shall be effective on
the date which is two Business Days following the date of receipt of the
financial statements required to be delivered pursuant to Section 6.1 or 6.2
hereof, as applicable, and the related Compliance Certificate. If such financial
statements and Compliance Certificate are not received by the Administrative
Agent by the date required, the Applicable Base Rate Margin shall be determined
as if the Leverage
- 3 -
<PAGE> 11
Ratio is greater than or equal to 4.50 to 1 until such time as such financial
statements and Compliance Certificate are received.
"Applicable Environmental Laws" means applicable laws pertaining to
health or the environment, including without limitation, the Comprehensive
Environmental Response, Compensation, and Liability Act of 1980, as amended by
the Superfund Amendments and Reauthorization Act of 1986 (as amended from time
to time, "CERCLA"), the Resource Conservation and Recovery Act of 1976, as
amended by the Used Oil Recycling Act of 1980, the Solid Waste Disposal Act
amendments of 1980, and the Hazardous and Solid Waste Amendments of 1984 (as
amended from time to time, "RCRA").
"Applicable Law" means (a) in respect of any Person, all provisions of
constitutions, statutes, rules, regulations and orders of governmental bodies or
regulatory agencies applicable to such Person and its properties, including,
without limiting the foregoing, all orders and decrees of all courts and
arbitrators in proceedings or actions to which the Person in question is a
party, and (b) in respect of contracts relating to interest or finance charges
that are made or performed in the State of Texas, "Applicable Law" shall mean
the laws of the United States of America, including without limitation 12 USC
Sections 85 and 86(a), as amended from time to time, and any other statute
of the United States of America now or at any time hereafter prescribing the
maximum rates of interest on loans and extensions of credit, and the laws of the
State of Texas, including, without limitation, Article 5069-IH, Title 79,
Revised Civil Statutes of Texas, 1925, as amended ("Art. IH"), if applicable,
and if Art. IH is not applicable, Article 5069-ID, Title 79, Revised Civil
Statutes, 1925, as amended ("Art. ID"), and any other statute of the State of
Texas now or at any time hereafter prescribing maximum rates of interest on
loans and extensions of credit; provided that the parties hereto agree that the
provisions of Chapter 346 of the Texas Finance Code, as amended, shall not apply
to Advances, this Agreement, the Notes or any other Loan Documents.
"Applicable LIBOR Rate Margin" means the following per annum
percentages, applicable in the following situations:
<TABLE>
<S> <C>
Applicability
(a) Initial Pricing Period 2.250%
(b) Subsequent Pricing Period
(1) The Leverage Ratio is greater than or 2.500%
equal to 4.50 to 1
(2) The Leverage Ratio is less than 4.50 to 1 2.250%
but greater than or equal to 4.00 to 1
(3) The Leverage Ratio is less than 4.00 to 1 2.000%
but greater than or equal to 3.50 to 1
</TABLE>
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<PAGE> 12
<TABLE>
<S> <C>
(4) The Leverage Ratio is less than 3.50 to 1 1.750%
but greater than or equal to 3.00 to 1
(5) The Leverage Ratio is less than 3.00 to 1 1.500%
</TABLE>
During the Subsequent Pricing Period, the Applicable LIBOR Rate Margin payable
by the Borrower on the LIBOR Advances outstanding hereunder shall be subject to
reduction or increase, as applicable and as set forth in the table above, on a
quarterly basis according to the performance of the Borrower as tested by using
the Leverage Ratio calculated as of the end of each fiscal quarter; provided,
that each adjustment in the Applicable LIBOR Rate Margin shall be effective on
the date which is two Business Days following the date of receipt of the
financial statements required to be delivered pursuant to Section 6.1 or 6.2
hereof, as applicable, and the related Compliance Certificate. If such financial
statements and Compliance Certificate are not received by the Administrative
Agent by the date required, the Applicable LIBOR Rate Margin shall be determined
as if the Leverage Ratio is greater than or equal to 4.50 to 1 until such time
as such financial statements and Compliance Certificate are received.
"Applicable Specified Percentage" means the Revolving Credit Specified
Percentage, the Term Loan Specified Percentage or the Total Specified
Percentage, as applicable in the context used.
"Assignees" means any assignee of a Lender pursuant to an Assignment
Agreement and shall have the meaning ascribed thereto in Section 11.6 hereof.
"Assignment Agreement" has the meaning specified in Section 11.6 hereof
and shall be in substantially the form of Exhibit F hereto.
"Authorized Signatory" means such senior personnel of the Borrower as
may be duly authorized and designated in writing by the Borrower to execute
documents, agreements and instruments on behalf of the Borrower, and to request
Advances and Letters of Credit hereunder.
"Base Rate Advance" means any Advance bearing interest at the Base Rate
Basis.
"Base Rate Basis" means, for any day, a per annum interest rate equal
to the higher of (a) the sum of (i) 0.50% plus (ii) the Federal Funds Rate on
such day plus (iii) the Applicable Base Rate Margin or (b) the sum of (i) the
Prime Rate on such day plus (ii) the Applicable Base Rate Margin. The Base Rate
Basis shall be adjusted automatically without notice as of the opening of
business on the effective date of each change in the Prime Rate or Federal Funds
Rate, as applicable, to account for such change.
- 5 -
<PAGE> 13
"Basle Accord" means the proposals for risk-based capital framework
described by the Basle Committee on Banking Regulations and Supervisory
Practices in its paper entitled "International Convergence of Capital Management
and Capital Standards" dated July 1988, as amended, modified, and supplemented
and in effect from time to time or any replacement thereof.
"Borrower's Audited Financial Statements" has the meaning specified in
Section 4.1(j)(i) hereto.
"Borrower's Unaudited Financial Statements" has the meaning specified
in Section 4.1(j)(ii) hereto.
"Borrowing Base" means, at the time in question, an amount equal to the
sum of (a) 85% of Eligible Accounts Receivable plus (b) 55% of Eligible
Inventory.
"Business Day" means a day on which commercial banks are open (a) for
the transaction of business in Dallas, Texas, and (b) with respect to any LIBOR
Advance, for the transaction of international business (including dealings in
U.S. Dollar deposits) in London, England.
"Capital Expenditures" means, for any period, expenditures made by the
Borrower and its Subsidiaries to acquire or construct fixed assets, plant and
equipment (including renewals, improvements and replacements during such period
and the aggregate amount of items leased or acquired under Capitalized Lease
Obligations at the cost of the item) computed in accordance with GAAP,
consistently applied.
"Capital Stock" means, as to any Person, the equity interests in such
Person, including, without limitation, the shares of each class of capital stock
in any Person that is a corporation, and each class of partnership interest
(including, without limitation, general, limited and preference units) in any
Person that is a partnership, and each class of member interest in any Person
that is a limited liability company.
"Capitalized Lease Obligations" means that portion of any obligation of
the Borrower or any of its Subsidiaries as lessee under a lease which at the
time would be required to be capitalized on a balance sheet of the Borrower or
such Subsidiary prepared in accordance with GAAP.
"Cash and Cash Equivalents" means with respect to the Borrower and each
of its Subsidiaries (a) cash, (b) securities issued or directly and fully
guaranteed or insured by the United States Government or any agency or
instrumentality thereof having maturities of not more than six months from the
date of acquisition, (c) certificates of deposit and eurodollar time deposits
with maturities of six months or less from the date of acquisition, bankers'
acceptances with maturities not exceeding six months and overnight bank
deposits, in each case with any Lender or with any domestic commercial bank
having capital and surplus in excess of $500,000,000, (d) repurchase obligations
with a term of not more than seven days for underlying securities of the types
described in clauses (b) and (c) entered into with any financial institution
meeting the qualifications specified in
- 6 -
<PAGE> 14
clause (c) above, (e) commercial paper issued by any Lender or the parent
corporation of any Lender, and commercial paper rated A-1 or the equivalent
thereof by Standard & Poor's Ratings Group, a Division of McGraw-Hill, Inc., a
New York corporation, or P-1 or the equivalent thereof by Moody's Investors
Service, Inc., and in each case maturing within six months after the date of
acquisition, and (f) a readily redeemable "money market mutual fund" advised by
a bank described in clause (iii) hereof, or an investment advisor registered
under Section 203 of the Investment Advisors Act of 1940, that has and maintains
an investment policy limiting its investments primarily to instruments of the
types described in clauses (a) through (e) hereof and having on the date of such
Investment total assets of at least $200,000,000.00.
"Change of Control" means the occurrence of any of the following events
after the Agreement Date: (a) any Person (other than Sam L. Leopold) or any
Persons acting together which would constitute a "group" (a "Group") for
purposes of Section 13(d) of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), or any successor provision thereto, shall beneficially own
(as defined in Rule 13d-3 of the Securities and Exchange Commission under the
Exchange Act or any successor provision thereto) 50% or more of the aggregate
Voting Power of the Borrower; (b) individuals who constituted the Board of
Directors of the Borrower on the Agreement Date (together with any new directors
whose election by such Board of Directors or whose nomination for election by
the shareholders of the Borrower was approved by a vote of a majority of the
directors of the Borrower then still in office who were either directors on the
Agreement Date or whose election or nomination for election was previously so
approved) shall cease for any reason to constitute a majority of the Board of
Directors of the Borrower then in office; or (c) any "Change of Control",
"Change in Control" or similar event or circumstance, however defined or
designated, under any agreement or document governing any Subordinated Debt.
"Code" means the Internal Revenue Code of 1986, as amended.
"Collateral" means any collateral hereafter granted by any Person to
the Administrative Agent to secure the Obligations.
"Collateral Document" means any document under which Collateral is
granted and any document related thereto.
"Commitments" means, collectively, the Revolving Credit Commitment and
the Term Loan Commitment, as reduced from time to time in the case of the
Revolving Credit Commitment pursuant to Section 2.6 hereof.
"Compliance Certificate" means a certificate, signed by an Authorized
Signatory, in substantially the form of Exhibit E, appropriately completed.
"Control" or "Controlled By" or "Under Common Control" means
possession, directly or indirectly, of power to direct or cause the direction of
management or policies (whether through ownership of voting securities, by
contract or otherwise); provided, however, that in any event any
- 7 -
<PAGE> 15
Person which beneficially owns, directly or indirectly, 10% or more (in number
of votes) of the securities having ordinary voting power for the election of
directors of a corporation shall be conclusively presumed to control such
corporation.
"Controlled Group" means as of the applicable date, as to any Person
not an individual, all members of a controlled group of corporations and all
trades or businesses (whether or not incorporated) which are under common
control with such Person and which, together with such Person, are treated as a
single employer under Section 414(b), (c) or (m) of the Code; provided, however,
that the Subsidiaries of the Borrower shall be deemed to be members of the
Borrower's Controlled Group.
"Credit Agricole Credit Agreement" means that certain Credit Agreement,
dated as of December 10, 1997, among the Borrower, the lending institutions
listed therein, and Credit Agricole Indosuez, New York Branch, as Agent, as
amended, modified or supplemented.
"Debtor Relief Laws" means any applicable liquidation, conservatorship,
bankruptcy, moratorium, rearrangement, insolvency, reorganization or similar
debtor relief Laws affecting the rights of creditors generally from time to time
in effect.
"Deed of Trust" means any fee simple Deed of Trust or Mortgage, as
applicable, relating to the real property and improvements owned by the Borrower
and each Domestic Subsidiary of the Borrower, in substantially the form set
forth in Exhibit I.
"Default" means an Event of Default and/or any of the events specified
in Section 8.1, regardless of whether there shall have occurred any passage of
time or giving of notice that would be necessary in order to constitute such
event an Event of Default.
"Default Rate" means a simple per annum interest rate equal to (a) with
respect to Base Rate Advances the lesser of (i) the Highest Lawful Rate or (ii)
the Base Rate Basis then in effect plus 2.00% or (b) with respect to LIBOR
Advances, the lesser of (i) the Highest Lawful Rate or (ii) the LIBOR Basis then
in effect plus 2.00%.
"Determining Lenders" means, on any date of determination, any
combination of Lenders whose Total Specified Percentages aggregate more than
50%; provided, however, in the event that each of the Commitments have been
terminated, "Determining Lenders" means, on any date of determination, any
combination of Lenders having more than 50% of the Advances then outstanding.
"Dividend" means, as to any Person, (a) any declaration or payment of
any dividend (other than a stock dividend) on, or the making of any distribution
on account of, any Capital Stocks of such Person and (b) any purchase,
redemption, or other acquisition or retirement for value of any Capital Stocks
of such Person.
"Dollar" or "$" means the lawful currency of the United States of
America.
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<PAGE> 16
"Domestic Subsidiary" means any Subsidiary of the Borrower other than a
Foreign Subsidiary.
"EBITDA" means, for any period, determined in accordance with GAAP on a
consolidated basis for the Borrower and its Subsidiaries, the sum of (a) Pretax
Net Income (excluding therefrom, to the extent included in determining Pretax
Net Income, any items of extraordinary gain, including net gains on the sale of
assets other than asset sales in the ordinary course of business, and adding
thereto, to the extent included in determining Pretax Net Income, any items of
extraordinary loss, including net losses on the sale of assets other than asset
sales in the ordinary course of business), plus (b) interest expense (including
interest expense pursuant to Capitalized Lease Obligations), plus (c) to the
extent included in determining Pretax Net Income, depreciation, amortization and
other non-cash charges, plus (d) to the extent included in determining Pretax
Net Income, transaction fees and related expenses incurred in connection with a
business combination accounted for as a pooling of interest transaction for
accounting purposes.
"Eligible Accounts Receivable" means, as at any applicable date of
determination, the aggregate face amount of the Accounts of the Obligors
included in clause (a) of the definition of Account hereunder (excluding any
Accounts set forth in clauses (b) through (f) of such definition), without
duplication, in each case less (without duplication) the aggregate amount of all
reserves, limits and deductions with respect to such Accounts set forth below
and less the aggregate amount of all returns, discounts, claims, rebates,
offsets, credits, charges (including warehouseman's charges) and allowances of
any nature with respect to such Accounts (whether issued, owing, granted or
outstanding). Unless otherwise approved in writing by the Administrative Agent
in its sole discretion, no individual Account shall be deemed to be an Eligible
Account Receivable if:
(a) an Obligor does not have legal and valid title to the
Account; or
(b) the Account is not the valid, binding and legally
enforceable obligation of the account debtor subject, as to
enforceability, only to (i) Debtor Relief Laws and (ii) judicial
discretion in connection with the remedy of specific performance and
other equitable remedies; or
(c) the Account arises out of a sale made by an Obligor to an
Affiliate of such Obligor; or
(d) that portion of any Account that is unpaid more than 90
days after the original invoice date, with respect to Accounts the
invoice for which provides that payment is due in 60 days or less from
the date of such invoice; or
(e) the Account is unpaid more than 30 days after the original
payment due date, with respect to Accounts the invoice for which
provides that payment is due more than 60 days from the date of such
invoice; provided, however, that the aggregate percentage of all
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<PAGE> 17
invoices providing for payment more than 60 days from the date of the
invoice that may constitute Eligible Accounts Receivable shall not
exceed 20% at any one time; or
(f) such Account, when aggregated with all other Accounts of
the same account debtor (or any Affiliate thereof), exceeds twenty
percent in face value of all Accounts of the Obligors then outstanding,
to the extent of such excess; or
(g) (i) the account debtor for such Account is also a creditor
of an Obligor, to the extent of the amount owed by such Obligor to the
account debtor, (ii) the Account is subject to any claim on the part of
the account debtor disputing liability under such Account in whole or
in part, to the extent of the amount of such dispute or (iii) the
Account otherwise is or is reasonably likely to become subject to any
right of setoff or any counterclaim, claim or defense by the account
debtor, to the extent of the amount of such setoff or counterclaim,
claim or defense; or
(h) the account debtor for such Account has commenced a
voluntary case under the federal bankruptcy laws, as now constituted or
hereafter amended, or made an assignment for the benefit of creditors
or if a decree or order for relief has been entered by a court having
jurisdiction in the premises in respect of the account debtor in an
involuntary case under the federal bankruptcy laws, as now constituted
or hereafter amended, or if any other petition or other application for
relief under the federal bankruptcy laws has been filed by or against
the account debtor, or if the account debtor has failed, suspended
business, ceased to be solvent, or consented to or suffered a receiver,
trustee, liquidator or custodian to be appointed for it or for all or a
significant portion of its assets or affairs; or
(i) the Administrative Agent does not have a valid and
perfected first priority security interest in such Account (subject
only to a tax lien being contested in good faith and by appropriate
proceedings and permitted by Section 5.6 hereof); or
(j) the sale to the account debtor for such Account is on a
consignment, sale on approval, guaranteed sale or sale-and-return basis
or pursuant to any written agreement requiring repurchase or return; or
(k) such Account is from an account debtor (or any Affiliate
thereof) and fifty percent (50%) or more, in face amount, of other
Accounts from either such account debtor or any Affiliate thereof are
due or unpaid for more than 90 days after the original invoice date; or
(l) fifty percent (50%) or more, in face amount, of other
Accounts from the same account debtor for such Account are not deemed
Eligible Accounts Receivable hereunder; or
(m) the account debtor for such Account is a foreign
government or any agency, department or institution thereof; or
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<PAGE> 18
(n) such Account is an Account a security interest in which
would be subject to the Federal Assignment of Claims Act of 1940, as
amended (31 U.S.C. Section 3727 et seq.), unless the Obligor has
assigned the Account to the Administrative Agent in compliance with the
provisions of such Act; or
(o) the account debtor for such Account is outside the United
States or incorporated in or conducting substantially all of its
business in any jurisdiction located outside the United States, unless
(i) the sale is on letter of credit or sight draft, guaranty or
acceptance terms, in each case acceptable to the Administrative Agent
or (ii) such Account is reasonably acceptable to the Administrative
Agent; or
(p) the Administrative Agent determines in good faith in
accordance with its internal credit policies that (i) collection of the
account is insecure or (ii) such Account may not be paid by reason of
the account debtor's financial inability to pay; provided, however,
that any Account referred to in this clause (p) shall not become
ineligible until the Administrative Agent shall have given the Obligor
three Business Days' advance notice of such determination; or
(q) the goods giving rise to such Account have not been
shipped or the services giving rise to such Account have not been
performed by an Obligor or the Account otherwise does not represent a
final sale; or
(r) such Account does not comply in all material respects with
all applicable legal requirements, including, where applicable, the
Federal Consumer Credit Protection Act, the Federal Truth in Lending
Act and Regulation Z of the Board of Governors of the Federal Reserve
System, in each case as amended.
In addition to the foregoing, Eligible Accounts Receivable includes
such Accounts as an Obligor requests and that the Administrative Agent approves
in advance, in writing and in its sole discretion (or if the aggregate face
amount to be approved exceeds $1,000,00 at any one time, the approval of the
Determining Lenders has been obtained in writing).
"Eligible Assignee" means (i) a Lender, (ii) an Affiliate of a Lender,
and (iii) any other Person approved by the Administrative Agent (such approval
not to be unreasonably withheld) and, unless an Event of Default has occurred
and is continuing at the time any assignment is effected in accordance with
Section 11.6(d) hereof, the Borrower, such approval not to be unreasonably
withheld or delayed by the Borrower and such approval to be deemed given by the
Borrower if no objection is received by the assigning Lender and the
Administrative Agent from the Borrower within two Business Days after notice of
such proposed assignment has been provided by the assigning Lender to the
Borrower; provided, however, that neither the Borrower nor an Affiliate of the
Borrower shall qualify as an Eligible Assignee.
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<PAGE> 19
"Eligible Inventory" means (A) the gross amount of Inventory of the
Obligors, valued at the lower of cost (on a FIFO basis) or market, which (i) is
owned solely by an Obligor and with respect to which such Obligor has good,
valid and marketable title; (ii) is stored on property that is either (a) owned
or leased by an Obligor, provided that with respect to any leased property, from
and after the sixtieth (60th) day following the Agreement Date the landlord has
executed and delivered a Landlord's Waiver, or (b) owned or leased by a
warehouseman that has contracted (including purchase orders) with an Obligor to
store Inventory on such warehouseman's property (provided that with respect to
Inventory stored on property owned or leased by a warehouseman, from and after
the sixtieth (60th) day following the Agreement Date the warehouseman has
executed and delivered to the Administrative Agent an agreement reasonably
satisfactory to the Administrative Agent where by the warehouseman acknowledges
the priority of the Lien of the Administrative Agent); (iii) is subject to a
valid, enforceable and first priority Lien in favor of the Administrative Agent
subject only to a tax lien being contested in good faith and by appropriate
proceedings and permitted by Section 5.6 hereof; (iv) is located in the United
States or the United Kingdom provided, that any such Inventory located in the
United Kingdom (x) is located in a warehouse leased by the Borrower or its
Subsidiaries, (y) is subject to a valid, enforceable and first priority security
interest reasonably acceptable to counsel for the Administrative Agent and (z)
does not exceed $1,500,000 in value at any one time; and (v) is not, in the
reasonable judgment of the Administrative Agent, obsolete or slow moving in
relation to customary industry practice, and which otherwise conforms to the
requirements for eligibility contained herein; (B) less the amount of any goods
returned or rejected by the Obligors' customers and goods in transit to third
parties (other than to the Obligors' agents or warehousemen that comply with
clause (A)(ii)(b) above); and (C) less the amount of any reserves for special
order goods or otherwise. In addition to the foregoing, Eligible Inventory shall
include such items of the Obligors' Inventory as the Borrower shall request and
that the Administrative Agent approves in advance, in writing and in its sole
discretion (or if the aggregate amount to be approved exceeds $1,000,000 at any
one time, the approval of the Determining Lenders has been obtained).
"Existing Letters of Credit" means those Letters of Credit outstanding
on the Agreement Date, as described on Schedule 1.1(c) hereto.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended from time to time, and any regulation promulgated thereunder.
"ERISA Event" means, with respect to the Borrower and its Subsidiaries,
(a) a Reportable Event (other than a Reportable Event not subject to the
provision for 30-day notice to the PBGC pursuant to regulations issued under
Section 4043 of ERISA), (b) the withdrawal of any such Person or any member of
its Controlled Group from a Plan subject to Title IV of ERISA during a plan year
in which it was a "substantial employer" as defined in Section 4001(a)(2) of
ERISA, (c) the filing of a notice of intent to terminate under Section 4041(c)
of ERISA, (d) the institution of proceedings to terminate a Plan by the PBGC,
(e) the failure to make required contributions which could result in the
imposition of a lien under Section 412 of the Code or Section 302 of ERISA, or
(f) any other event or condition which might reasonably be expected to
constitute grounds under Section 4042
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<PAGE> 20
of ERISA for the termination of, or the appointment of a trustee to administer,
any Plan or the imposition of any liability under Title IV of ERISA other than
PBGC premiums due but not delinquent under Section 4007 of ERISA.
"European Touch Acquisition" means the acquisition by the Borrower
and/or certain of its Subsidiaries of all of the issued and outstanding Capital
Stock of European Touch, LTD. II, a Wisconsin corporation, European Touch Co.,
Incorporated., a Wisconsin corporation, Beauty Products Inc., a Wisconsin
corporation, and Cosmetics International Inc., a Wisconsin corporation
(collectively, the "European Touch Companies").
"European Touch Companies Audited Financial Statements" has the meaning
specified in Section 4.1(j)(iii) hereto.
"European Touch Companies Unaudited Financial Statements" has the
meaning specified in Section 4.1(j)(iv) hereto.
"European Touch Transaction" means, collectively, (a) the European
Touch Acquisition, (b) the issuance by the Borrower of the Senior Subordinated
Notes, (c) the refinancing of certain existing Indebtedness of the Borrower,
including but limited to all Indebtedness in respect of the Credit Agricole
Credit Agreement.
"European Touch Transaction Documents" means all agreements, documents
and instruments executed in connection with or related to the European Touch
Transaction.
"Event of Default" means any of the events specified in Section 8.1,
provided that any requirement for notice or lapse of time has been satisfied.
"Excluded Matters" has the meaning specified in Section 5.9(a) hereof.
"Federal Funds Rate" means, for any day, the rate per annum equal to
the weighted average of the rates on overnight Federal funds transactions with
members of the Federal Reserve System arranged by Federal funds brokers on such
day, as published by the Federal Reserve Bank of Dallas on the Business Day next
succeeding such day, provided that (a) if such day is not a Business Day, the
Federal Funds Rate for such day shall be such rate on such transactions on the
next preceding Business Day as so published on the next succeeding Business Day,
and (b) if no such rate is so published on such next succeeding Business Day,
the Federal Funds Rate for such day shall be the average of the quotations for
the day for such transactions received by the Administrative Agent from three
Federal funds brokers of recognized standing selected by it.
"Fixed Charges" means, for any date of calculation, calculated for
Borrower and its Subsidiaries on a consolidated basis, the sum of, without
duplication, (a) scheduled principal payments in respect of Indebtedness, plus
(b) cash interest expense (including interest expense pursuant to Capitalized
Lease Obligations).
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<PAGE> 21
"Fixed Charge Coverage Ratio" means the ratio of Pretax Cash Flow to
Fixed Charges, calculated (a) for September 30, 1998, from the day after the
Agreement Date to September 30, 1998, (b) for December 31, 1998, from the day
after the Agreement Date to December 31, 1998, (c) for March 31, 1999, from the
day after the Agreement Date to March 31, 1999, and (d) for each fiscal quarter
thereafter, for the four consecutive fiscal quarters ending on the date of
calculation.
"Foreign Subsidiary" means any Subsidiary of the Borrower which is not
organized under the laws of any state of the United States of America or the
District of Columbia.
"GAAP" means generally accepted accounting principles applied on a
consistent basis, set forth in the opinions and pronouncements of the Accounting
Principles Board of the American Institute of Certified Public Accountants, or
their successors which are applicable in the circumstances as of the date in
question.
"Gena Stock Agreement" means that certain Stock Escrow and Buy-Back
Agreement, dated November 26, 1996 among the Borrower, Arizona Escrow &
Financial Corporation, Don Black, Howard Black, Barbara Black, Robert Black, Don
Cottam, Jim Cottam, and The Cottam Family Partnership.
"General Security Agreement" means the security agreement relating to
all personal property assets of the Borrower and its Domestic Subsidiaries,
substantially in the form of Exhibit C hereto, as amended, modified, renewed,
supplemented or restated from time to time.
"Guarantor" means each direct and indirect Subsidiary of the Borrower,
other than any Foreign Subsidiary.
"Guaranty" or "Guaranteed", means (a) as applied to an obligation of
another Person, (i) a guaranty, direct or indirect, in any manner, of any part
or all of such obligation, and (ii) an agreement, direct or indirect, contingent
or otherwise, the practical effect of which is to assure in any way the payment
or performance (or payment of damages in the event of nonperformance) of any
part or all of such obligation, including, without limiting the foregoing, any
reimbursement obligations with respect to amounts which may be drawn by
beneficiaries of outstanding letters of credit and (b) an agreement, direct or
indirect, contingent or otherwise, to maintain the net worth, working capital,
earnings or other financial performance of another Person; provided, however,
Guaranty does not mean (y) the endorsement of instruments for collection or
deposit in the ordinary course of business and (z) customary indemnities given
in connection with asset sales in the ordinary course of business.
"Highest Lawful Rate" means at the particular time in question the
maximum rate of interest which, under Applicable Law, the Lenders are then
permitted to charge on the Obligations. If the maximum rate of interest which,
under Applicable Law, the Lenders are permitted to charge on the Obligations
shall change after the date hereof, the Highest Lawful Rate shall be
automatically
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<PAGE> 22
increased or decreased, as the case may be, from time to time as of the
effective time of each change in the Highest Lawful Rate without notice to the
Borrower.
"Indebtedness" means, with respect to any Person, without duplication,
(a) all obligations for borrowed money, (b) all obligations evidenced by bonds,
debentures, notes or similar instruments, (c) all obligations under conditional
sale or other title retention agreements relating to property or assets
purchased by such Person, (d) all obligations issued or assumed as the deferred
purchase price of property or services, (e) all obligations secured by any Lien
on any property or asset owned by such Person, whether or not the obligation
secured thereby shall have been assumed, (f) to the extent not otherwise
included, all Capitalized Lease Obligations of such Person, all obligations in
respect of letters of credit, bankers' acceptances and similar instruments, and
all obligations under Interest Hedge Agreements, (g) the principal portion of
all obligations of such Person under any Synthetic Lease, (h) all preferred
stock issued by such Person and required by the terms thereof to be redeemed, or
for which mandatory sinking fund payments are due, by a fixed date, and (i) any
Guaranty of such Person of any obligation of another Person constituting
obligations of a type set forth above.
"Indemnified Matters" has the meaning specified in Section 5.9(a)
hereof.
"Indemnitees" has the meaning specified in Section 5.9(a) hereof.
"Initial Pricing Period" means the period from and including the
Agreement Date to and including the Rate Adjustment Date.
"Intellectual Property" has the meaning specified in Section 4.1(s)
hereof.
"Intellectual Property Security Agreement" means the security agreement
and assignment relating to all intellectual property of the Borrower and its
Domestic Subsidiaries substantially in the form of Exhibit D hereto, as amended,
modified, renewed, supplemented or restated from time to time.
"Interest Hedge Agreements" means any and all agreements, devices or
arrangements designed to protect at least one of the parties thereto from the
fluctuations of interest rates, exchange rates or forward rates applicable to
such party's assets, liabilities or exchange transactions, including, but not
limited to, dollar-denominated or cross-currency interest rate exchange
agreements, forward currency exchange agreements, interest rate cap, swap or
collar protection agreements, and forward rate currency or interest rate
options, as the same may be amended or modified and in effect from time to time,
and any and all cancellations, buy backs, reversals, terminations or assignments
of any of the foregoing.
"Interest Period" means the period beginning on the day any LIBOR
Advance is made and ending one, two, three or six months thereafter (as the
Borrower shall select); provided, however, that all of the foregoing provisions
are subject to the following:
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<PAGE> 23
(i) if any Interest Period would otherwise end on a day which
is not a Business Day, such Interest Period shall be extended to the
next succeeding Business Day, unless, with respect to a LIBOR Advance,
the result of such extension would be to extend such Interest Period
into another calendar month, in which event such Interest Period shall
end on the immediately preceding Business Day;
(ii) any Interest Period with respect to a LIBOR Advance that
begins on the last Business Day of a calendar month (or on a day for
which there is no numerically corresponding day in the calendar month
at the end of such Interest Period) shall end on the last Business Day
of a calendar month;
(iii) the Borrower may not select any Interest Period which
ends after the date of a scheduled principal payment on the Advances
unless, after giving effect to such selection, the aggregate unpaid
principal amount of the LIBOR Advances for which Interest Periods end
after such scheduled principal payment shall be equal to or less than
the principal amount to which the Term Loan Advances are required to be
reduced after such scheduled principal payment is made;
(iv) the Borrower may not select any Interest Period in
respect of LIBOR Advances having an aggregate amount less than
$1,000,000; and
(v) there shall be outstanding at any one time no more than
eight Interest Periods in the aggregate.
"Investment" means any acquisition of all or substantially all assets
of any Person, or any direct or indirect purchase or other acquisition of, or
beneficial interest in, capital stock or other securities of any other Person,
or any direct or indirect loan, advance (other than loans or advances to
employees for moving and travel expenses, drawing accounts and similar
expenditures in the ordinary course of business) or capital contribution to, or
investment in any other Person, including without limitation the purchase of
accounts receivable of any other Person that are not current assets or do not
arise in the ordinary course of business.
"Issuing Bank" means NationsBank, N.A., a national banking association,
in its capacity as issuer of the Letters of Credit.
"Landlord's Waiver" has the meaning specified in Section 3.1(m) hereof.
"Law" means any statute, law, ordinance, regulation, rule, order, writ,
injunction, or decree of any Tribunal.
"Lender" means each financial institution shown on the signature pages
hereof so long as such financial institution maintains a portion of the
Commitments or is owed any part of the
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<PAGE> 24
Obligations (including the Administrative Agent in its individual capacity), and
each Eligible Assignee that hereafter becomes a party hereto pursuant to Section
11.6 hereof, subject to the limitations set forth therein.
"L/C Related Documents" has the meaning specified in Section 2.15(e)
hereof.
"Letters of Credit" has the meaning specified in Section 2.15(a)
hereof, and shall include Existing Letters of Credit.
"Letter of Credit Agreement" has the meaning specified in Section
2.15(b) hereof.
"Letter of Credit Facility" has the meaning specified in Section
2.15(a) hereof.
"Leverage Ratio" means, for any date of calculation, the ratio of (a)
an amount equal to the remainder of (i) Total Debt as of such date minus (ii)
unrestricted cash balances of the Borrower and its Subsidiaries in excess of
$1,000,000 as of such date to (b) Adjusted EBITDA calculated for the four
consecutive fiscal quarters immediately preceding the date of calculation.
"LIBOR Advance" means an Advance which the Borrower requests to be made
as a LIBOR Advance or which is reborrowed as a LIBOR Advance, in accordance with
the provisions of Section 2.2 hereof.
"LIBOR Basis" means a per annum interest rate equal to the lesser of
(a) the Highest Lawful Rate, or (b) the sum of the Adjusted LIBOR Rate plus the
Applicable LIBOR Rate Margin.
"LIBOR Lending Office" means, with respect to a Lender, the office
designated as its LIBOR Lending Office on Schedule 1 attached hereto, and such
other office of the Lender or any of its Affiliates hereafter designated by
notice to the Borrower and the Administrative Agent.
"LIBOR Rate" means, for any LIBOR Advance for any Interest Period
therefor, the rate per annum (rounded upwards, if necessary, to the nearest
1/100 of 1%) appearing on Telerate Page 3750 (or any successor page) as the
London interbank offered rate for deposits in Dollars at approximately 11:00
a.m. (London time) two Business Days prior to the first day of such Interest
Period for a term comparable to such Interest Period. If for any reason such
rate is not available, the term "LIBOR Rate" shall mean, for any LIBOR Advance
for any Interest Period therefor, the rate per annum (rounded upwards, if
necessary, to the nearest 1/100 of 1%) appearing on Reuters Screen LIBO Page as
the London interbank offered rate for deposits in Dollars at approximately 11:00
a.m. (London time) two Business Days prior to the first day of such Interest
Period for a term comparable to such Interest Period; provided, however, if more
than one rate is specified on Reuters Screen LIBO Page, the applicable rate
shall be the arithmetic mean of all such rates (rounded upwards, if necessary,
to the nearest 1/100 of 1%).
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<PAGE> 25
"Lien" means, with respect to any property, any mortgage, lien, pledge,
collateral assignment, hypothecation, charge, security interest, title retention
agreement, levy, execution, seizure, attachment, garnishment or other similar
encumbrance of any kind in respect of such property, whether or not choate,
vested or perfected.
"Litigation" means any proceeding, claim, lawsuit, arbitration, and/or
investigation by or before any Tribunal, including, without limitation,
proceedings, claims, lawsuits, and/or investigations under or pursuant to any
environmental, occupational, safety and health, antitrust, unfair competition,
securities, Tax or other Law, or under or pursuant to any contract, agreement or
other instrument.
"Loan Documents" means this Agreement, the Notes, the Security
Agreements, the Deeds of Trust, any other Collateral Document, any Subsidiary
Guaranty, the L/C Related Documents, the Underwriting Fee Letter, the
Administrative Agent Fee Letter, any Interest Hedge Agreements entered into with
any Lender or any Affiliate of any Lender, and any other document or agreement
executed or delivered from time to time by the Borrower, any of its Subsidiaries
or any other Person in connection herewith or as security for the Obligations.
"Material Adverse Effect" means any act or circumstance or event that
(a) could reasonably be expected to be material and adverse to the business,
financial condition or results of operations of the Borrower and its
Subsidiaries taken as a whole, or (b) in any manner whatsoever does or could
reasonably be expected to materially and adversely affect (i) the validity or
enforceability of any Loan Document, (ii) the ability of the Borrower and its
Subsidiaries taken as a whole to perform their respective Obligations under the
Loan Documents, or (iii) the rights and remedies of the Lenders or the
Administrative Agent under any of the Loan Documents.
"Multiemployer Plan" means, as to any Person, at any time, a
"multiemployer plan" within the meaning of Section 4001(a)(3) of ERISA and to
which such Person or any member of its Controlled Group is making, or is
obligated to make contributions or has made, or been obligated to make,
contributions.
"NationsBank" means NationsBank, N.A., a national banking association,
in its capacity as a Lender.
"Necessary Authorization" means any right, franchise, license, permit,
consent, approval or authorization from, or any filing or registration with, any
Tribunal or any Person necessary or appropriate to enable the Borrower or any of
its Subsidiaries to maintain and operate its business and properties.
"Net Cash Proceeds" means, with respect to any sale, lease, transfer or
other disposition of any asset by any Person, the amount of cash received by
such Person in connection with such transaction (including cash proceeds of any
property received in consideration of any such sale, lease, transfer or other
disposition) after deducting therefrom the aggregate, without duplication, of
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<PAGE> 26
the following amounts to the extent properly attributable to such transaction or
to the asset that is the subject thereof: (i) reasonable brokerage commissions,
legal fees, finder's fees, financial advisory fees, accounting fees,
underwriting fees, investment banking fees and other similar commissions and
fees, and expenses, in each case, to the extent paid or payable by such Person;
(ii) filing, recording or registration fees or charges or similar fees or
charges paid by such Person; (iii) taxes paid or payable by such Person or any
shareholder, partner or member of such Person to governmental taxing authorities
as a result of such sale or other disposition; and (iv) payment of the
outstanding principal amount of, premium or penalty, if any, and interest on any
Indebtedness (other than the Obligations) that is secured by a Lien on the asset
in question and that is required to be repaid under the terms thereof as a
result of such asset sale.
"Net Income" means net earnings (or deficit) after taxes of the
Borrower and its Subsidiaries, on a consolidated basis, determined in accordance
with GAAP.
"Net Worth" means, for the Borrower and its Subsidiaries, on a
consolidated basis, determined in accordance with GAAP, total stockholders'
equity.
"Notes" means, collectively, the Revolving Credit Notes and the Term
Loan Notes.
"Notice of Borrowing" has the meaning specified in Section 2.2(a)
hereof.
"Notice of Continuation/Conversion" has the meaning specified in
Section 2.2(c) hereof.
"Notice of Issuance" has the meaning specified in Section 2.15(b)
hereof.
"Obligations" means (a) all obligations of any nature (whether matured
or unmatured, fixed or contingent, including the Reimbursement Obligations) of
the Borrower or of its Subsidiaries to any Lender, the Administrative Agent or
any Affiliate of any Lender under any of the Loan Documents as they may be
amended from time to time, and (b) all obligations of the Borrower or any of its
Subsidiaries for losses, damages, expenses or any other liabilities of any kind
that any Lender may suffer by reason of a breach by the Borrower or any of its
Subsidiaries of any obligation, covenant or undertaking with respect to any Loan
Document payable by the Borrower or any of its Subsidiaries under any Loan
Document.
"Obligor" means the Borrower and each Guarantor.
"Operating Lease" means any operating lease, as defined in the
Financial Accounting Standard Board Statement of Financial Accounting Standards
No. 13, dated November, 1976 or otherwise in accordance with GAAP.
"Participant" has the meaning specified in Section 11.6(c) hereof.
"Participation" has the meaning specified in Section 11.6(c) hereof.
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"Payment Date" means the last day of the Interest Period for any LIBOR
Advance.
"PBGC" means the Pension Benefit Guaranty Corporation or any entity
succeeding to any or all of its functions under ERISA.
"Permitted Issuance" means (a) the issuance by the Borrower of shares
of its Capital Stock in connection with an Acquisition and (b) the issuance by
the Borrower of shares of its Capital Stock in connection with employee benefit
plans.
"Permitted Liens" means, as applied to any Person:
(a) Any Lien in favor of the Lenders to secure the Obligations
hereunder;
(b) Liens for taxes, assessments, governmental charges, levies or
claims that are not yet delinquent or that are being diligently contested in
good faith by appropriate proceedings in accordance with Section 5.6 hereof and
for which adequate reserves shall have been set aside on such Person's books,
but only so long as no foreclosure, restraint, sale or similar proceedings have
been commenced with respect thereto;
(c) Liens of carriers, warehousemen, mechanics, landlord's, laborers
and materialmen and other similar Liens incurred in the ordinary course of
business for sums not yet due or being contested in good faith, if such reserve
or appropriate provision, if any, as shall be required by GAAP shall have been
made therefor;
(d) Liens (other than any Lien imposed by ERISA) incurred or deposits
made in the ordinary course of business in connection with worker's
compensation, unemployment insurance or similar legislation or to secure the
performance of bids, tenders, leases, trade contracts, statutory obligations,
surety and appeal bonds, performance bonds and other obligations of a like
nature (other than Indebtedness) incurred in the ordinary course of business;
(e) Easements, right-of-way, restrictions and other similar
encumbrances on the use of real property which do not interfere in any material
respect with the ordinary conduct of the business of such Person and do not
materially impair the value of such real property;
(f) Liens created to secure the purchase price of assets acquired (or
existing on property at the time such property is acquired) by such Person or
created to secure Indebtedness permitted by Section 7.1(c) or 7.1(h) hereof,
which is incurred solely for the purpose of financing the acquisition of such
assets and incurred at the time of acquisition or which exists against such
assets at the time of acquisition thereof, so long as each such Lien shall at
all times be confined solely to the asset or assets so acquired (and proceeds
thereof), and refinancings thereof so long as any such Lien remains solely on
the asset or assets acquired (and the proceeds thereof) and the amount of
Indebtedness related thereto is not increased;
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<PAGE> 28
(g) Any Liens which are described on Schedule 7.2 hereto, and Liens
resulting from the refinancing of the related Indebtedness, provided that the
Indebtedness secured thereby shall not be increased and the Liens shall not
cover additional assets of the Borrower;
(h) Liens arising from filing Uniform Commercial Code financing
statements for precautionary purposes relating solely to true leases of personal
property permitted by this Agreement under which the Borrower or any of its
Subsidiaries is a lessee;
(i) Any zoning or similar law or right reserved to or vested in any
Tribunal to control or regulate the use of any real property;
(j) Any other title or survey exception with respect to real property
assets disclosed by any preliminary title report, title commitment report,
survey or other search of title provided to the Administrative Agent in
accordance with this Agreement unless reasonably disapproved by the
Administrative Agent prior to the Agreement Date;
(k) Any leases or subleases (i) currently in effect, (ii) entered into
in the ordinary course of business or (iii) entered into in compliance with the
Loan Documents;
(l) Any replacements or renewals of Liens (but no increases in the
Indebtedness secured thereby) permitted by clauses (f), (g) and (h) hereof;
(m) Liens in connection with any attachment or judgment (including
judgment or appeal bonds) not in excess of $500,000 individually or in the
aggregate for the Borrower and its Subsidiaries (exclusive of any amount which a
credit-worthy insurance company has acknowledged coverage) unless the judgment
it secures shall within 60 days after the entry thereof, not have been
discharged or execution thereof not stayed pending appeal, or shall not have
been discharged within 30 days after the expiration of such stay; and
(n) Liens granted to State Street Bank and Trust Company of California,
N.A., or any successor trustee, pursuant to Section 7.07 of the Indenture, dated
as of June 23, 1998, by and among the Borrower, the existing Domestic
Subsidiaries of the Borrower, and State Street Bank and Trust Company of
California, N.A.
"Person" means an individual, corporation, partnership, limited
liability company, trust or unincorporated organization, or a government or any
agency or political subdivision thereof.
"Plan" means an employee benefit plan as defined in Section 3(3) of
ERISA (including a Multiemployer Plan) pursuant to which any employees of the
Borrower, its Subsidiaries or any member of their Controlled Group participate.
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<PAGE> 29
"Pretax Cash Flow" means, for any date of calculation, calculated for
the Borrower and its Subsidiaries on a consolidated basis, an amount equal to
the sum of (a) Adjusted EBITDA, minus (b) Capital Expenditures.
"Pretax Net Income" means net profit (or loss) before taxes of the
Borrower and its Subsidiaries, on a consolidated basis, determined in accordance
with GAAP.
"Prime Rate" means, at any time, the prime interest rate announced or
published by the Reference Lender from time to time as its reference rate for
the determination of interest rates for loans of varying maturities in United
States dollars to United States residents of varying degrees of creditworthiness
and being quoted at such time by the Reference Lender as its "prime rate;" it
being understood that such rate may not be the lowest rate of interest charged
by the Reference Lender.
"Quarterly Date" means the last day of each March, June, September and
December, beginning September 30, 1998.
"Rate Adjustment Date" means the date which is two Business Days
following the date that the Lenders receive the financial statements for the
fiscal quarter ending December 31, 1998, required to be delivered pursuant to
Section 6.3 hereof.
"Reference Lender" means NationsBank; provided that if NationsBank's
commitments shall terminate and it shall have no Advances and Letters of Credit
outstanding hereunder, NationsBank shall cease to be the Reference Lender, and
the Administrative Agent (after consultation with the Borrower) shall, with
notice to the Borrower and the Lenders, designate another Lender as the
Reference Lender.
"Reimbursement Obligations" means, in respect of any Letter of Credit
as at any date of determination, the sum of (a) the maximum aggregate amount
which is then available to be drawn under such Letter of Credit plus (b) the
aggregate amount of all drawings under such Letter of Credit not theretofore
reimbursed by the Borrower or converted to an Advance.
"Release Date" means the date on which the Notes have been paid, all
other Obligations due and owing have been paid and performed in full, and the
Commitments have been terminated.
"Reportable Event" has the meaning set forth in Section 4043(c) of
ERISA.
"Reserve Requirement" means, at any time, the maximum rate at which
reserves (including, without limitation, any marginal, special, supplemental or
emergency reserves) are required to be maintained under regulations issued from
time to time by the Board of Governors of the Federal Reserve System (or any
successor) by member banks of the Federal Reserve System against "Eurocurrency
liabilities" (as such term is used in Regulation D). Without limiting the effect
of the foregoing, the Reserve Requirement shall reflect any other reserves
required to be maintained by such member banks with respect to (i) any category
of liabilities which includes deposits by reference to which the Adjusted LIBOR
Rate (as the case may be) is to be determined, or (ii) any
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<PAGE> 30
category of extensions of credit or other assets which include LIBOR Advances.
The Adjusted LIBOR Rate shall be adjusted automatically on and as of the
effective date of any change in the Reserve Requirement.
"Responsible Officer" means, of any Person, the President, chief
operating officer, chief executive officer, chief financial officer, treasurer
or any other executive officer of such Person.
"Restricted Payments" means, collectively, (a) Dividends, (b) any
payment or prepayment of principal, premium, penalty or interest on any
Subordinated Debt of the Borrower or any of its Subsidiaries or any defeasance,
redemption, purchase, repurchase or other acquisition or retirement for value,
in whole or in part, of any Subordinated Debt (including, without limitation,
the setting aside of assets or the deposit of funds therefor), (c) any payment
of any executive compensation and related benefits or any management,
consulting, advisory or similar fees to any Affiliate and (d) any payment or
prepayment of any amounts pursuant to the Gena Stock Agreement.
"Revolving Commitment Fee" has the meaning specified in Section 2.4(a)
hereof.
"Revolving Commitment Maturity Date" means June 30, 2003, or the
earlier date of termination in whole of the Revolving Credit Commitment pursuant
to Section 2.6 or 8.2 hereof.
"Revolving Credit Acquisition Advance" means a Revolving Credit
Advance, all or a portion of the proceeds of which are used to finance an
Acquisition.
"Revolving Credit Advance" means an Advance made pursuant to Section
2.1(a) hereof, including a Revolving Credit Acquisition Advance.
"Revolving Credit Commitment" means $25,000,000, as reduced pursuant to
Section 2.6.
"Revolving Credit Notes" means the promissory notes of Borrower
evidencing Revolving Credit Advances hereunder, substantially in the form of
Exhibit A hereto, together with any extension, renewal, or amendment thereof, or
substitution therefor.
"Revolving Credit Specified Percentage" means, as to any Lender, the
percentage obtained by dividing such Lender's portion of the Revolving Credit
Commitment (or Revolving Credit Advances owing to such Lender after the
Revolving Credit Commitment has terminated) by the Revolving Credit Commitment
(or to the aggregate principal amount of Revolving Credit Advances after the
Revolving Credit Commitment has terminated), which percentage for each Lender
existing on the Agreement Date shall be set forth on Schedule 1.1(b) hereto.
"Rights" means rights, remedies, powers and privileges.
"Security Agreements" mean the General Security Agreement and the
Intellectual Property Security Agreement.
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<PAGE> 31
"Senior Subordinated Notes" means those certain senior subordinated
notes of the Borrower due July 1, 2003 issued by the Borrower in connection with
the European Touch Transaction in the aggregate principal amount of up to
$125,000,000, which shall be subordinated to the Obligations on the terms set
forth in the Indenture dated as of June 23, 1998 by and among the Borrower, the
existing Domestic Subsidiaries of the Borrower and State Street Bank and Trust
Company of California, N.A., as trustee, which notes shall be rated B- or better
by Standard & Poor's Rating Group, a division of McGraw-Hill, Inc. and B-3 or
better by Moody's Investors Service.
"Solvent" means, with respect to any Person, that as of the date of
determination, (a) the fair saleable value of the assets of such Person is
greater than the total amount of liabilities (including contingent and
unliquidated liabilities) of such Person, (b) such Person is able to pay the
probable liabilities on such Person's then existing debts as they become
absolute and matured considering all financing alternatives and potential asset
sales reasonably available to such Person, and (c) such Person does not have
unreasonably small capital with which to carry on its business. In computing the
amount of contingent or unliquidated liabilities at any time, such liabilities
will be computed at the amount which, in light of all the facts and
circumstances existing at such time, represents the amount that can reasonably
be expected to become an actual or matured liability discounted to present value
at rates believed to be reasonable by such Person.
"Special Counsel" means the law firm of Donohoe, Jameson & Carroll,
P.C., or such other legal counsel as the Administrative Agent may select.
"Subordinated Debt" means (a) the Senior Subordinated Notes and (b) any
other Indebtedness of the Borrower or any Subsidiary of the Borrower having
maturities and terms, and which is subordinated to payment of the Obligations in
a manner, approved in writing by the Administrative Agent and the Determining
Lenders, in each case with only such changes or amendments as are not prohibited
by Section 7.18 hereof.
"Subsequent Pricing Period" means the period from and including the
date which is the first day following the end of the Initial Pricing Period to
and including the Release Date.
"Subsidiary" of any Person means any corporation, partnership, limited
liability company, joint venture, trust or estate or other Person of which (or
in which) more than 50% of:
(a) the outstanding capital stock having voting power to elect a
majority of the Board of Directors of such corporation (irrespective of whether
at the time capital stock of any other class or classes of such corporation
shall or might have voting power upon the occurrence of any contingency),
(b) the interest in the capital or profits of such partnership, limited
liability company or joint venture,
(c) the beneficial interest of such trust or estate, or
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<PAGE> 32
(d) the equity interest of such other Person,
is at the time directly or indirectly owned by such Person, by such Person and
one or more of its Subsidiaries or by one or more of such Person's Subsidiaries.
"Subsidiary Guaranty" means a guaranty, substantially in the form of
Exhibit G hereto, executed by each direct and indirect Domestic Subsidiary of
the Borrower, as amended, supplemented, modified, renewed or otherwise restated
from time to time.
"Synthetic Lease" means any synthetic lease, tax retention operating
lease or off-balance sheet financing product where such transaction is
considered borrowed money indebtedness for tax purposes but which is classified
as an Operating Lease pursuant to GAAP.
"Taxes" has the meaning specified in Section 2.14 hereof.
"Term Loan Advance" means an Advance made pursuant to Section 2.1(b)
hereof.
"Term Loan Commitment" means $25,000,000 as terminated pursuant to
Section 2.1(b) hereof.
"Term Loan Commitment Termination Date" means December 31, 1999, or the
earlier date of acceleration of the Term Loan Advances pursuant to Section 8.2
hereof.
"Term Loan Maturity Date" means June 30, 2003, or the earlier date of
acceleration of the Term Loan Advances pursuant to Section 8.2 hereof.
"Term Loan Notes" means the promissory notes of the Borrower evidencing
Term Loan Advances hereunder, substantially in the form of Exhibit B hereto,
together with any extension, renewal or amendment thereof, or substitution
therefor.
"Term Loan Specified Percentage" means, as to any Lender, the
percentage obtained by dividing such Lender's portion of the Term Loan
Commitment (or Term Loan Advances owing to such Lender after the Term Loan
Commitment has terminated) by the Term Loan Commitment (or to the aggregate
principal amount of Term Loan Advances after the Term Loan Commitment has
terminated), which percentage for each Lender existing on the Agreement Date
shall be set forth on Schedule 1.1(b) hereto.
"Total Debt" means, as of any date of determination, determined for the
Borrower and its Subsidiaries on a consolidated basis, to the extent that the
following would appear as a liability upon the consolidated balance sheet of the
Borrower and its Subsidiaries in accordance with GAAP: (i) indebtedness for
borrowed money, (ii) obligations evidenced by bonds, debentures, notes or other
similar instruments, (iii) non-contingent obligations to pay the deferred
purchase price of property
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<PAGE> 33
or services other than trade payables and accrued liabilities incurred in the
ordinary course of business, and (iv) Capitalized Lease Obligations.
"Total Specified Percentage" means, as to any Lender, the percentage
obtained by dividing the sum of such Lender's portion of the Revolving Credit
Commitment and the Term Loan Commitment (or Revolving Credit Advances and Term
Loan Advances owing to such Lender after the Revolving Credit Commitment and the
Term Loan Commitment have been terminated) by the sum of the Revolving Credit
Commitment and the Term Loan Commitment (or to the sum of the aggregate
principal amount of the Revolving Credit Advances and the Term Loan Advances if
the Revolving Credit Commitment and the Term Loan Commitment has been
terminated), which percentage for each Lender existing on the Agreement Date
shall be set forth on Schedule 1.1(b) hereto.
"Tribunal" means any state, commonwealth, federal, foreign,
territorial, or other court or government body, subdivision, agency, department,
commission, board, bureau, or instrumentality of a governmental or other
regulatory or public body or authority.
"UCC" means the Uniform Commercial Code of Texas, as amended from time
to time, and the Uniform Commercial Code applicable in such other states as any
Collateral may be located.
"Underwriting Fee Letter" means that certain letter, dated May 28,
1998, from NationsBank, N.A., NationsBanc Montgomery Securities LLC, BankBoston,
N.A., and BankBoston Securities, Inc. providing an underwriting fee with respect
to the Commitments.
"Unused Portion" means an amount equal to the result of (i) the
Revolving Credit Commitment minus (ii) the sum of (A) the outstanding Revolving
Credit Advances plus (B) outstanding Reimbursement Obligations in respect of the
Letters of Credit.
"Voting Power" means, with respect to any Person, the power ordinarily
(without the occurrence of a contingency) to elect the members of the board of
directors (or persons performing similar functions).
Section 1.2 Amendments and Renewals. Each definition of an agreement in
this Article 1 shall include such agreement as amended to date, and as amended
or renewed from time to time in accordance with its terms, but only with the
prior written consent of the Determining Lenders or all the Lenders as required
pursuant to Section 11.11 hereof.
Section 1.3 Construction. The terms defined in this Article 1 (except
as otherwise expressly provided in this Agreement) for all purposes shall have
the meanings set forth in Section 1.1 hereof, and the singular shall include the
plural, and vice versa, unless otherwise specifically required by the context.
All accounting terms used in this Agreement which are not otherwise defined
herein shall be construed in accordance with GAAP on a consolidated basis for
the Borrower and its Subsidiaries, unless otherwise expressly stated herein.
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ARTICLE 2
Advances
Section 2.1 The Advances.
(a) Revolving Credit Advances. Each Lender severally agrees, upon the
terms and subject to the conditions of this Agreement, to make Revolving Credit
Advances to the Borrower from time to time up to but not including the Revolving
Commitment Maturity Date in an aggregate amount not to exceed its Revolving
Credit Specified Percentage of the Revolving Credit Commitment less its
Revolving Credit Specified Percentage of the aggregate amount of all
Reimbursement Obligations then outstanding (assuming compliance with all
conditions to drawing), for the purposes set forth in Section 5.8(a) hereof.
Subject to Section 2.9 hereof, Revolving Credit Advances may be repaid and then
reborrowed. Notwithstanding any provision in this Agreement or in any other Loan
Document to the contrary, in no event shall (a) the sum of the principal amount
of all outstanding (i) Revolving Credit Advances and (ii) Reimbursement
Obligations exceed (b) the lesser of (i) the Revolving Credit Commitment and
(ii) the Borrowing Base.
(b) Term Loan Advances. Each Lender severally agrees, upon the terms
and subject to the conditions of this Agreement (including, but not limited to,
Section 3.3 hereof), to make Term Loan Advances to the Borrower from time to
time up to but not including the Term Loan Commitment Termination Date in an
amount not to exceed its Term Loan Specified Percentage of the Term Loan
Commitment for the purposes set forth in Section 5.8(b) hereof. Notwithstanding
any provision in any Loan Document to the contrary, in no event shall the
principal amount of all outstanding Term Loan Advances exceed the Term Loan
Commitment. On the Term Loan Commitment Termination Date, the Term Loan
Commitment shall be automatically terminated. Term Loan Advances may not be
repaid and then reborrowed.
(c) Any Advance shall, at the option of the Borrower as provided in
Section 2.2 hereof (and, in the case of LIBOR Advances, subject to the
provisions of Article 9 hereof), be made as a Base Rate Advance or a LIBOR
Advance; provided that there shall not be outstanding, at any one time, more
than eight LIBOR Advances.
Section 2.2 Manner of Borrowing and Disbursement.
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(a) Base Rate Advances. In the case of Base Rate Advances, the
Borrower, through an Authorized Signatory, shall give the Administrative Agent
prior to 11:00 a.m., Dallas, Texas time, on the date of any proposed Base Rate
Advance, irrevocable written notice, or irrevocable telephonic notice followed
immediately by written notice, in substantially the form of Exhibit H hereto (a
"Notice of Borrowing") (provided, however, that the Borrower's failure to
confirm any telephonic notice in writing shall not invalidate any notice so
given), of its intention to borrow a Base Rate Advance hereunder. Such Notice of
Borrowing shall specify the requested funding date, which shall be a Business
Day, and the amount of the proposed aggregate Base Rate Advances to be made by
the Lenders.
(b) LIBOR Advances. In the case of LIBOR Advances, the Borrower,
through an Authorized Signatory, shall give the Administrative Agent at least
three Business Days' irrevocable written notice, or irrevocable telephonic
notice followed immediately by written notice (provided, however, that the
Borrower's failure to confirm any telephonic notice in writing shall not
invalidate any notice so given) pursuant to a Notice of Borrowing, of its
intention to borrow a LIBOR Advance hereunder. Notice shall be given to the
Administrative Agent prior to 11:00 a.m., Dallas, Texas time, in order for such
Business Day to count toward the minimum number of Business Days required. LIBOR
Advances shall in all cases be subject to Article 9 hereof. For LIBOR Advances,
the Notice of Borrowing shall specify the requested funding date, which shall be
a Business Day, the amount of the proposed aggregate LIBOR Advances to be made
by Lenders and the Interest Period selected by the Borrower, provided that no
such Interest Period shall extend past the Revolving Commitment Maturity Date or
the Term Loan Maturity Date, as appropriate, or prohibit or impair the
Borrower's ability to comply with Section 2.5 or 2.8 hereof.
(c) Continuation/Conversion. Subject to Sections 2.1 and 2.9 hereof,
the Borrower shall have the option (i) to convert at any time all or any part of
the outstanding Base Rate Advances to LIBOR Advances and all or any part of the
outstanding LIBOR Advances to Base Rate Advances or (ii) upon expiration of any
Interest Period applicable to a LIBOR Advance, to continue all or any portion of
such LIBOR Advance equal to $1,000,000 and integral multiples of $100,000 in
excess of that amount as a LIBOR Advance and the succeeding Interest Period(s)
of such continued LIBOR Advance shall commence on the last day of the Interest
Period of the LIBOR Advance to be continued; provided, however, (a) LIBOR
Advances may only be converted into Base Rate Advances on the expiration date of
the Interest Period applicable thereto and (b) notwithstanding anything in this
Agreement to the contrary, no outstanding Advance may be continued as, or
converted into, a LIBOR Advance when any Default or Event of Default has
occurred and is continuing. Not later than 11:00 a.m., Dallas, Texas time at
least one Business Day prior to the proposed continuation of or a conversion to
a Base Rate Advance and not later than 11:00 a.m., Dallas, Texas time, at least
three Business Days prior to a proposed continuation of or conversion to a LIBOR
Advance, the Borrower, through an Authorized Signatory, shall give the
Administrative Agent irrevocable written notice, or irrevocable telephonic
notice followed immediately by written notice, in substantially the form of
Exhibit K hereto (a "Notice of Continuation/Conversion") (provided, however,
that the Borrower's failure to confirm any telephonic notice in writing shall
not invalidate any notice so given), stating (i) the proposed
conversion/continuation date (which shall
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<PAGE> 36
be a Business Day), (ii) the amount of the Advance to be converted/continued,
(iii) in the case of a conversion to, or a continuation of, a LIBOR Advance, the
requested Interest Period, and (iv) in the case of a conversion of a Base Rate
Advance to a LIBOR Advance or continuation of a LIBOR Advance, stating that no
Default or Event of Default has occurred and is continuing. If the Borrower
shall fail to give any notice in accordance with this Section 2.2(c), the
Borrower shall be deemed irrevocably to have requested that such LIBOR Advance
be converted to a Base Rate Advance in the same principal amount.
(d) Minimum Amount. The aggregate amount of Base Rate Advances to be
made by the Lenders on any day shall be in a principal amount which is at least
$500,000 and which is an integral multiple of $100,000; provided, however, that
such amount may equal the unused amount of the applicable Commitment. The
aggregate amount of LIBOR Advances having the same Interest Period and to be
made by the Lenders on any day shall be in a principal amount which is at least
$1,000,000 and which is an integral multiple of $100,000.
(e) Notice and Disbursement. The Administrative Agent shall promptly
notify the Lenders of each notice received from the Borrower pursuant to this
Section. Each Lender shall, not later than 2:00 p.m., Dallas, Texas time, on the
date of any Advance, deliver to the Administrative Agent, at its address set
forth herein, such Lender's Applicable Specified Percentage of such Advance in
immediately available funds in accordance with the Administrative Agent's
instructions. Prior to 2:30 p.m., Dallas, Texas time, on the date of any Advance
hereunder, the Administrative Agent shall, subject to satisfaction of the
conditions set forth in Article 3, disburse the amounts made available to the
Administrative Agent by the Lenders by (i) transferring such amounts by wire
transfer pursuant to the Borrower's instructions, or (ii) in the absence of such
instructions, crediting such amounts to the account of the Borrower maintained
with the Administrative Agent. All Revolving Credit Advances shall be made by
each Lender according to its Revolving Credit Specified Percentage. All Term
Loan Advances shall be made by each Lender in accordance with its Term Loan
Specified Percentage.
Section 2.3 Interest.
(a) On Base Rate Advances.
(i) The Borrower shall pay interest on the outstanding unpaid
principal amount of the Base Rate Advances outstanding from time to
time, until such Base Rate Advances are due (whether at maturity, by
reason of acceleration, by scheduled reduction, or otherwise) and
repaid at a simple interest rate per annum equal to the Base Rate Basis
for the Base Rate Advances as in effect from time to time. If at any
time the Base Rate Basis would exceed the Highest Lawful Rate, interest
payable on the Base Rate Advances shall be limited to the Highest
Lawful Rate, but the Base Rate Basis shall not thereafter be reduced
below the Highest Lawful Rate until the total amount of interest
accrued on the Base Rate Advances equals the amount of interest that
would have accrued if the Base Rate Basis had been in effect at all
times.
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<PAGE> 37
(ii) Interest on the Base Rate Advances shall be computed on
the basis of a year of 365 or 366 days, as appropriate, for the actual
number of days elapsed, and shall be payable in arrears on each
Quarterly Date and on the Revolving Commitment Maturity Date or the
Term Loan Maturity Date, as appropriate.
(b) On LIBOR Advances.
(i) The Borrower shall pay interest on the unpaid principal
amount of each LIBOR Advance, from the date such Advance is made until
it is due (whether at maturity, by reason of acceleration, by scheduled
reduction, or otherwise) and repaid, at a rate per annum equal to the
LIBOR Basis for such LIBOR Advance. The Administrative Agent, whose
determination shall be controlling in the absence of demonstrable
error, shall determine the LIBOR Basis on the second Business Day prior
to the applicable funding, conversion or continuation date and shall
notify the Borrower and the Lenders of such LIBOR Basis.
(ii) Subject to Section 11.9 hereof, interest on each LIBOR
Advance shall be computed on the basis of a 360-day year for the actual
number of days elapsed, and shall be payable in arrears on the
applicable Payment Date and on the Revolving Commitment Maturity Date
or the Term Loan Maturity Date, as appropriate; provided, however, that
if the Interest Period for such LIBOR Advance exceeds three months,
interest shall also be due and payable in arrears on each three-month
anniversary of the commencement of such Interest Period during such
Interest Period.
(c) Interest After an Event of Default. (i) After an Event of Default
(other than an Event of Default specified in Section 8.1(f) or (g) hereof) and
during any continuance thereof, at the option of the Determining Lenders, and
(ii) after an Event of Default specified in Section 8.1(f) or (g) hereof and
during any continuance thereof, automatically and without any action by the
Administrative Agent or any Lender, the Obligations shall bear interest at a
rate per annum equal to the Default Rate. Such interest shall be payable on the
earlier of demand or the Revolving Commitment Maturity Date or the Term Loan
Maturity Date, as appropriate, and shall accrue until the earlier of (i) waiver
or cure of the applicable Event of Default, (ii) agreement by the Determining
Lenders to rescind the charging of interest at the Default Rate, or (iii)
payment in full of the Obligations. The Lenders shall not be required to
accelerate the maturity of the Advances, to exercise any other rights or
remedies under the Loan Documents, or to give notice to the Borrower of the
decision to charge interest at the Default Rate.
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Section 2.4 Fees.
(a) Revolving Commitment Fee. Subject to Section 11.9 hereof, the
Borrower agrees to pay to the Administrative Agent, for the account of the
Lenders according to their Revolving Credit Specified Percentages, a commitment
fee of 0.50% per annum (or 0.375% per annum during any period during the
Subsequent Pricing Period that the Applicable Base Rate Margin is 0.250% or
below) on the daily average Unused Portion during the period commencing on the
Agreement Date and ending on the Revolving Commitment Maturity Date. Such fee
shall be (i) payable in arrears on each Quarterly Date and on the Revolving
Commitment Maturity Date, (ii) fully earned when due and, subject to Section
11.9 hereof, nonrefundable when paid and (iii) subject to Section 11.9 hereof,
computed on the basis of a 360-day year for the actual number of days elapsed.
(b) Other Fees. Subject to Section 11.9 hereof, the Borrower agrees to
pay to the Administrative Agent, for the account of (i) the Administrative
Agent, the fees on the dates and in the amounts specified in the letter
agreement (the "Administrative Agent Fee Letter"), dated as of the Agreement
Date, between the Borrower and the Administrative Agent, and (ii) NationsBanc
Montgomery Securities LLC and BankBoston Securities, Inc. the fees specified in
the Underwriting Letter on the Agreement Date.
Section 2.5 Prepayments.
(a) Voluntary LIBOR Advance Prepayments. Upon three Business Days'
prior telephonic notice (to be promptly followed by written notice) by an
Authorized Signatory to the Administrative Agent, LIBOR Advances may be
voluntarily prepaid but only so long as the Borrower concurrently reimburses the
Lenders in accordance with Section 2.9 hereof; provided, however, the Lenders
acknowledge and agree that no other penalties or premiums shall be paid in
connection with such prepayment. Any notice of prepayment shall be irrevocable.
(b) Mandatory Prepayment. On or before the date of any reduction of the
Revolving Credit Commitment, the Borrower shall prepay applicable outstanding
Revolving Credit Advances in an amount necessary to reduce the sum of
outstanding Revolving Credit Advances and Reimbursement Obligations to an amount
less than or equal to the lesser of (i) the Revolving Credit Commitment as so
reduced and (ii) the Borrowing Base. To the extent required by the immediately
preceding sentence, the Borrower shall first prepay all Base Rate Advances and
shall thereafter prepay LIBOR Advances. To the extent that any prepayment
requires that a LIBOR Advance be repaid on a date other than the last day of its
Interest Period, the Borrower shall reimburse each Lender in accordance with
Section 2.9 hereof; provided, however, the Lenders acknowledge and agree that no
other penalties or premiums shall be paid in connection with such prepayment. To
the extent that at any time the aggregate principal amount of Revolving Credit
Advances and Reimbursement Obligations outstanding hereunder exceed the lesser
of (i) the Revolving Credit Commitment and (ii) the Borrowing Base, the Borrower
shall immediately repay Revolving Credit Advances in an amount equal to such
excess.
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(c) Prepayments from Sales of Assets. Concurrently with the receipt of
Net Cash Proceeds from the sale or disposition by the Borrower or any of its
Subsidiaries of any assets, including any Capital Stocks of any such Subsidiary
(other than sales or dispositions of assets (i) expressly permitted pursuant to
clauses (a) through (d) of Section 7.5 hereof or (ii) the aggregate amount of
Net Cash Proceeds of which during any fiscal year do not exceed $500,000), the
Borrower shall prepay Term Loan Advances in an amount equal to 100% of such Net
Cash Proceeds. Each such prepayment shall be applied as provided in Section
2.5(f) hereof.
(d) Prepayment from Sales of Capital Stock. Concurrently with receipt
of Net Cash Proceeds from the sale or disposition by the Borrower to any Person
of any Capital Stock after the Agreement Date (other than a Permitted Issuance),
the Borrower shall prepay Term Loan Advances in an amount equal to 33% of such
Net Cash Proceeds. Each such prepayment shall be applied as provided in Section
2.5(f) hereof.
(e) Prepayment from Issuance of Subordinated Debt. Concurrently with
the receipt of Net Cash Proceeds from the issuance of any Subordinated Debt by
the Borrower or any of its Subsidiaries, the Borrower shall prepay the Term Loan
Advances in an amount equal to 100% of such Net Cash Proceeds. Each such
prepayment shall be applied as provided in Section 2.5(f) hereof.
(f) Payments, Generally. Any prepayment of any Advance shall be
accompanied by interest accrued on the principal amount being prepaid. Any
voluntary partial payment of a Base Rate Advance shall be in a principal amount
which is at least $500,000 and which is an integral multiple of $100,000. Any
voluntary partial payment of a LIBOR Advance shall be in a principal amount
which is at least $1,000,000 and which is an integral multiple of $100,000, and
to the extent that any prepayment of a LIBOR Advance is made on a date other
than the last day of its Interest Period, the Borrower shall reimburse each
Lender in accordance with Section 2.9 hereof. Any voluntary or mandatory
prepayment of any Term Loan Advance shall be applied pro rata to all of the
unpaid scheduled installment payments of the Term Loan Advances, first to the
Base Rate Advances, if any, and then to LIBOR Advances. Any prepayment required
to be made pursuant to Sections 2.5(c), (d), or (e) hereof shall not be subject
to the notice and minimum payment provisions of this Section 2.5; provided,
however, the Borrower shall be required to reimburse each Lender for any loss,
cost or expense incurred by such Lender in connection with any such prepayment
as set forth in Section 2.9 hereof if any prepayment results in a LIBOR Advance
being paid on a day other than the last day of an Interest Period for such LIBOR
Advance. Notwithstanding any other provision in this Agreement or any of the
other Loan Documents to the contrary, the Borrower shall not be required to pay
any premium or penalty in connection with any prepayment required or permitted
by this Agreement, other than the reimbursements of amounts set forth in Section
2.9 hereof, to the extent applicable to such prepayment.
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Section 2.6 Reduction of Revolving Credit Commitment.
(a) Voluntary Reduction. The Borrower shall have the right, upon not
less than 5 Business Days' notice by an Authorized Signatory to the
Administrative Agent (if telephonic, to be confirmed by telex or in writing on
or before the date of reduction or termination), which shall promptly notify the
Lenders, to terminate or reduce the Revolving Credit Commitment. Each partial
termination shall be in an aggregate amount which is at least $1,000,000 and
which is an integral multiple thereof, and no voluntary reduction in the
Revolving Credit Commitment shall cause any LIBOR Advance to be repaid prior to
the last day of its Interest Period unless the Borrower shall reimburse each
Lender in accordance with Section 2.9 hereof.
(b) Mandatory Reduction. On the Revolving Commitment Maturity Date, the
Revolving Credit Commitment shall be automatically reduced to zero. On the Term
Loan Commitment Termination Date, the Term Loan Commitment shall be
automatically reduced to zero.
(c) General Requirements. Upon any reduction of the Revolving Credit
Commitment pursuant to this Section, the Borrower shall immediately make a
repayment of Revolving Credit Advances in accordance with Section 2.5(b) hereof.
The Borrower shall reimburse each Lender in connection with any such payment in
accordance with Section 2.9 hereof to the extent applicable. The Borrower shall
not have any right to rescind any termination or reduction. Once reduced, the
Revolving Credit Commitment may not be increased or reinstated.
Section 2.7 Non-Receipt of Funds by the Administrative Agent. Unless
the Administrative Agent shall have been notified by a Lender prior to the date
of any proposed Advance (which notice shall be effective upon receipt) that such
Lender does not intend to make the proceeds of such Advance available to the
Administrative Agent, the Administrative Agent may assume that such Lender has
made such proceeds available to the Administrative Agent on such date, and the
Administrative Agent may in reliance upon such assumption (but shall not be
required to) make available to the Borrower a corresponding amount. If such
corresponding amount is not in fact made available to the Administrative Agent
by such Lender, the Administrative Agent shall be entitled to recover such
amount on demand from such Lender (or, if such Lender fails to pay such amount
forthwith upon such demand, from the Borrower) together with interest thereon in
respect of each day during the period commencing on the date such amount was
available to the Borrower and ending on (but excluding) the date the
Administrative Agent receives such amount from (a) the Lender, at a per annum
rate equal to the lesser of (i) the Highest Lawful Rate or (ii) the Federal
Funds Rate, or (b) the Borrower, at the per annum rate applicable at the time to
such Advance. No Lender shall be liable for any other Lender's failure to fund
an Advance hereunder.
Section 2.8 Payment of Principal of Advances.
(a) Revolving Credit Advances. To the extent not otherwise required to
be paid earlier as provided herein, the principal amount of the Revolving Credit
Advances shall be due and payable on the Revolving Commitment Maturity Date.
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(b) Term Loan Advances. To the extent not otherwise required to be paid
earlier as provided herein, the principal amount of the Term Loan Advances shall
be repaid on each Quarterly Date, commencing March 31, 2000 and thereafter, in
quarterly installments each in an amount equal to the product of (i) 5%
multiplied by (ii) the aggregate principal amount of Term Loan Advances
outstanding on the Term Loan Commitment Termination Date; provided, however, all
unpaid Term Loan Advances shall be repaid on the Term Loan Maturity Date.
Section 2.9 Reimbursement. Whenever any Lender shall sustain or incur
any actual losses (excluding loss of anticipated profits) or reasonable
out-of-pocket expenses in connection with (a) failure by the Borrower to borrow
any LIBOR Advance after having given notice of its intention to borrow in
accordance with Section 2.2 hereof (whether by reason of the Borrower's election
not to proceed or the non-fulfillment of any of the conditions set forth in
Article 3 hereof), (b) any prepayment for any reason of any LIBOR Advance in
whole or in part (including, but not limited to, a prepayment pursuant to
Section 9.3(b) hereof) on other than the last day of an Interest Period
applicable to such LIBOR Advance, (c) any prepayment of any of its LIBOR
Advances that is not made on any date specified in a notice of prepayment given
by the Borrower or (d) the selling by such Lender (provided that such Lender was
a Lender on the Agreement Date) of its rights and obligations under this
Agreement to an Eligible Assignee within 90 days after the Agreement Date, in
each case, the Borrower agrees to pay to any such Lender, within 30 days after
demand by such Lender, an amount sufficient to compensate such Lender for all
such actual losses (excluding loss of anticipated profits) and reasonable
out-of-pocket expenses, subject to Section 11.9 hereof. A certificate as to any
amounts payable to any Lender under this Section 2.9 shall be submitted to the
Borrower by such Lender and shall certify that such amounts were actually
incurred by such Lender and shall show in reasonable detail an accounting of the
amount payable and the calculations used to determine in good faith such amount
and shall be conclusive absent demonstrable error.
Section 2.10 Manner of Payment.
(a) Payment Timing and Type. Each payment (including prepayments) by
the Borrower of the principal of or interest on the Advances, fees, and any
other amount owed under this Agreement or any other Loan Document shall be made
not later than 12:00 noon (Dallas, Texas time) on the date specified for payment
under this Agreement to the Administrative Agent at the Administrative Agent's
office, in Dallas constituting immediately available funds.
(b) Non-Business Day Payments. If any payment under this Agreement or
any other Loan Document shall be specified to be made upon a day which is not a
Business Day, it shall be made on the next succeeding day which is a Business
Day, unless, with respect to a payment due in respect of a LIBOR Advance, such
Business Day falls in another calendar month, in which case payment shall be
made on the preceding Business Day. Any extension of time shall in such case be
included in computing interest and fees, if any, in connection with such
payment.
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(c) Payments Without Deduction. The Borrower agrees to pay principal,
interest, fees and all other amounts due under the Loan Documents without
deduction for set-off, counterclaim, Taxes or any deduction whatsoever.
(d) Apportionment of Payments. Whenever any amount received by the
Administrative Agent under this Agreement in respect of the Obligations
(including, without limitation, proceeds of Collateral or payments under any
Subsidiary Guaranty) is insufficient to pay in full amounts due and payable in
respect of the Obligations, such amount shall be applied in the following order:
first, to pay the Administrative Agent's reasonable fees and expenses incurred
on behalf of the Lenders then due and payable; second, to pay all other
reasonable fees then due and payable in respect of the Advances and the
Reimbursement Obligations under the Loan Documents; third, to pay all other
amounts other than principal and interest (including; without limitation,
expense reimbursements and indemnities) not otherwise referred to in clauses
first and second immediately preceding then due and payable in respect of the
Advances and the Reimbursement Obligations under the Loan Documents; fourth, to
pay interest then due and payable on the Advances and the Reimbursement
Obligations, to be applied in accordance with each Lenders' Total Specified
Percentage; and fifth, to pay principal then due and payable on the Advances and
Reimbursement Obligations, and in the case of proceeds of Collateral and
payments under any Subsidiary Guaranty, to pay any other obligations to any
Secured Party (as defined in the Security Agreement) not covered in first
through four above, ratably among the Secured Parties in accordance with the
aggregate principal amount of Advances and the Reimbursement Obligations and, in
the case of proceeds of Collateral or payments under any Subsidiary Guaranty,
the obligations secured or guaranteed thereby, owed to each Secured Party.
Section 2.11 LIBOR Lending Offices. Each Lender's initial LIBOR Lending
Office is set forth opposite its name in Schedule 1.1 attached hereto. Each
Lender shall have the right at any time and from time to time to designate a
different office of itself or of any Affiliate of such Lender as such Lender's
LIBOR Lending Office, and to transfer any outstanding LIBOR Advance to such
LIBOR Lending Office. No such designation or transfer shall result in any
liability on the part of the Borrower for increased costs or expenses resulting
solely from such designation or transfer (except any such transfer which is made
by a Lender pursuant to Section 9.2 or 9.3 hereof, or otherwise for the purpose
of complying with Applicable Law). Increased costs for expenses resulting from a
change in law occurring subsequent to any such designation or transfer shall be
deemed not to result solely from such designation or transfer.
Section 2.12 Sharing of Payments. If any Lender shall obtain a payment
(whether voluntary or involuntary, due to the exercise of any right of set-off,
or otherwise) on account of its Advances (other than pursuant to Sections
2.4(b), 2.14, 2.15(d), 9.3 or 9.5 hereof) in excess of its share of payments
made by the Borrower, such Lender shall purchase from each other Lender such
participation in the Advances made by such other Lender as shall be necessary to
cause such purchasing Lender to share a ratable portion of the excess payment
with each other Lender (based on its Applicable Specified Percentage so long as
there does not exist an Event of Default, and based on its Total Specified
Percentage if there exists an Event of Default); provided, however, that if all
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or any portion of such excess payment is thereafter recovered from such
purchasing Lender, the purchase shall be rescinded and the purchase price
restored to the extent of such recovery, but without interest. The Borrower
agrees that any Lender so purchasing a participation from another Lender
pursuant to this Section, to the fullest extent permitted by law, may exercise
all its rights of payment (including the right of set-off) with respect to such
participation as fully as if such Lender were the direct creditor of the
Borrower in the amount of such participation.
Section 2.13 Calculation of LIBOR Rate. The provisions of this
Agreement relating to calculation of the LIBOR Rate are included only for the
purpose of determining the rate of interest or other amounts to be paid
hereunder that are based upon such rate, it being understood that each Lender
shall be entitled to fund and maintain its funding of all or any part of a LIBOR
Advance as it sees fit.
Section 2.14 Taxes.
(a) Any and all payments by the Borrower and each other Obligor
hereunder and under the other Loan Documents (including, without limitation,
payments pursuant to Sections 2.9, 5.9, 9.3, and 9.5 hereof and this Section
2.15) shall be made, in accordance with Section 2.10 hereof, free and clear of
and without deduction for any and all present or future taxes, levies, imposts,
deductions, charges and withholdings, and all liabilities with respect thereto,
excluding, in the case of each Lender and the Administrative Agent, (i) taxes
imposed on, based upon or measured by its overall net income, and franchise
taxes, doing business taxes or minimum taxes imposed on it, by the jurisdiction
under the laws of which such Lender or the Administrative Agent (as the case may
be) is organized or in which it has its applicable lending office or any
political subdivision thereof; (ii) taxes imposed by reason of failure by the
Lender or the Administrative Agent to comply with the requirements of paragraph
(e) of this Section 2.14; and (iii) in the case of any Lender, any taxes in the
nature of transfer, stamp, recording or documentary taxes resulting from a
transfer (other than as a result of foreclosure) by such Lender of all or any
portion of its interest in this Agreement, the Notes or any other Loan Documents
(all such non-excluded taxes, levies, imposts, deductions, charges, withholdings
and liabilities being hereinafter referred to as "Taxes"). If the Borrower shall
be required by Law to deduct or withhold any Taxes from or in respect of any sum
payable hereunder to any Lender or the Administrative Agent, to the extent not
prohibited by Applicable Law, (x) the sum payable shall be increased as may be
necessary so that after making all required deductions for Taxes (including
deductions applicable to additional sums payable under this Section 2.14) such
Lender or the Administrative Agent (as the case may be) receives an amount equal
to the sum it would have received had no such deductions been made, (y) the
Borrower shall make such deductions and (z) the Borrower shall pay the full
amount of Taxes deducted to the relevant taxation authority or other authority
in accordance with Applicable Law.
(b) In addition, the Borrower agrees to pay any and all stamp and
documentary taxes and any and all other excise and property taxes, charges and
similar levies (other than taxes described in clause (iii) of the first sentence
of Section 2.14(a) hereof) that arise from any payment made
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hereunder or from the execution, delivery or registration of, or otherwise with
respect to, this Agreement or any other Loan Document (hereinafter referred to
as "Other Taxes").
(c) The Borrower will indemnify each Lender and the Administrative
Agent for the full amount of Taxes and Other Taxes (including, without
limitation, any Taxes or Other Taxes imposed by any jurisdiction on amounts
payable under this Section 2.14) paid by such Lender or the Administrative Agent
(as the case may be) and all liabilities (including penalties, additions to tax,
interest and reasonable expenses) arising therefrom or with respect thereto
whether or not such Taxes or Other Taxes were correctly or legally asserted,
other than penalties, additions to tax, interest and expenses which are finally
judicially determined by a court of competent jurisdiction to have arisen as a
result of gross negligence or wilful misconduct on the part of such Lender or
the Administrative Agent. This indemnification shall be made within 30 days from
the date such Lender or the Administrative Agent (as the case may be) makes
written demand therefor. A certificate as to any amounts payable to any Lender
under this Section 2.14 shall be submitted to the Borrower by such Lender and
shall certify that such amounts were actually incurred by such Lender and shall
show in reasonable detail an accounting of the amount payable and the
calculations used to determine in good faith such amount and shall be conclusive
absent demonstrable error.
(d) As soon as practicable after the date of any payment of Taxes, the
Borrower will furnish to the Administrative Agent the original or a certified
copy of a receipt evidencing payment thereof. For purposes of this Section 2.14
the terms "United States" and "United States Person" shall have the meanings set
forth in Section 7701 of the Code.
(e) Each Lender which is not a United States Person hereby agrees that:
(i) it shall (except as provided in Section 2.14(e)(vi)
hereof), no later than the Agreement Date (or, in the case of a Lender
which becomes a party hereto pursuant to Section 11.6 hereof after the
Agreement Date, the date upon which such Lender becomes a party hereto)
and at such times as necessary in the reasonable determination of the
Borrower, deliver to the Borrower through the Administrative Agent,
with a copy to the Administrative Agent:
(A) if any lending office is located in the United
States, two (2) accurate and complete signed
originals of Internal Revenue Service Form 4224 or
any successor form thereto ("Form 4224"),
(B) if any lending office is located outside the United
States, two (2) accurate and complete signed
originals of Internal Revenue Service Form 1001 or
any successor form thereto ("Form 1001"),
in each case establishing that such Lender is on the date of delivery
thereof entitled to receive payments of principal, interest, fees, or
other amounts payable at such lending office or
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lending offices under this Agreement or any other Loan Document free
from deduction or withholding of United States federal income tax;
(ii) if at any time such Lender changes its lending office or
lending offices or selects an additional lending office it shall, at
the same time or reasonably promptly thereafter, but only to the extent
the forms previously delivered by it hereunder are not effective with
respect to such changed or additional lending office or lending
offices, deliver to the Borrower through the Administrative Agent, with
a copy to the Administrative Agent, in replacement for the forms
previously delivered by it hereunder:
(A) if such changed or additional lending office is
located in the United States, two (2) accurate and
complete signed originals of Form 4224; or
(B) otherwise, two (2) accurate and complete signed
originals of Form 1001,
in each case establishing that such Lender is on the date of delivery
thereof entitled to receive payments of principal, interest, fees, or
other amounts payable at such changed or additional lending office
under this Agreement or any other Loan Document free from deduction of
withholding of United States federal income tax;
(iii) it shall, before or promptly after the occurrence of any
event (including the passing of time but excluding any event mentioned
in clause (ii) above) requiring a change in the most recent Form 4224
or Form 1001 previously delivered by such Lender and if the delivery of
the same be lawful, deliver to the Borrower through the Administrative
Agent, with a copy to the Administrative Agent, two (2) accurate and
complete original signed copies of Form 4224 or Form 1001, in each case
establishing that such Lender is on the date of delivery thereof
entitled to receive payments of principal, interest, fees, or other
amounts payable under this Agreement or any other Loan Document free
from deduction or withholding of United States federal income tax, in
replacement for the forms previously delivered by such Lender;
(iv) it shall, promptly upon the request of the Borrower to
that effect, deliver to the Borrower such other forms or similar
documentation as may be required from time to time by any applicable
law, treaty, rule or regulation in order to establish such Lender's tax
status for withholding purposes;
(v) it shall notify the Borrower promptly after any event
(including an amendment to or a change in any applicable law or
regulation or in the written interpretation thereof by any regulatory
authority or any judicial authority or by ruling applicable to such
Lender of any governmental authority charged with the interpretation or
administration of any law) shall occur that results in such Lender no
longer being capable of receiving payments under this Agreement without
any deduction or withholding of United States federal income tax; and
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(vi) if such Lender is not a "bank" or other person described
in Section 881(c)(3) of the Code and cannot deliver either Form 4224 or
Form 1001, a statement that such Lender is not a "bank" under Section
881(c)(3)(A) of the Code and two original copies of Internal Revenue
Service Form W-8 (or any successor form), properly completed and duly
executed by such Lender.
(f) Without prejudice to the survival of any other agreement of the
Borrower hereunder, the agreements and obligations of the Borrower contained in
this Section 2.14 shall survive the payment in full of the Obligations.
(g) Each Lender (and the Administrative Agent with respect to payments
to the Administrative Agent for its own account) agrees that (i) it will take
all reasonable actions by all usual means to maintain all exemptions, if any,
available to it from United States withholding taxes (whether available by
treaty, existing administrative waiver or by virtue of the location of any
Lender's lending office), (ii) it will use reasonable efforts (consistent with
its internal policy and legal and regulatory restrictions) to change the
jurisdiction of its lending office, if the making of such a change would avoid
the need for, or reduce the amount of, any such additional amounts which may
thereafter accrue and would not, in the reasonable judgment of such Lender, be
disadvantageous to such Lender, (iii) otherwise cooperate with the Borrower (in
a manner that is not disadvantageous to such Lender in its reasonable
discretion) to minimize amounts payable by the Borrower under this Section 2.14
and (iv) notify the Borrower of any written assertion by any Tribunal with
respect to any Taxes for which the Borrower may be obligated to reimburse such
Lender under this Section 2.14; provided, however, no Lender nor the
Administrative Agent shall be obligated by reason of this Section 2.14(g) to (a)
disclose any information regarding its tax affairs or tax computations or
reorder its tax or other affairs or tax or other planning or (b) contest the
payment of any Taxes or Other Taxes. Subject to the foregoing, to the extent the
Borrower pays sums pursuant to this Section 2.14 and the Lender or the
Administrative Agent receives a refund of any or all of such sums, the party
receiving such refund shall promptly pay over all such refunded sums to the
Borrower, provided that no Default or Event of Default is in existence at such
time. At such time, if any, that such Default or Event of Default is cured or
waived, the party receiving such refund shall promptly pay over all such
refunded sums to the Borrower.
(h) If the Borrower becomes obligated to pay additional amounts
described in this Section 2.14 to any Lender, the Borrower may designate a
financial institution reasonably acceptable to the Administrative Agent to
replace such Lender by purchasing for cash and receiving an assignment of such
Lender's pro rata share of the Commitments and the Rights of such Lender under
the Loan Documents without recourse to or warranty by, or expense to, such
Lender, for a purchase price equal to the outstanding amounts owed to such
Lender (including such additional amounts owing to such Lender pursuant to this
Section 2.14). Upon execution of an Assignment Agreement, such other financial
institution shall be deemed to be a "Lender" for all purposes of this Agreement
as set forth in Section 11.6 hereof.
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Section 2.15 Letters of Credit.
(a) The Letter of Credit Facility. The Borrower may request the Issuing
Bank, on the terms and conditions hereinafter set forth, to issue, and the
Issuing Bank shall, if so requested, issue, letters of credit (including the
Existing Letters of Credit, the "Letters of Credit") for the account of the
Borrower from time to time on any Business Day from the date of the initial
Advance until the Revolving Commitment Maturity Date in an aggregate maximum
amount (assuming compliance with all conditions to drawing) not to exceed, at
any time outstanding, the lesser of (i) $7,500,000 and (ii) an amount equal to
(A) the lesser of the Revolving Credit Commitment and the Borrowing Base minus
(B) the aggregate principal amount of Revolving Credit Advances then outstanding
and the aggregate amount of all drawings under Letters of Credit that have not
been reimbursed by the Borrower or converted to Advances (the "Letter of Credit
Facility"). No Letter of Credit shall have an expiration date later than the
earlier of (i) thirty days prior to the Revolving Commitment Maturity Date or
(ii) one year after the date of issuance thereof (provided that any Letter of
Credit with a one-year term may provide for the renewal thereof for additional
one-year periods, which in no event extend beyond the date referred to in clause
(i) of this sentence). Immediately upon the issuance of each Letter of Credit
(or upon satisfaction of the conditions precedent set forth in Sections 3.1 and
3.2 hereof with respect to the Existing Letters of Credit), the Issuing Bank
shall be deemed to have sold and transferred to each Lender, and each Lender
shall be deemed to have purchased and received from the Issuing Bank, in each
case irrevocably and without any further action by any party, an undivided
interest and participation in such Letter of Credit, each drawing thereunder and
the obligations of the Borrower under this Agreement in respect thereof in an
amount equal to the product of (x) such Lender's Revolving Credit Specified
Percentage times (y) the maximum amount available to be drawn under such Letter
of Credit (assuming compliance with all conditions to drawing). Within the
limits of the Letter of Credit Facility, and subject to the limits referred to
above, the Borrower may request the issuance of Letters of Credit under this
Section 2.15(a), repay any Revolving Credit Advances resulting from drawings
thereunder pursuant to Section 2.15(c) hereof and request the issuance of
additional Letters of Credit under this Section 2.15(a).
(b) Request for Issuance. Each Letter of Credit shall be issued upon
notice, given not later than 1:00 p.m. (Dallas, Texas time) on the fourth
Business Day prior to the date of the proposed issuance of such Letter of
Credit, by the Borrower to the Issuing Bank. Each Letter of Credit shall be
issued upon notice given in accordance with the terms of any separate agreement
between the Borrower and the Issuing Bank in form and substance reasonably
satisfactory to the Borrower and the Issuing Bank providing for the issuance of
Letters of Credit pursuant to this Agreement and containing terms and conditions
not inconsistent with this Agreement (a "Letter of Credit Agreement"), provided
that if any such terms and conditions are inconsistent with this Agreement, this
Agreement shall control. Each such notice of issuance of a Letter of Credit by
the Borrower (a "Notice of Issuance") shall be by telecopier, specifying
therein, in the case of a Letter of Credit, the requested (i) date of such
issuance (which shall be a Business Day), (ii) maximum amount of such Letter of
Credit, (iii) expiration date of such Letter of Credit, (iv) name and address of
the beneficiary of such Letter of Credit, and (v) form of such Letter of Credit
and specifying such other
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information as shall be required pursuant to the relevant Letter of Credit
Agreement. If the requested terms of such Letter of Credit are acceptable to the
Issuing Bank in its reasonable discretion, the Issuing Bank will, upon
fulfillment of the applicable conditions set forth in Article 3 hereof, make
such Letter of Credit available to the Borrower at its office referred to in
Section 11.1 hereof or as otherwise agreed with the Borrower in connection with
such issuance.
(c) Drawing and Reimbursement. The payment by the Issuing Bank of a
draft drawn under any Letter of Credit shall constitute for all purposes of this
Agreement the making by the Issuing Bank of a Revolving Credit Advance, which
shall bear interest at the Base Rate Basis, in the amount of such draft (but
without any requirement for compliance with the conditions set forth in Article
3 hereof). In the event that a drawing under any Letter of Credit is not
reimbursed by the Borrower by 12:00 noon (Dallas, Texas time) on the first
Business Day after such drawing, the Issuing Bank shall promptly notify
Administrative Agent and each other Lender. Each such Lender shall, on the first
Business Day following such notification, make a Revolving Credit Advance (or,
if as a result of any Debtor Relief Law, the Lenders are prohibited from making
a Revolving Credit Advance, each Lender shall fund its participation purchased
pursuant to Section 2.15(a) hereof by making such amount available to the
Administrative Agent), which shall bear interest at the Base Rate Basis, and
shall be used to repay the applicable portion of the Issuing Bank's Revolving
Credit Advance with respect to such Letter of Credit, in an amount equal to the
amount of its participation in such drawing for application to reimburse the
Issuing Bank (but without any requirement for compliance with the applicable
conditions set forth in Article 3 hereof) and shall make available to the
Administrative Agent for the account of the Issuing Bank, by deposit at the
Administrative Agent's office, in same day funds, the amount of such Advance. In
the event that any Lender fails to make available to the Administrative Agent
for the account of the Issuing Bank the amount of such Advance, the Issuing Bank
shall be entitled to recover such amount on demand from such Lender together
with interest thereon at a rate per annum equal to the lesser of (i) the Highest
Lawful Rate or (ii) the Federal Funds Rate.
(d) Increased Costs. If, (i) any change after the Agreement Date in any
Law or in the interpretation thereof by any Tribunal charged with the
administration thereof or (ii) compliance by a Lender with any Law or any
guideline or requirement from any central bank or Tribunal (whether or not
having the force of law) adopted or promulgated after the Agreement Date
(including any implementation of the Basle Accord or similar guideline or
requirement adopted, promulgated or becoming effective after the Agreement Date)
shall either (A) impose, modify or deem applicable any reserve, special deposit
or similar requirement against letters of credit or guarantees issued by, or
assets held by, or deposits in or for the account of, the Issuing Bank or any
Lender or any corporation controlling the Issuing Bank or any Lender or (B)
impose on the Issuing Bank or any Lender or any corporation controlling the
Issuing Bank or any Lender any other condition regarding this Agreement or any
Letter of Credit, and the result of any event referred to in the preceding
clause (A) or (B) shall be to increase the cost to the Issuing Bank or any
corporation controlling the Issuing Bank of issuing or maintaining any Letter of
Credit or to any Lender or any corporation controlling such Lender of purchasing
any participation therein or making any Advance pursuant to Section 2.15(c),
then, within 10 days after demand by the Issuing Bank or such Lender, the
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Borrower shall, subject to Section 11.9 hereof, pay to the Issuing Bank or such
Lender, from time to time as specified by the Issuing Bank or such Lender,
additional amounts that shall be sufficient to compensate the Issuing Bank or
such Lender or any corporation controlling such Lender for such increased cost.
A certificate as to the amount of such increased cost shall be submitted to the
Borrower by the Issuing Bank or such Lender, shall certify that such increased
costs were actually incurred by the Issuing Bank or such Lender and shall show
in reasonable detail an accounting of the amount payable and the calculation
used to determine in good faith such amount and shall be conclusive absent
demonstrable error. In determining such amount, the Issuing Bank or such Lender
may use any reasonable averaging or attribution method. Nothing in this Section
2.15(d) shall provide the Borrower or any of its Subsidiaries the right to
inspect the records, files or books of the Issuing Bank or any Lender. If the
Borrower becomes obligated to pay additional amounts described in this Section
2.15(d) to any Lender, the Borrower may designate a financial institution
reasonably acceptable to the Administrative Agent to replace such Lender by
purchasing for cash and receiving an assignment of such Lender's pro rata share
of the Commitments and the Rights of such Lender under the Loan Documents
without recourse to or warranty by, or expenses to, such Lender, for a purchase
price equal to the outstanding amounts owing to such Lender (including such
additional amounts owing to such Lender pursuant to this Section 2.15(d)). Upon
execution of an Assignment Agreement, such other financial institution shall be
deemed to be a "Lender" for all purposes of this Agreement as set forth in
Section 11.6 hereof. The obligations of the Borrower under this Section 2.15(d)
shall survive termination of this Agreement. The Issuing Bank or any Lender
claiming any additional compensation under this Section 2.15(d) shall use
reasonable efforts (consistent with legal and regulatory restrictions) to reduce
or eliminate any such additional compensation which may thereafter accrue and
which efforts would not, in the reasonable judgment of the Issuing Bank or such
Lender, be otherwise disadvantageous.
(e) Obligations Absolute. The obligations of the Borrower under this
Agreement with respect to any Letter of Credit, any Letter of Credit Agreement
and any other agreement or instrument relating to any Letter of Credit or any
Revolving Credit Advance pursuant to Section 2.15(c) hereof shall be
unconditional and irrevocable, and shall be paid strictly in accordance with the
terms of this Agreement, such Letter of Credit Agreement and such other
agreement or instrument under all circumstances, including, without limitation,
the following circumstances:
(i) any lack of validity or enforceability of this Agreement,
any other Loan Document, any Letter of Credit Agreement, any Letter of
Credit or any other agreement or instrument relating thereto
(collectively, the "L/C Related Documents");
(ii) (A) any change in the time, manner or place of payment
of, or in any other term of, all or any of the Obligations of the
Borrower in respect of the Letters of Credit or any Revolving Credit
Advance pursuant to Section 2.15(c) hereof or (B) any other amendment
or waiver of or any consent to departure from all or any of the L/C
Related Documents;
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(iii) the existence of any claim, set-off, defense or other
right that the Borrower may have at any time against any beneficiary or
any transferee of a Letter of Credit (or any Persons for whom any such
beneficiary or any such transferee may be acting), the Issuing Bank,
any Lender or any other Person, whether in connection with this
Agreement, the transactions contemplated hereby or by the L/C Related
Documents or any unrelated transaction;
(iv) any statement or any other document presented under a
Letter of Credit proving to be forged, fraudulent, invalid or
insufficient in any respect or any statement therein being untrue or
inaccurate in any respect;
(v) payment by the Issuing Bank under a Letter of Credit
against presentation of a draft or certificate that does not comply
with the terms of the Letter of Credit, except for any payment made
upon the Issuing Bank's gross negligence or wilful misconduct;
(vi) any exchange, release or non-perfection of any
Collateral, or any release or amendment or waiver of or consent to
departure from any guarantee, for all or any of the Obligations of the
Borrower in respect of the Letters of Credit or any Revolving Credit
Advance pursuant to Section 2.15(c) hereof; or
(vii) any other circumstance or happening whatsoever, whether
or not similar to any of the foregoing, including, without limitation,
any other circumstance that might otherwise constitute a defense
available to, or a discharge of, the Borrower or a guarantor, other
than the Issuing's Bank gross negligence or wilful misconduct.
(f) Compensation for Letters of Credit.
(i) Credit Fee. Subject to Section 11.9 hereof, the Borrower
shall pay to the Administrative Agent for the account of the Lenders
according to their Revolving Credit Specified Percentages, a per annum
fee (which shall be payable quarterly in arrears on each Quarterly Date
and on the Revolving Commitment Maturity Date) equal to the product of
the Applicable LIBOR Rate Margin in effect from time to time for
Revolving Credit Advances multiplied by the average daily amount
available for drawing under all outstanding Letters of Credit. Subject
to Section 11.9 hereof, such fee shall be computed on the basis of a
360-day year for the actual number of days elapsed.
(ii) Fronting Fee. Subject to Section 11.9 hereof, the
Borrower shall pay to the Administrative Agent for the account of the
Issuing Bank a per annum fronting fee (which shall be payable quarterly
in arrears on each Quarterly Date and on the Revolving Commitment
Maturity Date) in an amount equal to the product of (a) 0.25% times (b)
the average daily amount available for drawing under all outstanding
Letters of Credit. Subject to Section 11.9 hereof, such fee shall be
computed on the basis of a 360-day year for the actual number of days
elapsed.
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(iii) Administrative Fee. Subject to Section 11.9 hereof, the
Borrower shall pay, with respect to each amendment, renewal or transfer
of each Letter of Credit and each drawing made thereunder, reasonable
documentary and processing charges in accordance with the Issuing
Bank's standard schedule for such charges in effect at the time of such
amendment, renewal, transfer or drawing, as the case may be.
(g) L/C Cash Collateral Account.
(i) Upon the occurrence of an Event of Default and demand by
the Administrative Agent pursuant to Section 8.2(c) hereof (except in
the case of an Event of Default specified in Section 8.1(f) or (g)
hereof, without any demand or taking of any other action by the
Administrative Agent or any Lender), the Borrower will promptly pay to
the Administrative Agent in immediately available funds an amount equal
to the maximum amount then available to be drawn under the Letters of
Credit then outstanding. Any amounts so received by the Administrative
Agent shall be deposited by the Administrative Agent in a deposit
account maintained by the Issuing Bank (the "L/C Cash Collateral
Account").
(ii) As security for the payment of all Reimbursement
Obligations and for any other Obligations, the Borrower hereby grants,
conveys, assigns, pledges, sets over and transfers to the
Administrative Agent (for the benefit of the Issuing Bank and Lenders),
and creates in the Administrative Agent's favor (for the benefit of the
Issuing Bank and Lenders) a Lien in, all money, instruments and
securities at any time held in or acquired in connection with the L/C
Cash Collateral Account, together with all proceeds thereof. The L/C
Cash Collateral Account shall be under the sole dominion and control of
the Administrative Agent and the Borrower shall have no right to
withdraw or to cause the Administrative Agent to withdraw any funds
deposited in the L/C Cash Collateral Account. At any time and from time
to time, upon the Administrative Agent's request, the Borrower promptly
shall execute and deliver any and all such further instruments and
documents, including UCC financing statements, as may be necessary,
appropriate or desirable in the Administrative Agent's judgment to
obtain the full benefits (including perfection and priority) of the
security interest created or intended to be created by this paragraph
(ii) and of the rights and powers herein granted. The Borrower shall
not create or suffer to exist any Lien on any amounts or investments
held in the L/C Cash Collateral Account other than the Lien granted
under this paragraph (ii).
(iii) The Administrative Agent shall (A) apply any funds in
the L/C Cash Collateral Account on account of Reimbursement Obligations
when the same become due and payable, (B) after the Revolving
Commitment Maturity Date, apply any proceeds remaining in the L/C Cash
Collateral Account first to pay any unpaid Obligations then outstanding
hereunder and then to refund any remaining amount to the Borrower.
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<PAGE> 52
(iv) The Borrower, no more than once in any calendar month,
may direct the Administrative Agent to invest the funds held in the L/C
Cash Collateral Account (so long as the aggregate amount of such funds
exceeds any relevant minimum investment requirement) in (A) Cash and
Cash Equivalents or direct obligations of the United States or any
agency thereof, or obligations guaranteed by the United States or any
agency thereof and (B) one or more other types of investments permitted
by the Determining Lenders, in each case with such maturities as the
Borrower, with the consent of the Determining Lenders, may specify,
pending application of such funds on account of Reimbursement
Obligations or on account of other Obligations, as the case may be. In
the absence of any such direction from the Borrower, the Administrative
Agent shall invest the funds held in the L/C Cash Collateral Account
(so long as the aggregate amount of such funds exceeds any relevant
minimum investment requirement) in one or more types of investments and
maturities with the consent of the Determining Lenders, pending
application of such funds on account of Reimbursement Obligations or on
account of other Obligations, as the case may be. All such investments
shall be made in the Administrative Agent's name for the account of the
Lenders, subject to the ownership interest therein of the Borrower. The
Borrower recognizes that any losses or taxes with respect to such
investments shall be borne solely by the Borrower, and the Borrower
agrees to hold the Administrative Agent and the Lenders harmless from
any and all such losses and taxes, except to the extent that such
losses or taxes are finally judicially determined by a court of
competent jurisdiction to be the result of gross negligence or wilful
misconduct of the Administrative Agent. Administrative Agent may
liquidate any investment held in the L/C Cash Collateral Account in
order to apply the proceeds of such investment on account of the
Reimbursement Obligations as provided in Section 2.15(g)(iii) hereof
(or on account of any other Obligation then due and payable, as the
case may be) without regard to whether such investment has matured and
without liability for any penalty or other fee incurred (with respect
to which the Borrower hereby agrees to reimburse the Administrative
Agent) as a result of such application.
(v) After the establishment of the L/C Cash Collateral Account
pursuant to Section 2.15(g)(i) hereof, the Borrower shall pay to the
Administrative Agent the fees customarily charged by the Issuing Bank
with respect to the maintenance of accounts similar to the L/C Cash
Collateral Account.
(vi) At such time as no Event of Default is in existence, the
Administrative Agent shall return any amount remaining in the L/C Cash
Collateral Account to the Borrower.
Section 2.16 Booking Loans. Any Lender may make, carry or transfer
Advances at, to or for the account of any of its branch offices or the office of
an Affiliate. No such action shall result in any liability on the part of the
Borrower from such action (except any such action which is made by a Lender
pursuant to Section 9.2 or 9.3 hereof, or otherwise for the purpose of complying
with Applicable Law).
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ARTICLE 3
Conditions Precedent
Section 3.1 Conditions Precedent to the Initial Advances and the
Initial Letters of Credit. The obligation of each Lender to make the initial
Advance and the obligation of the Issuing Bank to issue the initial Letter of
Credit is subject to (i) receipt by the Administrative Agent of the following
items which are to be delivered, in form and substance satisfactory to each
Lender, with a copy (except for the Notes and this Agreement) for each Lender,
and (ii) satisfaction of the following conditions which are to be satisfied:
(a) A loan certificate of each Obligor certifying as to the accuracy of
its representations and warranties in the Loan Documents, certifying, in the
case of any such Obligor, that no Default or Event of Default has occurred, and
including a certificate of incumbency with respect to each Authorized Signatory,
and including (i) a copy of the articles or certificate of incorporation or
other organizational documents of such Obligor, certified to be true, complete
and correct by the secretary of state of its state of organization, (ii) a copy
of a certificate of good standing and a certificate of existence for its state
of organization and, in the case of any such Obligor, each state in which it is
qualified to do business, (iii) a copy of such Obligor's bylaws, partnership
agreement or similar document, certified to be true, complete and correct by its
secretary or general partner, as the case may be, and (iv) a copy of corporate
or similar resolutions authorizing the execution, delivery and performance of
the Loan Documents to be executed by such Obligor;
(b) a duly executed Revolving Credit Note and Term Loan Note, payable
to the order of each Lender and in an amount for each Lender equal to its
Applicable Specified Percentage of each Commitment, respectively;
(c) UCC searches in appropriate jurisdictions where Collateral is
located;
(d) opinions of counsel to each Obligor addressed to the Lenders and in
form and substance satisfactory to the Lenders, dated the Agreement Date, and
covering certain of the matters set forth in Sections 4.1(a), (b), (c), (h),
(m), (n) and (p) and such other matters incident to the transactions
contemplated hereby as the Administrative Agent or Special Counsel may
reasonably request (including opinions of local counsel for all states where
Collateral is located and the Borrower and each other Obligor is incorporated
and foreign counsel with respect to any Capital Stock of a Foreign Subsidiary as
Collateral);
(e) reimbursement for the Administrative Agent for Special Counsel's
reasonable and customary fees and expenses rendered through the date hereof;
(f) evidence that all proceedings of each Obligor taken in connection
with the transactions contemplated by this Agreement and the other Loan
Documents shall be reasonably satisfactory in form and substance to the
Administrative Agent and Special Counsel; and the Lenders
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<PAGE> 54
shall have received copies of all documents or other evidence which the
Administrative Agent or Special Counsel may reasonably request in connection
with such transactions;
(g) any fees or any expenses required to be paid pursuant to the
Administrative Agent Fee Letter and the Underwriting Fee Letter;
(h) duly executed and completed Security Agreements, dated as of the
Agreement Date, granting a Lien, in all Collateral covered thereby, together
with related UCC financing statements, certificates of title with respect to
motor vehicles having a fair market value in excess of $30,000, stock powers,
stock certificates evidencing ownership of (i) 100% of the issued and
outstanding Capital Stock of each Domestic Subsidiary and (ii) 65% of the issued
and outstanding Capital Stock of each Foreign Subsidiary, and insurance
certificates listing Administrative Agent as loss payee and additional insured
and otherwise in a form required by the Collateral Documents.
(i) simultaneously with the making of the initial Advance, executed
UCC-3 Termination Statements to be filed in appropriate jurisdictions to
terminate all Liens against assets of European Touch, the Borrower and its
Subsidiaries (including the European Touch Companies) other than Permitted Liens
(or written agreements from each holder of such Liens to promptly execute such
Termination Statements);
(j) all European Touch Transaction Documents, which shall be in
substance and form satisfactory to the Administrative Agent and Special Counsel;
(k) consummation of the European Touch Transaction shall have occurred
on terms and conditions set forth in the European Touch Transaction Documents
satisfactory to the Administrative Agent and Special Counsel;
(l) Deeds of Trust executed by the Borrower and dated as of the
Agreement Date, together with environmental reports, surveys and title insurance
policies or commitments in form and substance satisfactory to the Administrative
Agent and Special Counsel;
(m) Landlord's Waivers executed by each lessor with respect to leased
properties on which Collateral is located in substantially the form set out on
Exhibit J ("Landlord's Waiver"), subject to the sixty-day grace period with
respect thereto provided in the definition of "Eligible Inventory" set forth in
Section 1.1 hereof;
(n) evidence satisfactory to the Administrative Agent that (i) the
European Touch Transaction shall have been consummated (or shall be consummated
simultaneously with the initial Advance hereunder), and (ii) the Borrower shall
have received at least $75,000,000 in gross proceeds from the sale of the Senior
Subordinated Notes;
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<PAGE> 55
(o) a pro forma balance sheet of the Borrower and its Subsidiaries
taking into account the European Touch Transaction and reflecting such
information relating to the European Touch Transaction as the Administrative
Agent may require;
(p) after giving effect to the European Touch Transaction, there shall
have occurred no material adverse change in the business, assets, operations,
prospects or condition (financial or otherwise) of the Borrower and its
Subsidiaries (including in respect of the assets and liabilities of the European
Touch Companies to be acquired in the European Touch Transaction), taken as a
whole, since December 31, 1997;
(q) financial projections of the Borrower and its Subsidiaries
(including the European Touch Companies) in form and substance satisfactory to
the Administrative Agent;
(r) all Indebtedness of the Borrower under the Credit Agricole Credit
Agreement shall have been (or shall be consummated simultaneously with the
initial Advance hereunder) refinanced in full pursuant to the terms hereof, and
all obligations of the Borrower and its Subsidiaries under the Credit Agricole
Credit Agreement, except for those that expressly survive termination thereof,
shall terminate;
(s) all requisite approvals of all Tribunals and other third parties
with respect to the European Touch Transaction and the other transactions
contemplated hereby to the extent required shall have been obtained; and
(t) in form and substance reasonably satisfactory to the Administrative
Agent and Special Counsel, such other documents, instruments and certificates as
the Administrative Agent or any Lender may reasonably require in connection with
the transactions contemplated hereby, including without limitation, evidence of
the status, organization or authority of the Borrower or any Subsidiary of the
Borrower, and the enforceability of the Obligations.
Section 3.2 Conditions Precedent to All Advances and Letters of Credit.
The obligation of each Lender to make each Advance hereunder (including the
initial Advance) and the obligation of the Issuing Bank to issue or extend each
Letter of Credit (including the initial Letter of Credit) is subject to
fulfillment of the following conditions immediately prior to or
contemporaneously with each such Advance, issuance or extension:
(a) With respect to each Advance and each issuance or extension of a
Letter of Credit, all of the representations and warranties of the Borrower
under this Agreement, which, pursuant to Section 4.2 hereof, are made at and as
of the time of each such Advance, issuance or extension, shall be true and
correct, both before and after giving effect to the application of the proceeds
of the Advance or Letter of Credit, except as otherwise expressly provided in
said Section 4.2 hereof.
(b) The incumbency of the Authorized Signatories shall be as stated in
the certificate of incumbency delivered in the Borrower's loan certificate
pursuant to Section 3.1(a) or as subsequently
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modified and reflected in a certificate of incumbency delivered to the
Administrative Agent. The Lenders may, without waiving this condition, consider
it fulfilled and a representation by the Borrower made to such effect if no
written notice to the contrary, dated on or before the date of such Advance or
Letter of Credit, is received by the Administrative Agent from the Borrower
prior to the making of such Advance or issuance or extension of such Letter of
Credit;
(c) There shall not exist a Default or Event of Default hereunder;
(d) The aggregate Advances and Letters of Credit, after giving effect
to such proposed Advance or Letter of Credit, shall not exceed the maximum
principal amount then permitted to be outstanding hereunder;
(e) No order, judgment, injunction or decree of any Tribunal shall
purport to enjoin or restrain any Lender or the Issuing Bank from making any
Advance or issuing or extending any Letter of Credit;
(f) There shall be no Litigation pending against, or, to the Borrower's
current actual knowledge, threatened against the Borrower or any of its
Subsidiaries, or in any other manner relating directly and adversely to the
Borrower or any of its Subsidiaries, or any of their respective properties, in
any court or before any arbitrator of any kind or before or by any governmental
body which could reasonably be expected to have a Material Adverse Effect; and
(g) There shall have occurred no material adverse change in the
business, assets, condition (financial or otherwise) or results of operations of
the Borrower and its Subsidiaries (including the assets acquired and liabilities
of the European Touch Companies acquired in the European Touch Transaction),
taken as whole, since December 31, 1997 (but after giving effect to the European
Touch Transaction).
Notwithstanding the above, the obligation of each Lender to make a
Revolving Credit Advance pursuant to Section 2.15(c) hereof (or fund its
participation in respect of Letters of Credit pursuant to Section 2.15(c)
hereof) shall be absolute and unconditional and shall not be affected by any
circumstances, including, without limitation, (i) the occurrence of any Default
or Event of Default, unless the Issuing Bank had actual knowledge of such
Default or Event of Default prior to the issuance of the Letter of Credit
related to such Revolving Credit Advance, (ii) the failure of the Borrower to
satisfy any condition set forth in this Section 3.2, or (iii) any other
circumstance, happening or event whatsoever, except that the conditions
precedent set forth in Sections 3.1 and 3.2 hereof with respect to the Letter of
Credit for which such Revolving Credit Advance is made pursuant to Section
2.15(c) hereof shall have been satisfied in full at the time of the issuance of
such Letter of Credit.
Section 3.3 Conditions Precedent to Each Term Loan Advance and Each
Revolving Credit Acquisition Advance. The obligation of each Lender to make each
Term Loan Advance and each Revolving Credit Acquisition Advance hereunder
(including the initial Term Loan Advance
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and any initial Revolving Credit Acquisition Advance) is subject to fulfillment
of the following conditions (in addition to the conditions set forth in Sections
3.1 and 3.2 hereof):
(a) The conditions set forth in Section 7.6 with respect to such
Acquisition shall have been satisfied.
(b) On or before the date of the Term Loan Advance or the Revolving
Credit Acquisition Advance, the Borrower shall have complied with Sections 5.11
and 5.12 hereof as to any property acquired or to be acquired in connection with
such Acquisition.
(c) There shall be delivered to the Administrative Agent (in each case,
with sufficient copies for each Lender) upon consummation of the Acquisition, a
complete set of documents effecting such Acquisition, together with all
schedules and exhibits thereto.
(d) The Administrative Agent shall be reasonably satisfied with the
final terms and conditions of, and documentation relating to, the Acquisition
(including, without limitation, all representations, warranties and indemnities
contained in such documentation). The Administrative Agent shall be deemed to be
satisfied with the final terms and conditions of, and documentation related to,
such Acquisition unless it notifies the Borrower in writing to the contrary
within 5 Business Days after receipt by the Administrative Agent of such final
terms and documentation.
Section 3.4 Conditions Precedent to Conversions and Continuations. The
obligation of the Lenders to convert any existing Base Rate Advance into a LIBOR
Advance or to continue any existing LIBOR Advance is subject to the condition
precedent that on the date of such conversion or continuation no Default or
Event of Default shall have occurred and be continuing or would result from the
making of such conversion or continuation. The acceptance of the benefits of
each such conversion and continuation shall constitute a representation and
warranty by the Borrower to each of the Lenders that no Default or Event of
Default shall have occurred and be continuing or would result from the making of
such conversion or continuation.
ARTICLE 4
Representations and Warranties
Section 4.1 Representations and Warranties. The Borrower hereby
represents and warrants to each Lender as follows:
(a) Organization; Power; Qualification. As of the Agreement Date, the
respective jurisdiction of organization or incorporation and percentage
ownership by the Borrower of the Subsidiaries listed on Schedule 4.1(a) hereto
are true and correct. As of the Agreement Date, Schedule 4.1(a) hereto is a
complete and accurate listing, showing with respect to the Borrower and each
Subsidiary of the Borrower (a) its mailing address, which is its principal place
of business, and
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(b) the classes of its Capital Stock and the number of amount of its Capital
Stock authorized and outstanding. All of the outstanding Capital Stock of the
Borrower and each Subsidiary of the Borrower is validly issued, fully paid and
non-assessable (except that, pursuant to Section 180.0622 of the Wisconsin
Statutes, a shareholder of any Wisconsin corporation may be assessed up to six
months back wages for employees of such corporation). Each of the Borrower and
its Subsidiaries is a corporation or other legal Person duly organized, validly
existing and in good standing under the laws of its state of incorporation or
organization. Each of the Borrower and its Subsidiaries has the legal power and
authority to own its properties and to carry on its business as now being and
hereafter proposed to be conducted. Each of the Borrower and its Subsidiaries is
authorized to do business, duly qualified and in good standing in the
jurisdiction as set forth in Schedule 4.1(a) hereto and no qualification or
authorization is necessary in any other jurisdictions in which the character of
its properties or the nature of its business requires such qualification or
authorization, except where the failure to be so qualified or authorized could
not reasonably be expected to have a Material Adverse Effect.
(b) Authorization. The Borrower has corporate power and has taken all
necessary corporate action to authorize it to borrow and request Letters of
Credit hereunder. Each of the Borrower and its Subsidiaries has corporate or
other proper power and has taken all necessary corporate or other action to
execute, deliver and perform the Loan Documents to which it is party in
accordance with the terms thereof, and to consummate the transactions
contemplated thereby. Each Loan Document has been duly executed and delivered by
the Borrower or its Subsidiary executing it. Each of the Loan Documents to which
the Borrower or any of its Subsidiaries is a party is a legal, valid and binding
obligation of the Borrower or such Subsidiary, as applicable, enforceable in
accordance with its terms, subject, to enforcement of remedies, to the following
qualifications: (i) equitable principles generally, and (ii) Debtor Relief Laws
(insofar as any such law relates to the bankruptcy, insolvency or similar event
of the Borrower or any of its Subsidiaries).
(c) Compliance with Other Loan Documents and Contemplated Transactions.
The execution, delivery and performance by the Borrower and its Subsidiaries of
the Loan Documents to which they are respectively a party, and the consummation
of the transactions contemplated thereby, do not and will not (i) require any
consent or approval necessary on or prior to the Agreement Date not already
obtained, except for matters which could not reasonably be expected to gave a
Material Adverse Effect, (ii) violate any Applicable Law, (iii) conflict with,
result in a breach of, or constitute a default under the certificate of
incorporation or by-laws or other applicable organizational documents of the
Borrower or any Subsidiary of the Borrower, (iv) conflict with, result in a
breach of, or constitute a default under any Necessary Authorization, indenture,
agreement or other instrument, to which the Borrower or any Subsidiary of the
Borrower is a party or by which they or their respective properties may be
bound, except for matters which could not reasonably be expected to have a
Material Adverse Effect, or (v) result in or require the creation or imposition
of any Lien (other than Liens in favor of the Lenders to secure the Obligations
hereunder or other Permitted Liens) upon or with respect to any property now
owned or hereafter acquired by the Borrower or any of its Subsidiaries.
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(d) Business. The Borrower and its Subsidiaries are engaged primarily
in the business of the manufacture and distribution of personal care and salon
products and businesses or activities reasonably directly related thereto.
(e) Licenses, etc. All Necessary Authorizations have been duly
obtained, and are in full force and effect without any known conflict with the
rights of others and free from any unduly burdensome restrictions, unless the
failure to obtain or have in effect such Necessary Authorizations could not
reasonably be expected to result in a Material Adverse Effect. The Borrower and
its Subsidiaries are and will continue to be in compliance with all provisions
thereof, except to the extent that any such failure to comply could not
reasonably be expected to have a Material Adverse Effect. No circumstance exists
which could reasonably be expected to impair the utility of the Necessary
Authorization or the right to renew such Necessary Authorization the effect of
which could reasonably be expected to have a Material Adverse Effect. No
Necessary Authorization is the subject of any pending or, to the Borrower's
knowledge, threatened challenge, suspension, cancellation or revocation, the
effect of which could reasonably be expected to have a Material Adverse Effect.
(f) Compliance with Law. The Borrower and its Subsidiaries are in
compliance in all respects with all Applicable Laws, except where the failure to
so comply could not reasonably be expected to have a Material Adverse Effect.
(g) Title to Properties. The Borrower and its Subsidiaries have good
title to, or a valid leasehold or subleasehold interest in, all of their
material assets. None of their assets are subject to any Liens, except Permitted
Liens. No financing statement or other Lien filing (except relating to Permitted
Liens) is on file in any state or jurisdiction that names the Borrower or any of
its Subsidiaries as debtor or covers (or purports to cover) any assets of the
Borrower or any of its Subsidiaries, except for Indebtedness with respect to
which the requirements of Section 3.1(i) hereof have been satisfied. The
Borrower and its Subsidiaries have not signed any such financing statement or
filing, nor any security agreement authorizing any Person to file any such
financing statement or filing (except relating to Permitted Liens).
(h) Litigation. Except as reflected on Schedule 4.1(h) hereto, as of
the Agreement Date, there is no Litigation pending against, or, to the
Borrower's current actual knowledge, threatened against the Borrower or any of
its Subsidiaries, or in any other manner relating directly and adversely to the
Borrower or any of its Subsidiaries, or any of their respective properties, in
any court or before any arbitrator of any kind or before or by any governmental
body in which the amount claimed in an aggregate amount (excluding liabilities
for which credit worthy insurance companies have acknowledged coverage) exceeds
$500,000.
(i) Taxes. All federal, state and other tax returns of the Borrower and
its Subsidiaries required by law to be filed have been duly filed, or extensions
have been timely filed, and all taxes shown to be due and payable on such
returns, have been paid, unless the same are being diligently contested in
accordance with Section 5.6 hereof. The charges, accruals and reserves on the
books
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of the Borrower and its Subsidiaries in respect of their taxes are, in the
reasonable judgment of the Borrower, adequate.
(j) Financial Statements; Material Liabilities.
(i) The Borrower has heretofore delivered to the Lenders the
audited consolidated balance sheets of the Borrower as at December 31,
1997, and the related statements of earnings and changes in
shareholders' equity and statement of cash flows for the twelve-month
period then ended (the "Borrower's Audited Financial Statements"). The
Borrower's Audited Financial Statements were prepared in conformity
with GAAP and fairly present, in all material respects, the financial
position of the Borrower and its Subsidiaries on a consolidated basis
or as at the date thereof and the consolidated results of operations
and cash flows for the period covered thereby.
(ii) The Borrower has heretofore delivered to the Lenders the
unaudited consolidated balance sheets of the Borrower as at March 31,
1998 and the related statements of earnings and changes in
stockholders' equity and statement of cash flows for the three-month
period then ended (the "Borrower's Unaudited Financial Statements").
The Borrower's Unaudited Financial Statements were prepared in
conformity with GAAP and fairly present, in all material respects, the
financial position of the Borrower and its Subsidiaries on a
consolidated basis as at the end of and for such fiscal quarter,
subject to normal year-end adjustments.
(iii) The Borrower has heretofore delivered the audited
consolidated balance sheets of the European Touch Companies as at
December 31, 1997 and the related statements of earnings and changes in
stockholders' equity and statement of cash flows for the twelve-month
period then ended (the "European Touch Companies Audited Financial
Statements"). The European Touch Companies Audited Financial Statements
were prepared in conformity with GAAP and fair present, in all material
respects, the financial position of the European Touch Companies and
the consolidated results of operations and cash flows for the period
covered thereby.
(iv) The Borrower has heretofore delivered to the Lenders the
unaudited combined balance sheets of the European Touch Companies as at
March 31, 1998 and the related statements of earnings and changes in
stockholders' equity and statement of cash flows for the three-month
period then ended (the "European Touch Companies Unaudited Financial
Statements"). The European Touch Companies Unaudited Financial
Statements were prepared in conformity with GAAP and fairly present, in
all material respects, the financial position of the European Touch
Companies, as at the end of and for such fiscal quarter, subject to
normal year-end adjustments.
(v) The projected consolidated financial statements of the
Borrower and its Subsidiaries (including the European Touch Companies)
delivered to the Lenders prior to
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or on the Agreement Date are based on good faith estimates and
assumptions made by the management of the Borrower and believed to be
reasonable at the time made, it being recognized by the Lenders that
such projections as to future events are not to be viewed as facts and
that actual results during the period or periods covered by any such
projections may significantly differ from the projected results.
(vi) The consolidated financial statements of the Borrower and
its Subsidiaries delivered to the Lenders pursuant to Section 6.1 and
6.2 hereof fairly present in all material respects their respective
financial condition and their respective results of operations as of
the dates and for the periods shown, all in accordance with GAAP,
subject to normal year-end adjustments. The latest of such financial
statements reflects all material liabilities, direct and contingent, of
the Borrower and each Subsidiary of the Borrower that are required to
be disclosed in accordance with GAAP.
(k) No Adverse Change. Since December 31, 1997, no event or
circumstance has occurred or arisen which is reasonably likely to have a
Material Adverse Effect.
(l) ERISA. As of the Agreement Date, none of the Borrower or its
Controlled Group maintains or contributes to any Plan (other than a
Multiemployer Plan) subject to Title IV of ERISA. Each such Plan (other than any
Multiemployer Plan) is in compliance in all material respects with the
applicable provisions of ERISA, the Code, and any other applicable Law, except
to the extent that failure to so comply would not reasonably be expected to have
a Material Adverse Effect. With respect to each Plan (other than any
Multiemployer Plan) of the Borrower and each member of its Controlled Group, all
reports required under ERISA or any other Applicable Law to be filed with any
Tribunal, the failure of which to file could reasonably be expected to result in
liability of the Borrower or any member of its Controlled Group in excess of
$500,000, have been duly filed. All such reports are true and correct in all
material respects as of the date given. No Plan of the Borrower or any member of
its Controlled Group has been terminated under Section 4041(c) of ERISA nor has
any accumulated funding deficiency (as defined in Section 412(a) of the Code)
been incurred (without regard to any waiver granted under Section 412 of the
Code), nor has any funding waiver from the Internal Revenue Service been
received or requested the result of which could reasonably be expected to have a
Material Adverse Effect. None of the Borrower or any member of its Controlled
Group has failed to make any contribution or pay any amount due or owing as
required under the terms of any such Plan, or by Section 412 of the Code or
Section 302 of ERISA by the due date under Section 412 of the Code and Section
302 of ERISA, the result of which could reasonably be expected to have a
Material Adverse Effect. There has been no ERISA Event or any event requiring
disclosure under Section 4041(c)(3)(C) or 4063(a) of ERISA with respect to any
Plan or its related trust of the Borrower or any member of its Controlled Group
since the effective date of ERISA, the result of which could reasonably be
expected to have a Material Adverse Effect. The present value of the benefit
liabilities, as defined in Title IV of ERISA, of each Plan subject to Title IV
of ERISA (other than a Multiemployer Plan) of the Borrower and each member of
its Controlled Group does not exceed by more than $500,000 the present value of
the assets of each such Plan as of the most recent valuation date using each
such Plan's actuarial assumptions at such
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date. There are no pending, or to the Borrower's knowledge threatened, claims,
lawsuits or actions (other than routine claims for benefits in the ordinary
course) asserted or instituted against, and neither the Borrower nor any member
of its Controlled Group has knowledge of any threatened litigation or claims
against, the assets of any Plan or its related trust or against any fiduciary of
a Plan with respect to the operation of such Plan, the result of which could
reasonably be expected to have a Material Adverse Effect. None of the Borrower
or, to the Borrower's knowledge, any member of its Controlled Group has engaged
in any prohibited transactions, within the meaning of Section 406 of ERISA or
Section 4975 of the Code, in connection with any Plan the result of which could
reasonably be expected to have a Material Adverse Effect. None of the Borrower
or any member of its Controlled Group has withdrawn from any Multiemployer Plan,
nor has incurred or reasonably expects to incur (A) any liability under Title IV
of ERISA (other than premiums due under Section 4007 of ERISA to the PBGC), (B)
any withdrawal liability (and no event has occurred which with the giving of
notice under Section 4219 of ERISA would result in such liability) under Section
4201 of ERISA as a result of a complete or partial withdrawal (within the
meaning of Section 4203 or 4205 of ERISA) from a Multiemployer Plan, or (C) any
liability under Section 4062 of ERISA to the PBGC or to a trustee appointed
under Section 4042 of ERISA, the result of which could reasonably be expected to
have a Material Adverse Effect. None of the Borrower, any member of its
Controlled Group, or any organization to which the Borrower or any member of its
Controlled Group is a successor or parent corporation within the meaning of
ERISA Section 4069(b), has engaged in a transaction within the meaning of ERISA
Section 4069, the result of which could reasonably be expected to have a
Material Adverse Effect. None of the Borrower or any member of its Controlled
Group maintains or has established any Plan (other than a Multiemployer Plan)
which is a welfare benefit plan within the meaning of Section 3(1) of ERISA and
which provides for continuing benefits or coverage for any participant or any
beneficiary of any participant after such participant's termination of
employment, except as may be required by any Applicable Law, the result of which
could reasonably be expected to have a Material Adverse Effect. Each of Borrower
and its Controlled Group which maintains a Plan which is a welfare benefit plan
within the meaning of Section 3(1) of ERISA has complied in all material
respects with any applicable notice and continuation requirements of the
Consolidated Omnibus Budget Reconciliation Act of 1985, as amended, and the
regulations thereunder. None of the Borrower or any member of its Controlled
Group maintains or has established a multiemployer welfare benefit arrangement
within the meaning of Section 3(40)(A) of ERISA.
(m) Compliance with Regulations T, U and X. The Borrower is not engaged
principally or as one of its important activities in the business of extending
credit for the purpose of purchasing or carrying any margin stock within the
meaning of Regulations T, U and X of the Board of Governors of the Federal
Reserve System, and no part of the proceeds of the Advances or Letters of Credit
will be used to purchase or carry any margin stock or to extend credit to others
for the purpose of purchasing or carrying any margin stock in any manner which
might cause the borrowing of any Advances or the application of any proceeds
thereof to violate Regulations T, U and X of the Board of Governors of the
Federal Reserve System.
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(n) Required Consents. The Borrower and its Subsidiaries are not
required to obtain any Necessary Authorization on or prior to the Agreement Date
that has not already been obtained from, or effect any material filing or
registration that has not already been effected with, any Tribunal in connection
with the execution and delivery of this Agreement or any other Loan Document, or
the performance thereof, in accordance with their respective terms, including
any borrowings hereunder, except for the filing of financing statements (and
other similar notices) and other Collateral Documents containing a description
of the Collateral with certain Tribunals, including the United States Patent and
Trademark Office.
(o) Absence of Default. The Borrower and its Subsidiaries are in
compliance in all respects with all of the provisions of their certificate of
incorporation, by-laws and other organizational documents, other than matters
that could not reasonably be expected to have a Material Adverse Effect. No
event has occurred or failed to occur, which has not been remedied or waived,
the occurrence or non-occurrence of which constitutes, or which with the passage
of time or giving of notice or both would constitute, (i) an Event of Default or
(ii) a default by the Borrower or any of its Subsidiaries under any indenture,
agreement or other instrument, or any judgment, decree or order to which the
Borrower or any of its Subsidiaries or by which they or any of their respective
properties is bound, the result of which could reasonably be expected to have a
Material Adverse Effect.
(p) Governmental Regulation. Neither the Borrower nor any of its
Subsidiaries is subject to regulation under the Public Utility Holding Company
Act of 1935, the Federal Power Act, the Interstate Commerce Act or the
Investment Company Act of 1940. Neither the entering into or performance by the
Borrower of this Agreement nor the issuance of the Notes violates any provision
of such act or requires any consent, approval, or authorization of, or
registration with, the Securities and Exchange Commission or any other Tribunal
pursuant to any provisions of such act.
(q) Environmental Matters. The Borrower does not have any knowledge
that any substance deemed hazardous by any Applicable Environmental Law, has
been placed (i) on any real property fee title to which is now owned by the
Borrower or any of its Subsidiaries or (ii) by Borrower or any of its
Subsidiaries on any real property leased by the Borrower or any of its
Subsidiaries, in either case in a manner which does not comply with Applicable
Environmental Laws, except to the extent that the failure to so comply could not
reasonably be expected to have a Material Adverse Effect. The Borrower and its
Subsidiaries are not in violation of or subject to any existing, pending or, to
the Borrower's knowledge, threatened investigation or inquiry by any Tribunal or
to any remedial obligations under any Applicable Environmental Laws, the effect
of which could reasonably be expected to have a Material Adverse Effect. The
Borrower and its Subsidiaries have not failed to obtain any permits, licenses or
similar authorizations other than certificates of occupancy and building permits
and other authorizations that have been obtained to construct, occupy, operate
or use any buildings, improvements, fixtures, and equipment forming a part of
any real property owned or leased by the Borrower or any Subsidiary of the
Borrower by reason of any Applicable Environmental Laws, except to the extent
that the failure to so obtain could not reasonably be expected to have a
Material Adverse Effect. The Borrower has no knowledge, that
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any hazardous substances or solid wastes have been disposed of or otherwise
released (i) on or to the real property fee title to which is owned by the
Borrower or any of its Subsidiaries or (ii) by Borrower or any of its
Subsidiaries on or to any real property leased by Borrower or any of its
Subsidiaries, all within the meaning of the Applicable Environmental Laws, the
effect of which could reasonably be expected to have a Material Adverse Effect.
(r) Certain Fees. Except for fees and expenses incurred in connection
with the European Touch Transaction, no broker's, finder's or other fee or
commission will be payable by the Borrower (other than to the Lenders hereunder)
with respect to the making of the Commitments or the Advances hereunder. The
Borrower agrees to indemnify and hold harmless the Administrative Agent and each
Lender from and against any claims, demand, liability, proceedings, costs or
expenses asserted with respect to or arising in connection with any such fees or
commissions, including those related to the European Touch Transaction.
(s) Intellectual Property. The Borrower and its Subsidiaries have
collectively obtained or applied for or licensed or otherwise obtained the right
to use all patents, patent applications, trademarks, trademark applications,
service marks, service mark applications, trade names, copyrights, trade secrets
and know how (collectively, the "Intellectual Property"), free from Liens
(except Permitted Liens), that are necessary for the operation of their business
as presently conducted, except to the extent that the failure to so obtain,
apply, license or obtain the right to use could not reasonably be expected to
have a Material Adverse Effect. Nothing has come to the knowledge of the
Borrower to the effect that (i) any process, method, part or other material
presently contemplated to be employed by the Borrower or any Subsidiary of the
Borrower infringes any valid and enforceable Intellectual Property or other
right owned by any other Person, or (ii) there is pending or overtly threatened
any claim or Litigation against or affecting the Borrower or any Subsidiary of
the Borrower contesting its right to sell or use any such process, method, part
or other material, which could reasonably be expected to have a Material Adverse
Effect.
(t) Disclosure. All factual information furnished by the Borrower or
any of its Subsidiaries in writing to the Administrative Agent or any Lender in
connection with this Agreement or the other Loan Documents is, and all other
such factual information hereafter furnished by or on behalf of the Borrower or
any of its Subsidiaries in writing to the Administrative Agent or any Lender
will be, true and accurate in all material respects on the date as of which such
information is dated or certified and not incomplete by omitting to state any
material fact necessary to make such information not misleading at such time in
light of the circumstances under which such information was provided. There is
no fact known to the Borrower and not known to the public generally that could
reasonably be expected to have a Material Adverse Effect, which has not been set
forth in this Agreement or in the documents, certificates and statements
furnished to the Lenders by or on behalf of the Borrower in connection with the
transaction contemplated hereby.
(u) Solvency. The Borrower is, and Borrower and its Subsidiaries on a
consolidated basis are, Solvent.
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(v) Labor Relations. Except as provided on Schedule 4.1(v) hereto,
neither the Borrower nor any Subsidiary is a party to a collective bargaining
agreement or similar agreement, and the Borrower and each Subsidiary is in
compliance in all material respects with all Laws respecting employment and
employment practices, terms and conditions of employment, wages and hours and
other laws related to the employment of its employees, except where the failure
to comply could not reasonably be expected to result in a Material Adverse
Effect, and there are no arrears in the payment of wages, withholding or social
security taxes, unemployment insurance premiums or other similar obligations of
the Borrower or any Subsidiary or for which the Borrower or any Subsidiary may
be responsible other than in the ordinary course of business, except for such
unpaid or unwithheld arrears which could not reasonably be expected to result in
a Material Adverse Effect. There is no strike, work stoppage or labor dispute
with any union or group of employees pending or overtly threatened involving
Borrower or any Subsidiary that could reasonably be expected to have a Material
Adverse Effect.
(w) Common Enterprise. The Borrower and its Subsidiaries are engaged in
the businesses set forth in Section 4.1(d) hereof. These operations require
financing on a basis such that the credit supplied can be made available from
time to time to the Borrower and various of the Subsidiaries, as required for
the continued successful operation of the Borrower and its Subsidiaries as a
whole. The Borrower and its Subsidiaries expect to derive benefit (and the
boards of directors of the Borrower and its Subsidiaries have determined that
the Borrower and the Subsidiaries may reasonably be expected to derive benefit),
directly or indirectly, from the credit extended by Lenders hereunder, both in
their separate capacities and as members of the group of companies, since the
successful operation and condition of the Borrower and its Subsidiaries is
dependent on the continued successful performance of the functions of the group
as a whole.
(x) Year 2000 Compliance. The Company has (a) initiated a review and
assessment of all areas within its and each of its Subsidiaries' business and
operations that could be adversely affected by the "Year 2000 Problem" (that is,
the risk that computer applications used by the Company or any of its
Subsidiaries may be unable to recognize and perform properly date-sensitive
functions involving certain dates prior to and any date after December 31,
1999), (b) developed a plan and timeline for addressing the Year 2000 Problem on
a timely basis, and (c) to date, implemented that plan in accordance with that
timetable. The Company reasonably believes that all computer applications that
are material to its or any of its Subsidiaries' business and operations will on
a timely basis be able to perform properly date-sensitive functions for all
dates before and after January 1, 2000 (that is, be "Year 2000 Compliant"),
except to the extent that a failure to do so could not reasonably be expected to
have a Material Adverse Effect.
Section 4.2 Survival of Representations and Warranties, etc. All
representations and warranties made under this Agreement and the other Loan
Documents shall be deemed to be made at and as of the Agreement Date and at and
as of the date of each Advance and the date of issuance of each Letter of
Credit, and each shall be true and correct when made, except to the extent (a)
previously fulfilled in accordance with the terms hereof, (b) previously waived
in writing by the Determining Lenders with respect to any particular factual
circumstance or permitted by the terms
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of this Agreement or (c) such representations and warranties specifically relate
to an earlier date, in which case such representations and warranties shall have
been true and correct on and as of such date. All such representations and
warranties shall survive, and not be waived by, the execution hereof by any
Lender, any investigation or inquiry by any Lender, or by the making of any
Advance or the issuance or extension of any Letter of Credit under this
Agreement.
ARTICLE 5
General Covenants
Until all amounts under the Notes and in respect of the Reimbursement
Obligations have been paid in full and all other amounts and expenses due and
payable hereunder shall be paid and until the Commitments have been terminated:
Section 5.1 Preservation of Existence and Similar Matters. The Borrower
shall, and shall cause each of its Subsidiaries to:
(a) except as otherwise permitted pursuant to Section 7.4 hereof,
preserve and maintain, or timely obtain and thereafter preserve and maintain,
its existence, rights, franchises, licenses, authorizations, consents,
privileges and all other Necessary Authorizations from any Tribunal, the loss of
which could reasonably be expected to have a Material Adverse Effect; and
(b) except as otherwise permitted pursuant to Section 7.4 hereof,
qualify and remain qualified and authorized to do business in each jurisdiction
in which the character of its properties or the nature of its business requires
such qualification or authorization, unless the failure to do so could not
reasonably be expected to have a Material Adverse Effect.
Section 5.2 Business; Compliance with Applicable Law. The Borrower and
its Subsidiaries shall (a) engage primarily in the businesses set forth in
Section 4.1(d) hereof, and (b) comply in all respects with the requirements of
all Applicable Law, except where the failure to so comply could not reasonably
be expected to have a Material Adverse Effect.
Section 5.3 Maintenance of Properties. The Borrower shall, and shall
cause each of its Subsidiaries to, maintain or cause to be maintained all its
properties (whether owned or held under lease) in adequate operating condition
and repair for purposes of their current use with due regard to the age thereof,
taken as a whole, subject to ordinary wear and tear, and from time to time make
or cause to be made all appropriate (in the reasonable judgment of the Borrower)
repairs, renewals, replacements, additions, betterments and improvements thereto
in accordance with past practice, except where the failure to so maintain,
repair, renew, replace or improve could not reasonably be expected to have a
Material Adverse Effect.
Section 5.4 Accounting Methods and Financial Records. The Borrower
shall, and shall cause each of its Subsidiaries to, (a) maintain a system of
accounting established and administered
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in accordance with GAAP, (b) keep adequate records and books of account in which
complete entries will be made and all transactions reflected in accordance with
GAAP, and (c) keep accurate and complete records of its respective assets. The
Borrower and each of its Subsidiaries shall maintain a fiscal year ending on the
last day of December.
Section 5.5 Insurance. The Borrower shall, and shall cause each of its
Subsidiaries to, maintain insurance from responsible companies in such amounts
and against such risks (but, including any event, public liability and business
interruption insurance and flood insurance as to any portion of the real estate
Collateral which shall at any time be located in an identified "flood prone"
area in which flood insurance has been made available pursuant to the Federal
Flood Protection Act of 1973, as amended), as shall be customary and usual in
the industry for companies of similar size and capability. Each insurance policy
shall (a) provide for at least 30 days' prior notice to the Administrative Agent
of any proposed termination or cancellation of such policy, whether on account
of default or otherwise and (b) otherwise contain the requirements for insurance
set forth in the Collateral Documents.
Section 5.6 Payment of Taxes and Claims. The Borrower shall, and shall
cause each of its Subsidiaries to, pay and discharge all material taxes to which
they are subject prior to the date on which penalties attach thereto, and all
lawful material claims for labor, materials and supplies which, if unpaid, might
by Law become a Lien upon any of its properties; except that no such tax or
claim need be paid which is being diligently contested in good faith by
appropriate proceedings and for which adequate reserves shall have been set
aside on the appropriate books, but only so long as any Lien related thereto is
a Permitted Lien and no foreclosure sale or similar proceeding shall have been
commenced. The Borrower shall, and shall cause each of its Subsidiaries to,
timely file all information returns (or extensions of such filing deadlines)
required by federal, state or local tax authorities.
Section 5.7 Visits and Inspections. The Borrower shall, and shall cause
each of its Subsidiaries to, promptly permit representatives of the
Administrative Agent or any Lender from time to time after reasonable written
notice by the Administrative Agent or any Lender to (a) visit and inspect the
properties of the Borrower and its Subsidiaries as often as the Administrative
Agent or any Lender shall reasonably deem advisable, (b) review, inspect and
make extracts from and copies of the Borrower's and each such Subsidiary's books
and records, and (c) discuss with the Borrower's and each such Subsidiary's
directors, officers, employees and auditors its business, assets, liabilities,
financial positions, results of operations and business prospects, provided that
such representatives of the Administrative Agent or any Lender shall keep
confidential all information obtained pursuant to this Section 5.7 to the extent
required by Section 11.14 hereof. The Borrower shall pay the reasonable
out-of-pocket expenses related to inspections and reviews performed (a) at any
time by the Administrative Agent and (b) after the occurrence and during the
continuance of an Event of Default, by each Lender. Except after the occurrence
and during the continuance of an Event of Default, all such visits and
inspections shall be conducted during normal business hours. Following the
occurrence and during the continuance of an Event of Default, such visits and
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inspections shall be conducted at any time requested by the Administrative Agent
or any Lender without any requirement for reasonable notice.
Section 5.8 Use of Proceeds. The proceeds (a) of the Revolving Credit
Advances shall be used by the Borrower to finance the ongoing working capital
and general corporate requirements of the Borrower and its Subsidiaries,
including Acquisitions permitted hereunder, and (b) of the Term Loan Advances
shall be used by the Borrower to finance Acquisitions permitted hereunder.
SECTION 5.9 INDEMNITY.
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(a) THE BORROWER AGREES TO DEFEND, PROTECT, INDEMNIFY AND HOLD
HARMLESS THE ADMINISTRATIVE AGENT, EACH LENDER, THE ISSUING BANK, EACH OF THEIR
RESPECTIVE AFFILIATES, AND EACH OF THEIR RESPECTIVE (INCLUDING SUCH AFFILIATES')
OFFICERS, DIRECTORS, EMPLOYEES, AGENTS, ATTORNEYS AND CONSULTANTS (INCLUDING,
WITHOUT LIMITATION, THOSE RETAINED IN CONNECTION WITH THE SATISFACTION OR
ATTEMPTED SATISFACTION OF ANY OF THE CONDITIONS SET FORTH HEREIN) OF EACH OF THE
FOREGOING (COLLECTIVELY, "INDEMNITEES") FROM AND AGAINST ANY AND ALL
LIABILITIES, OBLIGATIONS, LOSSES, DAMAGES, PENALTIES, ACTIONS, JUDGMENTS, SUITS,
CLAIMS, REASONABLE COSTS, REASONABLE OUT-OF-POCKET EXPENSES AND REASONABLE
DISBURSEMENTS OF ANY KIND OR NATURE WHATSOEVER (INCLUDING, WITHOUT LIMITATION,
THE REASONABLE FEES AND DISBURSEMENTS OF COUNSEL FOR SUCH INDEMNITEES IN
CONNECTION WITH ANY INVESTIGATIVE, ADMINISTRATIVE OR JUDICIAL PROCEEDING,
WHETHER OR NOT SUCH INDEMNITEES SHALL BE DESIGNATED A PARTY THERETO), IMPOSED
ON, INCURRED BY, OR ASSERTED AGAINST SUCH INDEMNITEES (WHETHER DIRECT, INDIRECT
OR CONSEQUENTIAL AND WHETHER BASED ON ANY FEDERAL, STATE, OR LOCAL LAWS AND
REGULATIONS, UNDER COMMON LAW OR AT EQUITABLE CAUSE, OR ON CONTRACT, TORT OR
OTHERWISE, ARISING FROM OR CONNECTED WITH THE PAST, PRESENT OR FUTURE OPERATIONS
OF THE BORROWER OR ANY OF ITS SUBSIDIARIES OR THEIR RESPECTIVE PREDECESSORS IN
INTEREST, OR THE PAST, PRESENT OR FUTURE ENVIRONMENTAL CONDITION OF PROPERTY OF
THE BORROWER OR ANY OF ITS SUBSIDIARIES) RELATING TO OR ARISING OUT OF THIS
AGREEMENT, THE OTHER LOAN DOCUMENTS, OR ANY ACT, EVENT OR TRANSACTION OR ALLEGED
ACT, EVENT OR TRANSACTION RELATING THERETO, INCLUDING IN CONNECTION WITH, OR AS
A RESULT, IN WHOLE OR IN PART, OF ANY ORDINARY OR MERE NEGLIGENCE OF
ADMINISTRATIVE AGENT OR ANY LENDER (OTHER THAN THOSE MATTERS RAISED EXCLUSIVELY
BY A PARTICIPANT AGAINST THE ADMINISTRATIVE AGENT OR ANY LENDER AND NOT THE
BORROWER), OR THE USE OR INTENDED USE OF THE PROCEEDS OF THE ADVANCES OR LETTERS
OF CREDIT HEREUNDER, OR IN CONNECTION WITH ANY INVESTIGATION OF ANY POTENTIAL
MATTER COVERED HEREBY, BUT EXCLUDING (i) ANY CLAIM OR LIABILITY THAT ARISES AS
THE RESULT OF THE GROSS NEGLIGENCE OR WILFUL MISCONDUCT OF ANY INDEMNITEE, AS
FINALLY JUDICIALLY DETERMINED BY A COURT OF COMPETENT JURISDICTION, (ii) ANY
CLAIM OR LIABILITY THAT ARISES AS THE DIRECT RESULT OF THE OPERATION OF THE
PROPERTY OF THE BORROWER OR ANY OF ITS SUBSIDIARIES BY ANY OF THE LENDERS AFTER
TAKING POSSESSION THEREOF BY FORECLOSURE OR BY TRANSFER IN LIEU OF FORECLOSURE
(PROVIDED THAT SUCH CLAIM OR LIABILITY DOES NOT RELATE TO ANY CONDITION EXISTING
ON SUCH PROPERTY PRIOR TO FORECLOSURE OR TRANSFER IN LIEU OF FORECLOSURE), AND
(iii) MATTERS RAISED BY ONE
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LENDER AGAINST ANOTHER LENDER OR BY ANY SHAREHOLDERS OF A LENDER AGAINST A
LENDER OR ITS MANAGEMENT (COLLECTIVELY, EXCEPT FOR THE MATTERS REFERRED TO
CLAUSES (i), (ii) or (iii) ABOVE, "INDEMNIFIED MATTERS", AND THE MATTERS
REFERRED TO IN CLAUSES (i), (ii) or (iii) ABOVE, COLLECTIVELY, "EXCLUDED
MATTERS").
(b) WITHOUT DUPLICATION, THE BORROWER SHALL PERIODICALLY, UPON
REQUEST, REIMBURSE EACH INDEMNITEE FOR ITS REASONABLE OUT-OF-POCKET LEGAL AND
OTHER ACTUAL REASONABLE EXPENSES (INCLUDING THE REASONABLE COST OF ANY
INVESTIGATION AND PREPARATION) INCURRED IN CONNECTION WITH ANY INDEMNIFIED
MATTER; PROVIDED THAT SUCH INDEMNITEE SHALL PROVIDE ADEQUATE DOCUMENTATION OF
SUCH EXPENSES; PROVIDED, FURTHER, THAT IF AN INDEMNITEE IS REIMBURSED HEREUNDER
FOR SUCH AMOUNT, THE AMOUNT SO PAID SHALL BE REFUNDED TO THE BORROWER IF AND TO
THE EXTENT IT IS FINALLY JUDICIALLY DETERMINED THAT THE INDEMNIFIED MATTER IN
QUESTION WAS AN EXCLUDED MATTER. THE REIMBURSEMENT, INDEMNITY AND CONTRIBUTION
OBLIGATIONS UNDER THIS SECTION SHALL BE IN ADDITION TO ANY LIABILITY WHICH THE
BORROWER MAY OTHERWISE HAVE, SHALL EXTEND UPON THE SAME TERMS AND CONDITIONS TO
EACH INDEMNITEE, AND SHALL BE BINDING UPON AND INURE TO THE BENEFIT OF ANY
SUCCESSORS, ASSIGNS, HEIRS AND PERSONAL REPRESENTATIVES OF THE BORROWER, THE
ADMINISTRATIVE AGENT, THE LENDERS AND ALL OTHER INDEMNITEES. THIS SECTION SHALL
SURVIVE ANY TERMINATION OF THIS AGREEMENT AND PAYMENT OF THE OBLIGATIONS.
Section 5.10 Environmental Law Compliance. The use which the
Borrower or any Subsidiary of the Borrower intends to make of any real property
which is owned or leased by it will not result in the disposal or other release
of any hazardous substance or solid waste on or to such real property which is
in violation of Applicable Environmental Laws, the effect of which could
reasonably be expected to have a Material Adverse Effect.
Section 5.11 Further Assurances. At any time or from time to time
upon the reasonable request by the Administrative Agent, the Borrower or any of
its Subsidiaries shall execute and deliver such further documents and do such
other acts and things as the Administrative Agent may reasonably request in
order to effect fully the purposes of this Agreement and the other Loan
Documents and to provide for payment of the Obligations in accordance with the
terms of this Agreement and the other Loan Documents. Without limiting the
generality of the foregoing, the Borrower agrees to (a) update and deliver to
the Administrative Agent Schedule 4.1(a) hereto (with respect to the identities,
jurisdictions of incorporation and ownership of the Borrower's Subsidiaries) at
the time of any Acquisition or delivery of the financial statements set forth in
Sections 6.1 and 6.2 hereof if the information provided therein is not complete
and correct, (b) update and deliver to the Administrative Agent Schedule 1.1 to
the Security Agreements promptly upon discovery if the
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information provided therein is not complete and correct, and (c) execute and
deliver to the Administrative Agent deeds of trust or mortgages, as appropriate,
in substantially the form of Exhibit I hereto with respect to any real property
hereafter acquired by the Borrower or any of its Subsidiaries, as applicable,
together with environmental reports and surveys in form satisfactory to the
Administrative Agent and title insurance thereon in an amount reasonably
satisfactory to the Administrative Agent, and such board resolutions, officer's
certificates, corporate and other documents and opinions of counsel as the
Administrative Agent shall reasonably request with respect thereto.
Section 5.12 Subsidiaries. At any time that any Person becomes a
Domestic Subsidiary, (a) such Subsidiary shall execute a Subsidiary Guaranty of
the Obligations and Collateral Documents granting a first priority Lien in all
assets of such Subsidiary required by the Determining Lenders to be pledged,
except, to the extent applicable, for Permitted Liens to secure the Obligations,
(b) 100% of such Subsidiary's Capital Stock shall be pledged to secure the
Obligations and (c) the Lenders shall receive such board resolutions, officer's
certificates, corporate and other documents and opinions of counsel as the
Administrative Agent shall reasonably request in connection with the actions
described in clauses (a) and (b) above. At any time that any Person becomes a
Foreign Subsidiary, (a) 65% of such Subsidiary's Capital Stock shall be pledged
to secure the Obligations and (b) the Lenders shall receive such board
resolutions, officers' certificates, corporate and other documents and opinions
of counsel as the Administrative Agent shall reasonably request in connection
with the action described in clause (a) above.
Section 5.13 Year 2000 Compliance. The Borrower will promptly notify
the Administrative Agent in the event the Borrower discovers or determines that
any computer application that is material to its or any of its Subsidiaries'
business and operations will not be Year 2000 Compliant on a timely basis,
except to the extent that such failure could not reasonably be expected to have
a Material Adverse Effect.
ARTICLE 6
Information Covenants
Until all amounts under the Notes and in respect of the
Reimbursement Obligations have been paid in full and all other amounts and
expenses due and payable hereunder shall be paid and until the Commitments have
been terminated, the Borrower shall furnish or cause to be furnished to each
Lender:
Section 6.1 Quarterly Financial Statements and Information. Within
45 after the end of each fiscal quarter of each fiscal year (other than the end
of a fiscal quarter which coincides with the end of a fiscal year), the
consolidated balance sheets of the Borrower and its Subsidiaries as at the end
of such fiscal quarter and the related consolidated statements of income for
such fiscal quarter and for the elapsed portion of the year ended with the last
day of such fiscal quarter, and
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consolidated statements of cash flow for the elapsed portion of the year ended
with the last day of such fiscal quarter, all of which shall be certified by the
president or chief financial officer or other officer of the Borrower acceptable
to the Administrative Agent, to, in his or her opinion acting solely in his or
her capacity as an officer of the Borrower, present fairly in all material
respects, in accordance with GAAP (except for the absence of footnotes), the
consolidated financial position and results of operations of the Borrower and
its Subsidiaries as at the end of and for such fiscal quarter, and for the
elapsed portion of the year ended with the last day of such fiscal quarter,
subject only to normal year-end adjustments.
Section 6.2 Annual Financial Statements and Information; Certificate
of No Default.
(a) Within 120 days after the end of each fiscal year, a copy of (i)
the consolidated and consolidating balance sheets of the Borrower and its
Subsidiaries, as of the end of the current and prior fiscal years and (ii) the
consolidated and consolidating statements of earnings and consolidated
statements of changes in shareholders' equity, and statements of cash flow as of
and through the end of such fiscal year, all of which are prepared in accordance
with GAAP, and certified by independent certified public accountants reasonably
acceptable to the Lenders (provided, however, any big six public accounting firm
shall be acceptable to the Lenders), whose opinion shall be in scope and
substance in accordance with generally accepted auditing standards and shall be
unqualified.
(b) Simultaneously with the delivery of the statements required by
this Section 6.2, a letter from the Borrower's public accountants stating to the
effect that during their audit of such financial statements nothing has come to
their attention that would result in a Default or Event of Default under this
Agreement, recognizing, however, that the scope and purpose of their audit was
not to determine compliance with the terms of this Agreement or whether a
Default or Event of Default has otherwise occurred.
(c) As soon as available, but in any event within 90 days following
the end of each fiscal year, a copy of the annual consolidated operating budget
of the Borrower and its Subsidiaries for the succeeding fiscal year.
Section 6.3 Compliance Certificate. At the time financial statements
are furnished pursuant to Sections 6.1 and 6.2 hereof, the Compliance
Certificate, completed as provided therein.
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Section 6.4 Copies of Other Reports and Notices.
(a) Promptly upon their becoming available, a copy of (i) all
material final reports or letters submitted to the Borrower or any Subsidiary of
the Borrower by accountants in connection with any annual, interim or special
audit, including without limitation any final report prepared in connection with
the annual audit referred to in Section 6.2 hereof, and any other comment letter
submitted to management in connection with any such audit, (ii) each regular,
periodic or other report and any registration statement (other than statements
on Form S-8) or prospectus (or material written communication in respect of any
thereof) filed by the Borrower or any of its Subsidiaries with any securities
exchange, with the Securities and Exchange Commission or any successor agency,
and (iii) all press releases concerning material financial aspects of the
Borrower or any of its Subsidiaries;
(b) Promptly upon becoming aware that (i) the holder(s) of any
note(s) or other evidence of indebtedness or other security of the Borrower of
any of its Subsidiaries in excess of $500,000 in the aggregate has given notice
or taken any action with respect to a breach, failure to perform, claimed
default or event of default thereunder or (ii) any event, circumstance or
condition which could reasonably be expected to be classified as a Material
Adverse Effect, a written notice specifying the details thereof (or the nature
of any claimed default or event of default) and what action is being taken or is
proposed to be taken with respect thereto;
(c) Promptly upon becoming aware that any party to any Capitalized
Lease Obligations of the Borrower or any of its Subsidiaries in excess of
$500,000 or Operating Lease of the Borrower or any of its Subsidiaries in which
the annual rentals thereunder exceed $100,000, has given notice or taken any
action with respect to a breach, failure to perform, claimed default or event of
default thereunder, a written notice specifying the details thereof (or the
nature of any claimed default or event of default) and what action is being
taken or is proposed to be taken with respect thereto;
(d) Promptly upon receipt thereof, information with respect to and
copies of any notices received from any Tribunal relating to any order, ruling,
law, information or policy that relates to a breach of or noncompliance with any
Law, and could reasonably be expected to (i) result in the payment of money by
the Borrower or any of its Subsidiaries in an amount of $500,000 or more in the
aggregate (ii) have a Material Adverse Effect, or (iii) result in the loss or
suspension of any Necessary Authorization where such loss could reasonably be
expected to have a Material Adverse Effect; and
(e) From time to time and promptly upon each request, such material
data, certificates, reports, statements, documents or further information
regarding the assets, business, liabilities, financial position, projections,
results of operations or business prospects of the Borrower and its
Subsidiaries, as the Administrative Agent or any Lender may reasonably request.
Section 6.5 Notice of Litigation, Default and Other Matters. Prompt
notice of the following events after the Borrower has knowledge or notice
thereof:
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(a) The commencement of all Litigation and investigations by or
before any Tribunal, and all actions and proceedings in any court or before any
arbitrator involving claims for damages (including punitive damages) in excess
of $500,000 (after deducting the amount with respect to which creditworthy
insurance companies have acknowledged coverage), against or in any other way
relating directly to the Borrower, any of its Subsidiaries, or any of their
respective properties or businesses; and
(b) Promptly upon the happening of any condition or event of which
the Borrower has current actual knowledge which constitutes a Default, a written
notice specifying the nature and period of existence thereof and what action is
being taken or is proposed to be taken with respect thereto.
Section 6.6 ERISA Reporting Requirements.
(a) Promptly and in any event (i) within 30 days after the Borrower
or any member of its Controlled Group has current actual knowledge that any
ERISA Event described in clause (a) of the definition of ERISA Event or any
event described in Section 4063(a) of ERISA with respect to any Plan of the
Borrower or any member of its Controlled Group has occurred, and (ii) within 10
days after the Borrower or any member of its Controlled Group has current actual
knowledge that any other ERISA Event with respect to any Plan of the Borrower or
any member of its Controlled Group has occurred or a request for a minimum
funding waiver under Section 412 of the Code has been made with respect to any
Plan of the Borrower or any member of its Controlled Group, a written notice
describing such event and describing what action is being taken or is proposed
to be taken with respect thereto, together with a copy of any notice of such
event that is given to the PBGC;
(b) Promptly and in any event within ten Business Days after receipt
thereof by the Borrower or any member of its Controlled Group from the PBGC,
copies of each notice received by the Borrower or any member of its Controlled
Group of the PBGC's intention to terminate any Plan or to have a trustee
appointed to administer any Plan;
(c) Promptly and in any event within 30 days after the filing
thereof by the Borrower or any member of its Controlled Group with the United
States Department of Labor or the Internal Revenue Service, copies of each
annual report (including Schedule B thereto, if applicable) with respect to each
Plan subject to Title IV of ERISA of which Borrower or any member of its
Controlled Group is the "plan sponsor";
(d) Promptly, and in any event within 10 Business Days after receipt
thereof, a copy of any correspondence the Borrower or any member of its
Controlled Group receives from the Plan Sponsor (as defined by Section
4001(a)(10) of ERISA) of any Plan concerning potential withdrawal liability
pursuant to Section 4219 or 4202 of ERISA, and a statement from the chief
financial officer of the Borrower or such member of its Controlled Group setting
forth details as to the events giving
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rise to such potential withdrawal liability and the action which the Borrower or
such member of its Controlled Group is taking or proposes to take with respect
thereto;
(e) Notification within 30 days of any material increases in the
benefits provided under any existing Plan which is not a Multiemployer Plan, or
the establishment of any new Plans, or the commencement of contributions to any
Plan to which the Borrower or any member of its Controlled Group was not
previously contributing, which could reasonably be expected in any such case to
result in an additional material liability to the Borrower;
(f) Notification within three Business Days after the Borrower or
any member of its Controlled Group knows that the Borrower or any such member of
its Controlled Group has filed or intends to file a notice of intent to
terminate any Plan under a distress termination within the meaning of Section
4041(c) of ERISA and a copy of such notice; and
(g) Within three Business Days after receipt of written notice of
commencement thereof, notice of all actions, suits and proceedings before any
court or governmental department, commission, board, bureau, agency or
instrumentality, domestic or foreign, affecting the Borrower or any member of
its Controlled Group with respect to any Plan, except those which, in the
aggregate, if adversely determined could not reasonably be expected to have a
Material Adverse Effect.
ARTICLE 7
Negative Covenants
Until all amounts under the Notes and in respect of the
Reimbursement Obligations have been paid in full and all other amounts and
expenses due and payable hereunder shall be paid and until the Commitments have
been terminated:
Section 7.1 Indebtedness. The Borrower shall not, and shall not
permit any of its Subsidiaries to, create, assume, incur or otherwise become or
remain obligated in respect of, or permit to be outstanding, or suffer to exist
any Indebtedness, except:
(a) Indebtedness under the Loan Documents;
(b) Accounts payable and accrued liabilities incurred in the
ordinary course of business, and indemnities given in the ordinary course of
business in connection with Acquisitions and sales of assets;
(c) Indebtedness, including purchase money Indebtedness and
Indebtedness in respect of Capitalized Lease Obligations, incurred to purchase,
or to finance the purchase of, assets which constitute property, plant and
equipment, not to exceed, together with Indebtedness permitted
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pursuant to clauses (h) and (l) of this Section 7.1, $15,000,000 in aggregate
principal amount outstanding;
(d) Subordinated Debt; provided that the Net Cash Proceeds of such
Subordinated Debt are applied in accordance with Section 2.5(e) hereof.
(e) Interest hedging obligations under Interest Hedge Agreements
entered into with any Lender in the ordinary course of business and not for
speculative purposes;
(f) Indebtedness existing on the Agreement Date which is described
on Schedule 7.1(e) hereof, including renewals, replacements and refinancings
(but no increases) thereof;
(g) Indebtedness in respect of endorsement of negotiable instruments
in the ordinary course of business;
(h) Indebtedness assumed in connection with Acquisitions permitted
under Section 7.6 or seller carry-back financing incurred in connection with
Acquisitions permitted under Section 7.6 not to exceed, together with
Indebtedness permitted pursuant to clauses (c) and (l) of this Section 7.1,
$15,000,000 in aggregate principal amount outstanding;
(i) Indebtedness (including as the result of intercompany transfers
made in the ordinary course of business) owing among the Obligors, provided such
Indebtedness is (A) subordinated to the Obligations pursuant to terms acceptable
to the Determining Lenders and (B) evidenced by an entry on the financial
records of such Obligors;
(j) Guaranties by the Borrower or its Subsidiaries of Indebtedness
of the Borrower or other Subsidiaries, to the extent such underlying
Indebtedness is permitted hereunder;
(k) Indebtedness in respect of the Senior Subordinated Notes; and
(l) Indebtedness not otherwise permitted pursuant to clauses (a)
through (k) above not to exceed, together with Indebtedness permitted pursuant
to clauses (c) and (h) of this Section 7.1, $15,000,000 in aggregate principal
amount outstanding;
provided, however, that no Indebtedness otherwise permitted pursuant to clauses
(c), (d), (e), (h) and (l) above may be incurred if, immediately before or after
giving effect to the incurrence thereof, any Default or Event of Default shall
have occurred and be continuing.
Section 7.2 Liens. The Borrower shall not, and shall not permit any
of its Subsidiaries to, create, assume, incur, permit or suffer to exist,
directly or indirectly, any Lien on any of its assets, whether now owned or
hereafter acquired, except Permitted Liens. The Borrower shall not, and shall
not permit any of its Subsidiaries to, agree with any other Person that it shall
not create, assume, incur, permit or suffer to exist or to be created, assumed,
incurred or permitted to exist, directly or indirectly, any Lien on any of its
assets other than in respect of (a) the Senior Subordinated Notes
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or any other Subordinated Debt and (b) Indebtedness permitted by Sections 7.1(c)
and (h) hereof, provided that such agreement with respect to Indebtedness
permitted by Sections 7.1(c) and (h) hereof relates only to the assets purchased
or acquired.
Section 7.3 Investments. The Borrower shall not, and shall not
permit any of its Subsidiaries to, make any Investment, except that the Borrower
and any of its Subsidiaries may purchase or otherwise acquire and own:
(a) Cash and Cash Equivalents;
(b) Accounts receivable that arise in the ordinary course of
business and are payable on standard terms; loans and advances to employees for
reasonable travel and business expenses in the ordinary course of business; and
deposits for utilities, security deposits, leases and similar prepaid expenses
incurred in the ordinary course of business;
(c) Investments in existence on the Agreement Date which are
described on Schedule 7.3(c) hereto;
(d) Investments which are Acquisitions permitted pursuant to Section
7.6 hereof, and to the extent that the Acquisition is of a direct Foreign
Subsidiary, subject to the limitations set forth in Section 7.3(f) hereof;
(e) Investments in the form of Interest Hedge Agreements permitted
by Section 7.1(e) hereof;
(f) Investments in, and expenditures in respect of Acquisitions of,
direct Foreign Subsidiaries in an aggregate amount after the Agreement Date not
to exceed (calculated immediately prior to the date of each such Investment or
Acquisition) 25% of Net Worth at any time outstanding;
(g) Investments in Obligors;
(h) Investments consisting of non-cash consideration received in
connection with a sale of assets permitted by Section 7.5 not to exceed
$4,000,000 in aggregate amount outstanding at any time;
(i) Investments arising from transactions by the Borrower or any of
its Subsidiaries with customers or suppliers in the ordinary course of business,
including endorsements of negotiable instruments, debt obligations and other
investments received in connection with the bankruptcy or reorganization of
customers and suppliers and in settlement of delinquent obligations of, and
other disputes with, customers and suppliers; and
(j) Investments not otherwise permitted pursuant to clauses (a)
through (i) above not to exceed $5,000,000 in aggregate amount outstanding at
any time;
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provided, however, that no Investment otherwise permitted by clauses (d), (e),
(f), (h) and (j) above shall be permitted to be made if, immediately before or
after giving effect thereto, any Event of Default shall have occurred and be
continuing.
Section 7.4 Liquidation, Merger. The Borrower shall not, and shall
not permit any of its Subsidiaries to, at any time:
(a) liquidate or dissolve itself (or suffer any liquidation or
dissolution) or otherwise wind up, except that (i) a Subsidiary of the Borrower
may liquidate or dissolve into the Borrower or a Subsidiary of the Borrower
which is an Obligor and (ii) a Subsidiary of the Borrower which is a direct
Foreign Subsidiary may liquidate or dissolve into an Obligor or another direct
Foreign Subsidiary; or
(b) enter into any merger or consolidation unless (i) with respect
to a merger or consolidation involving the Borrower, the Borrower shall be the
surviving corporation, or if the merger or consolidation involves a Subsidiary
of the Borrower which is an Obligor and not the Borrower, such Subsidiary shall
be the surviving corporation, (ii) such transaction shall not be utilized to
circumvent compliance with any term or provision herein and (iii) no Default or
Event of Default shall then be in existence or occur as a result of such
transaction.
Section 7.5 Sales of Assets. The Borrower shall not, and shall not
permit any of its Subsidiaries to, sell, transfer or otherwise dispose of, any
of its assets except (a) inventory in the ordinary course of business, (b)
obsolete or worn-out assets, (c) asset sales (i) for full and fair consideration
at least equal to the fair market value of the assets sold or otherwise disposed
of, (ii) at least 50% of the consideration received by the Borrower or its
Subsidiary, as the case may be, is in the form of Cash and Cash Equivalents and
is received at the time of such disposition, and (iii) in which the Net Cash
Proceeds from the disposition thereof (to the extent not applied pursuant to
clause (d) immediately following) are reinvested, within 270 days before or
after such disposition, in productive tangible assets used in the business of
the Borrower or its Subsidiaries, and provided that the aggregate amount of Net
Cash Proceeds outstanding and pending reinvestment pursuant to this clause (c)
shall not exceed $3,000,000 at any time, (d) sales and dispositions among
Obligors, and (e) asset sales (i) for full and fair consideration at least equal
to the fair market value of the assets sold or otherwise disposed of, (ii) at
least 50% of the consideration received by the Borrower or its Subsidiary, as
the case may be, is in the form of Cash and Cash Equivalents and is received at
the time of such disposition, and (iii) in which the Net Cash Proceeds of which
are applied in accordance with Section 2.5(c) hereof to the extent required
therein.
Section 7.6 Acquisitions. The Borrower shall not, and shall not
permit any of its Subsidiaries to, make any Acquisitions; provided, however, if
(a) immediately prior to and after giving effect to the proposed Acquisition
there shall not exist a Default or Event of Default and (b) immediately after
giving effect to the proposed transaction the Unused Portion shall be no less
than $7,000,000, the Borrower or any Subsidiary of the Borrower may make
Acquisitions so long as (i) if the Acquisition relates to a publicly-traded
company, such Acquisition shall not be opposed
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by a majority of the board of the directors of the Person being acquired, (ii)
the Lenders shall have received written notice at least 10 Business Days prior
to the date of such Acquisition, (iii) the Administrative Agent shall have
received at least 5 Business Days prior to the date of such Acquisition a
Compliance Certificate setting forth the covenant calculations both immediately
prior to and after giving effect to the proposed Acquisition (taking into
account Adjusted EBITDA and capital expenditures attributable to the assets
being acquired for the four fiscal quarters preceding such Acquisition and the
pro forma debt and interest expense incurred to complete such Acquisition), (iv)
the assets, property or business acquired shall be in the business described in
Section 4.1(d) hereof and the Administrative Agent for the benefit of the
Lenders shall have a first priority Lien in substantially all of such assets
(or, if less than substantially all of such assets are to be pledged, such
assets required by the Determining Lenders to be pledged), except for Permitted
Liens, (v) if such Acquisition results in a Domestic Subsidiary, (A) such
Subsidiary shall execute a Subsidiary Guaranty and Collateral Documents granting
a first priority Lien in substantially all of such assets (or, if less than
substantially all of such assets are to be pledged, all assets required by the
Determining Lenders to be pledged), except for Permitted Liens to secure the
Obligations, (B) 100% of such Subsidiary's Capital Stock shall be pledged to
secure the Obligations and (C) the Administrative Agent on behalf of the Lenders
shall have received such board resolutions, officer's certificates and opinions
of counsel as the Administrative Agent shall reasonably request in connection
with the actions described in clauses (A) and (B) above, (vi) if such
Acquisition results in a Foreign Subsidiary, (A) 65% of such Subsidiary's
Capital Stock shall be pledged to secure the Obligations and (B) the
Administrative Agent on behalf of the Lenders shall have received such board
resolutions, officer's certificates and opinions of counsel as the
Administrative Agent shall reasonably request in connection with clause (A)
immediately preceding, and (vii) the Acquisition Consideration for such
Acquisition does not exceed $25,000,000.
Section 7.7 Capital Expenditures. The Borrower shall not, and shall
not permit any of its Subsidiaries to, make or commit to make any Capital
Expenditures after the Agreement Date in an aggregate amount in excess of an
amount equal to the sum of (a) $2,000,000 plus (b) 5% of cumulative consolidated
net revenues of the Borrower and its Subsidiaries from and after the Agreement
Date.
Section 7.8 Restricted Payments. The Borrower shall not, and shall
not permit any of its Subsidiaries to, directly or indirectly declare, pay or
make any Restricted Payments except (a) Dividends payable by a Subsidiary to the
Borrower, (b) purchases, redemptions, retirements or acquisitions of shares of
Capital Stock of the Borrower, or options or warrants to purchase shares of such
Capital Stock, (i) held by officers, directors or employees of the Borrower or
any of its Subsidiaries pursuant to a compensation plan or arrangement in
connection with the death, disability or termination of employment of any such
officer, director or employee or (ii) otherwise, in all such cases taken as a
whole for aggregate cash payments from and including the Agreement Date not in
excess of 10% of Net Worth at the time any such purchase, redemption, retirement
or acquisition is made, (c) payments of regularly scheduled interest on
Subordinated Debt, (d) reasonable executive compensation and related benefits to
Sam L. Leopold consistent with customary business practices and (e) payments
pursuant to the Gena Stock Agreement; provided, however, the Borrower shall not
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pay or make any Restricted Payments permitted by this Section 7.8 unless there
shall exist no Default or Event of Default prior to or after giving effect to
any such proposed Restricted Payment.
Section 7.9 Affiliate Transactions. The Borrower shall not, and
shall not permit any of its Subsidiaries to, at any time engage in any
transaction with an Affiliate (other than the Borrower or any of its Domestic
Subsidiaries) on terms materially less advantageous to the Borrower or such
Subsidiary than would be the case if such transaction had been effected with a
non-Affiliate. The Borrower shall not, and shall not permit any of its
Subsidiaries to, in any event incur or suffer to exist any Indebtedness or
Guaranty in favor of any Affiliate, unless such Affiliate shall subordinate the
payment and performance thereof to the Obligations on terms, conditions and
documentation reasonably satisfactory to the Determining Lenders.
Section 7.10 Compliance with ERISA. The Borrower shall not, and
shall not permit any of its Subsidiaries to, directly or indirectly, or permit
any member of its Controlled Group to directly or indirectly, (a) terminate any
Plan so as likely to result in liability to the Borrower or any member of its
Controlled Group taken as a whole which could reasonably be expected to have a
Material Adverse Effect, (b) permit to exist any ERISA Event, or any other event
or condition with respect to a Plan which could reasonably be expected to have a
Material Adverse Effect, (c) make a complete or partial withdrawal (within the
meaning of Section 4201 of ERISA) from any Multiemployer Plan which could
reasonably be expected to have a Material Adverse Effect on the Borrower or any
member of its Controlled Group taken as a whole, or (d) enter into any new Plan
or modify any existing Plan so as to increase its obligations thereunder which
could reasonably be expected to have a Material Adverse Effect.
Section 7.11 Maximum Leverage Ratio. At the end of each fiscal
quarter occurring during the periods indicated below, the Borrower shall not
permit the Leverage Ratio to be greater than the ratio set forth below opposite
the period in which such fiscal quarter occurs:
Period Ratio
------ -----
From and including the Agreement Date to and including June 30, 4.75 to 1
1999
From and including July 1, 1999 to but not including December 31, 4.25 to 1
1999
From and including December 31, 1999 to but not including June 30, 3.75 to 1
2000
From and including June 30, 2000 to but not including December 31, 3.25 to 1
2000
From and including December 31, 2000 and thereafter 3.00 to 1
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Section 7.12 Minimum Fixed Charge Coverage Ratio. At the end of each
fiscal quarter occurring during this Agreement commencing with September 30,
1998, the Borrower shall not permit the Fixed Charge Coverage Ratio to be less
than 1.15 to 1.
Section 7.13 Minimum Net Worth. The Borrower shall not permit Net
Worth to be less than the sum of (a) $20,000,000, plus (b) 75% of cumulative Net
Income for the period from, but not including the Agreement Date through the
date of calculation (but excluding from the calculation of such cumulative Net
Income the effect, if any, of any fiscal quarter (or portion of a fiscal quarter
not then ended) of the Borrower for which Net Income was a negative number);
plus (c) an amount equal to 100% of the net worth of any Person that becomes a
Subsidiary of the Borrower or substantially all of the net assets of which are
acquired by the Borrower or any of its Subsidiaries to the extent that the
purchase price paid therefor is paid in Capital Stock of the Borrower, plus (d),
without duplication, 100% of the Net Cash Proceeds of any offerings of Capital
Stock of the Borrower.
Section 7.14 Sale or Discount of Receivables. The Borrower shall
not, and shall not permit any of this Subsidiaries to, directly or indirectly,
sell, with or without recourse, for discount or otherwise, any notes or accounts
receivable other than in the ordinary course of business consistent with such
practices of the Borrower prior to the Agreement Date.
Section 7.15 Business. Neither the Borrower nor any of its
Subsidiaries shall conduct any business other than the business described in
Section 4.1(d) hereof.
Section 7.16 Sale and Leaseback. The Borrower shall not, and shall
not permit any of its Subsidiaries to, enter into any arrangement whereby it
sells or transfers any of its assets, and thereafter rents or leases such asset,
other than sale-leasebacks during any fiscal year of the Borrower that do not
involve property having a fair market value in excess of $1,000,000 in the
aggregate.
Section 7.17 Amendment of Organizational Documents. The Borrower
shall not, and shall not permit any of its Subsidiaries to, amend its articles
of incorporation, bylaws or other applicable organizational documents in any
manner that could reasonably be expected to (a) result in a Material Adverse
Effect or (b) materially impair or materially adversely affect the Rights of the
Administrative Agent or any Lender under any Loan Documents or in respect of any
Collateral.
Section 7.18 Amendments and Waivers of Subordinated Debt. The
Borrower shall not, and shall not permit any of its Subsidiaries to, change or
amend (or take any action or fail to take any action the result of which is an
effective amendment or change) or accept any waiver or consent with respect to,
any document, instrument or agreement relating to any Subordinated Debt that
would result in (a) an increase in the principal, interest, overdue interest,
premium, penalty, fees or other amounts payable under any Subordinated Debt (not
including any increase of the Senior Subordinated Notes up to an amount of
$25,000,000, provided that the aggregate principal amount of the Senior
Subordinated Notes does not exceed $125,000,000, (b) an acceleration in any date
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fixed for payment or prepayment of principal, interest, fees or other amounts
payable under any Subordinated Debt (including, without limitation, as a result
of any redemption), (c) a reduction in any percentage of holders of any
Subordinated Debt required under the terms of any Subordinated Debt to take (or
refrain from taking) any action under any Subordinated Debt, (d) a change in any
covenant under any Subordinated Debt making such covenant more restrictive, (e)
a change in any default or event of default (however designated) under any
Subordinated Debt which makes such default or event of default more restrictive,
(f) a change in the definition of "Change of Control" or "Change in Control" or
similar event or circumstance, however defined or designated, as provided in any
Subordinated Debt which would result in such definition being more restrictive
than such definition in this Agreement, (g) a change in any of the subordination
provisions of any Subordinated Debt, (h) a change in any covenant, term or
provision in any Subordinated Debt which would result in such term or provision
being more restrictive than the terms of this Agreement and the other Loan
Documents or (i) a change in any term or provision of any Subordinated Debt that
could have, in any material respect, an adverse effect on the interest of the
Lenders.
Section 7.19 Indirect Foreign Subsidiaries. The Borrower shall not,
and shall not permit any of its Subsidiaries to, create or acquire any indirect
Foreign Subsidiaries.
Section 7.20 Designated Senior Debt. The Borrower shall not
designate any Indebtedness other than the Obligations as "Designated Senior
Debt" in connection with the Senior Subordinated Notes.
ARTICLE 8
Default
Section 8.1 Events of Default. Each of the following shall
constitute an Event of Default, whatever the reason for such event, and whether
voluntary, involuntary, or effected by operation of Law or pursuant to any
judgment or any Law of any Tribunal or any non-governmental body:
(a) Any representation or warranty made under any Loan Document
shall prove to have been incorrect or misleading in any material respect when
made;
(b) The Borrower shall fail to pay any (i) principal under any Note
when due; or (ii) interest under any Note or any fees payable hereunder or any
other costs, fees, expenses or other amounts payable hereunder or under any
other Loan Document within three Business Days after the date due;
(c) The Borrower or any of its Subsidiaries shall default in the
performance or observance of any agreement or covenant contained Section 5.1(a)
hereof or in Article 7 hereof;
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(d) The Borrower or any of its Subsidiaries shall default in the
performance or observance of any other agreement or covenant contained in this
Agreement not specifically referred to elsewhere in this Section 8.1, and such
default shall not be cured within a period of thirty days after the earlier of
notice from the Administrative Agent thereof or actual notice thereof by a
Responsible Officer of the Borrower or any such Subsidiary;
(e) The Borrower or any of its Subsidiaries shall default in the
performance or observance of any agreement or covenant in any of the Loan
Documents (other than this Agreement) and such default shall not be cured within
a period of thirty days after the earlier of notice from the Administrative
Agent thereof or actual notice thereof by a Responsible Officer of the Borrower
or any such Subsidiary;
(f) There shall be commenced an involuntary proceeding or an
involuntary petition shall be filed in a court having competent jurisdiction
seeking (i) relief in respect of the Borrower or any of its Subsidiaries, or a
substantial part of the property or the assets of the Borrower or any of its
Subsidiaries, under Title 11 of the United States Code, as now constituted or
hereafter amended, or any other applicable Federal, state or foreign bankruptcy
law or other similar law, (ii) the appointment of a receiver, liquidator,
assignee, trustee, custodian, sequestrator or similar official of the Borrower
or any of its Subsidiaries, or of any substantial part of their respective
properties, or (iii) the winding-up or liquidation of the affairs of the
Borrower or any of its Subsidiaries, and any such proceeding or petition shall
continue unstayed and in effect for a period of sixty consecutive days;
(g) The Borrower or any of its Subsidiaries shall (i) file a
petition, answer or consent seeking relief under Title 11 of the United States
Code, as now constituted or hereafter amended, or any other applicable Federal,
state or foreign bankruptcy law or other similar law, (ii) consent to the
institution of proceedings thereunder or to the filing of any such petition or
to the appointment or taking of possession of a receiver, liquidator, assignee,
trustee, custodian, sequestrator or other similar official of the Borrower or
any of its Subsidiaries or of substantially all of its properties, (iii) file an
answer admitting the material allegations filed against it in any such
proceeding, (iv) make a general assignment for the benefit of creditors, (v)
become unable, admit in writing its inability, or fail generally, to pay its
debts as they become due, or (vi) the Borrower or any of its Subsidiaries shall
take any corporate or other action in furtherance of any such action;
(h) A final judgment or judgments shall be entered by any court
against the Borrower or any of its Subsidiaries for the payment of money which
exceeds $500,000 in the aggregate, or a warrant of attachment or execution or
similar process shall be issued or levied against property of the Borrower or
any of its Subsidiaries which, together with all other such property of the
Borrower and its Subsidiaries subject to other such process, exceeds in value
$500,000 in the aggregate, and if such judgment or award is not insured or,
within 30 days after the entry, issue or levy thereof, such judgment, warrant or
process shall not have been paid or discharged or stayed pending appeal, or if,
after the expiration of any such stay, such judgment, warrant or process shall
not have been paid or discharged;
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(i) With respect to any Plan of the Borrower or any member of its
Controlled Group: (i) the Borrower, any such member, or any other
party-in-interest or disqualified person (other than any Lender) shall engage in
transactions which in the aggregate would reasonably be expected to result in a
direct or indirect liability to the Borrower or any member of its Controlled
Group under Section 409 or 502 of ERISA or Section 4975 of the Code; (ii) the
Borrower or any member of its Controlled Group shall incur any accumulated
funding deficiency, as defined in Section 412 of the Code, or request a funding
waiver from the Internal Revenue Service for contributions; (iii) the Borrower
or any member of its Controlled Group shall incur any withdrawal liability as a
result of a complete or partial withdrawal within the meaning of Section 4203 or
4205 of ERISA, or any other liability with respect to a Plan, unless the amount
of such liability has been funded within the Plan or pursuant to one or more
insurance contracts; (iv) the Borrower or any member of its Controlled Group
shall fail to make a required contribution by the due date under Section 412 of
the Code or Section 302 of ERISA which would result in the imposition of a lien
under Section 412 of the Code or Section 302 of ERISA; (v) the Borrower, any
member of its Controlled Group or any Plan sponsor shall notify the PBGC of an
intent to terminate, or the PBGC shall institute proceedings to terminate, or
the PBGC shall institute proceedings to terminate, any Plan subject to Title IV
of ERISA; (vi) a Reportable Event shall occur with respect to a Plan subject to
Title IV of ERISA, and within 15 days after the reporting of such Reportable
Event to the Administrative Agent, the Administrative Agent shall have notified
the Borrower in writing that the Determining Lenders have made a determination
that, on the basis of such Reportable Event, there are reasonable grounds for
the termination of such Plan by the PBGC or for the appointment by the
appropriate United States District Court of a trustee to administer such Plan
and as a result thereof an Event of Default shall have occurred hereunder; (vii)
a trustee shall be appointed by a court of competent jurisdiction to administer
any Plan or the assets thereof; or (viii) any ERISA Event with respect to a Plan
subject to Title IV of ERISA shall have occurred, and 30 days thereafter (A)
such ERISA Event, other than such event described in clause (f) of the
definition of ERISA Event herein, (if correctable) shall not have been corrected
and (B) the then present value of such Plan's benefit liabilities, as defined in
Title IV of ERISA, shall exceed the then current value of assets accumulated in
such Plan; provided, however, that the events listed in subsections (i) - (viii)
above shall constitute Events of Default only if the maximum aggregate liability
which the Borrower or any member of its Controlled Group has a reasonable
likelihood of incurring under the applicable provisions of ERISA resulting from
an event or events exceeds $500,000;
(j) The Borrower or any of its Subsidiaries shall default in any
payment in respect of Indebtedness beyond any grace period provided with respect
thereto, or shall default in the performance of any agreement or instrument
under which such Indebtedness is created or evidenced beyond any applicable
grace period, or any other event or condition shall occur in respect of such
Indebtedness, if the effect of such default, event or condition is to permit or
cause the holder of such Indebtedness (or a trustee on behalf of any such
holder) to cause such Indebtedness to become due, repurchased or redeemed prior
to its date of maturity, provided that (i) a default, event or condition of the
type described above in this Section 8.1(j) shall not constitute an Event of
Default under this Agreement unless, at such time, one or more defaults, events
or conditions of the type described
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above in this Section 8.1(j) shall have occurred and be continuing with respect
to Indebtedness the outstanding amount of which exceeds in the aggregate
$1,000,000 and (ii) a default in any payment due under the Gena Stock Agreement
shall not constitute an Event of Default under this Agreement so long as the
Borrower in good faith asserts an offset or a claim for damages as a defense to
such payment default;
(k) Any provision of any Loan Document shall for any reason cease to
be valid and binding on or enforceable against any party to it (other than the
Administrative Agent or any Lender) other than in accordance with its terms, or
any such party (other than the Administrative Agent or any Lender) shall so
assert in writing;
(l) Any Collateral Document shall for any reason cease to create a
valid and perfected first priority Lien in any Collateral subject thereto, other
than as (i) expressly provided or permitted in such Collateral Document or in
this Agreement or (ii) as a result of the negligence of the Administrative
Agent, the Documentation Agent, any Lender or any of their respective agents or
representatives; or
(m) A Change of Control shall occur.
Section 8.2 Remedies. If an Event of Default shall have occurred and
shall be continuing:
(a) With the exception of an Event of Default specified in Section
8.1(f) or (g) hereof, the Administrative Agent may at its election (provided
that the Administrative Agent has not previously received notice to the contrary
from the Determining Lenders), and shall upon the direction of the Determining
Lenders, terminate the Commitments and/or declare the principal of and interest
on the Advances and all Obligations and other amounts owed under the Loan
Documents to be forthwith due and payable without presentment, demand, protest
or notice of any kind, all of which are hereby expressly waived, except for
notices expressly set forth in the Loan Documents.
(b) Upon the occurrence of an Event of Default specified in Section
8.1(f) or (g) hereof, such principal, interest and other amounts shall thereupon
and concurrently therewith become due and payable and the Commitments shall
forthwith terminate, all without any action by the Administrative Agent, any
Lender or any holders of the Notes and without presentment, demand, protest or
other notice of any kind, all of which are expressly waived, anything in the
Loan Documents to the contrary notwithstanding.
(c) If any Letter of Credit shall be then outstanding, the
Administrative Agent may at its election, and shall upon the direction of the
Determining Lenders shall, demand upon the Borrower to, and forthwith upon such
demand (but in the case of an Event of Default specified in Section 8.1(f) or
(g) hereof, without any demand or taking of any other action by the
Administrative Agent or any Lender), the Borrower shall, pay to the
Administrative Agent in same day funds at the office of the Administrative Agent
for deposit in the L/C Cash Collateral Account, an amount equal to the maximum
amount available to be drawn under the Letters of Credit then outstanding.
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(d) The Administrative Agent and the Lenders may exercise all of the
Rights granted to them under the Loan Documents or under Applicable Law.
(e) The Rights of the Administrative Agent and the Lenders hereunder
shall be cumulative, and not exclusive.
ARTICLE 9
Changes in Circumstances
Section 9.1 LIBOR Basis Determination Inadequate. If with respect to
any proposed LIBOR Advance for any Interest Period, (i) any Lender reasonably
determines that deposits in dollars (in the applicable amount) are not being
offered to that Lender in the relevant market for such Interest Period or (ii)
any Lender reasonably determines that the LIBOR Rate for such proposed LIBOR
Advance does not adequately cover the cost to such Lender of making and
maintaining such proposed LIBOR Advance for such Interest Period, such Lender
shall forthwith give notice thereof to the Borrower, whereupon until such Lender
notifies the Borrower that the circumstances giving rise to such situation no
longer exist, the obligation of such Lender to make LIBOR Advances shall be
suspended; provided, however, such Lender shall promptly notify the Borrower if
the circumstances giving rise to such situation no longer exist.
Section 9.2 Illegality. If after the Agreement Date any change in
applicable law, rule or regulation, or adoption thereof, or any change in any
interpretation or administration thereof by any governmental authority, central
bank or comparable agency charged with the interpretation or administration
thereof, or compliance by any Lender (or its LIBOR Lending Office) with any
request or directive (whether or not having the force of law) of any such
authority, central bank or comparable agency, shall make it unlawful or
impossible for such Lender (or its LIBOR Lending Office) to make, maintain or
fund its LIBOR Advances, such Lender shall so notify the Borrower and the
Administrative Agent. Before giving any notice to the Borrower pursuant to this
Section, the notifying Lender shall designate a different LIBOR Lending Office
or other lending office if such designation will avoid the need for giving such
notice and will not, in the reasonable judgment of the Lender, be materially
disadvantageous to the Lender. Upon receipt of such notice, notwithstanding
anything contained in Article 2 hereof, the Borrower shall repay in full the
then outstanding principal amount of each LIBOR Advance owing to the notifying
Lender, together with accrued interest thereon and any reimbursement required
under Section 2.9 hereof, on either (a) the last day of the Interest Period
applicable to such Advance, if the Lender may lawfully continue to maintain and
fund such Advance to such day, or (b) immediately, if the Lender may not
lawfully continue to fund and maintain such Advance to such day or if the
Borrower so elects. Concurrently with repaying each affected LIBOR Advance owing
to such Lender if the Borrower does not terminate this Agreement,
notwithstanding anything contained in Article 2 hereof, the Borrower may,
without any requirement to satisfy the conditions precedent set forth in Section
3.1, 3.2 or 3.3
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hereof, borrow a Base Rate Advance from such Lender, and such Lender shall make
such Base Rate Advance, in an amount such that the outstanding principal amount
of the Advances owing to such Lender shall equal the outstanding principal
amount of the Advances owing immediately prior to such repayment.
Section 9.3 Increased Costs.
(a) If after the Agreement Date any change in or adoption of any
law, rule or regulation, or any change in the interpretation or administration
thereof by any governmental authority, central bank or comparable agency charged
with the interpretation or administration thereof or compliance by any Lender
(or its LIBOR Lending Office) with any request or directive (whether or not
having the force of law) of any such authority, central bank or compatible
agency:
(i) shall subject a Lender (or its LIBOR Lending Office) to any
Tax (net of any tax benefit engendered thereby) with respect to its
LIBOR Advances or its obligation to make such Advances, or shall
change the basis of taxation of payments to a Lender (or to its
LIBOR Lending Office) of the principal of or interest on its LIBOR
Advances or in respect of any other amounts due under this
Agreement, as the case may be, or its obligation to make such
Advances (except for changes in (A) the rate of tax on the overall
net income of the Lender and franchise taxes, doing business taxes
or minimum taxes imposed upon such Lender and (B) withholding taxes
of any Tribunal other than the United States of America or any state
thereof); or
(ii) shall impose, modify or deem applicable any reserve
(including, without limitation, any imposed by the Board of
Governors of the Federal Reserve System), special deposit or similar
requirement against assets of, deposits with or for the account of,
or credit extended by, a Lender's LIBOR Lending Office or shall
impose on the Lender (or its LIBOR Lending Office) or on the London
interbank market any other condition affecting its LIBOR Advances or
its obligation to make such Advances (but excluding any reserves or
deposits that are included in the calculation of LIBOR Basis);
and the result of any of the foregoing is to increase the cost to a Lender (or
its LIBOR Lending Office) of making or maintaining any LIBOR Advances, or to
reduce the amount of any sum received or receivable by a Lender (or its LIBOR
Lending Office) with respect thereto, by an amount reasonably deemed by a Lender
to be material, then, within 30 days after demand by a Lender, the Borrower
agrees to pay to such Lender such additional amount as will compensate such
Lender for such increased costs or reduced amounts, subject to Section 11.9
hereof. The affected Lender will as soon as practicable notify the Borrower of
any event of which it has knowledge, occurring after the date hereof, which will
entitle such Lender to compensation pursuant to this Section and will designate
a different LIBOR Lending Office or other lending office if such designation
will avoid the need for, or reduce the amount of, such compensation and will
not, in the reasonable judgment of the affected Lender made in good faith, be
disadvantageous to such Lender.
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(b) Any Lender claiming compensation under this Section shall
provide the Borrower with a certificate setting forth the additional amounts to
be paid to it hereunder and shall certify that such amounts or costs were
actually incurred by such Lender and shall show in reasonable detail an
accounting of the amount payable and the calculations used to determine in good
faith such amount which shall be conclusive absent demonstrable error. In
determining such amount, a Lender may use any reasonable averaging and
attribution methods. Nothing in this Section 9.3 shall provide the Borrower or
any Subsidiary of the Borrower the right to inspect the records, files or books
of any Lender. If a Lender demands compensation under this Section, the Borrower
may at any time, upon at least five Business Days' prior notice to the Lender,
after reimbursement to the Lender by the Borrower in accordance with this
Section of all costs incurred, prepay in full the then outstanding LIBOR
Advances of the Lender, together with accrued interest thereon to the date of
prepayment, along with any reimbursement required under Section 2.9 hereof.
Concurrently with prepaying such LIBOR Advances, the Borrower may, without any
requirement to satisfy the conditions precedent set forth in Section 3.1, 3.2 or
3.3 hereof, borrow a Base Rate Advance from the Lender, and the Lender shall
make such Base Rate Advance, in an amount such that the outstanding principal
amount of the Advances owing to such Lender shall equal the outstanding
principal amount of the Advances owing immediately prior to such prepayment.
Section 9.4 Effect On Base Rate Advances. If notice has been given
pursuant to Section 9.1, 9.2 or 9.3 hereof suspending the obligation of a Lender
to make LIBOR Advances, or requiring LIBOR Advances of a Lender to be repaid or
prepaid, then, unless and until the Lender notifies the Borrower that the
circumstances giving rise to such repayment no longer apply, all Advances which
would otherwise be made by such Lender as LIBOR Advances shall be made instead
as Base Rate Advances.
Section 9.5 Capital Adequacy. If (a) the introduction of or any
change in or in the interpretation of any Law after the Agreement Date or (b)
compliance by a Lender with any Law or any guideline or request from any central
bank or other governmental authority (whether or not having the force of law)
adopted or promulgated after the Agreement Date (including any implementation of
the Basle Accord or similar guideline or requirement adopted, promulgated or
becoming effective after the Agreement Date) affects or would affect the amount
of capital required or expected to be maintained by a Lender or any corporation
controlling such Lender, and such Lender determines that the amount of such
capital is increased by or based upon the existence of such Lender's commitment
or Advances hereunder and other commitments or advances of such Lender of this
type, then, within 10 days after demand by such Lender, subject to Section 11.9
hereof, the Borrower shall immediately pay to such Lender, from time to time as
specified by such Lender, additional amounts sufficient to compensate such
Lender with respect to such circumstances, to the extent that such Lender
reasonably determines in good faith such increase in capital to be allocable to
the existence of such Lender's Commitments hereunder. A certificate as to any
additional amounts payable to any Lender under this Section 9.5 shall be
submitted to the Borrower by such Lender and shall certify that such amounts
were actually incurred by such Lender or corporation controlling such Lender and
shall show in reasonable detail an accounting of the amount payable and the
calculations used to determine in good faith such amount and shall be conclusive
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absent demonstrable error. In determining such amount, such Lender or a
corporation controlling such Lender may use any reasonable averaging and
attribution methods. Notwithstanding the foregoing, nothing in this Section 9.5
shall provide the Borrower or any Subsidiary of the Borrower the right to
inspect the records, files or books of any Lender or any corporation controlling
such Lender.
Section 9.6 Replacement Lender. If the Borrower becomes obligated to
pay additional amounts to any Lender described in Section 9.2, 9.3 or 9.5
hereof, the Borrower may designate a financial institution reasonably acceptable
to the Administrative Agent to replace such Lender by purchasing for cash and
receiving an assignment of such Lender's pro rata share of such Lender's
commitment and the Rights of such Lender under the Loan Documents without
recourse to or warranty by, or expense to, such Lender, for a purchase price
equal to the outstanding amounts owing to such Lender (including such additional
amounts owing to such Lender pursuant to Section 9.3 or 9.5 hereof). Upon
execution of an Assignment Agreement, such other financial institution shall be
deemed to be a "Lender" for all purposes of this Agreement as set forth in
Section 11.6 hereof.
ARTICLE 10
Agreement Among Lenders
Section 10.1 Agreement Among Lenders. The Lenders agree among
themselves that:
(a) Administrative Agent. Each Lender hereby appoints the
Administrative Agent as its nominee in its name and on its behalf, to receive
all documents and items to be furnished hereunder; to act as nominee for and on
behalf of all Lenders under the Loan Documents; to, except as otherwise
expressly set forth herein, take such action as may be requested by the
Determining Lenders, provided that, (i) unless and until the Administrative
Agent shall have received such requests, the Administrative Agent may take such
administrative action, or refrain from taking such administrative action, as it
may deem advisable and in the best interests of the Lenders, and (ii) the
Administrative Agent shall not be required to take any action that exposes the
Administrative Agent to personal liability or that is contrary to any Loan
Document or Applicable Law; to arrange the means whereby the proceeds of the
Advances of the Lenders are to be made available to the Borrower; to distribute
promptly to each Lender information, requests and documents received from the
Borrower, and each payment (in like funds received) with respect to any of such
Lender's Advances, or the ratable amount of fees or other amounts; and to
deliver to the Borrower requests, demands, approvals and consents received from
the Lenders. Administrative Agent agrees to promptly distribute to each Lender,
at such Lender's address set forth below information, requests, documents and
payments received from the Borrower. The Administrative Agent shall have no
trustee or other fiduciary relationship in respect of any Lender by reason of
this Agreement or any other Loan Document. The Administrative Agent shall have
no duties or responsibilities except those expressly set forth in this
Agreement. The duties of the Administrative Agent are mechanical and
administrative in nature.
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(b) Replacement of Administrative Agent. Should the Administrative
Agent or any successor Administrative Agent ever cease to be a Lender hereunder,
or should the Administrative Agent or any successor Administrative Agent ever
resign as Administrative Agent, or should the Administrative Agent or any
successor Administrative Agent ever be removed with cause or without cause by
the action of the Determining Lenders (other than the Administrative Agent),
then the Lender appointed by the other Lenders (provided that no Event of
Default has occurred and is continuing, with the consent of the Borrower, which
consent shall not be unreasonably withheld) shall forthwith become the
Administrative Agent, and the Borrower and the Lenders shall execute such
documents as any Lender may reasonably request to reflect such change at no cost
to the Borrower. If the Administrative Agent also then serves in the capacity of
the Issuing Bank, such resignation or removal shall constitute resignation or
removal of the Issuing Bank and the successor Administrative Agent shall serve
in the capacity of the Issuing Bank. Any resignation or removal of the
Administrative Agent or any successor Administrative Agent shall become
effective upon the appointment by the Lenders of a successor Administrative
Agent; provided, however, if no successor Administrative Agent shall have been
so appointed and shall have accepted such appointment within 30 days after the
retiring Administrative Agent's giving of notice of resignation or the Lenders'
removal of the retiring Administrative Agent, then the retiring Administrative
Agent may, on behalf of the Lenders, appoint a successor Administrative Agent,
which shall be a commercial bank organized under the Laws of the United States
of America or of any State thereof and having a combined capital and surplus of
at least $500,000,000. Upon the acceptance of any appointment as the
Administrative Agent hereunder by a successor Administrative Agent, such
successor Administrative Agent shall thereupon succeed to and become vested with
all the rights and duties of the retiring Administrative Agent, and the retiring
Administrative Agent shall be discharged from its duties and obligations under
the Loan Documents, provided that if the retiring or removed Administrative
Agent is unable to appoint a successor Administrative Agent, the Administrative
Agent shall, after the expiration of a 60 day period from the date of notice, be
relieved of all obligations as Administrative Agent hereunder. Notwithstanding
any Administrative Agent's resignation or removal hereunder, the provisions of
this Article shall continue to inure to its benefit as to any actions taken or
omitted to be taken by it while it was the Administrative Agent under this
Agreement.
(c) Expenses. Each Lender shall pay its pro rata share, based on its
Total Specified Percentage, of any reasonable expenses paid by the
Administrative Agent directly and solely in connection with any of the Loan
Documents if Administrative Agent does not receive reimbursement therefor from
other sources within 60 days after the date incurred. Any amount so paid by the
Lenders to the Administrative Agent shall be returned by the Administrative
Agent pro rata to each paying Lender to the extent later paid by the Borrower or
any other Person on the Borrower's behalf to the Administrative Agent.
(d) Delegation of Duties. The Administrative Agent may execute any
of its duties hereunder by or through officers, directors, employees, attorneys
or agents, and shall be entitled to
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(and shall be protected in relying upon) advice of counsel concerning all
matters pertaining to its duties hereunder.
(e) Reliance by Administrative Agent. The Administrative Agent and
its officers, directors, employees, attorneys and agents shall be entitled to
rely and shall be fully protected in relying on any writing, resolution, notice,
consent, certificate, affidavit, letter, cablegram, telegram, telex or teletype
message, statement, order, or other document or conversation reasonably believed
by it or them in good faith to be genuine and correct and to have been signed or
made by the proper Person and, with respect to legal matters, upon opinions of
counsel selected by the Administrative Agent. The Administrative Agent may, in
its reasonable judgment, deem and treat the payee of any Note as the owner
thereof for all purposes hereof.
(f) Limitation of Administrative Agent's Liability. Neither the
Administrative Agent nor any of its officers, directors, employees, attorneys or
agents shall be liable for any action taken or omitted to be taken by it or them
hereunder in good faith and believed by it or them to be within the discretion
or power conferred to it or them by the Loan Documents or be responsible for the
consequences of any error of judgment, except for its or their own gross
negligence or wilful misconduct. Except as aforesaid, the Administrative Agent
shall be under no duty to enforce any rights with respect to any of the
Advances, or any security therefor. The Administrative Agent shall not be
compelled to do any act hereunder or to take any action towards the execution or
enforcement of the powers hereby created or to prosecute or defend any suit in
respect hereof, unless indemnified to its reasonable satisfaction against loss,
cost, liability and expense. The Administrative Agent shall not be responsible
in any manner to any Lender for the effectiveness, enforceability, genuineness,
validity or due execution of any of the Loan Documents, or for any
representation, warranty, document, certificate, report or statement made herein
or furnished in connection with any Loan Documents, or be under any obligation
to any Lender to ascertain or to inquire as to the performance or observation of
any of the terms, covenants or conditions of any Loan Documents on the part of
the Borrower. TO THE EXTENT NOT REIMBURSED BY THE BORROWER, EACH LENDER HEREBY
SEVERALLY INDEMNIFIES AND HOLDS HARMLESS THE ADMINISTRATIVE AGENT, PRO RATA
ACCORDING TO ITS TOTAL SPECIFIED PERCENTAGE, FROM AND AGAINST ANY AND ALL
LIABILITIES, OBLIGATIONS, LOSSES, DAMAGES, PENALTIES, ACTIONS, JUDGMENTS, SUITS,
COSTS, REASONABLE EXPENSES AND/OR DISBURSEMENTS OF ANY KIND OR NATURE WHATSOEVER
WHICH MAY BE IMPOSED ON, ASSERTED AGAINST, OR INCURRED BY THE ADMINISTRATIVE
AGENT (IN SUCH CAPACITY) IN ANY WAY WITH RESPECT TO ANY LOAN DOCUMENTS OR ANY
ACTION TAKEN OR OMITTED BY THE ADMINISTRATIVE AGENT UNDER THE LOAN DOCUMENTS
(INCLUDING ANY NEGLIGENT ACTION OF THE ADMINISTRATIVE AGENT), EXCEPT TO THE
EXTENT THE SAME ARE FINALLY DETERMINED BY A COURT OF COMPETENT JURISDICTION TO
RESULT FROM GROSS NEGLIGENCE OR WILFUL MISCONDUCT BY THE ADMINISTRATIVE AGENT.
THE INDEMNITY PROVIDED IN THIS SECTION 10.1(f) SHALL SURVIVE TERMINATION OF THIS
AGREEMENT.
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(g) Liability Among Lenders. No Lender shall incur any liability
(other than the sharing of expenses and other matters specifically set forth
herein and in the other Loan Documents) to any other Lender, except for acts or
omissions in bad faith.
(h) Rights as Lender. With respect to its commitment hereunder, the
Advances made by it and the Notes issued to it, the Administrative Agent shall
have the same rights as a Lender and may exercise the same as though it were not
the Administrative Agent, and the term "Lender" or "Lenders" shall, unless the
context otherwise indicates, include the Administrative Agent in its individual
capacity. The Administrative Agent or any Lender may accept deposits from, act
as trustee under indentures of, and generally engage in any kind of business
with, the Borrower and any of its Affiliates, and any Person who may do business
with or own securities of the Borrower or any of its Affiliates, all as if the
Administrative Agent were not the Administrative Agent hereunder and without any
duty to account therefor to the Lenders.
Section 10.2 Lender Credit Decision. Each Lender acknowledges that
it has, independently and without reliance upon the Administrative Agent or any
other Lender and based upon the financial statements referred to in Sections
4.1(j), 6.1, and 6.2 hereof, and such other documents and information as it has
deemed appropriate, made its own credit analysis and decision to enter into this
Agreement. Each Lender also acknowledges that it will, independently and without
reliance upon the Administrative Agent or any other Lender and based upon such
documents and information as it shall deem appropriate at the time, continue to
make its own credit decisions in taking or not taking action under this
Agreement and the other Loan Documents. Each Lender also acknowledges that its
decision to fund the initial Advances shall constitute evidence to the
Administrative Agent that such Lender has deemed all of the conditions set forth
in Section 3.1 hereof to have been satisfied.
Section 10.3 Benefits of Article. None of the provisions of this
Article shall inure to the benefit of any Person other than Lenders and, with
respect to Section 10.1(b) hereof, the Borrower; consequently, no such other
Person shall be entitled to rely upon, or to raise as a defense, in any manner
whatsoever, the failure of the Administrative Agent or any Lender to comply with
such provisions.
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ARTICLE 11
Miscellaneous
Section 11.1 Notices.
(a) All notices and other communications under this Agreement shall
be in writing (except in those cases where giving notice by telephone is
expressly permitted) and shall be deemed to have been given on the date
personally delivered or sent by telecopy (answerback received), or three days
after deposit in the mail, designated as certified mail, return receipt
requested, postage-prepaid, or one day after being entrusted to a reputable
commercial overnight delivery service, addressed to the party to which such
notice is directed at its address determined as provided in this Section. All
notices and other communications under this Agreement shall be given to the
parties hereto at the following addresses:
(i) If to the Borrower, at:
Styling Technology Corporation
2390 East Camelback Road
Suite 435
Phoenix, Arizona 85016
Telephone: (602) 955-3353
Telecopier: (602) 955-3383
Attention: Richard R. Ross
with a copy to:
O'Connor, Cavanagh, Anderson, Killingsworth & Beshears, P.A.
One East Camelback Road, Suite 1100
Phoenix, Arizona 85012
Telephone: (602) 263-2606
Telecopier: (602) 263-2900
Attention: Robert S. Kant, Esq.
(ii) If to the Administrative Agent, at:
NationsBank, N.A.
901 Main Street, 67th Floor
Dallas, Texas 75202-3714
Telephone: (214) 508-9060
Telecopier: (214) 508-0980
Attn: Natalie Hebert
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with a copy to:
NationsBank, N.A.
901 Main Street, 14th Floor
Dallas, Texas 75202
Telephone: (214) 508-9177
Telecopier: (214) 508-0944
Attention: Theresa Belk
(iii) If to a Lender, at its address shown below its name on the
signature pages hereof, or if applicable, set forth in its
Assignment Agreement.
(b) Any party hereto may change the address to which notices shall
be directed by giving 10 days' written notice of such change to the other
parties.
Section 11.2 Expenses. The Borrower shall promptly pay:
(a) all reasonable out-of-pocket expenses of the Administrative
Agent in connection with the preparation, negotiation, execution and delivery of
this Agreement and the other Loan Documents, the transactions contemplated
hereunder and thereunder, and the making of Advances hereunder, including
without limitation the reasonable fees and disbursements of Special Counsel;
(b) all reasonable out-of-pocket expenses, including reasonable
attorneys' fees, of the Administrative Agent in connection with the transactions
contemplated in this Agreement and the other Loan Documents and the preparation,
negotiation, execution and delivery of any waiver, amendment or consent by the
Administrative Agent relating to this Agreement or the other Loan Documents; and
(c) all reasonable out-of-pocket costs, expenses and attorneys' fees
of the Administrative Agent and each Lender incurred for enforcement,
collection, restructuring, refinancing and "workout", or otherwise incurred in
obtaining performance under the Loan Documents, which in each case shall include
without limitation reasonable fees and expenses of consultants, counsel for the
Administrative Agent and any Lender.
Section 11.3 Waivers. The rights and remedies of the Lenders under
this Agreement and the other Loan Documents shall be cumulative and not
exclusive of any rights or remedies which they would otherwise have. No failure
or delay by the Administrative Agent or any Lender in exercising any right shall
operate as a waiver of such right. The Lenders expressly reserve the right to
require strict compliance with the terms of this Agreement in connection with
any funding of a request for an Advance or issuance of a Letter of Credit. In
the event that any Lender decides to fund an Advance or the Issuing Bank decides
to issue a Letter of Credit at a time when the Borrower is not in strict
compliance with the terms of this Agreement, such decision by such Lender or the
Issuing Bank, as the case may be, shall not be deemed to constitute an
undertaking by the Lender
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or the Issuing Bank, as the case may be, to fund any further requests for
Advances or Letters of Credit or preclude the Lenders or the Issuing Bank, as
the case may be, from exercising any rights available under the Loan Documents
or at law or equity. Any waiver or indulgence granted by the Lenders or the
Issuing Bank shall not constitute a modification of this Agreement, except to
the extent expressly provided in such waiver or indulgence, or constitute a
course of dealing by the Lenders or the Issuing Bank at variance with the terms
of the Agreement such as to require further notice by the Lenders or the Issuing
Bank of the Lenders' or Issuing Bank's intent to require strict adherence to the
terms of the Agreement in the future. Any such actions shall not in any way
affect the ability of the Administrative Agent, the Lenders or the Issuing Bank,
in their discretion, to exercise any rights available to them under this
Agreement or under any other agreement, whether or not the Administrative Agent,
any of the Lenders or the Issuing Bank are a party thereto, relating to the
Borrower.
Section 11.4 Calculation by the Lenders Conclusive and Binding. Any
mathematical calculation required or expressly permitted to be made by the
Administrative Agent or any Lender under this Agreement or any other Loan
Document shall be controlling, absent demonstrable error.
Section 11.5 Set-Off. In addition to any rights now or hereafter
granted under Applicable Law and not by way of limitation of any such rights,
upon the occurrence and during the continuation of an Event of Default, each
Lender and any subsequent holder of any Note, and any assignee of any Note is
hereby authorized by the Borrower at any time or from time to time, without
notice to the Borrower or any other Person, any such notice being hereby
expressly waived, to set-off, appropriate and apply any deposits (general or
special (except trust and escrow accounts), time or demand, including without
limitation Indebtedness evidenced by certificates of deposit, in each case
whether matured or unmatured) and any other Indebtedness at any time held or
owing by such Lender or holder to or for the credit or the account of the
Borrower, against and on account of the Obligations and other liabilities of the
Borrower to such Lender or holder, irrespective of whether or not (a) the Lender
or holder shall have made any demand hereunder, or (b) the Lender or holder
shall have declared the principal of and interest on the Advances and other
amounts due hereunder to be due and payable as permitted by Section 8.2 hereof.
Any sums obtained by any Lender or by any assignee or subsequent holder of any
Note shall be subject to pro rata treatment of all Obligations and other
liabilities hereunder in accordance with each Lender's Total Specified
Percentage.
Section 11.6 Assignment.
(a) The Borrower may not assign or transfer any of its rights or
obligations hereunder or under the other Loan Documents without the prior
written consent of the Lenders.
(b) No Lender shall be entitled to assign or grant a participation
in its interest in this Agreement, its Notes or its Advances, except as
hereinafter set forth.
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(c) Each Lender may sell participations to one or more banks or
other entities (the "Participants") in or to all or a portion of its rights and
obligations under this Agreement (including, without limitation, all or a
portion of the Advances or Reimbursement Obligations owing to it and the Note or
Notes held by it) (the "Participations"); provided, however, that (i) such
Lender's obligations under this Agreement (including, without limitation, its
Specified Percentage of the Commitments) shall remain unchanged, (ii) such
Lender shall remain solely responsible to the other parties hereto for the
performance of such obligations, (iii) such Lender shall remain the holder of
any such Note for all purposes of this Agreement, (iv) the Borrower, the
Administrative Agent and the other Lenders shall continue to deal solely and
directly with such Lender in connection with such Lender's rights and
obligations under this Agreement, and (v) no Participant under any such
Participation shall have any right to approve any amendment or waiver of any
provision of any Loan Document, or any consent to any departure by the Borrower
therefrom, except to the extent that such amendment, waiver or consent would (A)
reduce or postpone any date fixed for payment of principal of, or interest on,
the Notes or any fees or other amounts payable hereunder (excluding any
mandatory prepayment pursuant to Section 2.5(c), (d) and (e) hereof), (B)
increase the commitment of any Participant or (C) release any Collateral or
security for the Obligations, except pursuant to the Loan Documents, in each
case to the extent subject to such Participation. Notwithstanding the foregoing,
the Borrower agrees that Participants shall be entitled to the benefits of
Article 9 hereof as though they were Lenders and the Lenders may, subject to
Section 11.14 hereof, provide copies of all financial information received from
the Borrower to such Participants.
(d) Each Lender may assign to one or more Eligible Assignees its
rights and obligations under this Agreement and the other Loan Documents;
provided, however, that (i) each such assignment shall be subject to the prior
written consent of the Administrative Agent and Borrower, which consents shall
not be unreasonably withheld (provided, however, notwithstanding anything herein
to the contrary, no consent of the Borrower is required for any assignment (A)
during any time that an Event of Default has occurred and is continuing, (B) to
an Affiliate of a Lender, (C) to an existing Lender hereunder or (D) to a
Related Fund), (ii) no such assignment shall be in an amount of Commitments or
Advances less than $5,000,000, unless the portion of the Commitments of a Lender
are less than $5,000,000, in which case such assignment may be in the aggregate
amount of such Lender's portion of the Commitments or Advances, (iii) the
applicable Lender, Administrative Agent and Eligible Assignee shall execute and
deliver to the Administrative Agent an Assignment and Acceptance Agreement (an
"Assignment Agreement") in substantially the form of Exhibit E hereto, together
with the Notes subject to such assignment and (iv) the Eligible Assignee
executing the Assignment, shall deliver to the Administrative Agent a processing
fee of $3,500. Upon such execution, delivery and acceptance from and after the
effective date specified in each Assignment, which effective date shall be at
least three Business Days after the execution thereof, (A) the Eligible Assignee
thereunder shall be party hereto and, to the extent that rights and obligations
hereunder have been assigned to it pursuant to such Assignment, have the rights
and obligations of a Lender hereunder and (B) the applicable Lender shall, to
the extent that rights and obligations hereunder have been assigned by it
pursuant to such Assignment, relinquish such rights and be released from such
obligations under this Agreement.
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(e) Notwithstanding anything in clause (d) above to the contrary,
(i) any Lender may assign and pledge all or any portion of its Advances and
Notes to any Federal Reserve Bank as collateral security pursuant to Regulation
A of F.R.S. Board and any Operating Circular issued by such Federal Reserve Bank
and (ii) any Lender that is a fund may at any time assign or pledge all or any
portion of its rights under this Agreement to secure such Lender's indebtedness;
provided, however, that no such assignment under this clause (e) shall release
the assignor Lender from its obligations hereunder.
(f) Upon its receipt of an Assignment Agreement executed by a Lender
and an Eligible Assignee, and any Note or Notes subject to such assignment, the
Borrower shall, subject to the Borrower's rights under Section 11.6(d) hereof,
within five Business Days after its receipt of such Assignment Agreement execute
and deliver to the Administrative Agent in exchange for the surrendered Notes
new Notes to the order of such Eligible Assignee in an amount equal to the
portion of the Advances and Commitments assigned to it pursuant to such
Assignment Agreement and new Notes to the order of the assignor Lender in an
amount equal to the portion of the Advances and Commitments retained by it
hereunder. Such new Notes shall be in an aggregate principal amount equal to the
aggregate principal amount of such surrendered Notes, shall be dated the
effective date of such Assignment Agreement and shall otherwise be in
substantially the form of Exhibit A or B hereto, as applicable.
(g) Any Lender may, in connection with any assignment or
participation or proposed assignment or participation pursuant to this Section
11.6, disclose to the Eligible Assignee or Participant or proposed Eligible
Assignee or participant, any information relating to the Borrower furnished to
such Lender by or on behalf of the Borrower, provided such Person agrees in
writing to handle such information in accordance with the standards set forth in
Section 11.14 hereof.
(h) Except as specifically set forth in this Section 11.6, nothing
in this Agreement or any other Loan Documents, expressed or implied, is intended
to or shall confer on any Person other than the respective parties hereto and
thereto and their successors and assignees permitted hereunder and thereunder
any benefit or any legal or equitable right, remedy or other claim under this
Agreement or any other Loan Documents.
(i) Notwithstanding anything in this Section 11.6 to the contrary,
no Eligible Assignee or Participant (nor the assigning or participating Lender)
shall be entitled to receive (whether individually or collectively) any greater
payment under Section 2.14 hereof or Section 9.3 or Section 9.5 hereof than such
assigning or participating Lender would have been entitled to receive with
respect to the interest assigned or participated to such Eligible Assignee or
Participant.
Section 11.7 Counterparts. This Agreement may be executed in any
number of counterparts, each of which shall be deemed to be an original, but all
such separate counterparts shall together constitute but one and the same
instrument.
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Section 11.8 Severability. Any provision of this Agreement or any
other Loan Document which is for any reason prohibited or found or held invalid
or unenforceable by any court or governmental agency shall be ineffective to the
extent of such prohibition or invalidity or unenforceability without
invalidating the remaining provisions hereof or thereof in such jurisdiction or
affecting the validity or enforceability of such provision in any other
jurisdiction.
Section 11.9 Interest and Charges. It is not the intention of any
parties to this Agreement to make an agreement in violation of the laws of any
applicable jurisdiction relating to usury. Regardless of any provision in any
Loan Documents, no Lender shall ever be entitled to receive, collect or apply,
as interest on the Obligations, any amount in excess of the Highest Lawful
Amount. If any Lender or participant ever receives, collects or applies, as
interest, any such excess, such amount which would be excessive interest shall
be deemed a partial repayment of principal and treated hereunder as such; and if
principal is paid in full, any remaining excess shall be paid to the Borrower.
In determining whether or not the interest paid or payable, under any specific
contingency, exceeds the Highest Lawful Rate, the Borrower and the Lenders
shall, to the maximum extent permitted under Applicable Law, (a) characterize
any nonprincipal payment as an expense, fee or premium rather than as interest,
(b) exclude voluntary prepayments and the effect thereof, and (c) amortize,
prorate, allocate and spread in equal parts, the total amount of interest
throughout the entire contemplated term of the Obligations so that the interest
rate is uniform throughout the entire term of the Obligations; provided,
however, that if the Obligations are paid and performed in full prior to the end
of the full contemplated term thereof, and if the interest received for the
actual period of existence thereof exceeds the Highest Lawful Rate, the Lenders
shall refund to the Borrower the amount of such excess or credit the amount of
such excess against the total principal amount of the Obligations owing, and, in
such event, the Lenders shall not be subject to any penalties provided by any
laws for contracting for, charging or receiving interest in excess of the
Highest Lawful Rate. This Section shall control every other provision of all
agreements pertaining to the transactions contemplated by or contained in the
Loan Documents.
Section 11.10 Headings. Headings used in this Agreement are for
convenience only and shall not be used in connection with the interpretation of
any provision hereof.
Section 11.11 Amendment and Waiver. The provisions of this Agreement
may not be amended, modified or waived except by the written agreement of the
Borrower and the Determining Lenders; provided, however, that no such amendment,
modification or waiver shall be made (a) without the consent of all Lenders, if
it would (i) increase the Applicable Specified Percentage or commitment of any
Lender, (ii) extend or postpone the date of maturity of, extend the due date for
any payment of principal or interest on, reduce the amount of any installment of
principal or interest on, or reduce the rate of interest on, any Advance, the
Reimbursement Obligations or other amount owing under any Loan Documents to
which such Lender is entitled, (iii) release any guaranty of the Obligations or
all or substantially all of the Collateral (except, in any case, pursuant to
this Agreement or the other Loan Documents), (iv) reduce the fees payable
hereunder to which such Lender is entitled, (v) revise this Section 11.11, (vi)
waive the date for payment of any principal, interest or fees hereunder, (vii)
amend the definition of "Determining Lenders", "Total
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Specified Percentage", "Revolving Credit Specified Percentage" or "Term Loan
Specified Percentage", or (viii) revise, or waive any mandatory prepayment
pursuant to, Section 2.5(c), (d) or (e) hereof; (b) without the consent of the
Administrative Agent, if it, would alter the rights, duties or obligations of
the Administrative Agent; or (c) without the consent of the Issuing Bank, if it
would alter the rights, duties or obligations of the Issuing Bank. Neither this
Agreement nor any term hereof may be amended orally, nor may any provision
hereof be waived orally but only by an instrument in writing signed by the
Administrative Agent and, in the case of an amendment, by the Borrower.
Section 11.12 Exception to Covenants. Neither the Borrower nor any
of its Subsidiaries of the Borrower shall be deemed to be permitted to take any
action or fail to take any action which is permitted as an exception to any of
the covenants contained herein or which is within the permissible limits of any
of the covenants contained herein if such action or omission would result in the
breach of any other covenant contained herein.
Section 11.13 No Liability of Issuing Bank. The Borrower assumes all
risks of the acts or omissions of any beneficiary or transferee of any Letter of
Credit with respect to its use of such Letter of Credit. Neither the Issuing
Bank nor any Lender nor any of their respective officers or directors shall be
liable or responsible for: (a) the use that may be made of any Letter of Credit
or any acts or omissions of any beneficiary or transferee in connection
therewith; (b) the validity, sufficiency or genuineness of documents, or of any
endorsement thereon, even if such documents should prove to be in any or all
respects invalid, insufficient, fraudulent or forged; (c) payment by the Issuing
Bank against presentation of documents that do not comply with the terms of a
Letter of Credit, including failure of any documents to bear any reference or
adequate reference to the Letter of Credit; or (d) any other circumstances
whatsoever in making or failing to make payment under any Letter of Credit,
except that the Borrower shall have a claim against the Issuing Bank, and the
Issuing Bank shall be liable to the Borrower, to the extent of any direct, but
not consequential, damages suffered by the Borrower that a court of competent
jurisdiction finally judicially determines were caused by (i) the Issuing Bank's
wilful misconduct or gross negligence or (ii) the Issuing Bank's wilful failure
to make lawful payment under a Letter of Credit after the presentation to it of
a draft and certificates strictly complying with the terms and conditions of the
Letter of Credit. In furtherance and not in limitation of the foregoing, the
Issuing Bank may accept documents that appear on their face to be in order,
without responsibility for further investigation, regardless of any notice or
information to the contrary.
Section 11.14 Confidentiality. Each Lender and the Administrative
Agent agrees (on behalf of itself and each of its Affiliates, directors,
officers and employees) to use reasonable efforts to keep confidential, in
accordance with customary procedures for handling confidential information of
this nature and in accordance with safe and sound banking practices, any
non-public information supplied to it by the Borrower or any of its Affiliates
pursuant to this Agreement, provided that nothing herein shall limit the
disclosure of any such information (a) to the extent required by statute, rule,
regulation or judicial process, (b) to counsel for any Lender or the
Administrative Agent, (c) to bank or other examiners, regulatory bodies
(including the National Association of Insurance
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Commissioners or any similar organization, or any nationally recognized rating
agency that requires access to information about any Lender's investment
portfolio), auditors or accountants of any Lender, (d) to the Administrative
Agent or any other Lender or any Affiliate thereof, (e) in connection with any
Litigation to which any one or more of Lenders is a party, (f) to the extent
necessary in connection with the exercise of any Right under this Agreement or
any other Loan Document, or (g) to any Eligible Assignee or Participant (or
prospective Eligible Assignee or Participant) or to any direct or indirect
contractual counterparties in swap agreements or to the professional advisors of
such swap counterparties so long as such Eligible Assignee or Participant (or
prospective Eligible Assignee or Participant) or direct or indirect contractual
counterparties in swap agreements or such swap counterparties' professional
advisors agrees to handle such information in accordance with the provisions of
this Section 11.14. Non-public information does not include information that (a)
was publicly known prior to the time of disclosure by the Borrower or any of its
Subsidiaries, (b) after disclosure by the Borrower to any Lender or the
Administrative Agent becomes publicly known through no act or omission by any
Lender or the Administrative Agent or by any Person acting on behalf of any
Lender or the Administrative Agent or (c) otherwise becomes known to any Lender
or the Administrative Agent other than through disclosure by the Borrower or any
of its Subsidiaries or Affiliates or any of their respective representatives or
consultants.
Section 11.15 No Duties of Documentation Agent. The Borrower, the
Lenders and the Administrative Agent acknowledge that the Documentation Agent
shall have no duties, responsibilities or liabilities in its capacity as
Documentation Agent.
SECTION 11.16 GOVERNING LAW. THIS AGREEMENT AND THE OTHER LOAN
DOCUMENTS SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE
STATE OF TEXAS (WITHOUT REGARD TO THE PRINCIPLES OF CONFLICTS OF LAWS) AND THE
APPLICABLE FEDERAL LAWS OF THE UNITED STATES OF AMERICA. THE LOAN DOCUMENTS ARE
PERFORMABLE IN DALLAS COUNTY, TEXAS, AND THE BORROWER AND EACH SURETY,
GUARANTOR, ENDORSER AND ANY OTHER PARTY EVER LIABLE FOR PAYMENT OF ANY MONEY
PAYABLE WITH RESPECT TO THE LOAN DOCUMENTS, JOINTLY AND SEVERALLY WAIVE THE
RIGHT TO BE SUED ELSEWHERE. WITHOUT EXCLUDING ANY OTHER JURISDICTION, THE
BORROWER, THE ADMINISTRATIVE AGENT AND EACH LENDER EACH AGREES THAT THE STATE
AND FEDERAL COURTS OF TEXAS LOCATED IN DALLAS, TEXAS, SHALL HAVE NON-EXCLUSIVE
JURISDICTION OVER PROCEEDINGS IN CONNECTION WITH THIS AGREEMENT AND THE OTHER
LOAN DOCUMENTS AND HEREBY SUBMITS WITH RESPECT TO ITSELF AND ITS PROPERTY TO THE
JURISDICTION OF ANY SUCH COURT FOR THE PURPOSE OF ANY SUIT, ACTION, PROCEEDING
OR JUDGMENT RELATING TO OR ARISING OUT OF THIS AGREEMENT OR ANY OTHER LOAN
DOCUMENT.
- 93 -
<PAGE> 101
SECTION 11.17 WAIVER OF JURY TRIAL. EACH OF THE BORROWER, THE
ADMINISTRATIVE AGENT AND THE LENDERS HEREBY KNOWINGLY VOLUNTARILY, IRREVOCABLY
AND INTENTIONALLY WAIVE, TO THE MAXIMUM EXTENT PERMITTED BY LAW, ALL RIGHT TO
TRIAL BY JURY IN ANY ACTION, PROCEEDING OR CLAIM ARISING OUT OF OR RELATED TO
ANY OF THE LOAN DOCUMENTS OR THE TRANSACTIONS CONTEMPLATED THEREBY. THIS
PROVISION IS A MATERIAL INDUCEMENT TO EACH LENDER ENTERING INTO THIS AGREEMENT
AND MAKING ANY ADVANCES HEREUNDER.
SECTION 11.18 ENTIRE AGREEMENT. THIS WRITTEN AGREEMENT, TOGETHER
WITH THE OTHER LOAN DOCUMENTS, REPRESENTS THE FINAL AGREEMENT BETWEEN THE
PARTIES REGARDING THE SUBJECT MATTER HEREIN AND THEREIN AND MAY NOT BE
CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS
OF THE PARTIES HERETO. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE
PARTIES.
REMAINDER OF PAGE LEFT INTENTIONALLY BLANK
- 94 -
<PAGE> 102
IN WITNESS WHEREOF, this Credit Agreement is executed as of the date
first set forth above.
BORROWER: STYLING TECHNOLOGY CORPORATION
By:
---------------------
Name: Richard R. Ross
Title: Secretary
- 95 -
<PAGE> 103
ADMINISTRATIVE AGENT: NATIONSBANK, N.A., as Administrative Agent
By:
----------------------------
Name: Frank M. Johnson
Title: Senior Vice President
- 96 -
<PAGE> 104
DOCUMENTATION AGENT: BANKBOSTON, N.A., as Documentation Agent
By:
--------------------------------------
Name:
-------------------------------
Title:
-------------------------------
- 97 -
<PAGE> 105
LENDERS: NATIONSBANK, N.A., as a Lender and Issuing
Bank
By:
----------------------------
Name: Frank M. Johnson
Title: Senior Vice President
901 Main Street, 67th Floor
Dallas, Texas 75202
Attn: Natalie Hebert
- 98 -
<PAGE> 106
BANKBOSTON, N.A., as a Lender
By:
--------------------------------------
Name:
-------------------------------
Title:
-------------------------------
100 Federal Street
MA BOS 01-08-05
Boston, Massachusetts 02106-2016
Attn: Bob Duggan
- 99 -
<PAGE> 107
SCHEDULE 1.1(a)
LIBOR LENDING OFFICES
NATIONSBANK, N.A.
901 Main Street, 66th Floor
Dallas, Texas 75202
BANKBOSTON, N.A.
100 Federal Street
MA BOS 01-08-05
Boston, Massachusetts 02106-2016
<PAGE> 108
SCHEDULE 1.1(b)
COMMITMENTS AND SPECIFIED PERCENTAGES
<TABLE>
<S> <C> <C>
NationsBank, N.A. $12,500,000 50.0%
BankBoston, N.A. $12,500,000 50.0%
</TABLE>
<PAGE> 109
SCHEDULE 1.1(c)
EXISTING LETTERS OF CREDIT
<TABLE>
<CAPTION>
Amount Maturity Date
------ -------------
<S> <C>
$500,000.00 November 26, 1998
$789,225.26 January 31, 1999
$ 14,600.00 November 1, 1998
$ 52,000.00 October 15, 1998
</TABLE>
<PAGE> 110
SCHEDULE 4.1(a)
SUBSIDIARIES, QUALIFICATION AND GOOD STANDING
<PAGE> 111
SCHEDULE 4.1(h)
EXISTING LITIGATION
<PAGE> 112
SCHEDULE 4.1(v)
LABOR RELATIONS
<PAGE> 113
SCHEDULE 7.1(f)
EXISTING INDEBTEDNESS
<PAGE> 114
SCHEDULE 7.2
EXISTING LIENS
<PAGE> 115
SCHEDULE 7.3(c)
EXISTING INVESTMENTS
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
reports and to all references to our Firm included in or made a part of this
registration statement.
/s/ ARTHUR ANDERSEN LLP
Phoenix, Arizona
September 14, 1998
